spro-10q_20190331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2019

OR

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

Commission File Number 001-38266

 

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)

 

(857) 242-1600

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

  

 

Smaller reporting company

 

 

 

 

Emerging growth company

 

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

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value per share

SPRO

The Nasdaq Global Select Market

 

As of May 6, 2019, the registrant had 17,523,835 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 and 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 and needs for additional financing;

 

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)

3

 

 

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

3

 

 

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

4

 

 

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

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018  

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

 

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

23

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

 

Controls and Procedures

35

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

Item 1A.

 

Risk Factors

36

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

71

Item 6.

 

Exhibits

71

 

 

 

 

Signatures

72

 

 

 

ii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

SPERO THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,395

 

 

$

34,080

 

Marketable securities

 

 

56,997

 

 

 

81,363

 

Other receivables

 

 

456

 

 

 

376

 

Tax incentive receivable, current

 

 

928

 

 

 

922

 

Prepaid expenses and other current assets

 

 

7,926

 

 

 

7,478

 

Total current assets

 

 

115,702

 

 

 

124,219

 

Property and equipment, net

 

 

2,864

 

 

 

2,893

 

Tax incentive receivable

 

 

294

 

 

 

233

 

Operating lease right of use assets

 

 

4,369

 

 

 

 

Other assets

 

 

1,421

 

 

 

1,661

 

Total assets

 

$

124,650

 

 

$

129,006

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

557

 

 

$

3,603

 

Accrued expenses and other current liabilities

 

 

5,199

 

 

 

8,263

 

Derivative liabilities

 

 

223

 

 

 

223

 

Deferred rent

 

 

 

 

 

229

 

Current operating lease liabilities

 

 

639

 

 

 

 

Total current liabilities

 

 

6,618

 

 

 

12,318

 

Deferred rent, net of current portion

 

 

 

 

 

833

 

Non-current operating lease liabilities

 

 

4,391

 

 

 

 

Other long-term liabilities

 

 

312

 

 

 

 

Total liabilities

 

 

11,321

 

 

 

13,151

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized, 3,220 shares issued and outstanding as of March 31, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.001 par value; 60,000,000 shares authorized as of March 31, 2019 and December 31, 2018;17,335,066 shares issued and outstanding as of March 31, 2019 and 17,205,962 shares issued and outstanding as of December 31, 2018

 

 

17

 

 

 

17

 

Additional paid-in capital

 

 

256,530

 

 

 

254,013

 

Accumulated deficit

 

 

(143,574

)

 

 

(138,502

)

Accumulated other comprehensive gain (loss)

 

 

1

 

 

 

(28

)

Total Spero Therapeutics, Inc. stockholders' equity

 

 

112,974

 

 

 

115,500

 

Non-controlling interests

 

 

355

 

 

 

355

 

Total stockholders' equity

 

 

113,329

 

 

 

115,855

 

Total liabilities and stockholders' equity

 

$

124,650

 

 

$

129,006

 

 

 

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

 

3


SPERO THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

Grant revenue

 

$

3,911

 

 

$

1,153

 

Collaboration revenue

 

 

3,807

 

 

 

 

Total revenues

 

 

7,718

 

 

 

1,153

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

9,526

 

 

 

8,925

 

General and administrative

 

 

3,888

 

 

 

3,044

 

Total operating expenses

 

 

13,414

 

 

 

11,969

 

Loss from operations

 

 

(5,696

)

 

 

(10,816

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income and other income (expense), net

 

 

624

 

 

 

172

 

Total other income (expense), net

 

 

624

 

 

 

172

 

Net loss

 

$

(5,072

)

 

$

(10,644

)

 

 

 

 

 

 

 

 

 

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

 

$

(0.29

)

 

$

(0.74

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted:

 

 

17,221,120

 

 

 

14,369,182

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

Net loss

 

 

(5,072

)

 

 

(10,644

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities

 

 

23

 

 

 

(29

)

Reclassification adjustment for gains included in net loss

 

 

6

 

 

 

 

Net unrealized gains (losses) on securities

 

 

29

 

 

 

(29

)

Total comprehensive loss

 

$

(5,043

)

 

$

(10,673

)

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

4


SPERO THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,072

)

 

$

(10,644

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

184

 

 

 

95

 

Share-based compensation

 

 

933

 

 

 

614

 

Realized (gain) loss on investments

 

 

(1

)

 

 

 

Unrealized foreign currency transaction (gain) loss

 

 

(95

)

 

 

8

 

Accretion of discount on marketable securities

 

 

(355

)

 

 

(45

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Other receivables

 

 

(80

)

 

 

(208

)

Prepaid expenses and other current assets

 

 

(448

)

 

 

604

 

Tax incentive receivables

 

 

(62

)

 

 

(45

)

Other assets

 

 

433

 

 

 

 

Accounts payable

 

 

(3,008

)

 

 

(2,469

)

Accrued expenses and other current liabilities

 

 

(3,364

)

 

 

165

 

Deferred rent

 

 

 

 

 

(36

)

Other long-term liabilities

 

 

11

 

 

 

 

Net cash used in operating activities

 

 

(10,924

)

 

 

(11,961

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(25,835

)

 

 

(22,825

)

Proceeds from maturities of marketable securities

 

 

50,587

 

 

 

 

Purchases of property and equipment

 

 

(81

)

 

 

 

Net cash provided by (used in) investing activities

 

 

24,671

 

 

 

(22,825

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock, net of issuance costs

 

 

1,525

 

 

 

 

Payment of offering costs

 

 

(16

)

 

 

 

Proceeds from stock option exercises

 

 

59

 

 

 

 

Net cash provided by financing activities

 

 

1,568

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

15,315

 

 

 

(34,786

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

34,080

 

 

 

87,338

 

Cash, cash equivalents and restricted cash at end of period

 

$

49,395

 

 

$

52,552

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable and accrued expenses

 

$

75

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

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

5


 

SPERO THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A and B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Spero

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

 

 

 

 

Additional

 

 

 

 

 

 

Comprehensive

 

 

Therapeutics, Inc.

 

 

Non-

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Income

 

 

Stockholders'

 

 

controlling

 

 

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

(Loss)

 

 

Equity

 

 

Interests

 

 

Equity

 

Balances at December 31, 2018

 

 

3,220

 

 

$

 

 

 

17,205,962

 

 

$

17

 

 

$

254,013

 

 

$

(138,502

)

 

$

(28

)

 

$

115,500

 

 

$

355

 

 

$

115,855

 

Issuance of common stock upon the exercise of stock options

 

 

 

 

 

 

 

 

10,014

 

 

 

 

 

 

59

 

 

 

 

 

 

 

 

 

59

 

 

 

 

 

 

59

 

Issuance of common stock, net of issuance costs

 

 

 

 

 

 

 

 

119,090

 

 

 

 

 

 

1,525

 

 

 

 

 

 

 

 

 

1,525

 

 

 

 

 

 

1,525

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

933

 

 

 

 

 

 

 

 

 

933

 

 

 

 

 

 

933

 

Unrealized gain (loss) on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

 

 

29

 

 

 

 

 

 

29

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,072

)

 

 

 

 

 

(5,072

)

 

 

 

 

 

(5,072

)

Balances at March 31, 2019

 

 

3,220

 

 

$

 

 

 

17,335,066

 

 

$

17

 

 

$

256,530

 

 

$

(143,574

)

 

$

1

 

 

$

112,974

 

 

$

355

 

 

$

113,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A and B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Spero

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

 

 

 

 

Additional

 

 

 

 

 

 

Comprehensive

 

 

Therapeutics, Inc.

 

 

Non-

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Income

 

 

Stockholders'

 

 

controlling

 

 

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

(Loss)

 

 

Equity

 

 

Interests

 

 

Equity

 

Balances at December 31, 2017

 

 

 

 

$

 

 

 

14,369,182

 

 

$

14

 

 

$

181,428

 

 

$

(96,840

)

 

$

 

 

$

84,602

 

 

$

355

 

 

$

84,957

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

614

 

 

 

 

 

 

 

 

 

614

 

 

 

 

 

 

614

 

Unrealized loss on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29

)

 

 

(29

)

 

 

 

 

 

(29

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,644

)

 

 

 

 

 

(10,644

)

 

 

 

 

 

(10,644

)

Balances at March 31, 2018

 

 

 

 

$

 

 

 

14,369,182

 

 

$

14

 

 

$

182,042

 

 

$

(107,484

)

 

$

(29

)

 

$

74,543

 

 

$

355

 

 

$

74,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

6


 

SPERO THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

Nature of the Business and Basis of Presentation

 

Spero Therapeutics, Inc., together with its consolidated subsidiaries (the “Company” or “Spero”), 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 is also developing SPR720, an oral antibiotic designed for the treatment of pulmonary non-tuberculous mycobacterial (“NTM”) infections. In addition, 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 product candidates generated from its Potentiator Platform are two intravenous, or IV,-administered agents, SPR206 and SPR741, designed to treat MDR Gram-negative infections in the hospital setting. 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.

 

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, funding from government contracts, a licensing agreement and through the sale of our common and preferred stock. The Company has incurred recurring losses since inception. As of March 31, 2019, the Company had an accumulated deficit of $143.6 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 May 9, 2019, 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.

7


 

 

Interim Financial Information

 

The consolidated balance sheet at December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of March 31, 2019, and for the three months ended March 31, 2019 and 2018, 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, 2018, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, 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 March 31, 2019, and results of operations for the three months ended March 31, 2019 and 2018, and cash flows for the three months ended March 31, 2019 and 2018 have been made. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019.

2.

Summary of Significant Accounting Policies

 

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 clinical trial costs and other research and development expenses, and the valuation of share-based awards. 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.

 

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.

 

8


 

 

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.

 

Revenue Recognition – Collaboration Revenue

 

Effective January 1, 2019, the Company entered into a licensing agreement that is evaluated under Accounting Standards Codification, Topic 606 (“Topic 606”), Revenue from Contracts with Customers, through which the Company licenses certain of its product candidates’ rights to a third party. Any future out-licensing agreements entered into by the Company and additional third parties shall also be evaluated under Topic 606. Terms of these arrangements include various payment types, typically including one or more of the following: upfront license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply services; and/or royalties on net sales of licensed products.

 

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations under the agreement; (iii) determine the transaction price, including constraint on variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) determine how the revenue will be recognized for each performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration to which it is entitled in exchange for the goods or services it transfers to a customer.

 

Once a contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. The Company assesses if these options provide a material right to the customer and if so, they are considered performance obligations. The exercise of a material right may be accounted for as a contract modification or as a continuation of the contract for accounting purposes.

 

The Company assesses whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct in the evaluation of a collaboration arrangement subject to Topic 606, the Company considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. The Company also considers the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, the Company is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct.

 

The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices (“SSP”) on a relative SSP basis. The SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. In certain circumstances, the Company may apply the residual method to determine the SSP of a good or service if the standalone selling price is considered highly variable or uncertain. The Company validates the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations.

 

If the consideration promised in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. The Company determines the amount of variable consideration by using the expected value method or the most likely amount method. The Company includes the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the

9


 

end of each subsequent reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.

 

If an arrangement includes development and regulatory milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

 

In determining the transaction price, the Company adjusts consideration for the effects of the time value of money if the timing of payments provides the Company with a significant benefit of financing. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. The Company assessed its revenue-generating arrangement in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in the arrangement.  For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied.

 

The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time this is based on the use of an output or input method.

 

In determining the accounting treatment for these arrangements, the Company develops assumptions to determine the stand-alone selling price for each performance obligation in the contract. These assumptions may include forecasted revenues, development timelines, discount rates and probabilities of technical and regulatory success.

 

Leases

 

Effective January 1, 2019, the Company adopted ASC Topic 842, Leases (“ASC 842”), using the modified retrospective approach and utilizing the effective date as its date of initial application, for which prior periods are presented in accordance with the previous guidance in ASC 840, Leases (“ASC 840”).

 

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Material leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. As of March 31, 2019, the Company’s short term leases with terms of one year or less were not material. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s initial lease term assessment unless there is reasonable certainty that the Company will renew. The Company monitors its plans to renew its material leases on a quarterly basis.

 

Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate (“IBR”), which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, and in a similar economic environment. Since the Company does not have any debt and has not been rated by any major credit rating agency, the Company’s IBR was estimated by developing a synthetic credit rating for the Company. In transitioning to ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rates.

 

In accordance with ASC 842, components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.).  The fixed and in-substance fixed contract consideration (including any consideration related to non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components.

 

Although separation of lease and non-lease components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and non-lease components. In making this election, entities would account for each lease component and the related non-lease component together as a single component. For new and amended leases beginning in 2019 and

10


 

after, the Company has elected to account for the lease and non-lease components for leases for classes of all underlying assets and allocate all of the contract consideration to the lease component only.

 

Net Income (Loss) per Share

 

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.

 

Recently Issued and Adopted Accounting Pronouncements

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), and will replace the existing guidance in ASC840, Leases. 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 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. ASU 2016-02 requires lessees to classify 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. A lessee is also required to record a right-of-use, or 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 under ASC 840. 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 Company elected to adopt ASU 2016-02 effective January 1, 2019 using the modified retrospective approach with no restatement of prior periods. This standard provides a number of optional practical expedients in transition. The Company applied the package of practical expedients to leases that commenced prior to the effective date whereby it elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The Company elected the short-term lease recognition exemption for all leases that qualified, and a right-of-use asset or lease liability was not recognized for short term leases.

 

The adoption of ASU 2016-02 resulted in the recognition of operating lease liabilities of $5.2 million and right-of-use assets of $6.1 million on the Company’s condensed consolidated balance sheet as of January 1, 2019. These and corresponding liabilities relate to existing facility operating leases and an embedded financing lease for manufacturing equipment. Other than the recognition of these right-of-use assets and liabilities, the adoption of ASU 2016-02 did not have a material impact on the Company’s consolidated statements of operations and comprehensive loss or consolidated statements of cash flows. No cumulative effect adjustment was recognized upon transition.

 

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

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within those fiscal years. The Company adopted the ASU effective January 1, 2019. The adoption of ASU 2017-11 did not have a material impact on the Company’s 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 adopted the ASU effective January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.

3.

Fair Value Measurements and Marketable Securities

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 March 31, 2019 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

 

 

$

38,575

 

 

$

 

 

$

38,575

 

Commercial paper

 

 

 

 

 

6,684

 

 

 

 

 

 

6,684

 

Total cash equivalents

 

 

 

 

 

45,259

 

 

 

 

 

 

45,259

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

 

 

 

25,382

 

 

 

 

 

 

25,382

 

Corporate bonds

 

 

 

 

 

9,141

 

 

 

 

 

 

9,141

 

Commercial paper

 

 

 

 

 

22,474

 

 

 

 

 

 

22,474

 

Total marketable securities

 

 

 

 

 

56,997

 

 

 

 

 

 

56,997

 

Total cash equivalents and marketable securities

 

$

 

 

$

102,256

 

 

$

 

 

$

102,256

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilution rights

 

$

 

 

$

 

 

$

223

 

 

$

223

 

 

 

$

 

 

$

 

 

$

223

 

 

$

223

 

 

 

 

Fair Value Measurements at December 31, 2018 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

 

 

$

22,327

 

 

$

 

 

$

22,327

 

Commercial paper

 

 

 

 

 

6,389

 

 

 

 

 

 

6,389

 

Total cash equivalents

 

 

 

 

 

28,716

 

 

 

 

 

 

28,716

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

 

 

 

37,815

 

 

 

 

 

 

37,815

 

Corporate bonds