Spero Therapeutics, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 90 Consolidated Balance Sheets 91 Consolidated Statements of Operations and Comprehensive Loss 92 Consolidated Statements of Convertible Preferred Shares and Stockholders’ Equity 93 Consolidated Statements of Cash Flows 94 Notes to Consolidated Financial Statements 95 89 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Spero Therapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Spero Therapeutics, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, of convertible preferred shares and stockholders’ equity and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Substantial Doubt about the Company’s Ability to Continue as a Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring losses since inception and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 11, 2021 We have served as the Company's auditor since 2016. 90 SPERO THERAPEUTICS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except unit, share and per share amounts) December 31, December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 85,209 $ 29,730 Marketable securities 41,697 52,315 Other receivables 5,330 7,760 Tax incentive receivable, current 846 786 Prepaid expenses and other current assets 6,063 4,823 Total current assets 139,145 95,414 Property and equipment, net 1,669 2,273 Tax incentive receivable 311 21 Operating lease right-of-use assets 7,114 4,875 Other assets 5,212 3,520 Total assets $ 153,451 $ 106,103 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,155 $ 4,147 Accrued expenses and other current liabilities 12,241 21,588 Operating lease liabilities 947 928 Total current liabilities 14,343 26,663 Non-current operating lease liabilities 6,891 4,617 Other long-term liabilities 177 249 Total liabilities 21,411 31,529 Commitments and contingencies (Note 12) Stockholders' equity: Preferred stock, $ 0.001 par value; 10,000,000 shares authorized, 3,218,287 shares issued and outstanding as of December 31, 2020 and 2,720 shares issued and outstanding as of December 31, 2019 3 — Common stock, $ 0.001 par value; 60,000,000 shares authorized as of December 31, 2020 and December 31, 2019; 29,260,247 shares issued and outstanding as of December 31, 2020 and 19,190,695 shares issued and outstanding as of December 31, 2019 29 19 Additional paid-in capital 409,722 273,966 Accumulated deficit ( 277,707 ) ( 199,427 ) Accumulated other comprehensive gain (loss) ( 7 ) 16 Total stockholders' equity 132,040 74,574 Total liabilities and stockholders' equity $ 153,451 $ 106,103 The accompanying notes are an integral part of these consolidated financial statements. 91 SPERO THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except share and per share data) Year Ended December 31, 2020 2019 Revenues: Grant revenue $ 9,072 $ 13,405 Collaboration revenue 258 4,742 Total revenues 9,330 18,147 Operating expenses: Research and development 67,003 65,775 General and administrative 21,440 15,588 Total operating expenses 88,443 81,363 Loss from operations ( 79,113 ) ( 63,216 ) Other income (expense): Gain on settlement of derivative liability — 223 Interest income 401 1,328 Other income (expense), net 432 740 Total other income (expense), net 833 2,291 Net loss $ ( 78,280 ) $ ( 60,925 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 3.52 ) $ ( 3.35 ) Weighted average common shares outstanding, basic and diluted: 22,386,122 18,160,525 Comprehensive loss: Net loss ( 78,280 ) ( 60,925 ) Other comprehensive gain (loss): Unrealized gain (loss) on marketable securities ( 23 ) 38 Reclassification adjustment for gains included in net loss — 6 Net unrealized gains (losses) on securities ( 23 ) 44 Total comprehensive loss $ ( 78,303 ) $ ( 60,881 ) The accompanying notes are an integral part of these consolidated financial statements. 92 SPERO THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED SHARES AND STOCKHOLDERS’ EQUITY (In thousands, except unit and share amounts) Series A, B, C and D Additional Accumulated Spero Therapeutics, Inc. Non- Total Convertible Preferred Stock Common Stock Paid-in Accumulated Other Comprehensive Stockholders' controlling Stockholders' Shares Par Value Shares Par Value Capital Deficit Income (Loss) Equity (Deficit) Interests Equity (Deficit) Balances at December 31, 2018 3,220 — 17,205,962 17 254,013 ( 138,502 ) ( 28 ) 115,500 355 115,855 Issuance of common stock upon the exercise of stock options — — 78,610 — 508 — — 508 — 508 Issuance of common stock, net of issuance costs of $ 474 — — 1,406,123 1 15,315 — — 15,316 — 15,316 Conversion of convertible preferred stock to common stock ( 500 ) — 500,000 1 ( 1 ) — — — — — Share-based compensation expense — — — — 3,776 — — 3,776 — 3,776 Purchase of non-controlling interest in Spero Gyrase, Inc. — — — — 355 — — 355 ( 355 ) — Unrealized gain on available-for-sale securities — — — — — — 44 44 — 44 Net loss — — — — — ( 60,925 ) — ( 60,925 ) — ( 60,925 ) Balances at December 31, 2019 2,720 — 19,190,695 19 273,966 ( 199,427 ) 16 74,574 — 74,574 Issuance of common stock upon the exercise of stock options — — 324,433 — 2,189 — — 2,189 — 2,189 Issuance of common stock, net of offering costs of $ 731 and net of issuance costs — — 8,025,119 8 77,921 — — 77,929 — 77,929 Issuance of Series C preferred stock, net of offering costs of $ 41 2,287 — — — 20,542 — — 20,542 — 20,542 Beneficial conversion feature of Series C preferred stock — ( 549 ) — — 549 — — — — — Deemed dividends related to immediate accretion of beneficial conversion feature of Series C preferred stock — 549 — — ( 549 ) — — — — — Issuance of Series D preferred stock, net of offering costs of $ 181 3,215,000 3 — — 30,218 — — 30,221 — 30,221 Conversion of convertible preferred stock to common stock ( 1,720 ) — 1,720,000 2 ( 2 ) — — — — — Share-based compensation expense — — — — 4,888 — — 4,888 — 4,888 Unrealized loss on available-for-sale securities — — — — — — ( 23 ) ( 23 ) — ( 23 ) Net loss — — — — — ( 78,280 ) — ( 78,280 ) — ( 78,280 ) Balances at December 31, 2020 3,218,287 3 29,260,247 29 409,722 ( 277,707 ) ( 7 ) 132,040 — 132,040 The accompanying notes are an integral part of these consolidated financial statements. 93 SPERO THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2020 2019 Cash flows from operating activities: Net loss $ ( 78,280 ) $ ( 60,925 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 761 750 Non-cash lease cost 585 408 Loss on disposal of fixed assets — 184 Gain on settlement of derivative liability — ( 223 ) Share-based compensation 4,888 3,776 Realized (gain) loss on investments — ( 1 ) Unrealized foreign currency transaction (gain) loss ( 330 ) ( 18 ) Accretion of discount on marketable securities ( 32 ) ( 750 ) Changes in operating assets and liabilities: Other receivables 2,430 ( 7,384 ) Prepaid expenses and other current assets ( 1,240 ) 2,654 Tax incentive receivables ( 254 ) 299 Other assets ( 1,890 ) ( 2,912 ) Accounts payable ( 2,975 ) 564 Accrued expenses and other current liabilities ( 9,130 ) 13,272 Other long-term liabilities ( 72 ) ( 52 ) Operating lease liabilities ( 333 ) 338 Net cash used in operating activities ( 85,872 ) ( 50,020 ) Cash flows from investing activities: Purchases of marketable securities ( 45,723 ) ( 88,993 ) Proceeds from maturities of marketable securities 56,350 118,837 Purchases of property and equipment ( 157 ) ( 314 ) Net cash provided by investing activities 10,470 29,530 Cash flows from financing activities: Proceeds from the issuance of common stock, net of commissions 13,166 15,790 Proceeds from the issuance of common stock related to Rights Offering 9,416 — Proceeds from the issuance of common stock related to the Underwritten Public Offering 56,078 — Proceeds from issuance of Series C Preferred Shares related to Rights Offering 20,583 — Proceeds from issuance of Series D Preferred Shares related to the Underwritten Public Offering 30,402 — Payment of offering costs ( 953 ) ( 158 ) Proceeds from stock option exercises 2,189 508 Net cash provided by financing activities 130,881 16,140 Net increase (decrease) in cash and cash equivalents 55,479 ( 4,350 ) Cash and cash equivalents at beginning of period 29,730 34,080 Cash and cash equivalents at end of period $ 85,209 $ 29,730 Supplemental disclosure of non-cash activities: Right-of-use assets and lease obligations recorded upon commencement or amendment of lease agreements $ 2,626 $ 1,038 The accompanying notes are an integral part of these consolidated financial statements. 94 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of the Business and Basis of Presentation Spero Therapeutics, Inc., together with its consolidated subsidiaries (the “Company” or “Spero”), is a multi-asset, clinical-stage biopharmaceutical company focused on identifying, developing and commercializing treatments in high unmet need areas involving multi-drug resistant, or MDR, bacterial infections and rare diseases. The Company’s 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. The Company is 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, the Company has a Potentiator technology, that includes an IV-administered product candidate, SPR206, being developed to treat MDR Gram-negative infections in the hospital. The Company was formed as Spero Therapeutics, LLC in December 2013 under the laws of the State of Delaware . On June 30, 2017 , through a series of transactions, Spero Therapeutics, LLC merged with and into Spero Therapeutics, Inc. (formerly known as Spero OpCo, Inc.), a Delaware corporation. On December 3, 2018, the Company 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 it registered for sale up to $ 200.0 million of any combination of its 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 it entered into with Cantor Fitzgerald & Co., or Cantor. Under the sales agreement, Cantor may sell the shares by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act. The prospectus underlying the “at-the-market” offering program was terminated on September 9, 2020 in connection with the Company’s underwritten public offering that was completed in September 2020. At such time, the Company had raised approximately $ 15.4 million in sales of its common stock under the “at-the-market” offering program, prior to deducting sales commissions, On November 13, 2020, the Company reinstated the “at-the-market” offering program for the remaining available capacity of $ 34.0 million by filing an updated prospectus. Concurrently with the filing of this Annual Report on Form 10-K, the Company entered into a new sales agreement with Cantor and will be filing 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.” The Company’s existing sales agreement with Cantor will terminate automatically at such time as the SEC declares effective the Company’s new universal shelf registration statement on Form S-3. The Company is subject to risks and uncertainties common to companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, risks of failure or unsatisfactory results of nonclinical studies and clinical trials, the need to obtain marketing approval for its product candidates, the need to successfully commercialize and gain market acceptance of its product candidates and the ability to secure additional capital to fund operations. The Company’s product candidates will require additional preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales. The pandemic caused by COVID-19 has resulted, and is likely to continue to result, in significant national and global economic disruption and may adversely affect our business. The Company has experienced impacts to its clinical and development timelines due to the worldwide spread of COVID-19. However, to date, the Company has not experienced material impacts to liquidity, nor has it incurred impairment of any assets as a result of COVID-19. The Company continues to monitor this situation and the possible effects on its business, results of operations and financial condition, including manufacturing, clinical trials, research and development costs and employee-related amounts. The accompanying consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its consolidated subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. 95 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Since inception, the Company has funded its operations with proceeds from sales of preferred units (including bridge units, which converted into preferred units), payments received in connection with a concluded collaboration agreement, funding from government contracts, a licensing agreement and through the sale of the Company’s common and preferred stock. The Company has incurred recurring losses since inception, including net losses of $ 78.3 million and $ 60.9 million for the years ended December 31, 2020 and 2019, respectively. In addition, as of December 31, 2020, the Company had an accumulated deficit of $ 277.7 million. The Company expects to continue to generate operating losses for the foreseeable future. In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. Based on the Company’s current operating plan and existing cash, cash equivalents and marketable securities, the Company has determined that there is substantial doubt regarding its ability to continue as a going concern. The Company will require additional funding to fund the development of its product candidates through regulatory approval and commercialization, and to support its continued operations. The Company will seek additional funding through public or private financings, debt financing, collaboration agreements or government grants. 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. There is no assurance that the Company will be successful in obtaining sufficient funding on acceptable terms, if at all, and it could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could materially adversely affect its business prospects or its ability to continue operations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, the accrual for clinical trial costs and other research and development expenses, and the valuation of share-based awards. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. The Company has contemplated the impact of COVID-19 within its financial statements and is not aware of any specific event or circumstance that would require the Company to update estimates, judgments or revise the carrying value of any assets or liabilities. There may be changes to those estimates in future periods. On an ongoing basis, management evaluates its estimates, as there are changes in circumstances, facts and experience. Actual results may differ from those estimates or assumptions. Segment Information The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company’s singular focus is on identifying, developing and commercializing novel treatments for MDR bacterial infections. All of the Company’s tangible assets are held in the United States. Consolidation Ownership interests in the Company’s subsidiaries that are held by entities other than the Company are reported as non-controlling interests in the consolidated balance sheets. Losses attributed to non-controlling interests and to the Company are reported separately in the consolidated statements of operations and comprehensive loss. 96 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In November 2019, the Company repurchased 100 % of the minority investor’s outstanding shares in Spero Gyrase, Inc. for $ 0.001 per share, and as a result, as of December 31, 2020 and 2019, the Company no longer reported a non-controlling interest. Additionally, effective as of January 1, 2020, the Company merged Spero Gyrase, Inc. with and into Spero, Therapeutics, Inc. Concentrations of Credit Risk and of Significant Suppliers Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains most of its cash and cash equivalents at one accredited financial institution. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients and formulated drugs. As of December 31, 2020, and 2019, the Company had no off-balance sheet risk such as foreign exchange contracts, option contracts, or other hedging arrangements. Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include cash held in banks and money market instruments. Marketable Securities Marketable securities consist of investments in corporate obligations with original maturities greater than 90 days. The Company considers its portfolio of investments to be available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Investments with maturities beyond one year are generally classified as short term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value are included as a component of other income (expense), net based on the specific identification method. The Company evaluates debt securities with an unrealized loss to determine whether there may be a credit impairment. The Company also assesses its intent to sell the security and whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost. Any credit impairments are recorded through an allowance account. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense are recognized using the straight-line method over the estimated useful life of each asset as follows: Estimated Useful Life Laboratory equipment 5 years Computer software and equipment 3 years Office furniture and equipment 7 years Manufacturing equipment 5 years Leasehold improvements Shorter of life of lease or 5 years Costs for capital assets not yet placed into service are capitalized as construction in progress and are depreciated in accordance with the above guidelines once placed into service. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance are charged to expense as incurred. The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of property and equipment. 97 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Leases Effective January 1, 2019 , the Company adopted ASC Topic 842, Leases (“ASC 842”), using the modified retrospective approach and utilizing the effective date as its date of initial application, for which prior periods are presented in accordance with the previous guidance in ASC 840, Leases (“ASC 840”) . At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. As of December 31, 2020, the Company had no short-term leases with terms of one year or less. Options to renew a lease are not included in the Company’s initial lease term assessment unless there is reasonable certainty that the Company will renew. The Company monitors its plans to renew its material leases on a quarterly basis. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate (“IBR”), which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, and in a similar economic environment. Since the Company does not have any debt and has not been rated by any major credit rating agency, the Company’s IBR was estimated by developing a synthetic credit rating for the Company. In transitioning to ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rates. The Company has elected to account for lease and non-lease components together as a single lease component. Other Assets Other assets consist of long-term prepayments and deposits. Impairment of Long-Lived Assets Long-lived assets consist of property and equipment and operating lease right-of-use assets. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flows. Fair Value Measurements Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. • Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. 98 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company’s cash equivalents are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The carrying values of the Company’s accounts payable and accrued expenses approximate their fair values due to the short-term nature of these liabilities. Collaboration Agreements For collaboration agreements with a third party, to determine the appropriate statement of operations classification of the recognized funding, the Company first assesses whether the collaboration arrangement is within the scope of the accounting guidance for collaboration arrangements. If it is, the Company evaluates the collaborative arrangement for proper classification in the statement of operations based on the nature of the underlying activity and the Company assesses 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, the Company bases 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, the Company assesses whether the collaboration arrangement represents a vendor/customer relationship. If the collaborative arrangement does not represent a vendor/customer relationship, the Company then classifies 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, the Company entered into a collaboration agreement with the Bill and Melinda Gates Medical Research Institute (the “Gates MRI”) and concluded that the agreement is within the scope of the accounting guidance for collaboration arrangements (see Note 14). Due to the cost-funded nature of the payments and the Company’s assessment that it does not have a vendor/customer relationship with the Gates MRI, the Company recognizes the funding received under the agreement as a reduction to the research and development expenses incurred, as the related expenses are incurred. Government Tax Incentives For available government tax incentives that the Company may earn without regard to the existence of taxable income and that require the Company to forego tax deductions or the use of future tax credits and net operating loss carryforwards, the Company classifies the funding recognized as a reduction of the related qualifying research and development expenses incurred. Since the fourth quarter of 2016, the Company’s operating subsidiary in Australia has met the eligibility requirements to receive a tax incentive for qualifying research and development activities (see Note 15). The Company recognizes these incentives as a reduction of research and development expenses in the consolidated statements of operations and comprehensive loss 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 the consolidated balance sheet as tax incentive receivables. Research and Development Costs Research and development costs are expensed as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities, including personnel salaries, share-based compensation and benefits, allocated facilities costs, depreciation, manufacturing expenses, costs related to the Company’s government contract and grant arrangements, and external costs of outside vendors engaged to conduct preclinical development activities, clinical trials as well as the cost of licensing technology. Upfront payments and milestone payments made for the licensing of technology are expensed as research and development in the period in which they are incurred. Advance payments 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. Clinical Trial and other Research Contract Costs and Accruals The Company has entered into various research and development contracts with clinical research organizations and other companies both inside and outside of the United States. These agreements are generally cancelable, and related payments are recorded as research and development expenses as incurred. There may be instances in which payments made to these vendors exceed the level of service provided and will result in a prepayment of the expense. The Company records accruals for estimated ongoing research and clinical trial costs based on the services received and efforts expended pursuant to multiple contracts with these vendors. When evaluating the adequacy of the accrued liabilities, the Company analyzes the progress of the studies or trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs. 99 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Patent Costs All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses. Share-Based Compensation The Company measures 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. Compensation expense of those awards is recognized over the requisite service period, which is generally the vesting period of the respective award. The Company records the expense for awards with service-based conditions using the straight-line method over the requisite service period, net of any actual forfeitures. The Company has also granted certain awards subject to performance-based vesting eligibility and a subsequent partial time-based vesting schedule. The Company classifies share-based compensation expense in its consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified. Comprehensive Loss Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with shareholders. For the years ended December 31, 2020 and 2019, these changes related to unrealized gains and losses on the Company’s available-for-sale marketable securities. There were no reclassifications out of comprehensive loss for the years ended December 31, 2020 and 2019. Net Loss per Share The Company follows the two-class method when computing net income (loss) per share, as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Net income (loss) per share attributable to common stockholders is calculated based on net income (loss) attributable to Spero Therapeutics, Inc. and excludes net income (loss) attributable to non-controlling interests. Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) attributable to common stockholders is computed by adjusting net income (loss) attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the diluted net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of common stock equivalents. Income Taxes The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. 100 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years , which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80 % of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50 % of adjusted taxable income plus business interest income ( 30 % limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. Recently Issued and Adopted Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No 2016-13, Financial Instruments – Credit Losses (Topic 326). The Accounting Standards Codification 326, Financial Instruments- Credit Losses (“ASC 326”) requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Under ASU 2016-13, the Company is required to use a current expected credit loss (“CECL”) model that immediately recognizes an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of the update, including trade receivables. The updated guidance also amends the previous other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments related to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position no longer impacts the determination of whether a credit loss exists. The Company adopted the guidance on January 1, 2020 with no impact. For available-for-sale securities, the updated guidance was applied prospectively. In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) (“ASU 2018-15”). The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted this standard as of January 1, 2020 , on a prospective basis. The adoption did not have a material impact on the Company’s consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This standard modifies certain disclosure requirements on fair value measurements. This standard became effective for the Company on January 1, 2020 and did not have a material impact on its disclosures. For the new disclosures regarding our Level 3 instruments, please read Note 3, Fair Value Measurements, to these consolidated financial statements. In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 . This standard makes targeted improvements for collaborative arrangements as follows: • Clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in ASC 606 should be applied, including recognition, measurement, presentation and disclosure requirements; • Adds unit-of-account guidance to ASC 808, Collaborative Arrangements, to align with the guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606; and • Precludes a company from presenting transactions with collaborative arrangement participants that are not directly related to sales to third parties with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer. This standard became effective for the Company on January 1, 2020 and did not have a material impact on its condensed consolidated financial statements and related disclosures. 101 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , amended guidance on the accounting and reporting of income taxes. The guidance is intended to simplify the accounting for income taxes by removing exceptions related to certain intraperiod tax allocations and deferred tax liabilities; clarifying guidance primarily related to evaluating the step-up tax basis for goodwill in a business combination; and reflecting enacted changes in tax laws or rates in the annual effective tax rate. The amended guidance is effective for interim and annual periods in 2021. Early adoption is permitted. The application of the amendments in the new guidance are to be applied on a retrospective basis, on a modified retrospective basis through a cumulative-effect adjustment to retained earnings or prospectively, depending on the amendment. The Company is currently evaluating the impact of adoption on its consolidated financial statements. 3. Fair Value Measurements and Marketable Securities The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands): Fair Value Measurements at December 31, 2020 Using: Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ — $ 73,488 $ — $ 73,488 Commercial paper — 5,998 — 5,998 Corporate bonds — 3,006 — 3,006 Total cash equivalents — 82,492 — 82,492 Marketable securities: Corporate bonds — 13,221 — 13,221 Commercial paper — 28,476 — 28,476 Total marketable securities — 41,697 — 41,697 Total cash equivalents and marketable securities $ — $ 124,189 $ — $ 124,189 Fair Value Measurements at December 31, 2019 Using: Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ — $ 26,751 $ — $ 26,751 Total cash equivalents — 26,751 — 26,751 Marketable securities: U.S. government securities — 16,797 — 16,797 Corporate bonds — 14,060 — 14,060 Commercial paper — 21,458 — 21,458 Total marketable securities — 52,315 — 52,315 Total cash equivalents and marketable securities $ — $ 79,066 $ — $ 79,066 Excluded from the tables above is cash of $ 2.7 million and $ 3.0 million as of December 31, 2020 and 2019, respectively. During the years ended December 31, 2020 and 2019, there were no transfers between Level 1, Level 2 and Level 3 categories. Marketable Securities The Company’s marketable securities are classified as Level 2 assets under the fair value hierarchy as these assets were primarily determined from independent pricing sources, which generally derive security prices from recently reported trades for identical or similar securities. The Company evaluated debt securities with unrealized losses for any expected credit losses and determined unrealized losses on these securities were related to non-credit factors. Additionally, the Company currently does not intend to and is not required to sell these investments prior to an anticipated recovery in value. 102 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the gross unrealized gains and losses of the Company’s marketable securities as of December 31, 2020 and 2019 (in thousands): December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Assets: U.S. government securities $ — $ — $ — $ — Corporate bonds 13,227 — ( 6 ) 13,221 Commercial paper 28,476 — — 28,476 $ 41,703 $ — $ ( 6 ) $ 41,697 December 31, 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Assets: U.S. government securities $ 16,791 $ 6 $ — $ 16,797 Corporate bonds 14,050 12 ( 2 ) 14,060 Commercial paper 21,458 — — 21,458 $ 52,299 $ 18 $ ( 2 ) $ 52,315 As of December 31, 2020 and 2019, all of the Company’s marketable securities had remaining contractual maturity dates of one year or less from the consolidated balance sheet date. Anti-Dilution Rights In connection with the issuance of non-controlling interests in certain of the Company’s subsidiaries (see Note 10), specifically Spero Gyrase, Inc., the Company granted anti-dilution rights to the minority investors. The Company classified the anti-dilution rights as a derivative liability on its consolidated balance sheet because they were freestanding instruments that represent a conditional obligation to issue a variable number of shares. The Company remeasured the derivative liability associated with the anti-dilution rights to fair value at each reporting date, and recognized changes in the fair value of the derivative liability as a component of other income (expense) in the consolidated statement of operations and comprehensive loss. The fair value of these derivative liabilities was determined using a discounted cash flow model. In March 2016, in connection with the issuance of a non-controlling interest in its subsidiary, Spero Gyrase, Inc. (“Spero Gyrase”), to Biota Pharmaceuticals, Inc. (now Vaxart, Inc.) (“Vaxart”), the Company granted to Vaxart certain anti-dilution rights (see Note 10). In November 2019, the Company repurchased 100 % of the minority investor’s outstanding shares in Spero Gyrase, Inc. at a price per share of $ 0.001 . As a result, as of December 31, 2020 and 2019, there are no anti-dilution rights outstanding. Additionally, effective as of January 1, 2020 , the Company merged Spero Gyrase, Inc. with and into Spero, Therapeutics, Inc. 103 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2020 2019 Leasehold improvements 1,636 1,636 Manufacturing equipment 1,338 1,338 Computer software and equipment $ 507 $ 438 Office furniture and equipment 424 364 Construction-in-progress 40 12 3,945 3,788 Less: Accumulated depreciation and amortization ( 2,276 ) ( 1,515 ) $ 1,669 $ 2,273 Property and equipment additions during the year ended December 31, 2020 primarily related to office furniture and equipment and construction-in-progress related to the expansion of Company’s leased office space (see Note 5). Property and equipment additions during the year ended December 31, 2019 primarily related to leasehold improvements previously in construction-in-progress. Depreciation and amortization expense was $ 0.8 million and $ 0.8 million for the years ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2019, the Company wrote off $ 0.2 million of leased manufacturing equipment which the Company determined did not have any further use. 5. Leases Operating Leases In August 2015, the Company entered into an operating lease agreement with U.S. REIF Central Plaza Massachusetts, LLC (the “Landlord”) with respect to its corporate headquarters located at 675 Massachusetts Avenue, Cambridge, Massachusetts (the “Original Lease”). The term of the Original Lease commenced in January 2016 and was scheduled to expire in December 2020 . Under the terms of the Original Lease, the Company provided a security deposit of $ 0.2 million to the Landlord, which is included in long-term assets in the accompanying condensed consolidated balance sheets. The Original Lease provided for annual rent escalations as well as tenant incentives in the amount of $ 0.7 million, of which $ 0.3 million would be reimbursed to the Landlord over the initial term of the Original Lease. On January 17, 2018, the Company entered into an amendment to the Original Lease (the “Amendment”). The Amendment made certain modifications to the Original Lease, including the addition of approximately 7,800 square feet of office space in the same building (the “Expansion Premises”) and an extension of the expiration date of the Original Lease to seven years , or December 2025 . The Amendment also provided for $ 0.4 million from the Landlord for leasehold improvements on the Expansion Premises. On December 16, 2019, the Company entered into a second amendment to the Original Lease and the Amendment (the “Second Amendment”). The Second Amendment made certain modifications, including (i) the addition of approximately 7,800 square feet of office space in the same building (the “Second Expansion Premises”) with a term beginning in June 2020 , and (ii) an extension of the expiration date of all existing leases through May 2027 . Under the Second Amendment, the Company has two consecutive options to extend the Lease Term for an additional period of five years (the “Option Terms”), subject to certain conditions, upon notice to the Landlord. These renewal options were not included in the calculation of the operating lease assets and operating lease liabilities, as the renewal is not reasonably certain. The Second Amendment provides for annual base rent for the Second Expansion Premises of approximately $ 0.6 million in the first year of the Lease Term, which increases on an annual basis to approximately $ 0.7 million in the final year of the Lease Term, and annual base rent during the Option Terms to be calculated based on the Landlord’s good faith determination of 100 % of the fair market rate for such Option Terms. The Company is also obligated to pay the Landlord certain costs, taxes and operating expenses, subject to certain exclusions. The Amendment also provides for $ 0.6 million from the Landlord for leasehold improvements on the Expansion Premises . 104 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On May 4, 2020, the Company entered into a third amendment to the Original Lease, as amended by the Second Amendment (the “Third Amendment”). The Third Amendment made certain modifications, including (i) amending the commencement date of the Second Expansion Premises with a term which began in August 2020 , and (ii) an extension of the expiration date of all existing leases through July 2027 . For the years ended December 31, 2020 and 2019, the components of operating lease expense were as follows (in thousands): Operating lease expense Statement of Operations Location December 31, 2020 December 31, 2019 Fixed operating lease expense Research and development expense $ 808 $ 601 General and administrative expense 418 641 Variable operating lease expense Research and development expense 89 56 General and administrative expense 58 181 Total operating lease expense $ 1,373 $ 1,479 Supplemental cash flow information related to the Company’s operating leases for the years ended December 31, 2020 and 2019, was as follows (in thousands): December 31, 2020 December 31, 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,171 $ 1,234 Non-cash amounts resulting from the measurement of the lease liabilities: Right-of-use asset and lease obligation recorded upon commencement or amendment of lease agreements 2,626 1,038 Embedded Finance Leases As part of our agreement with Meiji Seika Pharma Co. Ltd. (“Meiji”), the Company paid Meiji approximately $ 1.6 million during the three months ended December 31, 2018, related to fixed assets which will be used in manufacturing related activities at Meiji. The Company determined this equipment to be an embedded finance lease and has been capitalized as property and equipment in the consolidated balance sheet as of December 31, 2020 and 2019. As this equipment was fully paid in 2018, there is no corresponding lease liability as of December 31, 2020 or 2019. 105 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the lease balances within the consolidated balance sheet, weighted average remaining lease term, and the weighted average discount rates related to the Company’s operating and finance leases as of December 31, 2020 and 2019 (in thousands, except for the weighted average remaining lease term and the weighted average discount rate): Lease Assets and Liabilities Classification December 31, 2020 December 31, 2019 Assets Operating Operating lease right-of-use assets $ 7,114 $ 4,875 Financing Property and equipment, net 736 1,004 Total leased assets $ 7,850 $ 5,879 Liabilities Current Operating Operating lease liabilities $ 947 $ 928 Non-Current Operating Non-current operating lease liabilities 6,891 4,617 Total lease liabilities $ 7,838 $ 5,545 Weighted average remaining lease term (in years) 6.6 7.0 Weighted average discount rate 9.8 % 10.3 % The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2020 (in thousands): Years Ending December 31, 2021 $ 947 2022 1,662 2023 1,690 2024 1,718 2025 1,746 Thereafter 3,113 Total future minimum lease payments 10,876 Less imputed interest ( 3,038 ) Total operating lease liabilities $ 7,838 6. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): December 31, 2020 December 31, 2019 Accrued external research and development expenses $ 7,035 $ 17,746 Accrued payroll and related expenses 3,918 2,630 Accrued professional fees 1,066 803 Accrued other 222 409 $ 12,241 $ 21,588 106 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Equity Transactions Underwritten Public Offering On September 15, 2020, the Company completed an underwritten public offering of an aggregate of 4,785,000 shares of its common stock, and an aggregate of 3,215,000 shares of newly designated Series D Convertible Preferred Stock (“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, the Company granted the underwriters an option, exercisable for 30 days, to purchase up to 1,200,000 additional shares of common stock. 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 the Company. Additionally, pursuant to the Underwriting Agreement, on October 1, 2020, the Company 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. Rights Offering On February 11, 2020, the Company announced a rights offering pursuant to which it distributed to holders of its common stock and Series A Convertible Preferred Stock (“Series A Preferred Stock”) and Series B Convertible Preferred Stock (“Series B Preferred Stock”), at no charge, non-transferable subscription rights to purchase shares of Spero common stock and Series C Convertible Preferred Stock (“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, the holders of such shares received 0.152 rights to purchase shares of Spero 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. The Rights Offering was fully backstopped by certain affiliates of BVF Partners L.P. (“BVF”), which agreed to purchase, at a minimum, their respective as-converted pro rata share of the offered shares under the Rights Offering, plus an additional amount of Common Stock or Series C Preferred Shares that are not subscribed by other purchasers in the Rights Offering, for a total of up to $ 30.0 million. At the closing of the rights offering on March 5, 2020, a total of 1,046,249 shares of the Company’s common stock and 2,287 shares of Series C Preferred Stock were issued for aggregate gross proceeds of $ 30.0 million. The aggregate issuance costs related to the offering were $ 0.5 million. $ 20.6 million of the aggregate gross proceeds relates to the issuance of Series C and the associated issuance costs are $ 0.1 million. Upon issuance, each share of Series C Preferred Stock included an embedded beneficial conversion feature. The beneficial conversion feature arose because the market price of the Company’s common stock on the date of issuance of the Series C Preferred Stock was $ 9.22 per share as compared to an effective conversion price of the Series C Preferred Stock of $ 8.98 per share. As a result, the Company recorded the intrinsic value of the beneficial conversion feature of $ 0.5 million as a discount on the Series C Preferred Stock at issuance. Because the Series C Preferred Stock is immediately convertible upon issuance and does not include mandatory redemption provisions, the discount on the Series C Preferred Stock was immediately accreted. 8. Equity Convertible Preferred Shares Series A Convertible Preferred Shares The Company has designated 2,220 of the 10,000,000 authorized shares of preferred stock as Series A Convertible Preferred Stock, or the Series A Preferred Stock 107 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Each share of Series A Preferred Stock is convertible into 1,000 shares of common stock at any time at the option of the holder, provided that the holder will be prohibited from converting the Series A 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 A Preferred Stock will receive a payment equal to $ 0.001 per share of Series A Preferred Stock before any proceeds are distributed to the holders of common stock. Shares of Series A 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 A Preferred Stock will be required to amend the terms of the Series A Preferred Stock. As such, the Company has classified the Series A Preferred Stock within permanent equity in its consolidated balance sheet. Series B Convertible Preferred Shares The Company has designated 1,000 of the 10,000,000 authorized shares of preferred stock as Series B Convertible Preferred Stock, or the Series B Preferred Stock Each share of Series B Preferred Stock is convertible into 1,000 shares of common stock at any time at the option of the holder, provided that the holder will be prohibited from converting the Series B 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 B Preferred Stock will receive a payment equal to $ 0.001 per share of Series B 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. Shares of Series B 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 B Preferred Stock will be required to amend the terms of the Series B Preferred Stock. As such, the Company has classified the Series B Preferred Stock within permanent equity in its consolidated balance sheet. Series C Convertible Preferred Shares The Company has designated 3,333 of the 10,000,000 authorized shares of preferred stock as Series C Convertible Preferred Stock, or the Series C Preferred Stock Each share of Series C Preferred Stock is convertible into 1,000 shares of common stock at any time at the option of the holder, provided that the holder will be prohibited from converting the Series C 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 C Preferred Stock will receive a payment equal to $ 0.001 per share of Series C 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 and Series B Preferred Stock. Shares of Series C 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 C Preferred Stock will be required to amend the terms of the Series C Preferred Stock. As such, the Company has classified the Series C Preferred Stock within permanent equity in its consolidated balance sheet. Series D Convertible Preferred Shares The Company has designated 3,215,000 of the 10,000,000 authorized shares of preferred stock as Series D Convertible Preferred Stock, or the Series D Preferred 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, the Company has classified the Series D Preferred Stock within permanent equity in its consolidated balance sheet. 108 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Common Stock On December 3, 2018, the Company 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 the Company registered for sale up to $ 200.0 million of any combination of its common stock, preferred stock, debt securities, warrants, rights and/or units from time to time and at prices and on terms that the Company may determine, including up to $ 50.0 million of its common stock available for issuance pursuant to an “at-the-market” offering program sales agreement that it entered into with Cantor Fitzgerald & Co. (“Cantor”) Under the sales agreement, Cantor may sell shares of the Company’s 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. The prospectus underlying the “at-the-market” offering program was terminated on September 9, 2020 in connection with the Company’s underwritten public offering that was completed in September 2020. At such time, the Company had raised approximately $ 15.4 million in sales of its 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, the Company reinstated the “at-the-market” offering program with a capacity of up to $ 34.0 million by filing an updated prospectus. Concurrently with the filing of this Annual Report on Form 10-K, the Company entered into a new sales agreement with Cantor and will be filing 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.” The Company’s existing sales agreement with Cantor will terminate automatically at such time as the SEC declares effective the Company’s new universal shelf registration statement on Form S-3. On June 12, 2019, the Company entered into a securities purchase agreement with Novo Holdings A/S (“Novo”) to sell up to an aggregate of $ 10.0 million of its common stock, $ 0.001 par value per share, in two closings pursuant to the Company’s effective registration statement on Form S-3 (Registration No. 333-228661). The initial closing occurred on June 14, 2019 and consisted of 465,983 shares of common stock sold at a price of $ 10.73 per share for gross proceeds of $ 5.0 million prior to deducting offering expenses. The second closing of approximately $ 5.0 million occurred on October 18, 2019, pursuant to the terms of the securities purchase agreement. The number of shares sold in the second closing was determined by the volume weighted average trading price (“VWAP”) of the Company’s common stock prior to the date of the second closing, and consisted of 465,116 shares of common stock sold at a price of $ 10.75 per share for gross proceeds of approximately $ 5.0 million prior to deducting offering expenses. In June 2019, a holder of the Company’s Series A Convertible Preferred stock elected to convert 500 shares into 500,000 shares of the Company’s common stock, pursuant to such holder’s rights under the certificate of designation for such Series A Convertible Preferred Stock. In December 2020, holders subsequently elected to convert the remaining 1,720 shares of Series A Preferred Stock into 1,720,000 shares of the Company’s common stock, pursuant to such holder’s rights under the certificate of designation for such Series A Preferred Stock. In March 2020, at the closing of the rights offering, a total of 1,046,249 shares of the Company’s common stock were issued with total gross proceeds of $ 9.4 million. The cost of offering incurred was $ 0.4 million. In September 2020, at the closing of the underwritten public offering, a total of 4,785,000 shares of common stock and 3,215,000 shares of Series D Preferred Stock were issued 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 the Company. On October 1, 2020, the Company issued an additional 1,200,000 shares of its common stock pursuant to the underwriters’ exercise, in full, 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. During year ended December 31, 2020 the Company sold 993,870 shares of its common stock under the “at-the-market” offering sales 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. 109 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Share-Based Compensation 2017 Stock Incentive Plan On June 28, 2017, the Company’s stockholders approved the 2017 Stock Incentive Plan (the “2017 Plan”). The 2017 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock grants and stock-based awards. The 2017 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of stock options may not be less than 100 % of the fair market value of the share of common stock on the date of grant and the term of stock option may not be greater than ten years . The number of shares initially reserved for issuance under the 2017 Plan was 1,785,416 shares of common stock. The shares of common stock underlying any awards that are forfeited, cancelled, repurchased or are otherwise terminated by the Company under the 2017 Plan will be added back to the shares of common stock available for issuance under the 2017 Plan. On October 18, 2017, the Company’s stockholders approved an amendment to the 2017 Plan, which became effective upon the completion of the Company’s initial public offering, to increase the total number of shares reserved for issuance under the 2017 Plan from 1,785,416 to 2,696,401 . Additionally, the number of shares of common stock that may be issued under the 2017 Plan will automatically increase on each January 1, beginning with the fiscal year ending December 31, 2019 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2027, equal to the lowest of (i) 607,324 shares of common stock, (ii) 4 % of the outstanding shares of common stock on such date and (iii) an amount determined by the Company’s board of directors or compensation committee. As of December 31, 2020, there were 288,432 shares remaining available to be issued under the 2017 Plan. 2019 Equity Incentive Plan On March 11, 2019, the Company adopted the 2019 Inducement Equity Incentive Plan (the “2019 Inducement Plan”) to reserve 331,500 shares of its common stock to be used exclusively for grants of awards to individuals that were not previously employees or directors of the Company as a material inducement to such individuals’ entry into employment with Spero within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules. The terms and conditions of the 2019 Inducement Plan are substantially similar to those of the 2017 Plan. In June 2020, the board of directors approved an increase of 700,000 shares of common stock for issuance under the 2019 Inducement Plan. As of December 31, 2020, there were 481,500 shares remaining available to be issued under the 2019 Inducement Plan. The following table summarizes stock option activity for all of our plans during 2020: 2017 Plan 2019 Inducement Plan Total Number of Stock Options Outstanding as of December 31, 2019 2,798,128 171,300 2,969,428 Granted 821,828 392,700 1,214,528 Exercised ( 319,433 ) ( 5,000 ) ( 324,433 ) Forfeited or cancelled ( 163,290 ) ( 14,000 ) ( 177,290 ) Outstanding as of December 31, 2020 3,137,233 545,000 3,682,233 As of December 31, 2020, a total of 4,942,549 shares have been authorized and reserved for issuance under all equity plans and 769,932 shares were available for future issuance under such plans. 110 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Performance-based awards During 2019, the Company granted 100,000 options and 50,000 restricted stock units (“RSUs”) containing the same performance-based vesting criteria. The 100,000 options are included in the table above but the 50,000 RSU’s are excluded from the table. These options and RSUs (the “Performance Awards”) are subject to performance-based vesting eligibility and a subsequent partial time-based vesting schedule. Specifically, the Performance Awards are eligible for vesting based on the achievement of performance criteria, each representing a 25 % vesting opportunity if achieved within a specified time during the performance period (the “Performance Period”), and relating to (i) the release of tebipenem HBr top-line data; (ii) FDA acceptance of a tebipenem HBr New Drug Application; (iii) non-dilutive financing; and (iv) equity financing. Following the Performance Period, Performance Awards determined to be eligible for vesting as a result of achievement of the performance criteria will vest as follows: (a) 50 % of the eligible award will vest immediately, and (b) the remaining eligible award will vest (i) in the case of options, in equal monthly installments ending two years after the Performance Period expiration, and (ii) in the case of RSUs, on such two year anniversary. During the year ended December 31, 2020, no compensation expense associated with performance-based awards was recognized as the performance conditions were not probable of achievement. The following table summarizes the activity of options and RSUs under the 2017 Plan containing performance-based vesting criteria during the year ended December 31, 2020: Number of Performance Based Option Shares Number of Performance Based RSU Shares Outstanding as of December 31, 2019 84,146 40,750 Granted - - Exercised - - Forfeited or cancelled ( 21,039 ) ( 10,189 ) Outstanding as of December 31, 2020 63,107 30,561 In January 2021, the Company cancelled the performance-based awards due to the non-achievement of the performance-based vesting criteria, and the awards were added back to the shares of common stock available for issuance under the 2017 Plan. None of the outstanding options had vested as of December 31, 2020. Stock Option Valuation The fair value of stock options is estimated using the Black-Scholes option-pricing model. The Company does not have sufficient company-specific historical and implied volatility information and it therefore estimates its expected share volatility based on the historical volatility of a set of publicly traded peer companies. The Company expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded share price. The Company has estimated the expected term of the Company’s stock option awards utilizing the “simplified” method for awards that qualify as “plain-vanilla.” The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. The assumptions that the Company used in the Black-Scholes option-pricing model to determine the fair value of stock option awards granted to employees and directors were as follows, presented on a weighted average basis: Year Ended December 31, 2020 2019 Risk-free interest rate 1.1 % 2.4 % Expected term (in years) 6.2 6.3 Expected volatility 82.7 % 75.2 % Expected dividend yield 0.0 % 0.0 % 111 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes details regarding stock options granted under our equity incentive plans for the year ended December 31, 2020: Number of Shares Weighted Average Exercise Price Weighted Average Contractual Term Aggregate Intrinsic Value (in years) (in thousands) Outstanding as of December 31, 2019 2,969,428 $ 8.13 7.94 $ 6,689 Granted 1,214,528 10.94 — — Exercised ( 324,433 ) 6.80 — — Forfeited or cancelled ( 177,290 ) 9.94 — — Outstanding as of December 31, 2020 3,682,233 $ 9.10 7.84 $ 37,881 Outstanding as of December 31, 2020 - vested and expected to vest 3,682,233 $ 9.10 7.84 $ 37,881 Exercisable at December 31, 2020 1,771,383 $ 7.94 6.93 $ 20,286 The weighted average grant-date fair value of stock options granted during the year ended December 31, 2020 was $ 7.79 per share. The weighted average grant-date fair value of awards granted during the year ended December 31, 2019 was $ 5.62 per share. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2020 and 2019 was approximately $ 2.3 million and $ 0.4 million, respectively. The Company satisfies stock option exercises with newly issued shares of its common stock. As of December 31, 2020, total unrecognized compensation cost related to unvested stock option grants was approximately $ 11.5 million. This amount is expected to be recognized over a weighted average period of approximately 2.7 years. The Company recorded share-based compensation expense, for both incentive units and stock options in the following expense categories of its consolidated statements of operations and comprehensive loss (in thousands): Year Ended December 31, 2020 2019 Research and development expenses $ 2,229 $ 1,580 General and administrative expenses 2,659 2,196 Total $ 4,888 $ 3,776 10. Non-Controlling Interests Spero Gyrase In March 2016, the Company entered into an agreement with Aviragen and its affiliates in order to acquire certain intellectual property and know-how related to certain compounds. In connection with the transaction, the Company established Spero Gyrase, a Delaware corporation, and issued to Aviragen 200 common shares of Spero Gyrase with a fair value of $ 1.1 million, which represented a 20 % equity ownership interest in Spero Gyrase. In addition, Spero Gyrase agreed to make future milestone and royalty payments in exchange for the intellectual property. The Company accounted for the acquisition of technology as an asset acquisition because it did not meet the definition of a business. The Company recorded the acquired technology as research and development expense in the consolidated statement of operations and comprehensive loss in the amount of $ 1.1 million, because the acquired technology had not reached commercial feasibility and had no alternative future use, and recorded a non-controlling interest in Spero Gyrase in a corresponding amount. In November 2019, the Company repurchased 100 % of the minority investor’s outstanding shares in Spero Gyrase, Inc. at a price per share of $ 0.001 . As a result, as of December 31, 2020 and 2019, the Company no longer reports a non-controlling interest. Additionally, effective as of January 1, 2020, the Company merged Spero Gyrase, Inc. with and into Spero, Therapeutics, Inc. 112 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Income Taxes Prior to the Reorganization (see Note 1), the Company’s former parent company, Spero Therapeutics, LLC, was treated as a partnership for federal income tax purposes and, therefore, its owners, and not itself, were subject to U.S. federal or state income taxation on the income of Spero Therapeutics, LLC. Prior to the Reorganization, all of Spero Therapeutics, LLC’s directly held subsidiaries (including Spero Therapeutics, Inc.) were treated as corporations for U.S. federal income tax purposes and were subject to taxation in the United States or in other countries. Upon the Reorganization, Spero Therapeutics, Inc. became the parent company for Spero Therapeutics, LLC’s former subsidiaries and these entities continue to be subject to taxation in the United States or in other countries. In each reporting period, the Company’s tax provision includes the effects of consolidating the results of operations of its subsidiaries. During the years ended December 31, 2020 and 2019, the Company recorded no income tax benefits for the net operating losses incurred in each year or interim period due to its uncertainty of realizing a benefit from those items. The domestic and foreign components of loss before income taxes were as follows (in thousands): Year Ended December 31, 2020 2019 Domestic $ ( 77,671 ) $ ( 62,623 ) Foreign ( 609 ) 1,698 Loss before income taxes $ ( 78,280 ) $ ( 60,925 ) A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows: Year Ended December 31, 2020 2019 Federal statutory income tax rate ( 21.0 ) ( 21.0 ) Federal and state research and development tax credit ( 3.2 ) ( 3.0 ) State taxes, net of federal benefit ( 6.2 ) ( 6.7 ) Foreign rate differential - ( 0.8 ) Nondeductible items 0.9 1.1 Increase in deferred tax asset valuation allowance 29.5 30.4 Effective income tax rate — — Net deferred tax assets as of December 31, 2020 and 2019 consisted of the following (in thousands): December 31, 2020 2019 Net operating loss carryforwards $ 63,612 $ 44,239 Research and development tax credit carryforwards 8,024 5,220 Other 3,403 2,521 Total deferred tax assets 75,039 51,980 Valuation allowance ( 75,039 ) ( 51,980 ) Net deferred tax assets $ — $ — As of December 31, 2020, the Company had U.S. federal and state net operating loss carryforwards of $ 228.1 million and $ 226.2 million, respectively, which may be available to offset future income tax liabilities. The federal NOLs of $ 73.0 million will expire at various dates from 2033 to 2037 and approximately $ 155.1 million can be carried forward indefinitely. The state NOLs begin to expire in 2033 and will expire at various dates through 2039 . In addition, as of December 31, 2020, the Company had foreign net operating loss carryforwards of $ 10.7 million, which may be available to offset future income tax liabilities and do not expire. As of December 31, 2020, the Company also had federal and state research and development tax credit carryforwards of $ 6.7 million and $ 1.4 million, respectively, which may be available to offset future income tax liabilities and begin to expire in 2033 and 2028 , respectively. 113 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Utilization of the U.S. net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 % over a three-year period. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization. Further, until a study is completed by the Company and any limitation is known, no amounts are being presented as an uncertain tax position. The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2020 and 2019. Management reevaluates the positive and negative evidence at each reporting period. Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2020 and 2019 related primarily to the increase in net operating loss carryforwards and research and development tax credit carryforwards, and were as follows (in thousands): December 31, 2020 2019 Valuation allowance as of beginning of year $ ( 51,980 ) $ ( 34,141 ) Decreases recorded as benefit to income tax provision — — Increases recorded to income tax provision ( 23,059 ) ( 17,839 ) Valuation allowance as of end of year $ ( 75,039 ) $ ( 51,980 ) The Company has no t recorded any amounts for unrecognized tax benefits as of December 31, 2020 or 2019. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. As of December 31, 2020 or 2019, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts had been recognized in the Company’s statement of operations and comprehensive loss. The Company has not, as yet, conducted a study of its research and development credit carryforwards. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Prior to the Reorganization, the Company filed separate U.S. income tax returns return for each of its subsidiaries. As a result of the Reorganization, the Company will file U.S. income tax returns as a U.S. consolidated group. In Massachusetts, the Company files income tax returns as a combined group except for its Massachusetts Securities Corporation subsidiary, which is a separate income tax filing. The statute of limitations for assessment by the Internal Revenue Service and Massachusetts tax authorities remains open for all years since 2015. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state authorities to the extent utilized in a future period. No federal or state tax audits are currently in process. 114 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On December 22, 2017, former President Trump signed into law the Tax Cuts and Jobs Act (“TCJA”). The TCJA includes a number of changes to existing tax law, including, among other things, a permanent reduction in the federal corporate income tax rate from a top marginal rate of 34 % down to a flat rate of 21 %, effective as of January 1, 2018, as well as limitation of the deduction for net operating losses to 80 % of annual taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely). As a result of the TCJA, the Company was required to revalue deferred tax assets and liabilities existing as of December 31, 2017 from the 34% federal rate in effect through the end of 2017, to the new 21%. This revaluation resulted in a reduction to the Company’s deferred tax asset of $ 9.4 million. This amount was offset by a corresponding reduction in the valuation allowance. There was no impact to the Company’s consolidated statements of operations and comprehensive loss as a result of the reduction in rates. The other provisions of the TCJA did not have a material impact on the Company’s consolidated financial statements. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), was signed into law in the United States in March 2020. The CARES Act adjusted a number of provisions of the tax code, including the calculation and eligibility of certain deductions and the treatment of net operating losses and tax credits. The enactment of the CARES Act did not result in any material adjustments to the Company’s income tax provision for the year ended December 31, 2020, or to the Company’s net deferred tax assets as of December 31, 2020. 12. Commitments and Contingencies License Agreements The Company has entered into license agreements with various parties under which it is obligated to make contingent and non-contingent payments (see Note 14). Operating Leases The Company has entered into an operating lease agreement with U.S. REIF Central Plaza Massachusetts, LLC with respect to its corporate headquarters located at 675 Massachusetts Avenue, Cambridge, Massachusetts (see Note 5). Indemnification Agreements In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company is not aware of any claims under indemnification arrangements that will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its consolidated financial statements as of December 31, 2020 or 2019. Legal Proceedings The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to such legal proceedings. 115 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Government Contracts BARDA In July 2018, the Company was awarded a contract from Biomedical Advanced Research and Development Authority (“BARDA”) of up to $ 44.2 million to develop tebipenem HBr for the treatment of complicated urinary tract infections (“cUTI”) caused by antibiotic resistant Gram-negative bacteria and for assessment against biodefense pathogens. The award committed initial funding of $ 15.7 million over a three-year base period from July 1, 2018 to June 30, 2021 for cUTI development activities. In May 2019, the contract was modified to include additional funding of approximately $ 2.5 million for development of tebipenem HBr, increasing the amount of the initial committed funding from $15.7 million to approximately $ 18.2 million and increasing the overall potential award to $ 46.8 million. In January 2020, BARDA exercised its first contract option for additional committed funding of $ 15.9 million, increasing the total committed funding to $ 34.1 million and extended the period of performance through November 1, 2021. The balance of the award is subject to BARDA exercising a second option which would entail funding of $ 12.7 million and is exercisable by BARDA subject to, among other things, satisfactory progress and results from the biodefense studies described below. As part of an inter-agency collaboration between BARDA and the Defense Threat Reduction Agency (“DTRA”), a series of studies to assess the efficacy of tebipenem HBr in the treatment of infections caused by biodefense threats such as anthrax, plague and melioidosis will be conducted under the direction of Spero. The FDA requires data from a human pneumonic disease as supportive evidence of human efficacy when developing an antibiotic to treat a pulmonary biothreat infection under 21 CFR 314.600, “The Animal Rule,” the scope of which the BARDA award includes the assessment of tebipenem HBr levels in the lung of healthy volunteers as well as a proof of concept clinical trial in pneumonia patients. 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 collaborative program for tebipenem HBr. Together, BARDA and DTRA will provide up to $ 56.8 million in total funding for the clinical development and biodefense assessment of tebipenem HBr, of which $ 12.7 million is subject to the exercise of options by BARDA and Spero’s achievement of specified milestones. During the years ended December 31, 2020 and 2019, the Company recognized $ 7.9 million and $ 12.1 million of revenue under this agreement, respectively. U.S. Department of Defense On July 1, 2019, the Company received a $ 5.9 million award from the DoD Congressionally Directed Medical Research Programs (“CDMRP”) Joint Warfighter Medical Research Program. The funding will support the further clinical development of SPR206. The award commits non-dilutive funding of $ 5.9 million over a four-year period to cover the costs of select Phase 1 pharmacology studies, a 28-day GLP non-human primate toxicology study, and microbiological surveillance studies that would be required for a potential New Drug Application, or NDA, submission with the U.S. Food and Drug Administration for SPR206. During the years ended December 31, 2020 and 2019, the Company recognized $ 0.4 million and less than $ 0.1 million in revenue under this agreement, respectively. In September 2016, the Company was awarded a cooperative agreement from the Peer Reviewed Medical Research Program with the DoD to further develop anti-infective agents to combat Gram-negative bacteria. The agreement was initially structured as a single, two-year $ 1.5 million award through September 2018. The performance period was extended through September 29, 2019. The Company was eligible for the full funding from the DoD, as there were no options to be exercised at a later date. The DoD funding supported next-generation potentiator discovery and screening of SPR741 and SPR206. The Company and the DoD concluded the agreement at the end of the period of performance in September 2019. Company did no t recognize any revenue under this agreement during the year ended December 31, 2020 and recognized $ 0.2 million in revenue under this agreement, during the year ended December 31, 2019. NIAID In February 2017, the Company was awarded a grant from the U.S. National Institute of Allergy and Infectious Diseases, or NIAID, under its Small Business Innovation Research program, over a two-year period from March 1, 2017 to February 28, 2019 to conduct additional preclinical studies of SPR720, the Company’s novel oral bacterial gyrase inhibitor, for the treatment of non-tuberculous mycobacterial infections. The award was structured as a 12 -month $ 0.6 million base period and a $ 0.4 million option period. Through December 31, 2017, only the base period funds were committed. In February 2018 NIAID exercised the $ 0.4 million 12 -month option period. In January 2019, the period of performance for this award was extended for an additional 12 -month period. During the years ended December 31, 2020 and 2019, the Company recognized less than $ 0.1 million and $ 0.1 million of revenue under this agreement, respectively, before concluding the grant with NIAID. 116 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 2016, the Company entered into agreements with Pro Bono Bio PLC (“PBB”), a corporation organized under the laws of England, and certain of its affiliates, including PBB Distributions Limited and Cantab Anti-Infectives Limited (“CAI”), in order to acquire certain intellectual property and government funding arrangements relating to SPR206. Under these agreements, CAI agreed to submit a request to NIAID to novate the then CAI-held NIAID contract to Spero, which was finalized in December 2017. The NIAID contract provides for development funding of up to $ 6.5 million over a base period and three option periods. As of December 31, 2020, funding for the base period and the first two option periods totaling $ 5.9 million have been committed. As part of the agreement, Spero was obligated to pay PBB a percentage of funds received from NIAID up to a maximum of $ 1.3 million, which was fulfilled as of December 31, 2020. During the years ended December 31, 2020 and 2019, the Company recognized $ 0.7 million and $ 1.0 million in revenue under this agreement, respectively. 14. License, Collaboration and Service Agreements The Company has certain obligations under license agreements with third parties that include annual maintenance fees and payments that are contingent upon achieving various development, regulatory and commercial milestones. Pursuant to these license agreements, the Company is required to make milestone payments if certain development, regulatory and commercial milestones are achieved, and may have certain additional research funding obligations. Also, pursuant to the terms of each of these license agreements, when and if commercial sales of a product commence, the Company will pay royalties to its licensors on net sales of the respective products. Vaxart (formerly Aviragen) License Agreement Under the Company’s agreement with Vaxart for certain intellectual property and know-how relating to developing a gyrase inhibitor to develop therapies for Gram-negative infections, the Company was obligated to make milestone payments upon the achievement of specified clinical, regulatory and commercial milestones and to pay royalties of low single-digit percentages based on net sales of products the Company acquired under the agreement. In November 2019, the Company and Vaxart entered into a stock repurchase agreement which terminated all of the Company’s obligations to Vaxart. Cantab License Agreements Under the Cantab Agreements, the Company is obligated to make milestone payments of up to $ 5.8 million upon the achievement of specified clinical and regulatory milestones and a payment of £ 5.0 million ($ 6.8 million and $ 6.6 million as of December 31, 2020 and 2019, respectively) upon the achievement of a specified commercial milestone. In addition, the Company has agreed to pay to PBB royalties, on a product-by-product and country-by-country basis, of a low single-digit percentage based on net sales of products licensed under the agreement. During the year ended December 31, 2020, the Company did no t record any research and development expense related to the achievement of regulatory milestones for SPR206. The Cantab Agreements continue indefinitely, with royalty payment obligations thereunder continuing on a product-by-product and country-by-country basis until the later of ten years after the first commercial sale of such product in such country or the expiration in such country of the last to expire valid claim of any of the applicable patents. Vertex License Agreement In May 2016, the Company entered into an agreement with Vertex Pharmaceuticals Incorporated (“Vertex”) whereby Vertex granted the Company certain know-how and a sublicense to research, develop, manufacture and sell products for a proprietary compound, as well as a transfer of materials. In exchange for the know-how, sublicense and materials, Spero paid Vertex an upfront, one-time, nonrefundable, non-creditable fee of $ 0.5 million, which was recognized as research and development expense. As part of the agreement, the Company is obligated to make future milestone payments of up to $ 80.2 million upon the achievement of specified clinical, regulatory and commercial milestones and to pay Vertex tiered royalties, on a product-by-product and country-by-country basis, of a mid single-digit to low double-digit percentage based on net sales of products licensed under the agreement. During the year ended December 31, 2020, the Company paid and recorded $ 0.9 million in research and development expense related to the achievement of regulatory milestones for SPR720. The agreement continues in effect until the expiration of all payment obligations thereunder, with royalty payment obligations continuing on a product-by-product and country-by-country basis until the later of ten years after the first commercial sale of such product in such country or the date of expiration in such country of the last to expire applicable patent. Further, Vertex has the right to terminate the agreement if provided with notification from the Company of intent to cease all development or if no material development or commercialization efforts occur for one year . 117 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Meiji License Agreement In June 2017, the Company entered into agreements with Meiji Seika Pharma Co. Ltd. (“Meiji”), a Japanese corporation, whereby Meiji granted to the Company certain know-how and a license to research, develop, manufacture and sell products for a proprietary compound in the licensed territory. In exchange for the know-how and license, the Company paid Meiji an upfront, one-time, nonrefundable, non-creditable fee of $ 0.6 million, which was recognized as research and development expense. As part of the agreement, the Company is obligated to make future milestone payments of up to $ 2.0 million upon the achievement of specified clinical and regulatory milestones, to pay royalties, on a product-by-product and country-by-country basis, of a low single-digit percentage based on net sales of products licensed under the agreement and to pay Meiji a low double-digit percentage of any sublicense fees received by the Company up to $ 7.5 million. In October 2017, the Company paid a $ 1.0 million milestone payment to Meiji upon the enrollment of the first patient in the Company’s Phase 1 clinical trial of tebipenem HBr. The payment was recorded as research and development expense in the statement of operations and comprehensive loss for the year ended December 31, 2017. The Company paid Meiji approximately $ 1.6 million during the fourth quarter of 2018 related to fixed assets which will be used in manufacturing related activities at Meiji. This equipment has been capitalized as property and equipment in the consolidated balance sheet as of December 31, 2020. The agreement continues in effect until the expiration of all payment obligations thereunder (including royalty payments and licensee revenue) on a product-by-product and country-by-country basis, unless earlier terminated by the parties. Pursuant to the terms of the agreement, in addition to each party’s right to terminate the agreement upon the other party’s material breach (if not cured within a specified period after receipt of notice) or insolvency, the Company also has unilateral termination rights (i) in the event that the Company abandons the development and commercialization of tebipenem HBr for efficacy, safety, legal or business factors, and (ii) under certain circumstances arising out of the head license with a global pharmaceutical company. Northern License Agreement In June 2017, in connection with the repurchase of all of the outstanding shares of Spero Potentiator, the Company amended its license agreement with Northern such that the Company agreed to pay Northern up to $ 7.0 million upon the achievement of specified clinical, regulatory and other milestones, including a total payment of $ 2.5 million upon the closing of an initial public offering. In addition, under an exchange agreement the Company entered into with Northern, the Company is obligated to make a payment to Northern of $ 0.1 million upon the closing of an initial public offering. The agreement had a perpetual term and no express termination rights. Upon the closing of the Company’s IPO in November 2017, the Company paid $ 2.6 million to Northern in connection with both the license and exchange agreements. This payment was recorded as research and development expense in the Company’s statement of operations and comprehensive loss for the year ended December 31, 2017. The Company and Northern terminated the agreement effective January 1, 2020. Everest Medicines License Agreement On January 4, 2019, the Company, through its wholly owned subsidiary New Pharma License Holdings Limited (“NPLH”), entered into a license agreement (the “Original Everest License Agreement”), with Everest Medicines II Limited. Under the terms of the Original Everest License Agreement, the Company granted Everest an exclusive license to develop, manufacture and commercialize SPR206 or products that contain SPR206 (the “Licensed Products”), in Greater China (which includes Mainland China, Hong Kong and Macau), South Korea and certain Southeast Asian countries (the “Territory”). The Company retained development, manufacturing and commercialization rights with respect to SPR206 and Licensed Products in the rest of the world and also retained the right to develop or manufacture SPR206 and Licensed Products in the Territory for use outside the Territory. In addition to the license grant with respect to SPR206, the Company, through its wholly owned subsidiary, Spero Potentiator, Inc., a Delaware corporation, granted Everest a 12 -month exclusive option to negotiate with it for an exclusive license to develop, manufacture and commercialize SPR741 in the Territory. Under the terms of the Original Everest License Agreement and the Everest License Amendment, the Company received an upfront payment of $ 3.0 million that was recognized in the first quarter of 2019, comprised of a $ 2.0 million payment to license SPR206 and $ 1.0 million for the exclusive option to negotiate a license to develop SPR741. The Company also received a milestone payment of $ 2.0 million in the fourth quarter of 2020 upon completion and delivery of the results of a clinical study. The Company will receive future milestones of up to $ 1.5 million if the Company chooses to complete a future clinical study. On January 15, 2021, the Company entered into an amended and restated license agreement (“the Amended Everest License Agreement”) with Everest and Potentiator, which amended and restated in its entirety the Original Everest License Agreement. The Amended Everest License Agreement modifies the dates and values of certain milestone events related to development and commercialization of SPR206. Everest will be now be making more significant investments in the development of SPR206 beyond what was contemplated at the 118 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS time of the Original Everest License Agreement. The Original Everest License Agreement provided that the Company could receive up to $ 59.5 million upon achievement of certain milestones. The Amended Everest License Agreement provides that the Company may receive up to $ 38.0 million upon achievement of certain milestones, of which $ 2.0 million has been received to date. In addition, under the Amended Everest License Agreement, the Company assigned patents in the Territory to Everest, rather than licensing such patents to Everest, and the option related to SPR741 and the related provisions have been removed. Under the terms of the Amended Everest License Agreement, the Company is also entitled to receive high single-digit to low double-digit royalties on net sales, if any, of Licensed Products in the Territory following regulatory approval of SPR206. Everest has the right to sublicense to affiliates and third parties in the Territory . Everest is responsible for all costs related to developing, obtaining regulatory approval of and commercializing SPR206 and Licensed Products in the Territory, and is obligated to use commercially reasonable efforts to develop, manufacture and commercialize Licensed Products, including to achieve certain specified diligence milestones within agreed-upon periods. A joint development committee will be established between the Company and Everest to coordinate and review the development, manufacturing and commercialization plans with respect to Licensed Products in the Territory. Unless earlier terminated due to certain material breaches of the contract, or otherwise, the Amended Everest License Agreement will expire on a jurisdiction-by-jurisdiction and Licensed Product-by-Licensed Product basis upon the latest to occur of expiration of the last valid claim under a licensed patent in such jurisdiction, the expiration of regulatory exclusivity in such jurisdiction or ten years after the first commercial sale of such Licensed Product in such jurisdiction. The Amended Everest License Agreement may be terminated in its entirety by Everest upon 90 or 180 days ’ prior written notice, depending on the stage of development of the initial Licensed Product. Accounting Analysis and Revenue Recognition The Company determined the Amended Everest License Agreement to be under the scope of ASC 606. Accordingly, in determining the appropriate amount of revenue to be recognized, the Company performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measured the transaction price, including the constraint on variable consideration; (iv) allocated the transaction price to the identified performance obligations in proportion to their SSP; and (v) recognized revenue when each performance obligation was deemed to be satisfied. Based on that evaluation, the Company identified three performance obligations, as presented below. The transaction price to be allocated to the identified performance obligations was determined to be $ 5.0 million consisting of: (i) the license upfront fee of $ 2.0 million, (ii) the $ 1.0 million exclusive option to negotiate a license to develop SPR741, and (iii) research and development services related to a milestone of $ 2.0 million for which the achievement of the milestone was determined “most likely,” and that it was probable a significant reversal in the amount of cumulative revenue recognized would not occur. This milestone was achieved as of December 31, 2020. The additional clinical study that is at the Company’s discretion to perform is considered a marketing offering and therefore not included in the assessment at contract inception. The Company determined that the license was distinct from the exclusive option for SPR741 and the research and development services. The following table shows the performance obligations, along with their SSP and the transaction price allocated to those obligations (in thousands): Standalone Transaction Selling Price Performance Obligations Price Allocated Recognition Method License and know-how transfer (1) $ 9,858 $ 3,553 Fully satisfied; recognized upon delivery of the license Exclusive option on SPR741 400 144 Recognized in Q4 2019 upon the return of the IP rights to Northern Research and development services (2) 3,614 1,303 Recognized over time as services are delivered through the completion date, and fully recognized as of December 31, 2020. $ 5,000 (1) The standalone selling price for the license and know-how transfer was determined using the residual approach, corroborated by internal cost estimates. 119 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) The standalone selling price for the research and development services was estimated using management’s best estimate of the cost of obtaining these services at arm’s length from a third-party provider and using internal full time equivalent costs to support the development services. During the year ended December 31, 2020, the Company recognized $ 0.3 million of revenue related to this agreement. As of December 31, 2020, the aggregate amount of the transaction price was fully allocated to satisfied performance obligations, the Company had delivered the Clinical Study Report covering the SAD/MAD Phase 1 Clinical Trial of SPR206 and pursuant to the Original Everest License Agreement, Everest paid the Company the $ 2.0 million milestone. Gates MRI In June 2019, the Company entered into a collaboration with Gates MRI to develop SPR720 for the treatment of lung infections caused by Mycobacterium tuberculosis. In furtherance of the Gates MRI’s charitable purposes, the Company also granted to Gates MRI a no-cost, exclusive license to develop, manufacture and commercialize SPR720 for the treatment of tuberculosis (“TB”) in low- and middle- income countries. The Gates MRI is responsible for formulating and funding its own research plan for the development of SPR720 for TB. As such, Gates MRI will conduct and fund preclinical and clinical studies for the development of SPR720 against TB. In addition, Gates MRI and the Company will jointly design and manage certain collaborative research activities, which the Company will perform and which will be funded by the Gates MRI. Due to the cost-funded nature of the payments and the Company’s assessment that it does not have a vendor/customer relationship with the Gates MRI, the Company will recognize the funding received under the agreement as a reduction to the research and development expenses incurred, as the related expenses are incurred. During the years ended December 31, 2020 and 2019, the Company recorded $ 2.1 million and $ 1.7 million, respectively, as a reduction to research and development expense related to activities funded by Gates MRI. Savior Service Agreement In November 2018, the Company entered into a service agreement with Savior Lifetec Corporation (“Savior”) to perform technology transfer, process development, analytical method development and testing and formulation development for tebipenem HBr. Per the terms of the agreement, the Company paid Savior a non-refundable supervision fee of approximately $ 2.0 million to manage the buildout of a commercial manufacturing facility. The supervision fee is classified as a prepaid asset on the Company’s balance sheet and is being amortized over a service period of approximately 34 months. The Company has paid Savior an additional $ 5.1 million for facility build out costs, which is classified as a long-term asset on the Company’s balance sheet as of December 31, 2020. 15. Australia Research and Development Tax Incentive The Australian government has established a research and development tax incentive to encourage industry investment in research and development, which is available to companies incorporated under Australian law that have core research and development activities. In September 2016, the Company established Spero Potentiator Australia Pty Limited to carry out certain research and development activities. As this subsidiary meets the eligibility requirements of the Australian tax law, it is eligible to receive a 43.5% tax incentive for qualified research and development activities. For the years ended December 31, 2020 and 2019, $ 0.3 million and $ 0.4 million, respectively, was recorded as a reduction to research and development expenses in the consolidated statements of operations and comprehensive loss associated with this tax incentive, representing 43.5 % of the Company’s qualified research and development spending in Australia. The refund is denominated in Australian dollars and, therefore, the receivable is re-measured to U.S. dollars as of each reporting date. As of December 31, 2020 and 2019, the Company’s tax incentive receivables from the Australian government totaled $ 1.2 million and $ 0.8 million, respectively. 120 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Net Loss per Share Basic and diluted net loss per share attributable to common stockholders of Spero Therapeutics, Inc. was calculated as follows (in thousands, except share and per share amounts): Year Ended December 31, 2020 2019 Numerator: Net loss $ ( 78,280 ) $ ( 60,925 ) Deemed Dividend ( 549 ) - Net loss attributable to common stockholders $ ( 78,829 ) $ ( 60,925 ) Denominator: Weighted average common shares outstanding, basic and diluted 22,386,122 18,160,525 Net loss per share, basic and diluted $ ( 3.52 ) $ ( 3.35 ) The net loss applicable to common stockholders for the year ended December 31, 2020 did not equal net loss due to the accretion of the beneficial conversion feature of Series C Preferred Stock in the amount of $ 0.5 million. The beneficial conversion feature was initially recorded as a discount on the Series C Preferred Stock with a corresponding amount recorded to Additional Paid-in Capital. The discount on the Series C Preferred Stock was then immediately written off as a deemed dividend as the Series C Preferred Stock does not have a stated redemption date and is immediately convertible at the option of the holder. The Company excluded potentially dilutive securities from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders of Spero Therapeutics, Inc. is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect: Year Ended December 31, 2020 2019 Options to purchase common stock 3,682,233 2,969,428 Unvested restricted stock units 30,561 40,750 Series A convertible preferred stock (as converted to common shares) — 1,720,000 Series B convertible preferred stock (as converted to common shares) 1,000,000 1,000,000 Series C convertible preferred stock (as converted to common shares) 2,287,000 — Series D convertible preferred stock (as converted to common shares) 3,215,000 — Total 10,214,794 5,730,178 17. Retirement Plan The Company has a defined-contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre-tax basis. As currently established, the Company is not required to make any contributions to the 401(k) Plan. The Company made matching contributions to the 401(k) Plan of $ 0.3 million and $ 0.2 million during the years ended December 31, 2020 and 2019, respectively. 121 SPERO THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Subsequent Events On January 15, 2021, the Company entered into an amended and restated license agreement, or the Amended Everest License Agreement, with Everest and Potentiator, which amended and restated in its entirety the Original Everest License Agreement. The Amended Everest License Agreement provides for Spero to assign country-specific patents (in the Everest territory) to Everest as opposed to licensing them, adjusts diligence milestone dates to reflect updated clinical development plans and adjusts the value of potential development and sales milestones from $ 55.0 million to $ 34.5 million. Everest will share all Everest-funded data with the Company for use in its future regulatory submissions. On February 5, 2021, the Company announced that the FDA informed Spero that a clinical hold had been placed on its Phase 2a clinical trial of SPR720, following the Company’s notification to the FDA of its decision to pause dosing in its ongoing Phase 2a clinical trial of SPR720 as a precautionary measure related to events in its 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, the Company received a formal clinical hold letter in which the FDA has requested additional information from the non-human primate trial, including a study report. The Company has 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. The Company is continuing to work with the FDA to evaluate the findings and determine the further development pathway for the SPR720 clinical program. With respect to its “at-the-market” program, on March 11, 2021, the Company entered into a new sales agreement with Cantor relating to sales, from time to time, of the Company’s common stock up to an aggregate of $ 75.0 million. The Company will be filing a new universal shelf registration statement on Form S-3, including an “at-the-market” prospectus with the SEC concurrently with the filing of this Annual Report on Form 10-K. 122 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.