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Item 7. Management’s Discussion and Analysis

2021-03-11 compared with 2020-03-16 · 127 added, 133 removed, 226 unchanged (53% of the section changed)

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As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, 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.

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 broad-spectrum oral carbapenem-class antibiotic for use in adults to treat multi-drug resistant, or MDR, Gram-negative infections.

We are a multi-asset, clinical-stage biopharmaceutical company focused on identifying, developing and commercializing treatments in high unmet need areas involving MDR bacterial infections and rare diseases.

Our most advanced product candidate, tebipenem HBr, is designed to be the first broad-spectrum oral carbapenem-class antibiotic for use in adults to treat MDR Gram-negative infections.

Treatment with effective orally administrable antibiotics may prevent hospitalizations for serious infections and enable earlier, more convenient and cost-effective treatment of patients after hospitalization.

We are also developing SPR720, a novel oral antibiotic designed for the treatment of non-tuberculous mycobacterial, or NTM, disease, a rare, orphan disease caused by pulmonary non-tuberculous mycobacterial infections.

In addition, we also have a platform technology known as our Potentiator Platform, which includes an intravenous, or IV,-administered product candidate, SPR206, which is being developed to treat MDR Gram-negative infections in the hospital.

We are also developing SPR720, a novel oral antibiotic designed for the treatment of a rare, orphan disease caused by non-tuberculous mycobacterial pulmonary infections, or NTM disease.

In addition, we have a Potentiator technology, 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.

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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, together with the net proceeds from our rights offering completed in early March 2020, will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2021, including through the filing of an NDA for Tebipenem HBr.

Because these funds will not sufficient to fund our operations, as currently planned, for more than one year beyond the filing date of this Annual Report on Form 10-K, we have determined that there is substantial doubt regarding our ability to continue as a going concern.

We will require additional funding to fund the development of our product candidates through regulatory approval and commercialization, and to support our continued operations.

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.

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 second quarter of 2022, including through the submission of the NDA 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, potential 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.

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Recent Developments

Closing of Rights Offering for Net Proceeds of Approximately $29.5 Million

On March 5, 2020, we closed our previously announced rights offering issuing 1,046,249 shares of common stock and 2,287 shares of Series C Preferred Stock raising net proceeds of approximately $29.5 million.

Tebipenem HBr – Positive recommendation from independent data review committee regarding pivotal Phase 3 clinical trial and exercise of $15.9 million option by BARDA for tebipenem HBr development

On October 3, 2019, we announced that an independent review committee evaluated interim pharmacokinetic plasma data following the first 70 patients enrolled in our ongoing ADAPT-PO pivotal Phase 3 clinical trial of tebipenem HBr, our oral carbapenem product candidate, and recommended that we continue the trial without modification of the protocol-defined dose.

The independent review committee reviewed interim plasma concentration data from the first 33 patients who were randomized to tebipenem HBr in the Phase 3 clinical trial for the treatment of complicated urinary tract infections, or cUTI, and acute pyelonephritis, or AP.

A primary objective of the independent review committee was to confirm that plasma levels of tebipenem HBr in patients in the Phase 3 clinical trial support the selected treatment dose.

The Phase 3 trial remains blinded and will continue as planned.

ADAPT-PO is designed as a double-blind, double-dummy clinical trial to compare oral tebipenem HBr dosed as 600 mg administered three times per day, or TID, with a standard of care IV-administered antibiotic, ertapenem, in approximately 1,200 patients with cUTI or AP, randomized 1:1 in each arm.

We expect to report top-line data from the Phase 3 clinical trial in the third quarter of 2020.

On February 5, 2020, we announced that the Biomedical Advanced Research and Development Authority (BARDA) exercised its first contract option for additional committed funding pursuant to its existing contract with Spero.

Specifically, the option exercise provides us with $15.9 million in reimbursement for the further development of tebipenem HBr.

The $15.9 million option exercise is expected to support the funding of specified manufacturing activities required for approval of tebipenem HBr including active pharmaceutical ingredient, or API, validation batch manufacturing and stability studies.

Additionally, the option is expected to support the funding of several non-clinical and clinical development activities including a Phase 1 bronchoalveolar lavage, or BAL, study in healthy subjects that we anticipate initiating in the third quarter of 2020, as well as non-human primate efficacy studies in one or more models of biothreat disease.

The option was exercised under Spero’s existing 2018 contract with BARDA, which provides for reimbursement to us of up to $46.8 million for qualified expenses for tebipenem HBr development over a five-year period.

Total committed funding under the BARDA award to date is $34.1 million, inclusive of the first contract option exercised in 2020.

There is a second option exercisable by BARDA for the remaining $12.7 million of funding, subject to specified milestones being achieved under the award agreement.

Furthermore, the Defense Threat Reduction Agency (DTRA) provides up to $10.0 million, in addition to the total potential award from BARDA, to cover the cost of the nonclinical biodefense aspects of the collaboration program for tebipenem HBr.

SPR720 – First indication of human safety and PK profiles for SPR720 supports advancement of program to a Phase 2a proof-of-concept clinical trial in patients planned to initiate in the second half of 2020

On December 4, 2019, we announced preliminary findings from our Phase 1 first-in-human clinical trial of SPR720.

Analysis of blinded data from the Phase 1 double-blind, placebo-controlled single ascending dose, or SAD, and multiple ascending dose, or MAD, clinical trial in healthy volunteers suggests that SPR720 is generally well-tolerated, with a pharmacokinetic, or PK, profile that we believe supports the further development of SPR720 as an oral agent for the treatment of NTM disease.

Specifically, there were no serious adverse events reported and all participants completed the trial.

An analysis of preliminary data indicates that SPR720 was generally well-tolerated at doses up to 1000 mg over the maximum studied duration of 14 days.

Preliminary analyses of PK data across the cohorts show no significant impact of either advanced age or administration with food on PK variables.

At doses of 500 mg or higher, the mean plasma drug exposures of SPR719, the active metabolite of SPR720, are consistent with those suggested by in vitro and in vivo models of SPR720 to be necessary for clinical efficacy against target NTM pathogens.

In early February 2020 the SPR720 Phase 1 clinical trial was unblinded and the findings are in line with the preliminary analysis.

We plan to submit an Investigational New Drug Application, or IND, to the FDA and initiate a Phase 2a clinical trial of SPR720 in patients with NTM disease during the second half of 2020.

Potentiator Platform – Based on preliminary findings from Phase 1 clinical trial, we have selected SPR206 as lead product candidate within Potentiator Platform, and discontinued development of SPR741

On January 13, 2020, we announced preliminary findings from our Phase 1 first-in-humans clinical trial of SPR206.

Analysis of preliminary, blinded data from the Phase 1 double-blind, placebo-controlled SAD and MAD clinical trial in healthy adult volunteers suggests that SPR206 is well-tolerated at doses that are likely to be within a therapeutic range for target MDR Gram-negative bacterial infections and has a safety profile that we believe supports the further development of SPR206.

The decision to continue development of SPR206 is also supported by data from nonclinical studies in which SPR206 demonstrated activity as a single agent against MDR and extensively drug resistant, or XDR, bacterial strains, including isolates of Pseudomonas aeruginosa , Acinetobacter baumannii and carbapenem-resistant Enterobacteriaceae , in both in vitro and in vivo models of infection.

The Phase 1 clinical trial of SPR206 (Study SPR206-101) evaluated the safety, tolerability and pharmacokinetics of intravenously administered SPR206 at single doses ranging from 10 mg to 400 mg in seven SAD cohorts and repeat total daily doses ranging from 75 mg to 450 mg for seven consecutive days and 300 mg for 14 consecutive days across five MAD cohorts.

A total of 96 healthy volunteers were randomized to receive SPR206 or placebo.

All reported adverse events were mild to moderate and there were no reported severe or serious adverse events.

No evidence of nephrotoxicity was observed and there were no subjects with clinically significant changes in laboratory tests during the study.

Although the data remain blinded, an analysis of preliminary data indicates that SPR206 was well-tolerated at doses up to 100 mg administered three-times a day, a total of 300 mg daily, for 14 consecutive days.

Preliminary analyses of pharmacokinetic data across the cohorts indicates dose linearity and dose proportionality as well as mean plasma drug exposures of SPR206 that are concordant with preclinical models predictive for clinical efficacy against target Gram-negative pathogens.

We expect to receive a development milestone payment from our partner Everest Medicines upon delivery of the SPR206-101 SAD/MAD clinical study report, or CSR, as specified under the regional collaboration launched in 2019 and expects to present final data from the Phase 1 clinical trial in the first half of 2020.

In conjunction with Everest Medicines, and through its grant from 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 second half of 2020 as well as initiate a renal impairment study of SPR206.

Based on the foregoing, we have determined to discontinue development of SPR741, effective January 1, 2020.

We believe that the collective data from the recent Phase 1 and preclinical studies suggest a potency and safety profile for SPR206 that may be superior to SPR741.

Further, we believe SPR206 may have a potentially faster path to pivotal clinical trials when compared with SPR741 because SPR206 is being developed as a single agent.

As a result of this decision, we have terminated our license agreement with Northern Antibiotics Oy (Ltd.) relating to SPR741.

Effective January 1, 2020, the intellectual property rights associated with SPR741 have entirely reverted to Northern Antibiotics and we no longer have any rights with respect thereto and we no longer have any obligations for the cost of maintaining such intellectual property.

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 implemented and have maintained a remote working policy for all employees to aid the global containment effort.

Update on Phase 2a Clinical Trial

On February 5, 2021, we announced that the FDA informed us that a clinical hold had been placed on our Phase 2a clinical trial of SPR720, following our notification to the FDA of our decision to pause dosing in our ongoing Phase 2a clinical trial of SPR720 as a precautionary measure related to events in our ongoing animal toxicology study of SPR720.

The decision to implement the pause was made based on a recommendation from the Company’s Safety Review Board, or SRB, following review of data from an ongoing toxicology study of SPR720 in adult non-human primates in which mortalities with inconclusive causality to treatment were observed.

The animal study is being conducted to assess the potential toxicity of SPR720.

A concurrent study of SPR720 in rats is proceeding uneventfully.

These studies are meant to support longer-term treatment with SPR720 beyond the 28 days currently supported by IND-enabling toxicology studies.

No serious adverse events have been observed in any human study participants.

Subsequent to receiving verbal notification from the FDA of the clinical hold, we received a formal clinical hold letter in which the FDA has requested additional information from the non-human primate trial, including a study report.

We have decided to discontinue the Phase 2a clinical trial at this time to best facilitate future potential adjustments to the protocol based on FDA feedback and to avoid incurring costs associated with the trial while on clinical hold.

We are continuing to work with the FDA to evaluate the findings and determine the further development pathway for the SPR720 clinical program.

Components of Our Results of Operations

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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.

We expect that our revenue for the next few 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.

Collaboration revenue relates to our agreement with Everest.

Operating Expenses

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payments made under third-party licensing agreements.

Prior to novation of the NIAID contract to us in December 2017, under our agreements with PBB and certain of its affiliates, CAI continued to perform research and development at our direction.

We paid CAI for such research and development services at an agreed-upon rate that took into consideration costs incurred by CAI, net of amounts reimbursed to CAI by NIAID.

Thus, prior to novation of the NIAID contract to us in December 2017, the amount we record as research and development expenses is net of the NIAID reimbursement amount that CAI received.

We also paid CAI a portion of the NIAID reimbursement received at rates specified in the agreement, which we also recorded as research and development expense.

Since the fourth quarter of 2016, 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.

As described above, in June 2019, we entered into a collaboration with the Bill and Melinda Gates Medical Research Institute (the “Gates MRI”), a nonprofit research institution wholly owned by the Bill and Melinda Gates Foundation.

Gates MRI will conduct and fund preclinical and clinical studies for the development of SPR720 against tuberculosis, or TB, and also fund certain agreed upon collaborative research activities performed by us.

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 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 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 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 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 recognize the funding received under the agreement as a reduction to the research and development expenses as the related expenses are incurred.

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Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

We expect that our research and development expenses will increase substantially in connection with our ongoing and planned clinical development activities in the near term and in the future as we progress our existing clinical trials and other studies of tebipenem HBr, SPR720 and SPR206, continue to discover and develop additional product candidates, hire additional clinical and scientific personnel and acquire or in-license other product candidates and technologies.

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.

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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;

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;

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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 future as we increase our headcount to support our continued research, development, and commercialization of our product candidates.

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 our continued operation as a public company.

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We classified the anti-dilution rights as derivative liabilities on our consolidated balance sheet that we remeasured to fair value at each reporting date, and we recognized changes in the fair value of the derivative liabilities associated with the anti-dilution rights as a component of other income (expense) in our consolidated statement of operations and comprehensive loss.

In May 2017, we repurchased 100% of the minority investor’s outstanding shares in Spero Europe, Ltd.

and settled the anti-dilution rights associated with the shares.

In December 2019, we repurchased 100% of the minority investor’s outstanding shares in Spero Gyrase, Inc.

In November 2019, we repurchased 100% of the minority investor’s outstanding shares in Spero Gyrase, Inc.

at a price of $0.001 per share.

As a result, as of December 31, 2019, there are no anti-dilution rights outstanding.

Interest Income and Other Income (Expense), Net

As a result, as of December 31, 2020 and 2019, there are no anti-dilution rights outstanding.

Additionally, effective as of January 1, 2020, we merged Spero Gyrase, Inc.

with and into Spero, Therapeutics, Inc.

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 years ended December 31, 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.

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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

Funding Received from Government Contracts 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.

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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, the National Institute of Allergy and Infectious Diseases, or NIAID, of the National Institutes of Health, or NIH, and Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator, or CARB-X, 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 and we are reasonably assured that the expenses will be reimbursed and of the collectability of the revenue.

Revenue from government grants is recognized as the qualifying expenses related to the contracts are incurred, provided that there is reasonable assurance of recoverability.

Revenue recognized upon incurring qualifying expenses in advance of receipt of funding is recorded as unbilled receivables, a component of prepaid expenses and other current assets, in the consolidated balance sheet.

We recognize funding received from BARDA, the DoD and the NIAID of the 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 collectible.

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 $0.4 million and $1.2 million during the years ended December 31, 2019 and 2018, respectively.

Collaboration Agreements

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Examples of estimated accrued research and development expenses include fees paid to:

vendor in connection with the preclinical development activities;

vendors in connection with the preclinical development activities;

CMOs in connection with the production of preclinical and clinical trial materials;

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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 or common units and assumptions we make for the volatility of our common stock or common units, the expected term of our common stock options and incentive units, the risk-free interest rate for a period that approximates the expected term of our common stock options and incentive units, and our expected dividend yield.

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

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Other income (expense):

Interest income and other income (expense), net

Gain on settlement of derivative liability

Interest income

Other income (expense), net

Total other income (expense), net

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NIAID Award (SPR720)

DoD Agreement (Potentiator Platform)

CARB-X Award (SPR741)

DoD Agreement (Potentiator product candidates)

Total revenue

Grant revenue recognized during 2020 and 2019 consisted of the reimbursement of qualifying expenses incurred in connection with our various government awards.

The increase in revenue during 2019 was primarily due to funding received under our BARDA contract, which was awarded to us in July 2018, and for which we began incurring qualified expenses in the second half of 2018.

Offsetting this increase, we received lower funding from our other government contracts and awards, as well as our CARB-X award, which had a performance period through March 31, 2018.

The decrease in revenue during 2020 was primarily due to decreased funding received under our BARDA contract for tebipenem HBr.

Collaboration Revenue

During the years December 31, 2020 and 2019, we recognized $0.3 million and $4.7 million of revenue, respectively, related to our agreement with Everest, consisting of the performance of research and development services.

Research and Development Expenses

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Tebipenem HBr

Potentiator Platform (SPR206 and SPR741)

Potentiator product candidates (SPR206 and SPR741)

Unallocated expenses:

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Total research and development expenses

Direct costs related to our tebipenem HBr program increased during 2019 compared to 2018 due to an increase of $26.9 million in clinical trial expenses related to the ADAPT-PO pivotal Phase 3 clinical trial of tebipenem HBr, for which activities began in 2018 and enrollment initiated in the first quarter of 2019.

In addition to these higher clinical trial costs, we have incurred higher expenses during 2019 related to formulation development, manufacturing process and manufacturing of clinical trial material.

Additionally, during 2018, research and development expenses for our tebipenem HBr program conducted by our Australian subsidiary were recorded net of a 43.5% research and development tax incentive for qualified expenses from the Australian government of $0.9 million.

We expect direct costs related to tebipenem HBr to continue to increase as we conclude our pivotal 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 2019 compared to 2018 due to the cost of running the Phase 1 clinical trial of SPR720, which we initiated in January 2019, as well as costs related to drug substance and formulation development.

Direct costs related to our SPR720 program were recorded net of a $1.7 million reduction in expenses that were funded under our collaboration with Gates MRI.

We expect direct costs related to our SPR720 program to continue to increase as we advance this product candidate.

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 $3.8 million during 2019 as compared to 2018, due to toxicology studies and manufacturing costs incurred in 2018 to prepare for the Phase 1 study of SPR206, which we initiated in December 2018, as well as $0.2 million in expense related to the achievement of regulatory milestones for SPR206 in the fourth quarter of 2018.

These prior year expenses were partially offset by higher clinical trial costs in the current year due to the cost of running the Phase 1 trial.

We expect direct costs related to our SPR206 program to continue as we advance the program under the DoD award.

We incurred minimal expenses related to SPR741 during 2019 and have determined to discontinue this program effective January 1, 2020.

The increase in personnel-related costs included in unallocated expenses of $2.9 million was due to an increase in research and development headcount, as well as a $0.5 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 group of research and development personnel and their research efforts.

Direct costs related to our tebipenem HBr program decreased by $ 1.

5 million during 20 20 compared to 201 9 primarily due to the completion of significant activities and related costs of the Phase 3 clinical trial in 2020 .

We initiated enrollment for the phase 3 clinical trial in the first quarter of 2019, completed enrollment in the second quarter of 2020 and announced results of topline data in September 2020 .

This decrease was partially offset by increases in expenses related to formulation development, manufacturing process and manufacturing of clinical trial material in 2020 compared to 2019 .

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 by $0.1 million during 2020 compared to 2019, primarily due to increased expenses related to the initiation of our Phase 2a clinical trial, offset by decreased costs related to the formulation development, manufacturing process and manufacturing of clinical trial material.

Direct costs related to our SPR720 program during the year ended December 31, 2020 reflect a $2.1 million reduction to expense related to activities funded by Gates MRI, compared to $1.7 million during the year ended December 31, 2019.

On February 5, 2021, we announced that the FDA informed us that a clinical hold had been placed on our Phase 2a clinical trial of SPR720, which is further described elsewhere in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K under the heading “Recent Developments – Update on Phase 2a Clinical Trial.”

Direct costs related to our Potentiator product candidates include costs related to our SPR206 and SPR741 programs.

Direct costs related to our SPR206 program decreased by $2.0 million during 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 years ended December 31, 2020 and 2019.

In January 2020, we decided to proceed with SPR206 as the lead Potentiator product candidate 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 $1.2 million.

The increase in personnel-related costs included in unallocated expenses of $4.0 million was primarily due to an increase in research and development headcount and a $0.6 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

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Total general and administrative expenses

The increase in personnel-related costs of $1.3 million was primarily a result of an increase in headcount in our general and administrative function as we operate as a public company, as well as a $0.5 million increase in share-based compensation expense.

The increase in professional and consultant fees of $1.0 million was primarily related to increased expenses related to business development and commercial readiness activities.

The increase in personnel-related costs of $2.6 million was primarily a result of an increase in headcount in our general and administrative function.

Personnel-related costs for the years ended December 31, 2020 and 2019 included share-based compensation expense of $2.7 million and $2.2 million, respectively.

The increase in professional and consultant fees of $2.4 million 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 increase in facility-related and other costs was primarily due to the increased costs of supporting a larger number of general and administrative personnel.

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Other income, net was $0.8 million during 2020, compared to $2.3 million during 2019.

Other income, net, for the year ended December 31, 2019 consisted of other income of $2.1 million, which was primarily related to interest income on our invested cash balances and marketable securities, as well as $0.2 million in connection with the repurchase of Vaxart Inc.’s outstanding shares in Spero Gyrase, Inc.

Other income, net in the year ended December 31, 2020 was primarily comprised of unrealized foreign currency gains, offsetting decreased interest income due to falling interest rates.

In comparison, other income, net, for the year ended December 31, 2019 consisted of other income of $2.1 million, which was primarily related to interest income on our invested cash balances and marketable securities, as well as $0.2 million in connection with the repurchase of Vaxart Inc.’s outstanding shares in Spero Gyrase, Inc.

at a price of $0.001 per share.

Other income, net for the year ended December 31, 2018 consisted of other income of $1.8 million, which was primarily related to interest income on our invested cash balances and marketable securities, partially offset by $0.7 million of other expenses.

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 and our license agreement with Everest Medicines.

We have recognized limited revenue to date from funding arrangements with the DoD, NIAID, CARB-X and BARDA and our license agreement with Everest.

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, an underwritten public offering of our common and preferred stock in July 2018, and subsequent sales of our common stock.

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, and from multiple equity financings of our common and preferred stock.

As of December 31, 2020, we had cash, cash equivalents and marketable securities of $126.9 million.

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 common stock 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, on October 1, 2020, we issued and sold 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 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 our 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.

Issuance 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.

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” offering as defined in Rule 415 of the Securities Act, subject to the terms of the sales agreement.

During the year ended December 31, 2019, we sold 475,024 shares of common stock under the sales agreement at an average price of approximately $12.57 per share for aggregate gross proceeds of approximately $6.0 million and net proceeds of approximately $5.8 million after deducting the sales commissions and offering expenses.

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 “at-the-market” 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 “at-the-market” offering program, prior to deducting sales commissions, and had remaining available capacity of approximately $34.6 million.

On November 13, 2020, we reinstated the “at-the-market” offering program with a capacity of up to $34 million by filing an updated prospectus .

During the year ended December 31, 2020, we sold 993,870 shares of our common stock under the “at-the-market” agreement at an average price of approximately $13.66 per share for aggregate gross proceeds of approximately $13.6 million prior to deducting sales commissions.

Concurrently with the filing of this Annual Report on Form 10-K, we entered into a new sales agreement with Cantor and will file a new universal shelf registration statement on Form S-3, including an “at-the-market” prospectus with the SEC, which is further described elsewhere in this Annual Report on Form 10-K under “Item 9B.

Other Events.” Our existing sales agreement with Cantor will terminate automatically at such time as the SEC declares effective our new universal shelf registration statement on Form S-3.

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.

The following table summarizes our sources and uses of cash for the years ended December 31, 2020 and 2019:

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Net cash used in operating activities for the year ended December 31, 2020 was $85.9 million, primarily resulting from our net loss of $78.3 million, adjusted for net non-cash items of $5.9 million (primarily stock-based compensation and depreciation and amortization expense).

Net cash used in changes in our operating assets and liabilities was $(13.5) million and consisted primarily of a decrease of $12.1 million in accrued expenses and accounts payable, a $1.9 million increase in other assets and a $1.2 million increase in prepaid expenses and other current assets, partially offset by a $2.2 million net decrease in receivables related to our government awards.

Net cash used in operating activities for the year ended December 31, 2019 was $50.0 million, primarily resulting from our net loss of $60.9 million, adjusted for net non-cash items of $4.1 million (primarily stock-based compensation and depreciation and amortization expense).

Net cash provided by changes in our operating assets and liabilities was $6.8 million and consisted primarily of an increase of $13.8 million in accrued expenses and accounts payable and a $2.7 million decrease in prepaid expenses and other current assets, offset by a $7.1 million increase in receivables related to our government awards and a $2.9 million increase in other assets.

Net cash used in operating activities for the year ended December 31, 2018 was $39.6 million, primarily resulting from our net loss of $41.7 million, adjusted for net non-cash items of $3.1 million.

Net cash used by changes in our operating assets and liabilities was $1.1 million and consisted primarily of a $5.5 million increase in prepaid expenses and other current assets as we prepare to initiate our pivotal Phase 3 trial for tebipenem HBr, a $1.2 million increase in other assets, and partially offset by a decrease of $1.4 million in receivables related to the Australian research and development tax incentive and to our government contracts, and an increase in accounts payable and accrued expenses and other current liabilities of $3.7 million.

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.

Changes in accounts payable, accrued expenses and other current liabilities, and prepaid expenses and other current assets in all periods were generally due to the advancement of our development programs and the timing of vendor invoicing and payments.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2020 was $10.5 million, primarily related to the maturities of marketable securities of $56.4 million, offset by purchases of marketable securities of $45.7 million.

Net cash provided by investing activities for the year ended December 31, 2019 was $29.5 million and consisted primarily of the net maturities of marketable securities, as well as $0.3 million in property and equipment purchases.

Cash used in investing activities during the year ended December 31, 2018 was $83.2 million and primarily related to the net purchase of marketable securities, as well as $2.4 million of fixed assets purchased, which included $1.6 million of fixed assets which will be used in manufacturing related activities at Meiji.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2020 was $130.9 million, consisting primarily of proceeds of $116.5 million from the sale of common stock, Series C Preferred Stock and Series D Preferred Stock in our rights offering and underwritten public offering, net proceeds of $13.2 million from the sale of common stock under our “at-the-market” offering program sales agreement and proceeds of $2.2 million from the exercise of employee stock options, offset by the payment of offering expenses of approximately $1.0 million.

Net cash provided by financing activities for the year ended December 31, 2019 was $16.1 million, consisting primarily of net proceeds of $5.8 million from the sale of common stock under our “at-the-market” offering program sales agreement, proceeds of $10.0 million from the sale of common stock to Novo, both of which were offset by offering expenses of $0.2 million, as well as $0.5 million of proceeds from the exercise of employee stock options.

Cash provided by financing activities during the year ended December 31, 2018, of $69.5 million primarily consisted of $69.5 million of net proceeds from our July 2018 equity offering (after deducting offering costs of $1.0 million), as well as $0.3 million of proceeds from the exercise of employee stock options, offset by $0.3 million of deferred offering costs related to our December 2018 registration statement and at-the-market facility.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials for our product candidates in development.

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.

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As of December 31, 2020, we had cash, cash equivalents and marketable securities of $126.9 million.

In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), 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 as of December 31, 2019, together with committed funding from our BARDA contract and other non-dilutive funding commitments, together with the net proceeds from our rights offering completed in early March 2020, will not be sufficient to fund our operating expenses and capital expenditure requirements, as currently planned, for more than one year beyond the filing date of this Annual Report on Form 10-K.

Specifically, we believe these funds will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2021, including through the filing of an NDA for tebipenem HBr.

Because these funds will not be sufficient to fund our operations, as currently planned, for more than one year beyond the filing date of this Annual Report on Form 10-K, we have determined that there is substantial doubt regarding 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.

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 second quarter of 2022, including through the submission of the NDA for tebipenem HBr.

This timeline is subject to uncertainty as to the timing of future 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.

As a result, management has concluded that substantial doubt exists about our ability to continue as a going concern .

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.

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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.

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Payments Due by Period

Less Than 1 Year

More than 5 Years

(in thousands)

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Reflects payments due for our lease of office space under an operating lease agreement that expires in 2027.

Total minimum future lease payments of approximately $4.3 million for a lease that has not commenced as of December 31, 2019 is not included in the table above or in the lease liability in the consolidated financial statements, as the Company does not yet have control of the underlying asset.

The lease is expected to commence in June 2020 with a lease term of 7 years.

As further described below, under various licensing and related agreements with third parties, we have agreed to make milestone payments and pay royalties to third parties.

We have not included any contingent payment obligations, such as milestones or royalties, in the table above as the amount, timing and likelihood of such payments are not known.

Under our license agreement with Meiji, we are obligated (i) to make milestone payments of up to $3.0 million upon the achievement of specified clinical and regulatory milestones, (ii) to pay royalties, on a product-by-product and country-by-country basis, of a low single-digit percentage based on net sales of products licensed under the agreement and (iii) to pay to Meiji a low double-digit percentage of any sublicense fees received by us up to $7.5 million.

Under our license agreement with Meiji, we are obligated (i) to make future milestone payments of up to $2.0 million upon the achievement of specified clinical and regulatory milestones for tebipenem HBr, (ii) to pay royalties, on a product-by-product and country-by-country basis, of a low single-digit percentage based on net sales of products licensed under the agreement and (iii) to pay to Meiji a low double-digit percentage of any sublicense fees received by us up to $7.5 million.

During the fourth quarter of 2018 we paid Meiji approximately $1.6 million related to fixed assets which will be used in manufacturing related activities at Meiji.

The equipment has been capitalized as property and equipment in the consolidated balance sheet as of December 31, 2020 and 2019.

Under an agreement we entered into with PBB, we are obligated to make milestone payments of up to $5.8 million upon the achievement of specified clinical milestones and a payment of £5.0 million ($6.6 million as of December 31, 2019) upon the achievement of a specified commercial milestone.

Under an agreement we entered into with PBB, we are obligated to make milestone payments of up to $5.8 million upon the achievement of specified clinical milestones and a payment of £5.0 million ($6.8 million as of December 31, 2020) upon the achievement of a specified commercial milestone for SPR206.

In addition, we have agreed to pay to PBB royalties, on a product-by-product and country-by-country basis, of a low single-digit percentage based on net sales of products licensed under the agreement.

During the three months ended December 31, 2018, we recorded $0.2 million in expense related to the achievement of regulatory milestones for SPR206.

Under our agreement with Vertex, we are obligated to make milestone payments of up to $81.1 million upon the achievement of specified clinical, regulatory and commercial milestones and to pay to Vertex tiered royalties, on a product-by-product and country-by-country basis, of a mid single-digit to low double-digit percentage based on net sales of products licensed under the agreement.

During the three months ended December 31, 2018, we recorded $0.2 million in expense related to the achievement of regulatory milestones for SPR720.

Under our agreement with Vertex, we are obligated to make future milestone payments of up to $80.2 million upon the achievement of specified clinical, regulatory and commercial milestones and to pay to Vertex tiered royalties, on a product-by-product and country-by-country basis, of a mid single-digit to low double-digit percentage based on net sales of products licensed under the agreement.

During the year ended December 31, 2020, we paid Vertex $0.9 million related to the achievement of regulatory milestones for SPR720.

We enter into contracts in the normal course of business with CROs, CMOs and other third parties for clinical trials, preclinical research studies and testing, manufacturing and other services.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis