Spero Therapeutics, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited financial information and the notes thereto included appearing elsewhere in this Quarterly Report on Form 10-Q, and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. Overview We are a multi-asset, clinical-stage biopharmaceutical company focused on identifying, developing and commercializing treatments in high unmet need areas involving multi-drug resistant, or MDR, bacterial infections and rare diseases. Our most advanced product candidate, Tebipenem Pivoxil Hydrobromide, or tebipenem HBr (previously SPR994), is designed to be the first 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. We are also developing SPR720, a novel oral antibiotic designed for the treatment of a rare, orphan disease caused by pulmonary non-tuberculous mycobacterial infections, or NTM disease. In addition, we have a platform technology known as our Potentiator Platform, which includes an IV-administered product candidate, SPR206, being developed to treat MDR Gram-negative infections in the hospital. We believe that our 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. Since our inception in 2013, we have focused substantially all of our efforts and financial resources on organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights, building our intellectual property portfolio and conducting research and development activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. We have experienced net losses and significant cash outflows from cash used in operating activities since our inception. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. As of September 30, 2020, we had an accumulated deficit of $259.1 million, and cash, cash equivalents and marketable securities of $127.2 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Based on our current plans, we believe that our existing cash, cash equivalents and marketable securities, together with the committed funding from our existing BARDA contract and other non-dilutive funding commitments, will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2022, through the approval process for tebipenem HBr. This timeline is subject to uncertainty as to the timing of future expenditures. We have developed plans to mitigate this risk, which primarily consist of raising additional capital through some combination of equity or debt financings, potentially new collaborations, additional grant funding and/or reducing cash expenditures. If we are not able to secure adequate additional funding, we plan to make reductions in spending. In that event, we may have to delay, scale back, or eliminate some or all of our planned clinical trials and research stage programs. The actions necessary to reduce spending under this plan at a level that mitigates the factors described above is not considered probable, as defined in the accounting standards and therefore, the full extent to which management may extend our funds through these actions may not be considered in management’s assessment of our ability to continue as a going concern. As a result, management has concluded that substantial doubt exists about our ability to continue as a going concern. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates and do not enter into a commercialization partnership, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution. Further, we expect to incur additional costs associated with our continued operation as a public company. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, government funding arrangements, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates. 28 Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. Recent Developments Business Update regarding COVID-19 The spread of SARS-CoV-2, and the resulting disease COVID-19 in 2020, has caused an economic downturn on a global scale, as well as widespread business disruptions and significant volatility in the financial markets. In March 2020, the World Health Organization declared COVID-19 a pandemic. In response to the pandemic, we have implemented a remote working policy for all employees to aid the global containment effort. Underwritten Public Offering On September 15, 2020, we completed an underwritten public offering of 4,785,000 shares of common stock and 3,215,000 shares of our Series D Convertible Preferred Stock, or Series D Preferred Stock. The price to the public in the offering was $10.00 per share with respect to the common stock and the Series D Preferred Stock. We received net proceeds from the offering of approximately $74.7 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. In addition, pursuant to the Underwriting Agreement, we granted the underwriters an option, exercisable for 30 days, to purchase up to 1,200,000 additional shares of our common stock. On October 1, 2020, we issued and sold all 1,200,000 shares of common stock at the price of $10.00 per share pursuant to the underwriters’ exercise of their option to purchase additional shares of common stock, resulting in additional net proceeds of approximately $11.2 million after deducting underwriting discounts and commissions. The shares of Series D Preferred Stock are convertible on a one-to-one basis into shares of our common stock at any time at the option of the holder, provided that the holder will be prohibited from converting the Series D Preferred Stock into shares of our common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 9.99% of the total number of shares of our common stock then issued and outstanding. In the event of our liquidation, dissolution, or winding up, holders of our Series D Preferred Stock will receive a payment equal to $0.001 per share of Series D Preferred Stock before any proceeds are distributed to the holders of our common stock and equal to any distributions to the holders of Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock. The Series D Preferred Stock has no voting rights, except as required by law and except that the consent of the Series D Preferred Stock holders will be required to amend the terms of the Series D Preferred Stock. Tebipenem HBr On September 8, 2020, we announced positive topline results for the Phase 3 ADAPT-PO clinical trial of oral tebipenem HBr in complicated urinary tract infection, or cUTI, and acute pyelonephritis, or AP. The ADAPT-PO trial is the first ever trial to compare an all oral regimen against an all intravenous, or IV, regimen for the treatment of cUTI. The pivotal Phase 3 clinical trial of oral tebipenem HBr met the primary endpoint, demonstrating statistical non-inferiority versus IV ertapenem. The primary endpoint of the trial was defined as the overall response rate (combined clinical cure plus microbiological eradication) at the test-of-cure, or TOC, visit in the microbiological-intent-to-treat population, or micro-ITT. Favorable overall response rates at TOC were 58.8% versus 61.6% for tebipenem HBr and ertapenem, respectively (treatment difference, -3.3%; 95% confidence interval [CI]: -9.7, 3.2; -12.5% NI margin). Clinical cure rates at TOC were high, at greater than 93% in both treatment groups, and overall response rates were consistent across key subgroups of interest. In the ADAPT-PO trial, comparative safety data from the 1,372 hospitalized adult patients who enrolled in the trial suggest that tebipenem HBr was well-tolerated, with a safety profile similar to that of ertapenem. Treatment emergent adverse events, or TEAEs, were reported in approximately 26% of patients in both treatment groups. The most commonly reported TEAEs in both treatment groups were diarrhea (5.0%) and headache (3.8%). Serious TEAEs were infrequent (1.3% for tebipenem HBr versus 1.7% for ertapenem) and no deaths were reported in the trial. Three Clostridioides difficile -associated TEAEs were observed in the ertapenem group, while none were observed in the tebipenem HBr group. ADAPT-PO is a global, randomized, placebo-controlled Phase 3 clinical trial that evaluated the safety and efficacy of tebipenem HBr in hospitalized adult patients with cUTI or AP. Patients were randomized (1:1) to receive 600 mg of tebipenem HBr orally every 8 hours, or 1 g of ertapenem IV every 24 hours, for a total of 7 to 10 days. Patients with concurrent bacteremia received up to 14 days of therapy. The primary endpoint was the overall response, defined as the combination of clinical cure and microbiological eradication of the causative pathogen(s), at the TOC visit (Day 19, plus or minus 2 days) and was assessed in the micro-ITT population. The primary analysis and assessment of non-inferiority was evaluated using a pre-specified -12.5% non-inferiority, or NI, margin. This NI margin was a modification of the original NI margin of -10% that was discussed with the U.S. Food and Drug Administration, or FDA, because of concern that the COVID-19 pandemic could have an adverse effect on the trial. As a result, the NI margin was modified prior to database lock from the original NI margin. However, as noted by the lower bound of the 95% confidence interval (-9.7), the trial also achieved success according to the original -10% NI margin. 29 W e presented additional details on the ADAPT-PO trial at IDWeek 2020 on October 24 , 2020 demonstrating that both the clinical cure and microbiological eradication rates were comparable between treatment groups at the end of treatment, TOC and at the late follow-up visits . We anticipate submi tting a New Drug Application for tebipenem HBr to the FD A in the second quarter of 2021. SPR720 In September 2020, SPR720 received Fast Track designation for the treatment of adult patients with nontuberculous mycobacteria pulmonary disease (NTM-PD) by the FDA. On August 26, 2020, we announced that the FDA accepted our investigational new drug, or IND, application for SPR720. With the IND accepted, we expect to initiate a Phase 2a clinical trial evaluating SPR720 in patients with nontuberculous mycobacterial, or NTM, pulmonary disease by year-end 2020. The planned Phase 2a clinical trial is designed as a multi-center, partially blinded, placebo-controlled proof-of-concept clinical trial that will enroll approximately 90 treatment-inexperienced patients with NTM pulmonary disease due to Mycobacterium avium complex. Patients will be randomized to receive either 500mg or 1,000mg of oral SPR720, placebo or standard of care consisting of a macrolide and ethambutol, plus the option of adding a rifamycin. The objectives of the trial are to evaluate plasma pharmacokinetics, safety, tolerability, and microbiological response of SPR720 compared with placebo and standard of care over 28 days of treatment. Potentiator Platform We achieved a development milestone from our partner Everest Medicines upon delivery of the SPR206-101 SAD/MAD clinical study report, or CSR, in October 2020, as specified under the regional collaboration launched in 2019. We expect to present final data from the Phase 1 clinical trial in the first half of 2021. In conjunction with Everest Medicines, and through its grant from the DoD awarded in July 2019, we plan to conduct a Phase 1 BAL clinical trial assessing the penetration of SPR206 into the pulmonary compartment in the first half of 2021, as well as initiate a renal impairment study of SPR206 in 2021. Components of Our Results of Operations Grant Revenue To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates. To date, the majority of our revenue has been derived from government awards. We expect that our revenue for the next several years will be derived primarily from payments under our government awards that we have currently entered into and that we may enter into in the future. Collaboration Revenue Collaboration revenue relates to our agreement with Everest Medicines. Operating Expenses Research and Development Expenses Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our product candidates. Since the fourth quarter of 2016 and through September 30, 2020, we have recorded research and development expenses conducted by our Australian subsidiary net of a 43.5% research and development tax incentive we expect to receive for qualified expenses from the Australian government. In June 2019, we entered into a collaboration with the Bill & Melinda Gates Medical Research Institute, or the Gates MRI, a nonprofit research institution wholly owned by the Bill and Melinda Gates Foundation, to develop SPR720 for the treatment of lung infections caused by Mycobacterium tuberculosis , or Mtb. In furtherance of the Gates MRI’s charitable purposes, we also granted the Gates MRI a no cost, exclusive license to develop, manufacture and commercialize SPR720 for the treatment of tuberculosis, or TB, in low- and middle- income countries. Gates MRI will conduct and fund preclinical and clinical studies for the development of SPR720 against TB, and also fund certain agreed upon collaborative research activities performed by us. Due to our assessment that we do not have a vendor/customer relationship with the Gates MRI, we will recognize the funding received under the agreement as a reduction to the research and development expenses as the related expenses are incurred. We expense research and development costs as incurred. Nonrefundable advance payments we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed. 30 Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to consultants, contractors, CMOs and CROs in connection with our preclinical and clinical development activities. License fees and other costs incurred after a product candidate has been designated and that are directly related to the product candidate are included in direct research and development expenses for that program. License fees and other costs incurred prior to designating a product candidate are included in early stage research programs. We do not allocate employee costs, costs associated with our preclinical programs or facility expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. The Company continues to expect that its research and development expenses will increase in 2020 relative to 2019 due to the greater expense associated with the pivotal ADAPT-PO trial, for which the Company reported data in the third quarter of 2020, the initiation of a SPR720 Phase 2a clinical trial by year-end 2020, and increased research and development personnel to support the ongoing and planned programs. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties, including the following: • successful completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority, including on account of the disruptive impacts of the COVID-19 pandemic ; • receipt of marketing approvals from applicable regulatory authorities; • establishment of arrangements with third-party manufacturers to obtain manufacturing supply; • obtainment and maintenance of patent, trade secret protection and regulatory exclusivity, both in the United States and internationally, including our ability to maintain our license agreement with Meiji with respect to tebipenem HBr; • protection of our rights in our intellectual property portfolio; • launch of commercial sales of tebipenem HBr and our other product candidates, if approved, whether alone or in collaboration with others; • acceptance of tebipenem HBr and our other product candidates, if approved, by patients, the medical community and third-party payors; • competition with other therapies; and • a continued acceptable safety profile of tebipenem HBr and our other product candidates, if approved. A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates. General and Administrative Expenses General and administrative expenses consist primarily of salaries and related costs, including share-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting and audit services. We anticipate that our general and administrative expenses will increase in the foreseeable future as we increase our headcount to support our continued research, development and commercialization of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance, infrastructure and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. Other Income (Expense) Interest Income Interest income consists of interest earned on our cash equivalents, which are primarily invested in money market accounts, as well as interest earned on our investments in marketable securities that we held during the three and nine months ended September 30, 2020 and 2019. Other Income (Expense), Net Other income (expense), net, consists of insignificant amounts of miscellaneous income, as well as realized and unrealized gains and losses from foreign currency-denominated cash balances, vendor payables and receivables from the Australian research and development tax incentive. 31 Income Taxes Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. As of December 31, 2019 , we had federal and state net operating loss carryforwards of $156.8 million and $157.8 million, respectively, which may be available to offset future income tax liabilities and begin to expire in 2033. In addition, as of December 31, 2019 , we had foreign net operating loss carryforwards of $7.7 million, which may be available to offset future income tax liabilities and do not expire. As of December 31, 2019 , we also had federal and state research and development tax credit carryforwards of $4.1 million and $1.1 million, respectively, which begin to expire in 2033 and 2028, respectively. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date. Critical Accounting Policies and Significant Judgments and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. We believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements. Funding Received from Government Contracts, Tax Incentives and Collaborations Since our inception, we have been able to obtain partial funding for our research and development activities from government contracts, government tax incentives and a collaboration arrangement. The classification within our statement of operations and comprehensive loss of the funding received under these arrangements is subject to management judgment based on the nature of the arrangements we enter into, the source of the funding and whether the funding is considered central to our business operations. Government Contracts We generate revenue from government contracts that reimburse us for certain allowable costs for funded projects. We have determined that government grant revenue is outside the scope of ASC 606. For contracts with government agencies, when we have concluded that we are the principal in conducting the research and development expenses and where the funding arrangement is considered central to our ongoing operations, we classify the recognized funding received as revenue. We recognize funding received from the Biomedical Advanced Research and Development Authority, or BARDA, the U.S. Department of Defense, or the DoD, and the National Institute of Allergy and Infectious Diseases, or NIAID, of the National Institutes of Health, or NIH, as revenue, rather than as a reduction of research and development expenses, because we are the principal in conducting the research and development activities and these contracts are central to our ongoing operations. We recognize revenue only after the qualifying expenses related to the contracts have been incurred, we are reasonably assured that the expenses will be reimbursed and the revenue is collectable. We record revenue recognized upon incurring qualifying expenses in advance of billing as unbilled revenue, which is included in other receivables in our consolidated balance sheet. The related costs incurred by us are included in research and development expense in our consolidated statements of operations and comprehensive loss. Government Tax Incentives For available government tax incentives that we may earn without regard to the existence of taxable income and that require us to forego tax deductions or the use of future tax credits and net operating loss carryforwards, we classify the funding recognized as a reduction of the related qualifying research and development expenses incurred. Since the fourth quarter of 2016, our operating subsidiary in Australia has met the eligibility requirements to receive a 43.5% tax incentive for qualifying research and development activities. We recognize these incentives as a reduction of research and development expenses in our consolidated statements of operations in the same period that the related qualifying expenses are incurred. Reductions of research and development expense recognized upon incurring qualifying expenses in advance of receipt of tax incentive payments are recorded in our consolidated balance sheet as tax incentive receivables. Related to these incentives, we recognized reductions of research and development expense of less than $0.1 million and $0.1 million during the three months ended September 30, 2020 and 2019, respectively, and $0.3 million and $0.3 million during the nine months ended September 30, 2020 and 2019 32 Collaboration Agreements For collaboration agreements with a third party, to determine the appropriate statement of operations classification of the recognized funding, we first assess whether the collaboration arrangement is within the scope of the accounting guidance for collaboration arrangements. If it is, we evaluate the collaborative arrangement for proper classification in the statement of operations based on the nature of the underlying activity and we assess the payments to and from the collaborative partner. If the payments to and from the collaborative partner are not within the scope of other authoritative accounting guidance, we base the statement of operations classification for the payments received on a reasonable, rational analogy to authoritative accounting guidance, applied in a consistent manner. Conversely, if the collaboration arrangement is not within the scope of accounting guidance for collaboration arrangements, we assess whether the collaboration arrangement represents a vendor/customer relationship. If the collaborative arrangement does not represent a vendor/customer relationship, we then classify the funding payments received in the statement of operations and comprehensive loss as a reduction of the related expense that is incurred. In June 2019, we entered into a collaboration agreement with the Gates MRI and concluded that the agreement is within the scope of the accounting guidance for collaboration arrangements. Due to the cost-funded nature of the payments and our assessment that we do not have a vendor/customer relationship with the Gates MRI, we will recognize the funding received under the agreement as a reduction to research and development expense as we incur the related expenses. Accrued Research and Development Expenses As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to: • vendor in connection with the preclinical development activities; • CMOs in connection with the production of preclinical and clinical trial materials; • CROs in connection with preclinical and clinical studies; and • investigative sites in connection with clinical trials. We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses. Share-Based Compensation We measure all share-based awards granted to employees and directors based on the fair value on the date of grant using the Black-Scholes option-pricing model, and we recognize compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. Generally, we issue awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. The Black-Scholes option-pricing model uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our common stock options and performance-based awards, the risk-free interest rate for a period that approximates the expected term of our common stock options and performance-based awards, and our expected dividend yield. Results of Operations Our financial statements have been presented on the basis that we are a going concern, which contemplates the realization of revenues and the satisfaction of liabilities in the normal course of business. We have incurred losses from the inception of our operations. These factors raise substantial doubt about our ability to continue as a going concern. 33 Comparison of the Three Months Ended September 30, 2020 and 2019 The following table summarizes our results of operations for the three months ended September 30, 2020 and 2019 (in thousands): Three Months Ended September 30, 2020 2019 $ Change Revenues: Grant revenue $ 3,957 $ 4,471 $ (514 ) Collaboration revenue 38 172 (134 ) Total revenues 3,995 4,643 (648 ) Operating expenses: Research and development 17,706 18,495 (789 ) General and administrative 5,309 4,133 1,176 Total operating expenses 23,015 22,628 387 Loss from operations (19,020 ) (17,985 ) (1,035 ) Other income (expense): Interest income 29 403 (374 ) Other income (expense), net 55 (135 ) 190 Total other income (expense), net 84 268 (184 ) Net loss $ (18,936 ) $ (17,717 ) $ (1,219 ) Grant Revenue Three Months Ended September 30, 2020 2019 $ Change BARDA Contract (tebipenem HBr) $ 3,763 $ 4,245 $ (482 ) NIAID Contract (SPR206) 184 57 127 NIAID Award (SPR720) — 9 (9 ) DoD Agreement (Potentiator Platform) 10 160 (150 ) Total grant revenue $ 3,957 $ 4,471 $ (514 ) Grant revenue recognized during the three months ended September 30, 2020 and 2019 consisted of the reimbursement of qualifying expenses incurred in connection with our various government awards. The decrease in revenue during the three months ended September 30, 2020 was primarily due to decreased funding received under our BARDA contract for tebipenem HBr and net immaterial decreases under our other government awards. Collaboration Revenue During the three months ended September 30, 2020 and 2019, we recognized less than $0.1 million and $0.2 million of revenue, respectively, related to our agreement with Everest Medicines, consisting of the performance of research and development services. Research and Development Expenses Three Months Ended September 30, 2020 2019 $ Change Direct research and development expenses by program: Tebipenem HBr (SPR994) $ 10,589 $ 12,954 $ (2,365 ) SPR720 1,392 969 423 Potentiator Platform (SPR206 and SPR741) 545 921 (376 ) Unallocated expenses: Personnel related (including share-based compensation) 3,938 2,912 1,026 Facility related and other 1,242 739 503 Total research and development expenses $ 17,706 $ 18,495 $ (789 ) Direct costs related to our tebipenem HBr program decreased by $2.4 million during the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to the completion of significant activities in the Phase 3 clinical trial. We expect to continue to incur direct costs related to tebipenem HBr as we finalize activities in the Phase 3 clinical trial and incur expenses related to a potential NDA filing for tebipenem HBr. 34 Direct costs related to our SPR720 program increased during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 , primarily due to increased expenses related to preparation for our Phase 2a clinical trial. These expenses were partially offset by a decrease in spending associated with formulation development, manufacturing process and manufacturing of clinical trial material . Direct costs related to our SPR720 program during the three months ended September 3 0 , 2020 reflect a $0.2 million reduction to expense related to activities funded by Gates MRI , compared to $0.9 million during the three months ended September 30, 2019. Direct costs related to our Potentiator Platform include costs related to our SPR206 and SPR741 programs. Direct costs related to our SPR206 program decreased by $0.4 million during the three months ended September 30, 2020, primarily due to higher costs incurred in the prior year related to the Phase 1 trial. Direct costs related to our SPR741 program were immaterial for both the three months ended September 30, 2020 and 2019. In early January 2020, we decided to proceed with SPR206 as the lead product candidate within the Potentiator Platform and discontinue development of SPR741. During 2020 and 2019, research and development expenses conducted by our Australian subsidiary were recorded net of a 43.5% research and development tax incentive for qualified expenses from the Australian government, resulting in a receivable of $1.0 million. The increase in personnel-related costs included in unallocated expenses of $1.0 million was due to an increase in research and development headcount, as well as a $0.2 million increase in share-based compensation. The increase in facility-related and other costs was primarily due to the increased costs of supporting a larger research and development staff. General and Administrative Expenses Three Months Ended September 30, 2020 2019 $ Change Personnel related (including share-based compensation) $ 2,560 $ 2,186 $ 374 Professional and consultant fees 2,424 1,504 920 Facility related and other 325 443 (118 ) Total general and administrative expenses $ 5,309 $ 4,133 $ 1,176 The increase in personnel-related costs of $0.4 million was primarily a result of an increase in headcount in our general and administrative function. Personnel-related costs for the three months ended September 30, 2020 and 2019 included share-based compensation expense of $0.6 million and $0.6 million, respectively. The increase in professional and consultant fees of $0.9 million was primarily due to increased commercial operation expenses. The decrease in facility-related and other costs was primarily due to the higher allocation of costs to research and development due to the increased research and development headcount. Other Income (Expense), Net Other income, net was $0.1 million for the three months ended September 30, 2020, compared to $0.3 million for the three months ended September 30, 2019. The change was primarily due to a larger unrealized foreign currency gain recognized in the third quarter of 2020, as a result of favorable foreign currency fluctuations, offsetting lower interest income earned as a result of lower interest rates. 35 Comparison of the Nine Months Ended September 30, 2020 and 2019 The following table summarizes our results of operations for the nine months ended September 30, 2020 and 2019 (in thousands): Nine Months Ended September 30, 2020 2019 $ Change Revenues: Grant revenue $ 7,165 $ 10,471 $ (3,306 ) Collaboration revenue 258 4,046 (3,788 ) Total revenues 7,423 14,517 (7,094 ) Operating expenses: Research and development 53,798 40,047 13,751 General and administrative 13,942 11,803 2,139 Total operating expenses 67,740 51,850 15,890 Loss from operations (60,317 ) (37,333 ) (22,984 ) Other income (expense): Interest income 352 1,008 (656 ) Other income (expense), net 270 386 (116 ) Total other income (expense), net 622 1,394 (772 ) Net loss $ (59,695 ) $ (35,939 ) $ (23,756 ) Grant Revenue Nine Months Ended September 30, 2020 2019 $ Change BARDA Contract (SPR994) $ 6,572 $ 9,364 $ (2,792 ) NIAID Contract (SPR206) 520 837 (317 ) NIAID Award (SPR720) 40 55 (15 ) DoD Agreement (Potentiator Platform) 33 215 (182 ) Total revenue $ 7,165 $ 10,471 $ (3,306 ) Grant revenue recognized during the nine months ended September 30, 2020 and 2019 consisted of the reimbursement of qualifying expenses incurred in connection with our various government awards. The decrease in revenue during the nine months ended September 30, 2020 was primarily due to decreased funding received under our BARDA and our other government awards. Collaboration Revenue During the nine months ended September 30, 2020 and 2019, we recognized $0.3 and $4.0 million of revenue, respectively, related to our agreement with Everest Medicines. The decrease in revenue is mainly due to decreased research and development services performed under the collaboration agreement. Research and Development Expenses Nine Months Ended September 30, 2020 2019 $ Change Direct research and development expenses by program: Tebipenem HBr (SPR994) $ 35,367 $ 23,555 $ 11,812 SPR720 3,238 2,934 304 Potentiator Platform (SPR206 and SPR741) 1,174 2,556 (1,382 ) Unallocated expenses: Personnel related (including share-based compensation) 10,813 8,214 2,599 Facility related and other 3,206 2,788 418 Total research and development expenses $ 53,798 $ 40,047 $ 13,751 36 Direct costs related to our tebipenem HBr program increased during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 , primarily due to costs related to significant activities performed in the Phase 3 clinical trial, as well as expenses related to formulation development, manufacturing process and manufacturing of clinical trial material We expect to continue to incur direct costs related to tebipenem HBr as we finalize activities in the Phase 3 clinical trial and incur expenses related to a potential NDA filing for tebipenem HBr. Direct costs related to our SPR720 program increased during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily due to increased expenses related to preparation for our Phase 2a clinical trial and increased costs related to the formulation development, manufacturing process and manufacturing of clinical trial material. Direct costs related to our SPR720 program during the nine months ended September 30, 2020 reflect a $0.7 million reduction to expense related to activities funded by Gates MRI, compared to $0.9 million during the nine months ended September 30, 2019. Direct costs related to our Potentiator Platform include costs related to our SPR206 and SPR741 programs. Direct costs related to our SPR206 program decreased by $1.4 million during the nine months ended September 30, 2020, primarily due to higher costs incurred in the prior year related to the Phase 1 trial. Direct costs related to our SPR741 program were immaterial for both the nine months ended September 30, 2020 and 2019. In early January 2020, we decided to proceed with SPR206 as the lead product candidate within the Potentiator Platform and discontinue development of SPR741. During 2020 and 2019, research and development expenses conducted by our Australian subsidiary were recorded net of a 43.5% research and development tax incentive for qualified expenses from the Australian government, resulting in a receivable of $1.0 million. The increase of $2.6 million in personnel-related costs included in unallocated expenses was due to an increase in research and development headcount, as well as a $0.4 million increase in share-based compensation. The increase in facility-related and other costs was primarily due to the increased costs of supporting a larger research and development staff. General and Administrative Expenses Nine Months Ended September 30, 2020 2019 $ Change Personnel related (including share-based compensation) $ 7,236 $ 6,238 $ 998 Professional and consultant fees 5,506 4,129 1,377 Facility related and other 1,200 1,436 (236 ) Total general and administrative expenses $ 13,942 $ 11,803 $ 2,139 The increase in personnel-related costs of $1.0 million was primarily a result of an increase in headcount in our general and administrative function. Personnel-related costs for the nine months ended September 30, 2020 and 2019 included share-based compensation expense of $1.9 million and $1.7 million, respectively. The increase in professional and consultant fees of $1.4 million was primarily related to increased commercial operations expenses, as well as increased IT, HR and Finance contractor and consulting expenses related to supporting the growth in our business. The decrease in facility-related and other costs was primarily due to the higher allocation of costs to research and development due to the increased research and development headcount. Other Income (Expense), Net Other income, net was $0.6 million for the nine months ended September 30, 2020, compared to $1.4 million for the nine months ended September 30, 2019. Other income, net in the nine months ended September 30, 2020 was primarily comprised of unrealized foreign currency gains, offsetting decreased interest income due to falling interest rates. In comparison, other income, net in the nine months ended September 30, 2019 was primarily comprised of interest earned on invested cash balances and marketable securities, offset by unrealized foreign currency losses. Liquidity and Capital Resources Since our inception, we have incurred significant operating losses. We have generated limited revenue to date from funding arrangements with the DoD, NIAID, CARB-X and BARDA. We have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any product candidates for several years, if at all. To date, we have funded our operations with proceeds from the sales of preferred units and bridge units, payments received under license and collaboration agreements and funding from government contracts, with proceeds from the IPO of our common stock, in July 2018 with an underwritten public offering of our common and preferred stock, and subsequent sales of our common stock and preferred stock. As of September 30, 2020, we had cash, cash equivalents and marketable securities of $127.2 million. 37 On September 15, 2020, we completed an underwritten public offering of an aggregate of 4,785,000 shares of our common stock, and 3,215,000 shares of our Series D Preferred Stock. The price to the public in the offering was $10.00 per share with respect to the c ommon s tock and the Series D Preferred Stock. In addition, under the terms of the Underwriting Agreement, we granted the underwriters an option, exercisable for 30 days, to purchase up to 1,200,000 additional shares of common stock. The shares of Series D Preferred Stock are convertible on a one-to-one basis into shares of common stock at any time at the option of the holder, provided that the holder will be prohibited from converting the Series D Preferred Stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 9.99% of the total number of shares of common stock then issued and outstanding, subject to certain exceptions. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series D Preferred Stock will receive a payment equal to $0.001 per share of Series D Preferred Stock before any proceeds are distributed to the holders of common stock and equal to any distributions to the holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. Shares of Series D Preferred Stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the then outstanding Series D Preferred Stock will be required to amend the terms of the Series D Preferred Stock. As such, we have classified the Series D Convertible Preferred Stock within permanent equity in its consolidated balance sheet. The offering closed on September 15, 2020 with an aggregate public offering price of $80.0 million. Aggregate net proceeds from the offering were $74.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. In addition, pursuant to the Underwriting Agreement, we granted the underwriters an option, exercisable for 30 days, to purchase up to 1,200,000 additional shares of our common stock. On October 1, 2020, we issued and sold all 1,200,000 shares of common stock at the price of $10.00 per share pursuant to the underwriters’ exercise of their option to purchase additional shares of common stock, resulting in additional net proceeds of approximately $11.2 million after deducting underwriting discounts and commissions. On February 11, 2020, the Company announced a rights offering pursuant to which it distributed to holders of its common stock and Series A Preferred Stock and Series B Preferred Stock, at no charge, non-transferable subscription rights to purchase shares of our common stock and Series C Convertible Preferred Stock, or Series C Preferred Stock, with an aggregate offering value of $30.0 million. For each share of common stock (including shares of common stock issuable upon conversion of the Company’s outstanding shares of Series A Preferred Stock and Series B Preferred Stock) owned by holders of record as of 5:00 p.m., New York time, on February 10, 2020, such holders received 0.152 rights to purchase shares of our common stock (subject to the aggregate offering threshold and certain ownership limitations). Each whole right allowed holders to subscribe for one share of common stock at the subscription price equal to $9.00 per whole share (or an equivalent number of shares of Series C Preferred Stock). The total number of subscription rights issued to each stockholder was rounded down to the nearest whole number. Any participant in the rights offering that, following exercise of such participant’s subscription right, would be or become a holder of greater than 9.99% of the outstanding number of shares of the Company’s common stock following the offering could elect to instead purchase Series C Preferred Stock at a purchase price of $9,000 per share (ratably adjusted for fractional shares), and any such holder so electing had a right to purchase one one-thousandth of a share of Series C Preferred Stock for each share of common stock it had a right to purchase under the subscription rights. Each share of Series C Preferred Stock is convertible into 1,000 shares of our common stock at the election of the holder, subject to beneficial ownership conversion limits applicable to the Series C Preferred Stock. The Series C Preferred Stock generally have no voting rights, except as required by law, and participate pari passu (on an as-converted basis) with any distribution of proceeds to holders of common stock and Series A Preferred Stock and Series B Preferred Stock, in the event of the Company’s liquidation, dissolution or winding up or the payment of a dividend on the common stock. At the closing of the rights offering on March 5, 2020, a total of 1,046,249 shares of our common stock and 2,287 shares of Series C Preferred Stock were issued for aggregate gross proceeds of $30.0 million. Issue costs related to the offering were $0.5 million. On December 3, 2018, we filed a universal shelf registration statement on Form S-3 (Registration No. 333-228661) with the SEC, which was declared effective on December 11, 2018, and pursuant to which we registered for sale up to $200.0 million of any combination of our common stock, preferred stock, debt securities, warrants, rights and/or units from time to time and at prices and on terms that we may determine, including up to $50.0 million of our common stock available for issuance pursuant to an at-the-market offering program sales agreement that we entered into with Cantor Fitzgerald & Co, or Cantor. Under the sales agreement, Cantor may sell shares of our common stock by any method permitted by law deemed to be an “at the market,” or ATM, offering as defined in Rule 415 of the Securities Act, subject to the terms of the sales agreement. The prospectus underlying the ATM offering program was terminated on September 9, 2020 in connection with our underwritten public offering that was completed in September 2020. At such time, we had raised approximately $15.4 million in sales of our common stock under the ATM offering program, prior to deducting sales commissions, and had remaining available capacity of approximately $34.6 million. During the nine months ended September 30, 2020, we sold 786,447 shares of our common stock under the ATM agreement at an average price of approximately $12.02 per share for aggregate gross proceeds of approximately $9.4 million prior to deducting sales commissions. 38 The COVID-19 pandemic has resulted in ongoing volatility in financial markets. If our access to capital is restricted or associated borrowing costs increase as a result of developments in financial markets relating to the COVID-19 pandemic, our operations and financial condition could be adversely impacted. Cash Flows The following table summarizes our sources and uses of cash for the nine months ended September 30, 2020 and 2019: Nine Months Ended September 30, 2020 2019 Cash used in operating activities $ (69,489 ) $ (32,653 ) Cash provided by investing activities 50,210 33,629 Cash provided by financing activities 114,791 10,541 Net increase in cash and cash equivalents $ 95,512 $ 11,517 Operating Activities Net cash used in operating activities for the nine months ended September 30, 2020 was $69.5 million, primarily resulting from our net loss of $59.7 million, adjusted for net non-cash items of $4.2 million (primarily stock-based compensation, depreciation, amortization, and unrealized foreign currency transaction gains). Net cash provided by changes in our operating assets and liabilities was $(14.0) million and consisted primarily of a $1.9 million increase in other assets, a $(1.7) million increase in accounts payable, a $2.5 million increase in prepaid expenses and other current assets and a decrease of $8.3 million in accrued expenses. Net cash used in operating activities for the nine months ended September 30, 2019 was $32.7 million, primarily resulting from our net loss of $35.9 million, adjusted for net non-cash items of $3.2 million (primarily stock-based compensation and depreciation and amortization expense). Net cash provided by changes in our operating assets and liabilities was $0.1 million and consisted primarily of an increase of $5.0 million in receivables related to the Australian research and development tax initiative and our receivables under our government awards, and a $1.0 million decrease in accounts payable. These uses of cash were offset by a $3.8 million decrease in prepaid expenses and other current assets and an increase of $2.7 million in accrued expenses. Changes in accounts payable, accrued expenses and other current liabilities, and prepaid expenses and other current assets in all periods were generally due to growth in our business, the advancement of our development programs and the timing of vendor invoicing and payments. Investing Activities Cash provided by investing activities during the nine months ended September 30, 2020 was $50.2 million primarily related to the maturities of marketable securities of $54.4 million, offset by purchases of marketable securities of $4.0 million. Cash provided by investing activities during the nine months ended September 30, 2019 was $33.6 million primarily related to the net maturities of marketable securities. Financing Activities Cash provided by financing activities during the nine months ended September 30, 2020 was $114.8 million, consisting primarily of proceeds of $105.2 million from the sale of common stock, Series C Preferred Stock and Series D Preferred Stock in our rights offering and underwritten public offering, proceeds of $9.2 million from the sale of common stock under our ATM offering program sales agreement and proceeds of $1.0 million from the exercise of employee stock options, offset by the payment of offering expenses of $0.6 million. Cash provided by financing activities during the nine months ended September 30, 2019 was $10.5 million, consisting primarily of proceeds of $5.3 million from the sale of common stock under our ATM offering program sales agreement, proceeds of $5.0 million from the sale of common stock to Novo, offset by offering expenses of $0.2 million, as well as $0.4 million of proceeds from the exercise of employee stock options. Funding Requirements We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our clinical programs and prepare for possible commercialization of one or more of our product candidates. In addition, we expect to incur additional costs associated with our continued operation as a public company. The timing and amount of our operating expenditures will depend largely on: • the timing and costs of our ongoing and planned clinical trials; 39 • the initiation, progress, timing, costs and results of preclinical studies and clinical trials of our other product candidates and potential new product candidates; • the amount of funding that we receive under government contracts that we have applied for; • the number and characteristics of product candidates that we pursue; • the outcome, timing and costs of seeking regulatory approvals; • the costs of commercialization activities for tebipenem HBr and other product candidates if we receive marketing approval, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities; • the receipt of marketing approval and revenue received from any potential commercial sales of tebipenem HBr; • the terms and timing of any future collaborations, licensing or other arrangements that we may establish; • the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights, including milestone and royalty payments and patent prosecution fees that we are obligated to pay pursuant to our license agreements; • the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against any intellectual property related claims; • the costs of operating as a public company; and • the extent to which we in-license or acquire other products and technologies. As of September 30, 2020, we had cash, cash equivalents and marketable securities of $127.2 million. In accordance with Accounting Standards Update, or ASU, 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40) , we are required to evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern from the issuance date of our financial statements. Based on our current plans, we believe that our existing cash, cash equivalents and marketable securities, together with the committed funding from our existing BARDA contract and other non-dilutive funding commitments, will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2022, through the approval process for tebipenem HBr. This timeline is subject to uncertainty as to the timing of future expenditures. We have developed plans to mitigate this risk, which primarily consist of raising additional capital through some combination of equity or debt financings, potentially new collaborations, additional grant funding and/or reducing cash expenditures. If we are not able to secure adequate additional funding, we plan to make reductions in spending. In that event, we may have to delay, scale back, or eliminate some or all of our planned clinical trials, research stage programs and commercial activities. The actions necessary to reduce spending under this plan at a level that mitigates the factors described above is not considered probable, as defined in the accounting standards and therefore, the full extent to which management may extend our funds through these actions may not be considered in management’s assessment of our ability to continue as a going concern. As a result, management has concluded that substantial doubt exists about our ability to continue as a going concern. Our consolidated financial statements as of December 31, 2019 were prepared under the assumption that we will continue as a going concern for the next twelve months. As a result, the opinion from our independent registered public accounting firm with respect to our annual financial statements contains an explanatory paragraph about such substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The substantial doubt about our ability to continue as a going concern may adversely affect our stock price and our ability to raise capital. There is no assurance that we will be successful in obtaining sufficient funding on acceptable terms, if at all, and we could be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, which could materially adversely affect our business prospects or our ability to continue operations. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including those listed above. 40 Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, government funding, collaborations, strategic alliances and marketing, distribution or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. The COVID-19 pandemic has resulted in ongoing volatility in financial markets. If our access to capital is restricted or associated borrowing costs increase as a result of developments in financial markets, including relating to the COVID-19 pandemic, our operations and financial condition could be adversely impacted. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Contractual Obligations and Commitments During the three months ended September 30, 2020, there have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” in our Annual Report on Form 10-K for the year ended December 31, 2019. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Recently Issued and Adopted Accounting Pronouncements A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.