Spero Therapeutics(SPRO) - 2022 Q3 - Quarterly Report

FORM 10-Q Filing Information This section provides basic filing information for the Quarterly Report on Form 10-Q, identifying SPERO THERAPEUTICS, INC. as the registrant Filing Details This section provides the basic filing information for the Quarterly Report on Form 10-Q for the period ended September 30, 2022, identifying SPERO THERAPEUTICS, INC. as the registrant - The document is a Quarterly Report on Form 10-Q for the period ended September 30, 2022[2] - The registrant is SPERO THERAPEUTICS, INC., with Commission File Number 001-38266[2] Registrant Information This section details the registrant's corporate information, including its state of incorporation, address, telephone number, and securities registered on Nasdaq Global Select Market - Spero Therapeutics, Inc. is incorporated in Delaware[3] 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 | Filer Status and Outstanding Shares The company is classified as a non-accelerated filer, a smaller reporting company, and an emerging growth company, and has elected not to use the extended transition period for new accounting standards. As of November 10, 2022, 51,776,053 shares of common stock were outstanding Registrant Filer Status | Large accelerated filer | ☐ | | :---------------------- | :-- | | Accelerated filer | ☐ | | Non-accelerated filer | ☒ | | Smaller reporting company | ☒ | | Emerging growth company | ☒ | - The registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards[4] - As of November 10, 2022, 51,776,053 shares of common stock, $0.001 par value per share, were outstanding[4] Forward-Looking Statements This section outlines the nature and scope of forward-looking statements within the report, covering future events, financial performance, and associated risks Nature of Forward-Looking Statements This section clarifies that the report contains forward-looking statements, made under safe harbor provisions, which involve risks and uncertainties and reflect current views on future events or financial performance - The report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995[6] - These statements reflect current views on future events or financial performance and involve known and unknown risks, uncertainties, and other factors[7] Key Areas of Forward-Looking Statements Forward-looking statements cover various aspects of the company's operations, including preclinical and clinical trials, regulatory approvals, potential milestone payments and royalties, key personnel retention, product commercialization, pricing, intellectual property, strategic collaborations, cost-savings from restructuring, financial performance, and competitive developments - Initiation, timing, design, progress, and results of preclinical studies, clinical trials, and R&D programs[8] - Regulatory path and potential FDA approval for tebipenem HBr[8] - Potential receipt of milestone payments and royalties under the GSK License Agreement[8] - Ability to retain key professionals and hire additional qualified personnel[8] - Ability to advance product candidates into, and successfully complete, clinical trials[8] - Timing or likelihood of regulatory filings and approvals[8] - Impact of COVID-19 pandemic on business and operations[8] - Future development and commercialization of product candidates, if approved[8] - Pricing, coverage, and reimbursement of product candidates, if approved[8] - Implementation of business model and strategic plans[8] - Scope of intellectual property protection for product candidates[8] - Ability to enter into strategic arrangements and/or collaborations[8] - Expected cost-savings from announced strategic restructuring[8] - Estimates regarding expenses, capital requirements, and needs for additional financing[8] - Ability to continue as a going concern[8] - Financial performance[8] - Developments relating to competitors and the industry[8] - Other risks and uncertainties, including those listed under Part II, Item 1A. 'Risk Factors'[8] Risk Factor Summary This section summarizes material risk factors, including uncertainties in regulatory approval, clinical trials, market acceptance, financial sustainability, and reliance on third parties Overview of Key Risks This section provides a summary of the material risk factors, highlighting uncertainties related to regulatory approval of tebipenem HBr, clinical trial outcomes, market acceptance, competition, financial sustainability, legal proceedings, and reliance on third parties - Uncertainty regarding the timing and terms of potential FDA approval for tebipenem HBr for complicated urinary tract infections (cUTI), despite positive indications from a Type A meeting[11][12] - Risk that product candidates may fail to demonstrate safety and efficacy in clinical trials, leading to additional costs, delays, or inability to complete development and commercialization[11][12] - Preliminary or interim clinical data may change, potentially impacting development plans[11][12] - Identification of serious adverse events or undesirable side effects during or after development could delay/prevent approval or limit commercial potential[11][12] - Even if approved, product candidates may not achieve market acceptance by physicians, patients, hospitals, and third-party payors[11][12] - Inability to establish sales, marketing, and distribution capabilities or agreements with third parties could hinder commercialization[11][12] - Substantial competition from other pharmaceutical and biotechnology companies may adversely affect operating results[11][12] - History of losses and expectation of future losses, with substantial doubt about the ability to continue as a going concern if additional capital is not secured[11][12] - Need for substantial additional funding; failure to raise capital could force delays or elimination of product development/commercialization efforts[11][12] - Ongoing lawsuits could result in substantial costs and divert management's attention[11][12] - Continued COVID-19 pandemic could adversely impact business, including preclinical studies and clinical trials[11][12] - Dependence on third-party collaborations for development and commercialization[11][12] - Reliance on third parties for manufacturing preclinical and clinical supplies increases risks of insufficient quantities or unacceptable costs[11][12] - Government funding for programs adds complexity and may impose requirements increasing commercialization and production costs[11][12] - Inability to obtain and maintain sufficient patent protection or enforce trademarks could adversely affect business[11][12] - Delays in obtaining required regulatory approvals will materially impair revenue generation[11][12] - Internal restructuring activities could disrupt business or harm financial condition[11][12] PART I – FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Spero Therapeutics, Inc., including balance sheets, statements of operations and comprehensive loss, statements of cash flows, and statements of stockholders' equity, along with detailed notes explaining the company's business, accounting policies, and specific financial items Condensed Consolidated Balance Sheets This section presents the company's condensed consolidated balance sheets, detailing assets, liabilities, and stockholders' equity as of September 30, 2022, and December 31, 2021 Condensed Consolidated Balance Sheets (In thousands) | (In thousands) | September 30, 2022 | December 31, 2021 | | :--------------- | :----------------- | :---------------- | | Assets | | | | Cash and cash equivalents | $50,446 | $112,584 | | Marketable securities | — | $33,818 | | Total current assets | $52,887 | $157,872 | | Total assets | $64,476 | $171,072 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $16,225 | $18,670 | | Liability related to the sale of future royalties, non-current | — | $48,414 | | Total liabilities | $31,992 | $82,783 | | Total stockholders' equity | $32,484 | $88,289 | | Total liabilities and stockholders' equity | $64,476 | $171,072 | - Cash and cash equivalents decreased by 55.2% from $112,584 thousand at December 31, 2021, to $50,446 thousand at September 30, 2022[17] - Total assets decreased by 62.4% from $171,072 thousand at December 31, 2021, to $64,476 thousand at September 30, 2022[17] - Total liabilities decreased by 61.3% from $82,783 thousand at December 31, 2021, to $31,992 thousand at September 30, 2022, primarily due to the repayment of the liability related to the sale of future royalties[17] Condensed Consolidated Statements of Operations and Comprehensive Loss This section presents the company's condensed consolidated statements of operations and comprehensive loss, detailing revenues, expenses, and net loss for the three and nine months ended September 30, 2022 and 2021 Condensed Consolidated Statements of Operations and Comprehensive Loss (In thousands, except per share data) | (In thousands, except per share data) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenues | $2,006 | $3,064 | $6,068 | $15,512 | | Research and development | $7,360 | $14,436 | $32,504 | $47,301 | | General and administrative | $6,632 | $11,152 | $29,988 | $28,680 | | Restructuring | $(152) | — | $11,697 | — | | Total operating expenses | $13,840 | $25,588 | $74,189 | $75,981 | | Loss from operations | $(11,834) | $(22,524) | $(68,121) | $(60,469) | | Net loss | $(11,675) | $(22,521) | $(73,186) | $(60,516) | | Net loss per share, basic and diluted | $(0.33) | $(0.70) | $(2.16) | $(1.99) | - Total revenues decreased by 34.6% YoY for the three months ended September 30, 2022, and by 60.9% YoY for the nine months ended September 30, 2022[19] - Research and development expenses decreased by 49.0% YoY for the three months ended September 30, 2022, and by 31.3% YoY for the nine months ended September 30, 2022, primarily due to strategic restructuring[19] - Net loss decreased by 48.1% YoY for the three months ended September 30, 2022, but increased by 20.9% YoY for the nine months ended September 30, 2022, largely due to restructuring charges and other expenses related to the sale of future royalties[19] - Restructuring charges of $11.7 million were recognized for the nine months ended September 30, 2022[19] Condensed Consolidated Statements of Cash Flows This section presents the company's condensed consolidated statements of cash flows, detailing operating, investing, and financing activities for the nine months ended September 30, 2022 and 2021 Condensed Consolidated Statements of Cash Flows (In thousands) | (In thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(52,213) | $(36,998) | | Net cash provided by investing activities | $33,807 | $30,947 | | Net cash provided by (used in) financing activities | $(43,732) | $33,701 | | Net increase (decrease) in cash and cash equivalents | $(62,138) | $27,650 | | Cash, cash equivalents and restricted cash at end of period | $50,446 | $112,859 | - Net cash used in operating activities increased by 41.1% to $52,213 thousand for the nine months ended September 30, 2022, compared to $36,998 thousand in the prior year[22] - Net cash used in financing activities was $(43,732) thousand for the nine months ended September 30, 2022, a significant change from $33,701 thousand provided in the prior year, primarily due to the repayment of the liability related to the sale of future royalties[22] - Cash, cash equivalents, and restricted cash at the end of the period decreased by 55.3% to $50,446 thousand from $112,859 thousand in the prior year[22] Condensed Consolidated Statements of Stockholders' Equity This section presents the company's condensed consolidated statements of stockholders' equity, detailing changes in equity components from December 31, 2021, to September 30, 2022 Condensed Consolidated Statements of Stockholders' Equity (In thousands, except share amounts) | (In thousands, except share amounts) | Balances at Dec 31, 2021 | Balances at Sep 30, 2022 | | :----------------------------------- | :----------------------- | :----------------------- | | Preferred Stock Par Value | $3 | $0 | | Common Stock Par Value | $32 | $43 | | Additional Paid-in Capital | $455,719 | $473,090 | | Accumulated Deficit | $(367,463) | $(440,649) | | Total Stockholders' Equity | $88,289 | $32,484 | - Total stockholders' equity decreased by 63.2% from $88,289 thousand at December 31, 2021, to $32,484 thousand at September 30, 2022[24][25] - Accumulated deficit increased by 20.0% from $(367,463) thousand to $(440,649) thousand, reflecting ongoing net losses[24][25] - All preferred stock was converted to common stock by September 30, 2022, increasing common stock par value and additional paid-in capital[24][25] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed notes explaining the company's business, significant accounting policies, and specific financial items referenced in the unaudited condensed consolidated financial statements 1. Nature of the Business and Basis of Presentation Spero Therapeutics, Inc. is a clinical-stage biopharmaceutical company focused on bacterial infections and rare diseases, with lead product candidate SPR720 and partnership programs SPR206 and tebipenem HBr. The company has incurred recurring losses since inception and expects to continue to do so, raising substantial doubt about its ability to continue as a going concern beyond 12 months without additional funding, despite recent upfront payments from the GSK License Agreement and SPA - Spero Therapeutics is a multi-asset, clinical-stage biopharmaceutical company focused on bacterial infections (including MDR) and rare diseases[28] - Lead product candidate: SPR720 for nontuberculous mycobacterial (NTM) pulmonary disease (rare orphan disease)[28] - Partnership programs: SPR206 (IV-administered for MDR Gram-negative bacterial infections) and tebipenem HBr (oral carbapenem for complicated urinary tract infections (cUTIs))[28] - The Company has incurred recurring losses since inception, with net losses of $11.7 million and $22.5 million for the three months ended September 30, 2022 and 2021, respectively, and $73.2 million and $60.5 million for the nine months ended September 30, 2022 and 2021, respectively. Accumulated deficit as of September 30, 2022, was $440.6 million[31] - The Company expects its current operating plan, existing cash, cash equivalents, marketable securities, and initial upfront payments of $66.0 million from the GSK License Agreement and $9.0 million from the GSK SPA will fund operations for at least 12 months from the issuance date of the financial statements. Beyond this, additional funding will be required, raising substantial doubt about its ability to continue as a going concern[32] 2. Summary of Significant Accounting Policies This section outlines significant accounting policies, including revenue recognition, R&D costs, share-based compensation, and fair value measurements, crucial for financial statement preparation - The Company manages its operations as a single segment, focusing on identifying, developing, and commercializing novel treatments for bacterial infections and rare diseases[37] - Revenue recognition for collaboration agreements follows ASC 606, involving a five-step model to identify performance obligations, determine transaction price, allocate it, and recognize revenue as obligations are satisfied[51] - Research and development costs are expensed as incurred, including personnel, preclinical/clinical development, manufacturing, and licensing expenses[62] - The Company uses the two-class method for net income (loss) per share calculation due to participating securities[68] 3. Fair Value Measurements and Marketable Securities This note details the fair value measurements of the company's assets and liabilities, primarily cash equivalents and derivative liabilities, categorized into Level 1, Level 2, and Level 3 of the fair value hierarchy. It also provides information on marketable securities and embedded derivatives Fair Value Measurements at September 30, 2022 (In thousands) | (In thousands) | Level 1 | Level 2 | Level 3 | Total | | :------------- | :------ | :------ | :------ | :---- | | Cash equivalents: Money market funds | $— | $49,569 | $— | $49,569 | | Derivative liability | $— | $— | $141 | $141 | Fair Value Measurements at December 31, 2021 (In thousands) | (In thousands) | Level 1 | Level 2 | Level 3 | Total | | :------------- | :------ | :------ | :------ | :---- | | Cash equivalents: Money market funds | $— | $109,316 | $— | $109,316 | | Corporate bonds | $— | $2,701 | $— | $2,701 | | Marketable securities: Corporate bonds | $— | $11,479 | $— | $11,479 | | Commercial paper | $— | $22,339 | $— | $22,339 | | Derivative liability | $— | $— | $802 | $802 | - The derivative liability related to a change of control provision was $0.1 million as of September 30, 2022, classified as a Level 3 liability[79][80] 4. Accrued Expenses and Other Current Liabilities This note provides a breakdown of accrued expenses and other current liabilities, showing a significant decrease in accrued external research and development expenses and an increase in accrued restructuring expenses from December 31, 2021, to September 30, 2022 Accrued Expenses and Other Current Liabilities (In thousands) | (In thousands) | September 30, 2022 | December 31, 2021 | | :------------------------------------ | :----------------- | :---------------- | | Accrued external research and development expenses | $1,219 | $6,315 | | Accrued restructuring expenses | $967 | — | | Accrued payroll and related expenses | $4,860 | $5,884 | | Accrued professional fees | $836 | $909 | | Accrued other | $211 | $1,242 | | Total Accrued expenses and other current liabilities | $8,093 | $14,350 | - Accrued external research and development expenses decreased by 80.7% from $6,315 thousand to $1,219 thousand[84] - Accrued restructuring expenses increased from $0 to $967 thousand, reflecting the strategic restructuring initiative[84] 5. Common Stock This note details common stock activities, including sales under an 'at-the-market' offering program, conversions of preferred stock to common stock, and a share purchase agreement with Pfizer. All preferred stock has been converted to common stock as of September 30, 2022 - During the nine months ended September 30, 2022, the Company sold 3,964,478 shares of common stock under its Sales Agreement for aggregate gross proceeds of approximately $10.7 million[86] - All of the Company's preferred stock (Series B, C, and D) was converted to common stock by September 30, 2022[87][88][89][90] - In June 2021, Pfizer Inc. purchased 2,362,348 shares of common stock for $40.0 million, with a fair market value of $27.5 million and an associated premium of $12.5 million allocated to the Pfizer License Agreement[92][94] 6. Share-Based Compensation This note describes the company's equity compensation plans, including stock options and restricted stock units (RSUs), and the associated compensation expense. It also details performance-based awards granted to employees and executives - The weighted-average grant date fair value of stock options was $7.94 per option for the nine months ended September 30, 2022, compared to $13.57 in the prior year[101] - 1,115,357 RSUs were granted to employees during the nine months ended September 30, 2022, with $8.6 million of unrecognized compensation expense remaining[102][103] Share-Based Compensation Expense (In thousands) | (In thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Research and development expenses | $730 | $1,059 | $2,595 | $2,794 | | General and administrative expenses | $1,376 | $1,271 | $4,031 | $3,708 | | Total | $2,106 | $2,330 | $6,626 | $6,502 | 7. Commitments and Contingencies This note outlines the company's commitments under license agreements and operating leases, as well as potential liabilities from indemnification agreements and ongoing legal proceedings, specifically two putative class action lawsuits - The Company is obligated to make contingent and non-contingent payments under various license agreements[110] - Two putative class action lawsuits were filed against the Company and certain officers, alleging violations of the Securities Exchange Act of 1934 related to statements about tebipenem HBr's New Drug Application. The lawsuits were consolidated, and the Company intends to vigorously defend against them[114] - The Company provides indemnification to vendors, lessors, business partners, and directors/officers, with maximum potential amounts often unlimited, but has not incurred material costs to date[112] 8. Government Contracts This note details the company's government funding agreements with BARDA, the U.S. Department of Defense (DoD), and NIAID, which support the development of tebipenem HBr and SPR206. It highlights committed funding amounts and revenue recognized from these contracts - BARDA awarded up to $44.2 million (later increased to $59.7 million total potential contract value) for tebipenem HBr development, with $46.9 million committed funding as of January 2022. An additional $10.0 million from DTRA brings total potential funding to $69.7 million[116][117] - The DoD awarded $5.9 million for SPR206 clinical development, with all activities completed and the award closed on August 14, 2022[119] - NIAID awarded up to $23.4 million over five years for SPR206 development, with $2.1 million committed for the base period as of September 30, 2022[120] Grant Revenue (In thousands) | (In thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 30, 2021 | | :------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | BARDA Contract | $537 | $721 | $1,865 | $8,908 | | NIAID Contract | $339 | $129 | $962 | $530 | | DoD Agreement | $48 | $1,506 | $1,016 | $3,260 | 9. License, Collaboration and Service Agreements This note details various license, collaboration, and service agreements, including those with Cantab, Vertex, Meiji, Everest Medicines, Gates MRI, Savior Lifetec, and Pfizer. These agreements involve milestone payments, royalties, and responsibilities for development and commercialization of product candidates - Cantab License Agreements: Obligation for future milestone payments up to $5.8 million (clinical/regulatory) and £5.0 million (commercial), plus low single-digit royalties on net sales of SPR206[123][125] - Vertex License Agreement: Obligation for future milestone payments up to $80.2 million (clinical/regulatory/commercial) and mid-single-digit to low double-digit royalties on net sales of SPR720[128] - Meiji License Agreement: Obligation for future milestone payments up to $1.0 million (regulatory) and low single-digit royalties on net sales of tebipenem HBr, plus a low double-digit percentage of sublicense fees up to $7.5 million[132] - Amended Everest License Agreement: Everest granted exclusive license for SPR206 in Greater China, South Korea, and certain Southeast Asian countries. Company may receive up to $38.0 million in milestones (of which $1.3 million received to date) and high single-digit to low double-digit royalties on net sales. Everest is responsible for development, regulatory approval, and commercialization costs in the Territory[137][139] - Gates MRI Collaboration Agreement: Gates MRI granted a no-cost, exclusive license for SPR720 for TB in low- and middle-income countries, funding preclinical and clinical studies. Funding received is recognized as a reduction to R&D expenses[141] - Savior Service Agreement: Paid Savior Lifetec Corporation approximately $2.0 million supervision fee for managing commercial manufacturing facility buildout for tebipenem HBr, fully amortized by December 31, 2021. An additional $5.3 million paid for facility build-out costs is classified as a long-term asset[148] - Pfizer License Agreement: Pfizer granted exclusive royalty-bearing license for SPR206 globally (excluding US and certain Asian markets). Company eligible for up to $80.0 million in development and sales milestones, and high single-digit to low double-digit royalties on net sales. A $5.0 million milestone payment was received in Q3 2022 for regulatory engagement[148] - The Company recognized $1.1 million and $1.5 million of collaboration revenue from the Pfizer contract during the three and nine months ended September 30, 2022, respectively[151] 10. Liability Related to the Sale of Future Royalties This note explains the termination of the Revenue Interest Agreement with HCR, which involved the sale of future royalties. The company repaid $54.5 million and recognized a $3.6 million loss on extinguishment, with a remaining derivative liability of $0.1 million for a contingent change of control payment - On June 7, 2022, the Company terminated its Revenue Interest Agreement with HCR, repaying $54.5 million[154] - A loss on extinguishment of $3.6 million was recognized[156] - A derivative liability of $0.1 million was recorded for a conditional obligation to pay HCR an additional cash amount upon a change of control event occurring on or prior to December 31, 2022[155][156] Changes in Liability Related to Sale of Future Royalties (In thousands) | (In thousands) | Amount | | :------------------------------------------ | :----- | | Liability related to sale of future royalties, as of December 31, 2021 | $48,414 | | Repayment of liability | $(54,485) | | Loss on extinguishment of liability | $3,581 | | Establish change of control derivative liability | $(115) | | Interest expense recognized | $2,605 | | Liability related to sale of future royalties, as of September 30, 2022 | $— | 11. Restructuring In May 2022, the Company implemented a strategic restructuring, reducing its workforce from 146 to 41 full-time employees, to cut costs and reallocate resources to SPR720 and SPR206 programs. This resulted in a $11.7 million restructuring charge for the nine months ended September 30, 2022, primarily for employee termination costs, lease impairment, and other discontinuation costs - A strategic restructuring initiative was implemented on May 3, 2022, reducing the workforce from 146 to 41 full-time employees[158] - A restructuring charge of approximately $11.7 million was recognized for the nine months ended September 30, 2022, comprising $8.6 million for employee termination costs, $0.6 million for lease impairment, and $2.5 million for other discontinuation costs[159][161] - As of September 30, 2022, $1.0 million remained in accrued expenses related to restructuring costs, expected to be paid by Q1 2023[161] - Retention awards totaling $1.4 million (cash) and $2.6 million (cash/RSU) were approved for employees and executives, accrued as services are performed[162][163][164] 12. Net Loss per Share This note presents the calculation of basic and diluted net loss per share, which are identical due to the anti-dilutive effect of potential common shares. The net loss per share was $(0.33) for the three months and $(2.16) for the nine months ended September 30, 2022 Net Loss per Share Attributable to Common Stockholders (In thousands, except share and per share amounts) | (In thousands, except share and per share amounts) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(11,675) | $(22,521) | $(73,186) | $(60,516) | | Weighted average common shares outstanding, basic and diluted | 35,882,076 | 32,132,500 | 33,834,198 | 30,417,305 | | Net loss per share, basic and diluted | $(0.33) | $(0.70) | $(2.16) | $(1.99) | - Potentially dilutive securities were excluded from diluted net loss per share calculation as their effect would be anti-dilutive[166] 13. Subsequent Events This note describes significant events occurring after September 30, 2022, including the closing of the GSK License Agreement for tebipenem HBr, an associated share purchase agreement with GSK, and additional 'at-the-market' common stock sales - On November 7, 2022, the Company closed an exclusive license agreement with GSK for tebipenem HBr, granting GSK rights in all territories except certain Asian countries[168] - Upfront payment: $66.0 million[169] - Potential development milestones: up to $150.0 million[169] - Potential commercial milestone payments: up to $150.0 million[169] - Potential sales milestone payments: up to $225.0 million[169] - Royalties: Low-single digit to low-double digit tiered royalties on net product sales (if sales exceed $1.0 billion)[169] - The Company will be responsible for the execution and costs of the follow-up Phase 3 clinical trial of tebipenem HBr, while GSK will handle further development, regulatory filing, and commercialization outside the US[170] - Concurrently, Glaxo Group Limited (an affiliate of GSK) purchased 7,450,000 shares of the Company's common stock for $9.0 million on November 7, 2022[174][175] - From September 30, 2022, through November 10, 2022, an additional 1,567,505 shares of common stock were sold under the 'at-the-market' offering program for approximately $3.2 million gross proceeds[177] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, and future outlook, including an overview of its business, recent program developments, detailed analysis of revenues and expenses, critical accounting policies, and a discussion of liquidity and capital resources Overview This section provides an overview of Spero Therapeutics as a clinical-stage biopharmaceutical company, its accumulated deficit, and its funding outlook for the next 12 months and beyond - Spero Therapeutics is a multi-asset, clinical-stage biopharmaceutical company focused on bacterial infections and rare diseases, with lead product candidate SPR720 and partnership programs SPR206 and tebipenem HBr[179] - The company has not generated revenue from product sales since its inception in 2013 and has an accumulated deficit of $440.6 million as of September 30, 2022[180][181] - Existing cash, cash equivalents, marketable securities, and initial payments from the GSK License Agreement and SPA are expected to fund operations for at least 12 months, and beyond 2024 with GSK milestone payments, but substantial additional funding will be required thereafter[181] Recent Developments This section highlights recent program updates for SPR720, SPR206, and tebipenem HBr, including clinical trial initiations, patent issuances, regulatory milestones, and the GSK license agreement and equity investment - SPR720 Program Updates: Initiated Phase 2 clinical trial for NTM pulmonary disease, with first patient screening/dosing expected in Q4 2022. Top-line data expected in H1 2024[185] - SPR206 Program Updates: U.S. Patent No. 11,459,357 issued covering SPR206 composition of matter, extending into at least June 2039. Received $5.0 million payment from Pfizer for a regulatory milestone in Q3 2022. Phase 2 clinical trial expected to initiate in Q3 2023[187][188] - Tebipenem HBr Program Updates: FDA indicated that positive results from a single additional Phase 3 clinical trial could support approval for cUTI for a limited use indication. Entered into an exclusive license agreement with GSK in September 2022, receiving a $66.0 million upfront payment and eligibility for up to $525.0 million in milestones and tiered royalties. GSK also made a $9.0 million equity investment[189][190][192] Components of our Results of Operations This section details the components of the company's results of operations, including sales, grant, and collaboration revenues, along with research and development, general and administrative, restructuring, and other income/expense categories - Sales Revenue: No product sales revenue to date; future revenue depends on successful development and regulatory approval[193][194] - Grant Revenue: Primarily derived from government awards (BARDA, DoD, NIAID)[195] - Collaboration Revenue: From agreements with Everest and Pfizer[196] - Research and Development Expenses: Expensed as incurred, including personnel, preclinical/clinical development, manufacturing, and licensing costs. Direct costs are tracked by program, while unallocated costs include employee and facility expenses[197][198][199] - General and Administrative Expenses: Primarily salaries, benefits, share-based compensation for executive, finance, and administrative functions, plus professional fees and facility costs[200][201] - Restructuring: Expected substantial reduction in future operating expenses due to strategic restructuring and cessation of tebipenem HBr commercialization activities[202][203] - Other Income (Expense): Includes interest income, interest expense related to the sale of future royalties, loss on extinguishment of liability, and changes in fair value of derivative liability[204][205][206] Critical Accounting Policies and Significant Judgments and Estimates This section discusses critical accounting policies and the significant judgments and estimates required for financial statement preparation, particularly regarding revenue recognition, clinical trial accruals, share-based awards, and restructuring expenses - The preparation of financial statements requires management to make estimates and assumptions, particularly for revenue recognition, clinical trial cost accruals, share-based awards, and restructuring expenses[207][208] - A material change in critical accounting estimates during the nine months ended September 30, 2022, was related to restructuring expenses, where estimates and judgments were made regarding the amount and timing of termination benefits and other exit costs[208] Results of Operations This section provides a detailed analysis of the company's results of operations, comparing revenues, expenses, and net loss for the three and nine months ended September 30, 2022 and 2021 Summary of Results of Operations (In thousands) | (In thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenues | $2,006 | $3,064 | $6,068 | $15,512 | | Research and development | $7,360 | $14,436 | $32,504 | $47,301 | | General and administrative | $6,632 | $11,152 | $29,988 | $28,680 | | Restructuring | $(152) | — | $11,697 | — | | Loss from operations | $(11,834) | $(22,524) | $(68,121) | $(60,469) | | Net loss | $(11,675) | $(22,521) | $(73,186) | $(60,516) | - Three Months Ended September 30, 2022 vs. 2021: - Total revenues decreased by $1.1 million, primarily due to a $1.5 million decrease in DoD funding for SPR206 and a $0.2 million decrease in BARDA funding for tebipenem HBr, partially offset by a $0.2 million increase in NIAID funding for SPR206 and a $0.9 million increase in Pfizer collaboration revenue[212][213][214][215][216] - Total operating expenses decreased by $11.7 million, driven by a $7.1 million decrease in R&D (mainly tebipenem HBr program reduction and personnel costs) and a $4.5 million decrease in G&A (headcount reduction and professional fees)[217][218][219] - Net loss decreased by $10.8 million, reflecting reduced operating expenses[220][221] - Nine Months Ended September 30, 2022 vs. 2021: - Total revenues decreased by $9.4 million, primarily due to a $7.0 million decrease in BARDA funding for tebipenem HBr and a $2.2 million decrease in DoD funding for SPR206, and a $0.6 million decrease in collaboration revenue[223][224][225] - Total operating expenses decreased by $1.8 million, with a $14.8 million decrease in R&D (tebipenem HBr program reduction) offset by a $1.3 million increase in G&A and an $11.7 million restructuring charge[226][227][228][229] - Net loss increased by $12.7 million, mainly due to the restructuring charge, interest expense, and loss on extinguishment of future royalties liability[230][231][232] Liquidity and Capital Resources This section discusses the company's liquidity and capital resources, including cash position, 'at-the-market' equity sales, cash flow activities, and future funding requirements, highlighting reliance on additional capital - As of September 30, 2022, the Company had cash, cash equivalents, and marketable securities of $50.4 million[233] - The Company sold 3,964,478 shares of common stock for approximately $10.7 million gross proceeds under its 'at-the-market' offering program during the nine months ended September 30, 2022[235] Summary of Cash Flows (In thousands) | (In thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----------------------------- | :----------------------------- | :----------------------------- | | Cash used in operating activities | $(52,213) | $(36,998) | | Cash provided by investing activities | $33,807 | $30,947 | | Cash provided by (used in) financing activities | $(43,732) | $33,701 | | Net increase (decrease) in cash and cash equivalents | $(62,138) | $27,650 | - Net cash used in operating activities increased to $52.2 million (9M 2022) from $37.0 million (9M 2021), primarily due to net loss and changes in operating assets/liabilities[238][239] - Net cash used in financing activities was $43.7 million (9M 2022), compared to $33.7 million provided (9M 2021), mainly due to the $54.5 million repayment of the liability related to future royalties[243][244] - The Company believes existing cash, cash equivalents, marketable securities, and initial payments from the GSK License Agreement and SPA will fund operations for at least 12 months from the issuance date of the financial statements, and beyond 2024 with GSK milestone payments, but substantial additional funding will be required thereafter[245] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate sensitivity on its cash, cash equivalents, and marketable securities, and foreign currency exchange rate fluctuations due to international research expenses - As of September 30, 2022, the Company had $50.4 million in cash, cash equivalents, and marketable securities, primarily exposed to interest income sensitivity[254] - The Company faces exposure to foreign currency exchange rates (Euro, British Pound, Japanese Yen, Australian dollar) due to international research expenses, though historically, fluctuations have not had a material impact[254] Item 4. Controls and Procedures Management, with CEO and CFO participation, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2022, concluding they were effective at a reasonable assurance level. No material changes in internal control over financial reporting occurred during the quarter - As of September 30, 2022, the Company's disclosure controls and procedures were evaluated and deemed effective at the reasonable assurance level[255][256] - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2022[257] PART II – OTHER INFORMATION This part covers other information, including legal proceedings, risk factors, equity sales, defaults, mine safety, other disclosures, and exhibits Item 1. Legal Proceedings This section discloses two consolidated putative class action lawsuits filed against the Company and certain officers, alleging securities law violations related to statements about tebipenem HBr's New Drug Application. The Company denies wrongdoing and intends to vigorously defend, but cannot predict the outcome or estimate potential losses - Two putative class action lawsuits were filed and consolidated against the Company and certain officers, alleging violations of Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5[259] - The complaints allege false/misleading statements concerning the New Drug Application for tebipenem HBr, leading investors to believe the drug would receive FDA approval[259] - The Company denies wrongdoing and intends to vigorously defend, but cannot predict outcomes or reasonably estimate a range of possible loss[259] Item 1A. Risk Factors This comprehensive section details various risks that could materially and adversely affect the company's business, financial condition, results of operations, and future growth prospects. Key areas of risk include product development and commercialization, financial position and capital needs, the COVID-19 pandemic, dependence on third parties, government contracts, intellectual property, regulatory approvals, employee matters, and common stock volatility Risks Related to Product Development and Commercialization This section outlines risks associated with product development and commercialization, including regulatory approval uncertainties, clinical trial failures, market acceptance, competition, and product liability - Uncertainty of tebipenem HBr FDA approval despite Type A meeting, requiring an additional Phase 3 trial and potentially restrictive labeling[262][266] - Clinical trials may fail to produce favorable results, leading to delays, increased costs, or inability to complete development[267] - Preliminary/interim clinical data are subject to change and may not be predictive of final results[281] - Serious adverse events or unexpected side effects could delay/prevent approval, limit commercial potential, or lead to withdrawal[284] - Approved products may not achieve market acceptance by physicians, patients, hospitals, or third-party payors[288] - Inability to establish sales, marketing, and distribution capabilities or partnerships could hinder commercialization[294] - Substantial competition from other pharmaceutical and biotechnology companies, including existing and pipeline products for cUTIs and Gram-negative infections[297] - Potential for unfavorable pricing regulations or inadequate third-party payor coverage and reimbursement[303] - Risk of bacteria developing resistance to product candidates, affecting revenue potential[307] - Failure to discover, develop, and commercialize additional product candidates could impair business expansion[309] - Product liability lawsuits could divert resources, incur substantial liabilities, and limit commercialization[312] - Failure to comply with environmental, health, and safety laws could result in fines or penalties[314] - Internal computer systems or those of third parties may fail or suffer security breaches, disrupting development programs and potentially leading to liability[317] Risks Related to Our Financial Position and Need for Additional Capital This section details financial risks, including a history of losses, the need for substantial additional funding, potential dilution from capital raises, limitations on net operating loss carryforwards, and ongoing litigation costs - History of losses and expectation of substantial future losses; auditor expressed substantial doubt about going concern ability[324][326] - Need for substantial additional funding; inability to raise capital or receive government award payments could force delays or elimination of product development programs[331] - Raising additional capital may dilute stockholders' ownership, restrict operations, or require relinquishing rights to technologies/product candidates[336] - Ability to use net operating loss carryforwards may be limited by Section 382 ownership changes[339] - Limited operating history and no history of commercializing pharmaceutical products make future viability difficult to evaluate[342] - Ongoing lawsuits could result in substantial costs and divert management's attention[345] Risks Related to the COVID-19 Pandemic This section discusses the adverse impacts of the COVID-19 pandemic on business operations, preclinical studies, and clinical trials, including regulatory disruptions, commercial delays, and supply chain issues - The continued COVID-19 pandemic could adversely impact business, preclinical studies, and clinical trials through disruptions in regulatory operations, delays in commercial launch, difficulties in patient enrollment, and supply chain interruptions[347][348] - The extent of the impact depends on future developments, which are highly uncertain, including the duration of the outbreak and effectiveness of containment measures[350] Risks Related to Our Dependence on Third Parties This section outlines risks stemming from reliance on third-party collaborations for development and commercialization, contract manufacturers for supplies, and compliance with in-license agreements - Dependence on collaborations with third parties (e.g., GSK, Pfizer, Everest) for development and commercialization, with risks including collaborators' discretion, potential non-performance, and termination[351][353][354] - Inability to establish collaborations could force curtailment or delay of product candidate development[356] - Reliance on third parties for all nonclinical studies and clinical trials, limiting control and posing risks of delays or non-compliance with regulatory standards[361][362] - Reliance on third-party contract manufacturers for preclinical, clinical, and commercial supplies, increasing risks of insufficient quantities, unacceptable costs, and supply chain disruptions (e.g., Taiwan facilities, increased raw material/shipping costs)[365][366][367][368] - Failure to comply with obligations in in-license or acquisition agreements (e.g., Meiji, GSK) could lead to loss of important rights[374][378] Risks Related to Our United States Government Contracts and to Certain Grant Agreements This section details risks associated with government funding, including increased costs, audit and modification clauses, potential termination, and implications for intellectual property rights - Government funding (e.g., BARDA, NIAID, DoD) adds complexity and imposes requirements that may increase commercialization and production costs, including government rights to intellectual property and unilateral contract control[379][381] - Government contracts are subject to audit and modification, with potential for termination for convenience or default, and liability for improper activities[384][385] - Compliance with numerous government contracting laws and regulations (e.g., FAR, business ethics) makes business conduct more expensive and difficult[387] - Provisions in government contracts may affect intellectual property rights, including government's royalty-free use and 'march-in' rights[391] Risks Related to Our Intellectual Property This section addresses risks concerning intellectual property, including challenges in obtaining and maintaining patent protection, potential infringement lawsuits, and the need to protect trade secrets and trademarks - Inability to obtain and maintain sufficient patent protection or broad scope could allow competitors to commercialize similar technologies[392][393] - Patent position in biotechnology and pharmaceuticals is highly uncertain, with risks of challenges to validity, enforceability, and scope[394][396] - Involvement in lawsuits to protect or enforce patents/intellectual property could be expensive, time-consuming, and unsuccessful[398][399][400] - Risk of being sued for infringing third-party intellectual property rights, potentially leading to cessation of development/commercialization or costly licensing[402] - Exposure to claims of misappropriating third-party intellectual property or disputes over ownership of own intellectual property[404][405] - Failure to protect the confidentiality of trade secrets could materially adversely affect technology value and harm business[407][408] - Failure to enforce registered trademarks or secure registration of pending applications could adversely affect business, including product naming and market presence[409][410] Risks Related to Regulatory Approval and Other Legal Compliance Matters This section covers risks related to regulatory approvals, including delays, fast track/priority review limitations, orphan drug status, generic competition, international approvals, post-approval obligations, and compliance with healthcare laws and pricing programs - Inability or delays in obtaining required regulatory approvals (FDA, foreign authorities) will materially impair revenue generation[411][413] - Fast track designation may not lead to faster development or regulatory review/approval[415] - Priority review designation does not assure FDA approval or a faster process[416] - Inability to obtain or maintain orphan drug designations could limit market exclusivity benefits[417] - Approved products may face generic competition sooner than anticipated, impacting revenue potential[418] - Failure to obtain marketing approval in international jurisdictions will prevent product commercialization abroad[420] - Ongoing obligations and continuing regulatory review post-approval may result in significant additional expense, restrictions, or market withdrawal[421][422] - Relationships with customers and third-party payors are subject to anti-kickback, fraud and abuse, and other healthcare laws, exposing the company to criminal sanctions, civil penalties, and reputational harm[426][427][428][429][430][431][432][433][434][435][436][437][438][439][440][441] - Recently enacted and future policies/legislation (e.g., ACA, drug pricing reforms) may increase difficulty and cost of obtaining approval and affect reimbursement[442][443] - Failure to comply with reporting and payment obligations under U.S. governmental pricing programs could have a material adverse effect[444] - Risk of misconduct by employees, contractors, or vendors, including noncompliance with regulatory standards, leading to sanctions and reputational harm[445][446] - Inadequate funding for FDA, SEC, and other government agencies could hinder timely development/commercialization or normal business functions[447][448][449] Risks Related to Employee Matters and Managing Growth This section discusses risks related to employee matters and managing growth, including retaining key personnel, potential disruptions from restructuring, and challenges of conducting business in international markets - Future success depends on retaining key executives (e.g., CEO Ankit Mahadevia, M.D.) and attracting/retaining qualified personnel, especially after a restructuring that reduced the workforce from 146 to 41 employees[450][451][452] - Internal restructuring activities could result in business disruptions, loss of continuity, and unexpected expenses, potentially harming financial condition[453] - Conducting business in international markets, if foreign approvals are obtained, subjects the company to additional risks such as reduced intellectual property protection, economic/political instability, and supply chain disruptions[454] Risks Related to Our Common Stock This section outlines risks related to the company's common stock, including price volatility, Nasdaq listing compliance, analyst coverage, preferred stock issuance, management discretion, 'emerging growth company' status, public company costs, internal control failures, stock sales, lack of dividends, and corporate governance provisions - The price of common stock may be volatile and fluctuate substantially due to various factors, including clinical trial results, regulatory developments, competition, and financial performance[456][458] - Past failure to satisfy Nasdaq Global Select Market listing requirements (e.g., minimum bid price) could recur, negatively affecting stock price and liquidity[460][461] - If securities or industry analysts do not publish research or publish inaccurate/unfavorable research, share price and trading volume could decline[463](index