Spero Therapeutics
Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITIONPERIOD FROM TO Commission File Number 001-38266 SPERO THERAPEUTICS, INC.(Exact name of registrant as specified in its Charter) Delaware46-4590683 ( State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.) 675 Massachusetts Avenue, 14th FloorCambridge, Massachusetts02139 (Address of principal executive offices)(Zip Code) Registrant’s telephone number, including area code: (857) 242-1600 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.001 par value per shareThe Nasdaq Global Select Market(Title of each class)(Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit andpost such files). YES ☒ NO ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer☐Non-accelerated filer ☒ (Do not check if a small reporting company) Small reporting company☐ Emerging growth company☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, there was no established public market for the registrant’s commonstock. The registrant therefore cannot calculate the aggregate market value of its voting and non-voting common equity held by non-affiliates as of such date. The registrant’scommon stock began trading on the The Nasdaq Global Select Market on November 2, 2017.As of March 28, 2018, the registrant had 14,369,182 shares of common stock, $0.001 par value per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCEThe registrant intends to file a definitive proxy statement pursuant to Regulation 14A relating to the 2018 Annual Meeting of Stockholders within 120 days of the end of theregistrant’s fiscal year ended December 31, 2017. Portions of such definitive proxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K to theextent stated herein. Table of Contents PagePART I Item 1. Business1Item 1A. Risk Factors33Item 1B. Unresolved Staff Comments65Item 2. Properties66Item 3. Legal Proceedings66Item 4. Mine Safety Disclosures66 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities67Item 6. Selected Financial Data70Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations71Item 7A. Quantitative and Qualitative Disclosures About Market Risk87Item 8. Financial Statements and Supplementary Data88Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure123Item 9A. Controls and Procedures123Item 9B. Other Information123 PART III Item 10. Directors, Executive Officers and Corporate Governance124Item 11. Executive Compensation124Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters124Item 13. Certain Relationships and Related Transactions, and Director Independence124Item 14. Principal Accounting Fees and Services124 PART IV Item 15. Exhibits, Financial Statement Schedules125Item 16. Form 10-K Summary127 i PART IForward-Looking InformationThis Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. We make such forward-lookingstatements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statementsother than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identifyforward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”“potential,” “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to,statements about: •the initiation, timing, design, progress and results of our preclinical studies and clinical trials, and our research and development programs; •our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals; •our ability to advance product candidates into, and successfully complete, clinical trials; •the timing or likelihood of regulatory filings and approvals; •the commercialization of our product candidates, if approved; •the pricing, coverage and reimbursement of our product candidates, if approved; •the implementation of our business model and strategic plans for our business and product candidates and our Potentiator Platform; •the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and our PotentiatorPlatform; •our ability to enter into strategic arrangements and/or collaborations and the potential benefits of such arrangements; •our estimates regarding expenses, capital requirements, liquidity and needs for additional financing and our anticipated future cash position; •our financial performance; •developments relating to our competitors and our industry; and •other risks and uncertainties, including those listed under Part II, Item 1A. “Risk Factors”.Any forward-looking statements in this Annual Report on Form 10-K reflect our current views with respect to future events or to our future financialperformance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to bematerially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may causeactual results to differ materially from current expectations include, among other things, those listed under Part II Item 1A. “Risk Factors” and elsewhere inthis Annual Report on Form 10-K. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required bylaw, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.This Annual Report on Form 10-K also contains estimates, projections and other information concerning our industry, our business, and the marketsfor certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Informationthat is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events orcircumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry,business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry,medical and general publications, government data and similar sources. Item 1. Business.OverviewWe are a multi-asset, clinical-stage biopharmaceutical company focused on identifying, developing and commercializing novel treatments for multi-drug resistant, or MDR, bacterial infections. Our most advanced product candidate, SPR994, is designed to be the1 first broad-spectrum oral carbapenem-class antibiotic for use in adults to treat MDR Gram-negative infections. Treatment with effective orally administrableantibiotics may prevent hospitalizations for serious infections and enable earlier, more convenient and cost-effective treatment of patients afterhospitalization. We also have a platform technology known as our Potentiator Platform that we believe will enable us to develop drugs that will expand thespectrum and potency of existing antibiotics, including formerly inactive antibiotics, against Gram-negative bacteria. Our lead product candidates generatedfrom our Potentiator Platform are two intravenous, or IV,-administered agents, SPR741 and SPR206, designed to treat MDR Gram-negative infections in thehospital setting. In addition, we are developing SPR720, an oral antibiotic designed for the treatment of an orphan disease called pulmonary non-tuberculousmycobacterial infections, or NTM. We believe that our novel product candidates, if successfully developed and approved, would have a meaningful patientimpact and significant commercial applications for the treatment of MDR infections in both the community and hospital settings. Antibiotic-resistant bacteria are one of the largest threats to global health, and their prevalence is increasing. While the majority of life-threateninginfections historically resulting from antibiotic-resistant bacteria are acquired in the hospital setting, there is an increasing incidence of MDR pathogens inthe community setting. Antibiotics used currently for first-line empiric treatment of MDR bacterial infections suffer from significant limitations and risks,including narrow spectrums of coverage and safety and tolerability concerns, and they can be associated with serious adverse effects. In addition, there are nooral antibiotics commercially available that can reliably be used in adults with MDR Gram-negative bacterial infections. This limits the ability of physiciansto prevent hospitalizations and transition patients home from the hospital after receiving IV-administered therapy. The increasing prevalence of drugresistance and MDR Gram-negative bacteria, as well as the limitations of existing therapies and traditional drug development approaches, highlights thecritical need for novel therapies, and in particular orally administrable agents, that are capable of overcoming these obstacles to effective patient treatment. To address the foregoing, we are developing a portfolio of novel product candidates, including: •SPR994: Novel Antibiotic with Potential to be the First Broad-Spectrum Oral Carbapenem for Use in Adults. SPR994 is our novel oralformulation of tebipenem, a carbapenem-class antibiotic marketed by Meiji Seika Pharma Co. Ltd., or Meiji, in Japan as Orapenem since2009 for common pediatric infections. While we are developing SPR994 to be effective against a broad spectrum of MDR bacterialinfections, our initial focus is on the treatment of complicated urinary tract infections, or cUTIs. Carbapenems are an important class ofantibiotics because they are safe and effective against MDR bacterial infections. Carbapenems have emerged as the standard-of-care formany MDR and other bacterial infections, but they have been available to date only intravenously for such indications.Based on our pre-investigational new drug application meeting, or pre-IND meeting, with the U.S. Food and Drug Administration, or FDA,and subject to our receiving favorable results from our Phase 1 clinical trial of SPR994 acceptable to the FDA, we believe we will be ableto progress directly to a pivotal Phase 3 clinical trial of SPR994 for the treatment of cUTI. We filed a Clinical Trial Notification, or CTN,in Australia in September 2017 and initiated in October 2017 a Phase 1 dose-selection clinical trial of SPR994. A CTN enables conduct ofclinical trials in Australia similar to an investigational new drug application, or IND, in the United States. We expect to report top-linedata from this trial in mid-2018. We intend to request a meeting with the FDA to discuss the clinical trial protocol during the second halfof 2018. Following our discussions with the FDA, we expect to initiate a pivotal Phase 3 clinical trial of SPR994 for the treatment of cUTIaround year-end 2018 in support of a new drug application, or NDA.Our clinical strategy is supported by extensive safety data underlying tebipenem’s regulatory approval in Japan and long-standing use inJapan for common pediatric infections. Approximately 1,100 subjects, including approximately 741 adults, have been dosed withtebipenem at a range of doses in clinical and pharmacologic studies. We have rights to use all clinical data generated by Meiji, includingtwo exploratory Phase 2 trials that were conducted in Japan in patients with cUTI, the first indication in which we intend to studySPR994. Further, we have received Qualified Infectious Disease Product, or QIDP, designation from the FDA for SPR994 for the treatmentof cUTI, community-acquired bacterial pneumonia, or CABP, and moderate to severe diabetic foot infections, or DFI, which providespriority review of SPR994 for regulatory approval by the FDA. The QIDP designation for SPR994, however, does not guarantee a fasterdevelopment process or ensure FDA approval.We have global commercialization rights to SPR994, except in certain contractually specified Asian countries. We believe that ourintellectual property portfolio will provide SPR994 protection globally, including in the United States and Europe, through 2038. •Potentiator Platform (SPR741 and SPR206): Innovative Platform Designed to Target MDR Gram-Negative Bacterial Infections. OurPotentiator Platform molecules are designed to treat Gram-negative bacterial infections through the molecules’ interactions with thebacteria’s outer cell membrane as a monotherapy or by co-administering our Potentiator Platform molecules with existing antibiotics,thereby making the existing antibiotics more effective by clearing a path for them to enter and kill the bacteria. Gram-negative bacteriaare a subset of bacterial organisms distinguished by the presence of an outer cell membrane. Our Potentiator Platform relies on our uniquechemical and2 biological insights that enable us to design molecules that specifically increase the permeability of this outer cell membrane. Specifically,our Potentiator Platform molecules utilize a mechanism of action whereby they interact with constituents of the outer cell membranecalled lipopolysaccharides, or LPS, resulting in a loss of outer membrane integrity and increased permeability, thereby potentiallyallowing antibiotics that were previously excluded to enter the Gram-negative bacteria where they become active or in the case of ourdirect acting molecules to exhibit potent activity alone against these bacteria. Since we began work on our Potentiator Platform in 2015,we have generated two development-stage product candidates: SPR741 and SPR206.We have two Potentiator Platform product candidates – SPR741, our combination IV-administered agent that has demonstrated in vitrothe ability to expand the spectrum and increase the potency of a co-administered antibiotic; and SPR206, our direct acting IV-administered agent that has demonstrated in vitro activity alone. Both have demonstrated potency against Gram-negative bacteria,including organisms identified by the Centers for Disease Control and Prevention, or the CDC, and the World Health Organization, orthe WHO, as urgent and serious threats to human health.SPR741 has demonstrated an ability to potentiate over two dozen existing antibiotics by expanding their activity against Gram-negativepathogens. While previous attempts by others to develop agents that interact with the bacteria’s outer membrane using the mechanism ofaction employed by SPR741 have, to our knowledge, failed in preclinical testing and Phase 1 clinical trials due to safety concerns, datafrom our Phase 1 single-ascending dose, or SAD, and multiple-ascending dose, or MAD, clinical trial of SPR741 demonstrate it wasgenerally well tolerated at single doses up to and including 800 mg and at doses up to and including 600 mg every 8 hours for 14 days.In late November 2017, we initiated our Phase 1b drug-drug interaction clinical trial of SPR741 in the United Kingdom. The Phase 1btrial enrolled 27 healthy volunteers to evaluate SPR741 as a single dose in combination with compounds from the beta-lactam class ofantibiotics, including cephalosporins ( ceftazidime), monobactams (aztreonam) and beta-lactams/beta-lactamase inhibitors(piperacillin/tazobactam). The trial was designed to assess the impact, if any, on the standalone pharmacokinetics of SPR741 or thestandalone pharmacokinetics of the beta-lactam combination drug when the two are dosed together as a single dose. We anticipate top-line data from this Phase 1b trial during the second quarter of 2018.In addition, we continue to progress the development of our direct-acting Potentiator Platform molecules, exemplified by our productcandidate SPR206. SPR206 is designed to also have antibiotic activity as a single agent against MDR and extremely drug resistant, orXDR, bacterial strains, including variants isolated in Pseudomonas aeruginosa, Acinetobacter baumannii and carbapenem-resistantEnterobacteriaceae. We are currently testing SPR206 in a good laboratory practice, or GLP, preclinical toxicology study. Recent datafrom this study suggest a potency and safety profile for SPR206 that may be superior to SPR741, as well as a potentially faster path tomarket than SPR741 because SPR206 can be developed as a single agent.We believe that our intellectual property portfolio for SPR741 will provide SPR741 protection globally, including in the United Statesand Europe, through 2038. Additionally, we have multiple patent applications pending for SPR206 that we believe will provide SPR206protection globally, including in the United States and Europe, through 2035. •SPR720: Novel Antibiotic with Potential to be the First Approved Oral Treatment for Pulmonary Non-tuberculous MycobacterialInfections, an orphan infectious disease. SPR720 is our novel oral therapy product candidate designed for the treatment of NTMinfection. Lung infections caused by NTM are rare, and occur most frequently in patients with compromised immune systems, includinghuman immunodeficiency virus, or HIV, or respiratory conditions, such as cystic fibrosis, chronic obstructive pulmonary disease, asthmaand bronchiectasis. The annual prevalence of NTM infection is increasing at an estimated rate of 8% per year. The current treatment forNTM infection is lengthy and involves combination therapy, often including three or more antibiotics, including some parenterallyadministered. None of these treatments are approved for use in NTM infection. Treatment failure is common and is often due to poorcompliance or patients’ inability to tolerate the regimen. Many patients experience progressive lung disease and mortality is high. Webelieve SPR720, if successfully developed, has the potential to be the first oral antibiotic approved for the treatment of this debilitatingorphan disease. In vitro and in vivo studies have demonstrated the potency of SPR720 against a range of bacteria causing NTM infection,including Mycobacterium abscessus, a highly resistant strain causing infections with high mortality.SPR720 is currently in preclinical development. We are conducting 28-day and 31-day toxicity studies in rats and non-human primates inaccordance with GLP regulations. We have also observed activity as good as or better than positive controls in in vitro and in vivostudies, including in an acute murine pneumonia model of infection caused by Mycobacterium abscessus. We are currently testingSPR720 in animal studies to assess activity across other pathogens of interest. Pending positive results from our additional toxicitystudies, we plan to initiate a Phase 1 clinical trial of SPR720 in the first half of 2019.3 We believe that our intellectual property portfolio for SPR720 will provide protection globally, including in the United States andEurope, through 2033. Our Pipeline The following table sets forth our product candidates, their status and certain anticipated milestones for our product candidates. Portfolio Prioritization After we receive results from the Phase 1b clinical trial of SPR741 and our ongoing preclinical toxicology study of SPR206, we intend to prioritize ourproduct candidates for further clinical development. Our decision will be based on which program we believe represents the best opportunity for us within anoptimal timeframe, factoring in the choices we must make to prioritize the opportunities within our portfolio and to best deploy our capital resources.Accordingly, for the balance of 2018, our internal operational plans and budget and our estimate of our cash runway being sufficient to fund our operatingexpenses and capital expenditure requirements into the second quarter of 2019 are based on us funding the development of SPR994 and SPR720 and eitherSPR206 or SPR741 during that period. We may seek partnering opportunities or other non-dilutive funding for further clinical development of thepotentiator candidate we elect to deprioritize. Our Strategy Our goal is to identify, develop and commercialize novel treatments for MDR bacterial infections, focusing on areas of high unmet medical need forsafe and effective antibiotic treatments. Key elements of our strategy are as follows: •Rapidly advance our lead product candidate SPR994 through clinical development and regulatory approval. We initiated a Phase 1dose-selection clinical trial of SPR994 in Australia in October 2017, and we expect to report top-line data from this trial in mid-2018.Following completion of this trial, leveraging data and know-how we have licensed from Meiji, we intend to request a pre-Phase 3meeting with the FDA in late 2018. Following our discussions with the FDA, we expect to submit an IND and initiate the pivotal Phase 3clinical trial of SPR994 for the treatment of cUTI around year-end 2018 in support of an NDA. In addition to cUTI, we believe SPR994 hasthe potential to treat other serious and life-threatening infections. •Advance a product candidate from our Potentiator Platform through clinical development and regulatory approval, either through acollaboration or with non-dilutive funding (or both), and advance our other product candidates. Both product candidates within ourPotentiator Platform are advancing, and we expect to bring forward one of our Potentiator Platform product candidates for further clinicaltesting in 2018. Regarding SPR741, we recently completed a Phase 1, two-part, randomized, double-blind, placebo-controlled, dose-escalation clinical trial. Regarding SPR206, recent preclinical data suggest a potency and safety profile that may be superior to SPR741,as well as a potentially faster path to pivotal trials than SPR741, because SPR206 can be developed as a single agent. The SAD and MADdata from the SPR741 clinical trial indicated that SPR741 was generally well tolerated at single4 doses up to and including 800 mg and at doses up to and including 600 mg every 8 hours for 14 days. We submitted a CTA in the UnitedKingdom in October 2017 and, we initiated our Phase 1b drug-drug interaction clinical trial of SPR741 in the United Kingdom during thefourth quarter of 2017. Based on the results of the SPR741 Phase 1b trial and results from a GLP toxicology study for SPR206 we expectto prioritize which of these product candidates we will bring forward as our lead clinical Potentiator product candidate. We intend tocontinue to advance our other product candidates, including SPR720, through preclinical and clinical development. •Maximize the value of our Potentiator Platform through collaborations with other pharmaceutical companies. We may elect to pursuestrategic collaborations with other pharmaceutical companies to leverage our Potentiator Platform. We believe it may be optimal todevelop and commercialize one or more of our Potentiator product candidates through partnering opportunities. These may includeglobal collaborations to advance the entire Potentiator Platform, or product-specific deals pairing our product candidates withcollaborators’ antibiotics, whether generic or novel, with the intention of enhancing those antibiotics’ performance and efficacy. Webelieve this approach will facilitate the capital-efficient development and commercialization of our Potentiator Platform. •Continue to pursue collaborations with non-commercial organizations for scientific expertise and funding support. We are currentlyreceiving funding support of up to an aggregate of $10.1 million from the U.S. National Institute of Allergy and Infectious Diseases,or NIAID, the U.S. Department of Defense, or DoD, and the Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator, orCARB-X, a public-private partnership funded by the Biomedical Advanced Research and Development Authority, or BARDA, within theU.S. Department of Health and Human Services. We intend to continue to collaborate with government agencies and non-profitfoundations to support the development of our product candidates. •Expand our portfolio of product candidates for the treatment of MDR infections. Since our inception, we have focused on identifyingand developing antibiotics to treat MDR infections, and we are using our expertise to aggressively build and expand a portfolio ofproduct candidates for the treatment of such infections. Our management team has deep-rooted relationships in the academic, medical andcorporate infectious disease community, which provide us visibility into new and innovative therapies under development. We believethe greatest unmet medical needs for safe and effective antibiotic treatments lie among infections due to MDR bacteria, as patients withthese infections often have limited or inadequate therapeutic options, leading to high rates of mortality. The increasing prevalence ofdrug resistance and MDR bacteria, and the limitations of existing therapies and traditional drug development approaches, highlight thecritical need for novel therapies capable of overcoming resistance, particularly orally administrable agents. •Establish global commercialization and marketing capabilities. We have global commercialization rights to all of our productcandidates, with the exception of SPR994 in certain contractually specified Asian countries. Our management team has significantexpertise in the commercialization of infectious disease treatments. Prior to joining us, members of our management team havecollectively played leading roles in the approval and launch of 11 infectious disease products. We intend to build a targeted sales forceand directly commercialize our product candidates in the United States in both hospital and community settings. Outside the UnitedStates, we intend to enter into collaborations with third parties to develop and market our product candidates in targeted geographicalmarkets. By collaborating with companies that have an existing commercial presence and experience in such markets, we believe we canefficiently maximize the commercial potential of our product candidates. •Diversify into rare orphan infectious disease markets such as NTM infection. We believe there is a significant opportunity to developproducts for underserved “orphan” infectious disease areas, such as NTM infection. These markets offer the attributes of fewer branded orgeneric competitors as well as chronic therapy. Our drug candidate SPR720 has the potential to be the first oral antibiotic approved for thetreatment of pulmonary non-tuberculous mycobacterial infections. We may seek to acquire other product candidates for otherunderserved, debilitating orphan infectious diseases.5 The Problem: Antibiotics and Drug ResistanceAntibiotic Background Antibiotics are drugs used to treat infections that are caused by bacteria. Prior to the introduction of the first antibiotics in the 1930s and 1940s,bacterial infections were often fatal. Today, antibiotics are used routinely to treat and prevent infections. There are two main varieties of bacteria, Gram-negative bacteria and Gram-positive bacteria, which are distinguished by structural differences in their cell envelope. Gram-positive bacteria are surroundedby a single lipid membrane and a thick cell wall, while Gram-negative bacteria are encircled by two lipid membranes, an inner membrane and an outermembrane, with a thinner cell wall in between, as shown in the illustration below. Antibiotics that target Gram-negative bacteria must be specifically designed to cross both the inner and outer membranes to enter the bacteria. Theouter membrane, with its LPS-containing outer leaflet, represents a significant barrier to the entry into the bacteria by antibiotics and is a significantcontributor toward reduced potency of many agents in treating Gram-negative bacterial infections. A study of 13,796 patients in intensive care units aroundthe world reported in 2009 that 51% of patients experienced bacterial infections, and of these patients 62% were infected by Gram-negative organisms. Antibiotics are evaluated according to several criteria, including: •Spectrum. Antibiotics that are effective against a wide variety of bacteria are considered to be broad-spectrum, while those that act upononly a limited number of bacteria are considered to be narrow-spectrum. •Potency. Potency is the measure of the microbiological ability of an antibiotic to kill or inhibit growth of bacteria in vitro. Potency iscommonly expressed as the minimum inhibitory concentration, or MIC, in µg/mL, which is the lowest concentration at which the druginhibits growth of the bacteria. Antibiotics with lower MICs are considered to be more potent. •Resistance. Antibiotic resistance refers to the inability of an antibiotic to effectively control bacterial growth. Some bacteria are naturallyresistant to certain types of antibiotics. Antibiotic resistance can also occur due to genetic mutations or changes in gene expression. Thereare numerous mechanisms responsible for antibiotic resistance, and resistance mechanisms are often found together and can be transferredbetween different bacteria, leading to multi-drug resistance.Growing Antibiotic Resistance in the Hospital and Community Settings Antibiotic resistance is one of the largest threats to global health, and resistance rates are increasing. Antibiotic resistance can affect anyone, of anyage and in any country. According to the CDC, each year in the United States at least 2 million people become infected with bacteria that are resistant toantibiotics, and at least 23,000 people die each year as a direct result of these infections. Approximately 70% of the pathogens that cause these infections areresistant to at least one drug, meaning the incidence rate of serious infections is increasing and the proportion of the infections caused by MDR pathogens isincreasingly seen as an emerging threat to world health. The CDC estimates that the excess annual cost resulting from these infections in the United States isas high as $20 billion. According to the CDC, among all of the bacterial resistance problems, Gram-negative pathogens, which cause a majority of all bacterial infections, areparticularly worrisome because they are becoming resistant to nearly all drugs that would be considered for treatment. In February 2017, the WHO publisheda list of Gram-negative bacteria based on the urgency of need for new antibiotics and highlighted a critical group of MDR Gram-negative bacteria that pose aparticular threat to human health, including Acinetobacter, Pseudomonas and various Enterobacteriaceae (including Klebsiella sp., E. coli, Serratia andProteus). These pathogens are associated with significant mortality because the increased incidence of antibiotic resistance has limited the number ofeffective treatment options.6 There is an acute need for new antibiotics to treat MDR bacterial infections, as few new antibiotics capable of addressing such infections have beenapproved recently for commercialization or are in clinical development. Further, the majority of MDR bacterial infections historically have been acquired inthe hospital setting, where they have been treated using IV-administered antibiotics. However, increasingly such infections are being acquired in thecommunity setting, emphasizing the need for orally administrable antibiotics that can effectively treat such infections. Our Product Candidates Have the Potential to Overcome Limitations of Available Treatment Options Antibiotics currently used for first-line empiric treatment of MDR bacterial infections and NTM infection suffer from significant limitations. Webelieve that our product candidates will overcome these limitations, as described below: •SPR994 is designed to address the lack of orally administrable antibiotics to prevent hospitalization and permit IV-to-oral switchtherapy in resistant Gram-negative infections. Many of the most commonly used antibiotics for MDR Gram-negative infections are onlyavailable in an IV-administered formulation. Treatment with effective orally administrable antibiotics may prevent hospitalizations forserious infections and enable earlier, more convenient and cost-effective treatment of patients following hospitalization. However,currently there are no oral antibiotics commercially available that can reliably be used in adults with MDR Gram-negative infections.SPR994 is an orally administrable tablet that we believe has the potential to treat such infections in both the community and hospitalsettings, thereby preventing certain hospitalizations and enabling patients to transition to oral treatment. •SPR741 and SPR206 are designed to address the decline of novel and effective IV-administered antibiotics to treat MDR Gram-negative infections in the hospital setting. First-line empiric antibiotics, such as levofloxacin, ceftazidime and piperacillin-tazobactam,have experienced diminished utility as the number of bacterial strains resistant to these antibiotics has increased. Due to gaps in thespectrum of coverage of antibiotics currently on the market, physicians are often confronted with the need to design complicated multi-drug cocktails for patients with serious infections. We believe that SPR741 has the potential to address the need for more effectivetreatments against MDR Gram-negative bacterial infections by expanding the spectrum and potency of existing antibiotics, includingformerly inactive antibiotics. We believe that SPR206 has the potential to address this need as a single agent. •SPR720 is designed to be the first oral treatment for an orphan disease, NTM infection, where treatment failure is common and noapproved therapies exist. The current treatment for NTM infection is lengthy and involves combination therapy, often including three ormore antibiotics, including injectables. None of these combination treatments are currently approved for use in NTM infection. Treatmentfailure is common and is often due to poor compliance or patients’ inability to tolerate the regimen. Many patients experience progressivelung disease as a result of NTM infection, and mortality rates are high, ranging from 29% to 69% within five years of diagnosis. Webelieve SPR720, if successfully developed, has the potential to be the first approved oral agent for NTM infection, and it hasdemonstrated effectiveness in vitro and in vivo against a range of pathogens, including Mycobacterium abscessus, a highly resistantorganism causing NTM infection with a high rate of mortality. Our Product CandidatesSPR994 (Tebipenem Pivoxil Extended Release) Our lead product candidate, SPR994, is designed to be a broad-spectrum oral carbapenem for use in adults to treat MDR Gram-negative infections.Currently, there are no commercially available oral carbapenems for use in adults, and we believe SPR994 has the potential to address this unmet need.Carbapenems have been utilized for over 30 years and are considered the standard of care for many serious MDR Gram-negative bacterial infections, but todate they have only been available as IV-administered formulations. SPR994 is an oral extended-release tablet formulation of tebipenem. Tebipenem wasapproved in 2009 in Japan for sale under the name Orapenem for pediatric use in common infections, including pneumonia, otitis media and sinusitis. It hasbeen sold by Meiji in Japan as a granule presentation for children, and is combined with food and dosed twice per day. To accelerate our clinicaldevelopment of SPR994, in June 2017 we exclusively licensed certain data and know-how from Meiji and a global pharmaceutical company, which we referto as Global Pharma, which we intend to use to support our clinical development of SPR994. The FDA has designated SPR994 as a QIDP for the treatment ofcUTI, CABP and DFI under the Generating Antibiotics Incentives Now Act, or the GAIN Act, which enables priority review for regulatory approval by theFDA. The QIDP designation for SPR994, however, does not guarantee a faster development process or ensure FDA approval. We believe, if approved, thatSPR994, which incorporates our proprietary formulation technology and benefits from know-how and data we have licensed from Meiji, has the potential tofurther increase the clinical demand for the carbapenem class of antibiotics. 7 We have global commercialization rights to SPR994, except in certain contractually specified Asian countries. If SPR994 is approved for treatment ofcUTI, CABP or DFI, the QIDP designation for SPR994 will extend by an additional five years any non-patent exclusivity period awarded for SPR994 in theUnited States, such as a five-year New Chemical Entity, or NCE, exclusivity granted under the Hatch-Waxman Act, for a total of 10 years. In Europe,exclusivity for NCEs is 10 years (eight years for data exclusivity and an additional two years for market exclusivity), with the possibility of a one-yearextension if the chemical entity is approved for use in an additional indication. Additionally, we believe that our intellectual property portfolio for SPR994,which includes multiple patent applications pending, will provide SPR994 protection globally, including in the United States and Europe, through 2038. Potential Advantages of SPR994 We believe that the following key attributes differentiate SPR994 from other antibiotics targeting MDR Gram-negative infections. We believe theseattributes have the potential to make SPR994 a safe and effective treatment for cUTI and other serious and life-threatening infections for which we maydevelop SPR994. •Potential to be the first oral carbapenem in adults. SPR994 is designed to be the first broad-spectrum oral carbapenem-class antibiotic foruse in adults to treat MDR Gram-negative infections. Unlike other carbapenems, which are only available as IV-administered infusions,SPR994 is an orally administered tablet. Oral administration may potentially allow physicians to avoid IV-administered antibiotics forotherwise healthy or stable patients and/or allow for a reduction in costs associated with avoiding or shortening hospitalization. •Favorable safety, efficacy and tolerability profile suggested by clinical studies of tebipenem in Japanese populations. A granuleformulation of tebipenem has been approved for use in Japan in pediatric patients since 2009, where it has demonstrated a favorablesafety and efficacy profile. Approximately 1,100 subjects have been dosed with the active pharmaceutical ingredient of SPR994,tebipenem, in clinical and pharmacologic studies during development of this drug by Meiji and Global Pharma in Japan. This data setincludes 741 adults, including 88 patients with cUTIs, the initial indication for which we plan to develop SPR994. In each casetebipenem has demonstrated a favorable safety, pharmacokinetic and tolerability profile. •Broad spectrum of activity against a variety of MDR Gram-negative, Gram-positive and anaerobic bacteria, with a potency consistentwith certain IV-administered carbapenems. In in vitro studies, SPR994 displayed potent antibiotic activity against Gram-negativebacteria, including E. coli producing extended spectrum beta lactamases, or ESBLs, and ESBL-producing Klebsiella pneumoniae. ESBL-producing bacteria are Gram-negative bacteria that hydrolyze, or break down, cephalosporins and render them ineffective for treatment.ESBL-producing pathogens are associated with poor clinical outcomes in severe infections. Further, the potency of SPR994 againstEnterobacteriaceae has been observed to be similar to IV-administered ertapenem (or ETP) and imipenem (or IMI). As a result, we believethat SPR994 has the potential to be used for the treatment of cUTI and other serious and life-threatening infections caused by resistantGram-negative pathogens. •Potential to enable IV-to-oral transition of antibiotic treatment to assist with reduction in hospital stays and/or eliminate the need forhospitalization. We believe the unique oral formulation of SPR994 may enable patients who begin IV-administered treatment for ESBLsin the hospital setting to transition to oral dosing of SPR994 either in the hospital or upon discharge for convenient home-based care. Webelieve that the availability and use of an oral carbapenem as a transition therapy may eliminate hospitalization or reduce the length of apatient’s hospital stay and the overall cost of care. We believe the foregoing advantages of SPR994 also significantly differentiate SPR994 from fluoroquinolones. Fluoroquinolones are the most widelyused antibiotic class in treating community and hospital Gram-negative infections, but they have encountered increasing resistance among MDR Gram-negative bacteria and are associated with significant adverse effects. The table below reflects resistance rates in the United States in the community andhospital settings. cUTIs in the United States 2013-2014 E. coli ResistanceRates to Fluoroquinolones 2000-2004 E. coli ResistanceRates to Fluoroquinolones Community Setting 11.7% 0%Hospital Setting 34.5% 3.5% Currently, fluoroquinolones are the most frequently selected antibiotic for empirical urinary tract infection, or UTI, treatment in the community andhospital settings. Current UTI treatment guidelines published by the Infectious Diseases Society of America identify fluoroquinolones as an appropriateempirical therapy option. This recommendation, however, is contingent on local resistance rates being less than 10%. The endemicity (high rates) offluoroquinolone-resistant E. coli found in the United States today in the community and hospital settings based on the table above would suggest thatfluoroquinolones should not be used empirically for cUTI patients. 8 The following table highlights the observed in vitro potency differences between SPR994 and levofloxacin, the most widely used fluoroquinolone. Asshown below, SPR994 has a MIC90 value of 0.03 µg/mL, which compares favorably (i.e., at or below) to the potency value obtained by levofloxacin. Compound E. coliMIC90(µg /mL) SPR994 0.03Levofloxacin >4 In addition, the FDA has issued several warnings against the use of fluoroquinolones in certain patients. In particular, an FDA Advisory Committeestated in November 2015 that the risk of serious side effects caused by fluoroquinolones generally outweighs the benefits for patients with acute bacterialsinusitis, acute exacerbation of chronic bronchitis and uncomplicated UTIs. The FDA has determined that fluoroquinolones should be reserved for use inpatients with these conditions who have no alternative treatment options. In Japan, Orapenem (tebipenem pivoxil) does not have a black box warning andhas been studied in approximately 1,100 subjects. We believe SPR994 could become a potential alternative to oral fluoroquinolones based on its safety andefficacy profile. Significant Market Opportunity for SPR994 Given the observed activity of SPR994 against different bacteria, we view the market opportunity for SPR994, if approved, to be substantial,including for the following uses: •Treating urinary tract infections acquired in the community setting without the need for patient hospitalization. •Transitioning patients hospitalized for UTIs or cUTIs to an oral therapy as they are discharged from the hospital. UTIs are among the most common bacterial diseases worldwide, with significant clinical and economic burden. QuintilesIMS estimates that between33 and 34 million patients either visit their physician or are hospitalized for a UTI or otherwise suspected of experiencing a UTI in the United Statesannually. While drugs such as trimethoprim/sulfamethoxazole (Bactrim/Septra) and fluoroquinolones (levofloxacin, ciprofloxacin) have been the primaryoral options for treatment of UTIs caused by Gram-negative organisms, nearly 30% to 35% of UTIs are resistant, which has led to increased use of IV-administered therapeutics such as carbapenems. QuintilesIMS completed a market assessment in August 2017 in the community and hospital settings in which it estimated that there were 11 to12 million patients annually who presented in the community physician’s office with a UTI and 3.5 to 4.5 million patients annually in the hospital with aUTI in the United States alone. Of these UTIs, 10 to 11 million are suspected to be caused by Gram-negative bacteria, and 4 to 5 million of these patients hadan infection that is resistant to or failed first-line therapy, such as the fluoroquinolone class, or require IV therapy due to the severity of infection. Physiciansin the survey reported high concern with growing fluoroquinolone resistance and lack of oral options for MDR Gram-negative infections. We believeSPR994 is well positioned to meet the unmet need for an oral therapy for community-acquired UTI and may offer physicians an option for treating MDR UTIswhile avoiding patient hospitalization. In addition, we believe SPR994 has the potential to accelerate hospital discharge and obviate the need for continuedIV-administered therapy at home by transitioning discharged patients to an at-home oral therapy. Our initial study for SPR994 will focus on patients whosuffer from a subset of UTIs called cUTIs, which affect approximately 4.9 million patients in the United States annually. A significant majority of UTIs,including cUTIs, are caused by a group of MDR Gram-negative bacteria called Enterobacteriaceae. Additional use may be seen in treating patients hospitalized with complicated Gram-negative infections, such as complicated intra-abdominalinfections, or cIAI, hospital-acquired, or nosocomial, pneumonia and blood stream infections as they are discharged from the hospital. SPR994 Clinical Development Program Based on our pre-IND meeting with the FDA, we initiated a Phase 1 pharmacokinetics and safety clinical trial in Australia of SPR994 in October 2017,and expect to report top-line data from this trial in mid-2018. Following completion of this trial to select a dose for pivotal trials, we intend to request a pre-Phase 3 meeting with the FDA to confirm that no additional clinical trials or preclinical studies are required prior to initiating a Phase 3 clinical trial. Subjectto feedback from the FDA, and using know-how we have licensed from Meiji, we plan to obtain agreement on the clinical trial protocol in late 2018 andexpect to initiate the pivotal9 Phase 3 clinical trial of SPR994 for the treatment of cUTI around year-end 2018 under an IND. We anticipate that the data from this study will form the basisfor the clinical trial data package that will support an NDA. The FDA has designated SPR994 as a QIDP for the treatment of cUTI, CABP and DFI under the GAIN Act, which enables priority review for regulatoryapproval by the FDA. The QIDP designation for SPR994, however, does not guarantee a faster development process or ensure FDA approval. Further, ifSPR994 is successfully developed and approved for the treatment of cUTI, CABP or DFI, the FDA’s QIDP designation for SPR994 should extend any non-patent exclusivity period awarded to SPR994 in the United States for five years, such as a five-year New Chemical Entity data exclusivity granted under TheDrug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act. SPR994 Phase 1 Clinical Trial We filed a CTN in Australia in September 2017 and initiated in October 2017 a Phase 1 clinical trial in Australia of SPR994 in approximately 60healthy volunteers. A CTN enables conduct of a clinical trial in Australia similar to the manner that an IND enables such a study in the United States. ThePhase 1 clinical trial is evaluating several oral tablet formulations of SPR994 designed to optimize exposure. The trial consists of SAD cohorts and multipledose cohorts. The objective of the trial is primarily dose selection for our planned Phase 3 trial and includes determination of pharmacokinetics, safety andtolerability for up to 14 days and food effect. In particular, the focus of the SAD cohort is to assess the safety and probability of target attainment (killing oftarget pathogens). The focus of the MAD cohorts is on dose and schedule, specifically, determining how dose drives bacterial clearance over time. We expectto use data from the trial to refine a pharmacokinetic/pharmacodynamic model to establish an in vitro/in vivo relationship to support dose and scheduleadministration for our planned pivotal Phase 3 clinical trial based on drug concentration and inter-patient variability. We expect to report top-line data fromthe Phase 1 clinical trial in mid-2018. Planned Pivotal SPR994 Phase 3 Clinical Trial Based on our pre-IND meeting with the FDA, we believe that results from our Phase 1 clinical trial of SPR994, together with nonclinical studies,PK/PD, and other supporting data, will be acceptable to FDA to allow us to commence a pivotal Phase 3 clinical trial of SPR994 under a U.S. IND. After wereport top-line data from our Phase 1 clinical trial, we plan to request a pre-Phase 3 meeting with the FDA to confirm that no additional clinical trials orpreclinical studies are required prior to initiating our Phase 3 clinical trial. Subject to feedback from the FDA, we plan to submit an IND and agree upon theclinical trial protocol in late 2018 and expect to initiate the pivotal Phase 3 clinical trial of SPR994 for the treatment of cUTI and acute pyelonephritisaround year-end 2018. Clinical trial applications will also be submitted in Europe and other regions, as needed, to support study enrollment. Our plannedpivotal Phase 3 clinical trial of the efficacy and safety of SPR994 is currently designed as a double-blind, double-dummy trial to compare SPR994 with anexisting standard of care antibiotic in approximately 1,100 patients randomized 1:1 in each arm. We believe that the primary endpoint of the trial will benon-inferiority versus a standard of care antibiotic, with a 10% non-inferiority margin. We intend to commence our pivotal Phase 3 clinical trial with a lead-in cohort with intensive pharmacokinetics sampling in order to analyze exposure prior to enrolling the majority of the Phase 3 clinical trial cohort. In thisPhase 3 trial, the primary efficacy endpoint is clinical cure and microbiological eradication in the microbiological intent-to-treat population per U.S. FDAguidance for cUTI trials. We will also assess the trial for the primary efficacy endpoint of microbiological eradiation in the microbiologically evaluablepopulation per the European regulatory requirements, under a separate statistical analysis plan of the same datasets. Following receipt of top-line data from this pivotal Phase 3 clinical trial, with requisite safety data, drug-drug interaction studies and other studies, weintend to submit to the FDA an NDA for SPR994 to treat cUTI including acute pyelonephritis. These data, if positive, may also support marketingapplications in other global regions. We also intend to reach an agreement with the FDA on a Pediatric Study Plan and initiate development of SPR994 inpediatrics for cUTI upon receipt of top-line data in adult patients. Data Supporting the Use of SPR994 for the Treatment of cUTI We have tested SPR994 in vitro and in animal models. We believe that nonclinical assays are generally predictive of clinical efficacy for antibiotics,particularly in the case of a well-understood class such as carbapenems. In addition, approximately 1,100 subjects have been dosed with tebipenem inclinical and pharmacologic studies during the development of this drug by Meiji in Japan. The data set from these studies includes 741 adults, including 88patients with cUTIs, the initial indication for which we plan to develop SPR994. In addition, there are post-marketing outcomes data reporting the safety andefficacy of tebipenem in 3,540 pediatric patients with pneumonia, otitis media, or sinusitis. These data are consistent with the safety profile of tebipenem asestablished in the clinical trial. 10 In vitro Activity Against MDR Enterobacteriaceae Results from multiple susceptibility testing studies against MDR Enterobacteriaceae demonstrate that SPR994 remained potent against strainsresistant to several other classes of antibiotics, including aminoglycosides and fluoroquinolones. In these studies, we measured the potency, or MIC, of eachdrug by determining the concentration of drug required to inhibit the growth of 50% and 90% of the isolate set (i.e., the MIC50 or MIC90). The graph belowdepicts the in vitro activity of SPR994 compared to two commercially available intravenously delivered antibiotics commonly used to treat cUTI against alarge number of clinical isolates, namely Invanz (ertapenem, or ETP) from Merck and generically available imipenem, or IMI.SPR994 Activity Against Contemporary Isolates of E. coli SPR994 has showed MIC50 and MIC90 values of less than or equal to 0.015 µg/mL and 0.03 µg/mL, which compare favorably (i.e., at or below) to thevalues obtained by competitive agents ertapenem and imipenem. Regarding a more resistant set of E. coli isolates, including fluoroquinolone-resistant strains, SPR994 again showed in vitro activity similar tocommercially available intravenously delivered drugs such as Merrem (meropenem, or MEM), and better than levofloxacin, or LVX, as shown in the graphbelow.SPR994 is Active Against E. coli, Including Fluoroquinolone-Resistant Isolates SPR994 has also shown activity in preclinical in vitro studies against a wide variety of ESBL-producing E. coli and ESBL-producing K. pneumoniaestrains, as highlighted in the table below. 11 SPR994 Has Potent Activity Against A Variety of ESBL EnzymesIn vitro Activity of SPR994 and Comparator Antibiotics against Clinical Isolates We believe these data show the ability of orally available SPR994 to deliver similar activity to comparative IV-administered agents. Tebipenem Phase 1 Clinical Trial Data Support Development of SPR994 for the Treatment of cUTI Tebipenem was also tested by Meiji in healthy volunteers to determine urinary concentrations as a predictor of efficacy in the cUTI population.Results from this single-ascending dose study are shown in the graph below.Single-Ascending Dose Calculated Urine Levels of Tebipenem In early clinical studies in Japan, healthy volunteers received doses up to 600 mg/day. At each dose level, and in a dose dependent manner, the urineconcentration of tebipenem exceeded the MIC90 for E. coli of 0.03 µg/ml (defined as the level that is expected to inhibit 90% of E. coli isolates). 12 A food-effect clinical study was performed to evaluate the impact of meals or dairy products on tebipenem-pivoxil granule pharmacokinetics. Thestudy showed comparable plasma AUC (a measure of drug exposure over time) and urinary excretion rates of tebipenem pivoxil among the study’s subjects inboth the fed and fasted states. The effect of a meal or dairy products on tebipenem absorption was observed to be limited, and no adverse safety or tolerabilityeffects were observed in dosing in the fed state.Meiji Phase 2 Clinical Trial Data of Tebipenem in cUTI Meiji and Global Pharma conducted two exploratory, dose-ranging Phase 2 clinical trials of tebipenem in patients with cUTI including patients withacute pyelonephritis. These trials were conducted in Japan between 2001 and 2004. Study L-084 04 (report date 2003), a multicenter open-label study toevaluate the efficacy (clinical and microbiological) and safety (adverse events and laboratory tests) of tebipenem at doses of 100 mg administered three timesdaily, or TID, (Group A), 150 mg administered BID (Group B), and 150 mg administered TID (Group C), for seven days in patients with cUTI. There were 51adult patients, aged 20-74 years inclusive, enrolled with 40 being evaluable for efficacy (14 in Group A; 17 in Group B; 9 in Group C). Study ME1211(report date 2004), a multicenter, open-label study to evaluate efficacy (early and late assessments) and safety (adverse events and laboratory tests) oftebipenem at doses of 250 mg administered BID (500 mg Group) and 300 mg administered TID (900 mg Group) for seven days in patients with cUTI. Therewere 37 adult patients, aged 20 to 74 years inclusive, enrolled with all being evaluable for efficacy (19 in 500-mg Group; 18 in 900-mg Group). Although the design of the Phase 2 clinical trials in Japan was different from what is recommended in FDA guidance for clinical trials in patients withcUTI, including acute pyelonephritis, we believe these results support our plan to develop SPR994 in cUTI. With respect to these results, which aresummarized in the chart below, the efficacy rate refers to the proportion of subjects judged to have experienced a “markedly effective” or “effective”tebipenem dosage versus the total number of subjects tested, and the negative conversion rate refers to the proportion of subjects with negative urine culturesversus the total number of subjects tested. Observed Efficacy of Tebipenem in Meiji Phase 2 Trials in cUTI Study L-084 04 Subjects EfficacyRate* NegativeConversionRate 300-mg group A(100 mg administered TID) 14 92.9% 92.9%300-mg group B(150 mg administered BID) 17 94.1% 94.1%450-mg group C(150 mg administered TID) 9 100% 100% *Based on overall clinical outcome. Study ME1211 Subjects EarlyEfficacyAssessment* NegativeConversionRate** 500-mg group A(250 mg administered BID) 16 93.8%*** 87.5%900 mg group B(300 mg administered TID) 16 93.8% 93.8% *Based on overall clinical effect at the end of therapy.**Early assessment, at end of therapy. For the purpose of this assessment, negative conversion rate is defined as the rate of subjects with negative urinecultures.***“Markedly effective” or “effective.” 13 Safety of Tebipenem Tebipenem pivoxil is a prodrug that is metabolized to tebipenem, its therapeutically active form. We view the clinical safety profile of tebipenempivoxil established by Meiji as relevant and supportive of SPR994 because both metabolize to the active metabolite, tebipenem, in plasma. Our formulationdevelopment efforts are designed to improve target concentration while maintaining the exposure per dose. Tebipenem pivoxil is an orally administered carbapenem, which is a sub-group of the beta-lactam class of antibiotics. The safety of tebipenem pivoxilwas evaluated in approximately 1,100 subjects supporting the application for approval in Japan. In this safety data set, there are 741 adult subjects across 17trials and 440 pediatric subjects across six trials. These 23 trials in total, included one double-blind, comparator-controlled trial in children, five open-labeltrials in children, five trials enrolling adult patients (including two open-label cUTI trials), and 12 Phase 1 clinical pharmacology trials. Among thepharmacology trials, tebipenem pivoxil was studied for an effect on QT interval, and for the known effect of the pivoxil prodrug on serum carnitineconcentrations. In these studies, tebipenem pivoxil was generally safe and well tolerated, with an adverse event, or AE, profile comparable to common, approved oralbeta lactam antibiotics and IV-administered carbapenems. The most common AEs were gastrointestinal (e.g., diarrhea, loose stools) in both children andadults, and in the Phase 3 clinical trial of otitis media, the incidence was similar to that reported for the comparator, cefditoren (also a pivoxil prodrug), anoral cephalosporin antibiotic. No effect of the administration of tebipenem pivoxil on the prolongation of the QT interval was observed, and the effect onserum carnitine concentrations was reversed post treatment and not associated with AEs. A side effect seen with beta-lactam antibiotics is seizures; however,there have been no reports of inducement of seizures due to the administration of tebipenem pivoxil in clinical trials. In addition, there are post-marketingoutcomes data reporting the safety and efficacy of tebipenem in 3,540 pediatric patients with pneumonia, otitis media, or sinusitis. These data are consistentwith the safety profile of tebipenem as established in the clinical trial. A total of 3,547 cases were enrolled into the study, and the analysis was conducted using 3,540 cases for which it was possible to recover thequestionnaires. Of these 3,540 cases, a total of 3,331 cases were used in the safety analysis, 2,844 cases were used in the efficacy analysis, 2,769 cases wereused in the clinical efficacy analysis, and 461 cases were used in the bacteriological efficacy analysis. The incidence of adverse drug reactions was 9.97%(332/3,331 cases), and the primary adverse drug reactions were “gastrointestinal disorders” such as diarrhea, which occurred in 317 cases (9.52%). “Diarrhea”occurred in 313 cases (316 instances). All of these events were non-serious, and 94.9% (297/313 cases) showed recovery or remission. A clinical study evaluating the effect of tebipenem pivoxil dosing over one week on intestinal flora was also performed. Total aerobic and anaerobicbacterial counts were evaluated. Total bacterial count was reduced by day 7 of the study in both the 100 and 200 mg TID groups. However, no additionalchange in bacterial count was observed on subsequent examination days. Neither fecal C. difficile nor its toxin was detected in any of the subjects during orfollowing completion of the 7-day dosing period. Our Potentiator Platform (SPR741 and SPR206)We have two product candidates in our Potentiator Platform, SPR741 and SPR206. Both product candidates are IV-administered derivatives ofPolymyxin B, or PMB. Both have demonstrated in vitro activity against Gram-negative bacteria, including organisms identified by the CDC and the WHO asurgent and serious threats to human health. There are two primary differences between these two product candidates. SPR741 has minimal antibacterialactivity as a single agent and requires combination therapy with a companion antibiotic to demonstrate antimicrobial potency. SPR741 also hasdemonstrated activity primarily against MDR Gram Negative organisms such as Enterbacteriaceae and against some strains of Acinetobacter baumaniidepending on its combination partner. SPR206 is active as a single agent and exerts potency with and without a partner. SPR206 also has a broad spectrum ofactivity including all the strains SPR741 covers, as well as expanded coverage of carbapenem-resistant Pseudomonas aeruginosa, carbapenem-resistantAcinetobacter baumanii and carbapenem-resistant Enterobacteriaceae. We have completed a Phase 1, two part, randomized, double-blind, placebo-controlled, dose-escalation trial of SPR741. We initiated our Phase 1bdrug-drug interaction clinical trial of SPR741 in the United Kingdom during the fourth quarter of 2017. The Phase 1b trial enrolled 27 healthy volunteers toevaluate SPR741 as a single dose in combination with compounds from the beta-lactam class of antibiotics, including cephalosporins (ceftazidime),monobactams (aztreonam) and beta-lactam/beta-lactamase inhibitors (piperacillin/tazobactam). The trial was designed to assess the impact, if any, on thestandalone pharmacokinetics of SPR741 or the standalone pharmacokinetics of the beta-lactam combination drug when the two are dosed together as a singledose. We anticipate top-line data from this Phase 1b trial during the second quarter of 2018. 14 We believe that our intellectual property portfolio for SPR741, which includes multiple issued patents and patent applications pending, will provideSPR741 protection globally, including in the United States and Europe, through 2038. Additionally, we have multiple patent applications pending forSPR206 that we believe will provide SPR206 protection globally, including in the United States and Europe, through 2035. How Our Potentiator Platform Molecules Are Designed to Work Gram-positive and Gram-negative bacteria are classified by the lab staining test known as the “Gram stain”, but their nature is due to structuraldifferences in their cell envelope, with Gram-positive bacteria surrounded by a single lipid membrane and a thick cell wall and Gram-negative bacteriaencircled by two lipid membranes, an inner membrane and an outer membrane, with a thinner cell wall in between. The outer membrane, with its LPS-containing outer leaflet, represents a significant barrier to the entry into the bacteria by antibiotics and is a significant contributor to reduced potency ofmany agents in treating Gram-negative bacterial infections. Each membrane in Gram-negative bacteria excludes different types of chemical entities, requiringGram-negative active antibiotics to be specifically designed to permeate both membranes. Gram-negative bacteria include Pseudomonas aeruginosa,Acinetobacter baumannii, and the Enterobacteriaceae, a family of related organisms that includes E. coli, Klebsiella pneumoniae, Enterobacter, Salmonella,and Shigella species. Advantages of our Potentiator Platform We believe that the following key attributes of our Potentiator Platform generally have the potential to support the clinical utility and commercialvalue of our Potentiator Platform for the safe and effective treatment of serious infections: •Potential to Expand the Potency of Standard-of-Care Antibiotics. We believe SPR741and SPR206 have the potential to expand thepotency of standard-of-care antibiotics by restoring and expanding their Gram-negative activity, thereby improving therapeuticoutcomes, decreasing physicians’ reliance on drugs of last resort and encouraging improved antibiotic stewardship. •SPR741 was demonstrated to be well tolerated in Phase 1 studies. Data from our Phase 1 SAD and MAD clinical trial of SPR741demonstrate SPR741 was generally well tolerated at single doses up to and including 800 mg and at doses up to and including 600 mgevery 8 hours for 14 days. •SPR206 may potentially be a safe and potent IV-administered direct-acting agent. Like SPR741, our Potentiator Platform candidateSPR206 is designed to interact with LPS to disrupt the outer membrane. However, SPR206 is also designed to have direct antibioticactivity, while retaining potentiator activity, including activity against Pseudomonas and Acinetobacter. We are developing SPR206 as atreatment for high-risk patients with suspected or known Gram-negative infections such as carbapenem-resistant Enterobacteriaceae, orCRE, carbapenem resistant Acinetobacter baumannii, or CRAB, and MDR Pseudomonas aeruginosa, or MDR PA, to prevent mortalityand reduce the length of stay in the hospital setting. Significant Market Opportunity for SPR741 and SPR206, including Gram-Negative IV Market The need for new antibiotics to treat CRE, CRAB and MDR PA is particularly acute, as together these represent among the top global threats ininfectious disease. In February 2017, the WHO published a list of Gram-negative bacteria based on the urgency of need for new antibiotics: critical, high andmedium priority. The most critical group includes MDR bacteria that pose a particular threat including Acinetobacter, Pseudomonas and variousEnterobacteriaceae (including Klebsiella, E. coli, Serratia, and Proteus). These bacteria can cause severe and often deadly infections. As such, there is anacute need for new drugs to treat MDR Gram-negative bacteria. Currently approved products are increasingly ineffective against Gram-negative bacteria dueto increasing resistance, resulting in limited treatment options for patients with MDR infections. Few new therapeutic agents have been approved or are inclinical development to treat infections caused by Gram-negative bacteria. Acinetobacter baumannii is an opportunistic bacterial pathogen primarily associated with hospital-acquired infections. The recent increase inincidence, largely associated with infected combat troops returning from conflict zones, coupled with a dramatic increase in the incidence of MDR strains,has significantly raised the profile of this emerging opportunistic pathogen. It is estimated between 50,000 to 80,000 infections annually in the United Statesand approximately 63% of isolates are MDR. Mortality rates for patients with Acinetobacter baumannii have been reported as high as 43%. Currently theonly drugs to treat these resistant organisms are polymyxins such as colistin, polymixyn B, or PMB, and tigecycline, or TIG, both of which have significantsafety and tolerability issues. SPR206 would provide a much needed addition to the treatment of these very serious infections. 15 Pseudomonas is one of the most common Gram-negative organisms in the hospital setting. Incidence ranges from 13% in UTIs and as high as 25% inrespiratory tract infections. Resistance to commonly used agents such as cephalosporins, piperacillin/tazobactam and quinolones ranges from 10% in thenon-ICU setting to upwards of 35% in the ICU. Even more problematic is the increase in resistance to carbapenems, which is reported to be as high as 19% inthe ICU. Pseudomonas is a serious cause of infection with morbidity and mortality rates of 18% to 61%. In preclinical studies to date, SPR206 hasdemonstrated potent activity across a broad range of resistant strains of Pseudomonas aeruginosa. There are limited treatment options available today to treatthese resistant organisms. CRE infections are associated with significant mortality, with up to 50% mortality observed in patients with bloodstream infections. With limitedtreatment options available for CRE infections, physicians have resorted to older drugs such as colistin or more recently drugs such as tigecycline andceftazidime/avibactam. However, there is evidence that these antibiotics are failing patients. For example, in bloodstream infections due to carbapenemase-producing Klebsiella pneumoniae, all-cause mortality for treatment with colistin, tigecycline, or combinations of antibiotics that do not include acarbapenem active in vitro against the infecting isolate was reported to be 46%, 47%, and 37%, respectively. Recently, resistance to even these last-resorttreatments has begun to be reported, further increasing the urgency for new therapeutic options. SPR741—Phase 1 Clinical Trial and Clinical Development Data from our Phase 1 SAD and MAD clinical trial show SPR741 administered intravenously in single doses up to and including 800 mg and multipledaily doses up to and including 600 mg every 8 hours for 14 days was generally well tolerated in healthy adult subjects. There were no deaths or seriousadverse events. All subjects completed the study. As shown in the chart below, the pharmacokinetics observed in the SAD portion of the trial were dose linearand dose proportional with a half-life of between two and four hours, consistent with expectations from preclinical modeling. Similarly, the pharmacokineticsobserved in the MAD portion of the trial were dose linear and dose proportional, with only minor accumulation noted in the top dose cohort (600 mg every 8hours). We initiated our Phase 1b drug-drug interaction clinical trial of SPR741 in the United Kingdom during the fourth quarter of 2017. The Phase 1b trialenrolled 27 healthy volunteers to evaluate SPR741 as a single dose in combination with compounds from the beta-lactam class of antibiotics, includingcephalosporins (ceftazidime), monobactams (aztreonam) and beta-lactams/beta-lactamase inhibitors (piperacillin/tazobactum). The trial was designed toassess the impact, if any, on the standalone pharmacokinetics of SPR741 or the standalone pharmacokinetics of the beta-lactam combination drug when thetwo are dosed together as a single dose. We anticipate top-line data from this Phase 1b trial during the second quarter of 2018. Our Potentiator Platform is funded in part with non-dilutive funding from the DoD and CARB-X, consisting of $1.9 million through March 31, 2018.We have global commercialization rights to SPR741, which has global patent protection extending through 2038. In Vitro Activity of SPR741 Against MDR Gram-Negative Bacteria Results from multiple susceptibility testing studies against suggest that SPR741 is capable of potentiating the activity of several classes of antibiotics,including some beta-lactams and macrolides. We ascertained the potential clinical profile of combinations of SPR741 against MDR Enterobacteriaceaeencountered in the hospital setting by testing the combinations against a large number of clinical isolates collected from unique patients with different typesof infections from hospitals around the world. In one such study,16 we measured the ability of SPR741 to enhance the activity of ceftazidime, or CAZ, or piperacillin-tazobactam (Zosyn, or TZP) against a large collection ofclinical isolates expressing the drug-resistant phenotype ESBL. In each case, as shown in the graph and summarized in the table below, SPR741 potentiatedthe activity of the antibiotics resulting in an MIC90 shift from 256 to 8 for CAZ and from 256 to 1 for TZP. We believe that this data demonstrates SPR741’sability to restore the combined antibiotic’s therapeutic activity against a resistant strain of bacteria. Potency of Piperacillin-Tazobactam and Ceftazidime with and without SPR741in Global Set of Clinical Isolates Classified as ESBL Producers MIC90 and % of Bacteria Susceptible to Piperacillin-Tazobactam and Ceftazidimewith and without SPR741 in Global Set of Clinical Isolates Classified as ESBL Producers MIC90(mg/mL) %Susceptible(1) CAZ 256 20%CAZ+SPR741 8 88%TZP 256 75%TZP+SPR741 1 98% (1)Breakpoints for CAZ+SPR741 and TZP+SPR741 are defined by regulatory bodies only upon approval of NDA(s) and as such none exist today. As a surrogate, we haveused the clinically approved breakpoints for CAZ and TZP to define anticipated susceptibility for our combinations. 17 SPR206—Development Plan In Vitro Activity of SPR206 Against MDR Gram-Negative Bacteria Results from multiple susceptibility testing studies against MDR Enterobacteriaceae suggests that SPR206 is capable potent activity against MDREnterobacteriaceae, carbapenem resistant Pseudomonas aeruginosa and carbapenem resistant Acinetobacter baumanii. In vivo Activity of SPR206 against Carbapenem-Resistant Acinetobacter baumanniiThe activity of SPR206 against a carbapenem resistant strain of Acinetobacter baumannii exceeded the activity of polymyxin B (PMB) andtigecycline (TIG) in a mouse lung infection model as shown below.Activity of SPR206 vs. Comparators in a Mouse Lung Infection Model 18 Orphan disease, Pulmonary Non-Tuberculous Mycobacterial Infection Program A third area of our focus is anti-infective orphan disease. We are developing SPR720, a novel mechanism of action therapeutic candidate for thetreatment of NTM infection. SPR720 is designed to be the first novel, oral candidate to treat NTM infection. SPR720 is an orally available gyrase inhibitor.SPR720 has potent activity against most common NTM infection species, such as M. avium, M. abscessus and M. kansasii. As shown in the exhibit below,SPR720 shows dose responsive efficacy against difficult to treat, multidrug resistant pathogens, with better activity as compared to amikacin, or AMK,considered the positive control in this experiment. Lung Infections in Multidrug Resistant Abscessus Strains Non-tuberculous mycobacteria are typically found in water and soil. NTM cause a rare infection of the lung that is acquired through inhalation of thismicrobe. There are approximately 150 types of mycobacteria, with Mycobacterium avium complex, or MAC, and Mycobacterium abscessus the mostcommon cause of NTM infections, together comprising almost 90% of all NTM infections. NTM infections occur in many different types of patients. NTM infections often occur in people with compromised immune systems, such as thosewith HIV, or those with respiratory conditions such as cystic fibrosis, chronic obstructive pulmonary disease, asthma or bronchiectasis. According to Strolloet al. and Adjemian et al., the diagnosed patient population is approximately 86,000 in the United States. The annual prevalence of NTM infection isincreasing at an estimated rate of 8% per year. While people of any age can be infected by NTM, it mostly affects middle-aged to elderly adults, and isincreasing among patients over 65, a population expected to nearly double by 2030. While relatively rare compared to other infectious diseases, theprevalence of NTM infection has more than doubled since 1997. By comparison, the prevalence of tuberculosis in North America has declined. There are currently no FDA-approved therapeutics indicated for NTM infections. Given the unmet medical need, there are regulatory incentivesavailable to encourage drug development to address NTM infection. These include orphan drug designation, potential for breakthrough therapy status andQIDP designation. The current treatment for NTM infection is lengthy and involves combination therapy, often including three or more drugs including aninjectable. Treatment failure is common and is often due to poor compliance or inability to tolerate the regimen. Many patients experience progressive lungdisease and mortality is high. We believe there is a need for new, potent, orally available therapies for NTM infection. While there are competitivecompounds in late-stage development for NTM infection, these therapies are not effective in all patients and are not orally available. We believe that our intellectual property portfolio for SPR720, which includes multiple issued patents and patent applications pending, will provideSPR720 protection globally, including in the United States and Europe, through 2033.19 Our SPR720 Development Plan Our strategy is to develop SPR720 to become the first oral treatment FDA-indicated for NTM infection, and to enable refractory patients to regain abetter quality of life. SPR720 is currently in preclinical development. We have conducted 28-day GLP toxicity studies in rats and non-human primates, andwe are waiting for the final results of these studies. We have also observed activity as good as or better than positive controls in in vitro and in vivo testing,including in an infection model caused by Mycobacterium abscessus and Mycobacterium avium. Pending further evidence of in vivo activity and positiveresults from our additional toxicity studies, we plan to initiate a Phase 1 SAD/MAD clinical trial in healthy volunteers during the first half of 2019.Collaboration and License Agreements In addition to our own patents and patent applications, we have acquired or licensed patents, patent applications and know-how from various thirdparties to access intellectual property covering product candidates that we are exploring and developing. We have certain obligations under these acquisitionor licensing agreements, including diligence obligations and payments, that are contingent upon achieving various development, regulatory and commercialmilestones. Also, pursuant to the terms of some of these license agreements, when and if commercial sales of a product commence, we may be obligated topay royalties to such third parties on net sales of the respective products. Some of our license agreements include sublicenses of rights owned by third-partyhead licensors. Meiji Agreements To support our development of SPR994, in June 2017 we entered into an exclusive License Agreement with Meiji Seika Pharma Co., Ltd., or the MeijiLicense. Pursuant to the Meiji License, we obtained know-how, data and regulatory documents that will support the development of SPR994. We retain exclusive rights to commercialize SPR994 throughout the world, except in Japan, Bangladesh, Brunei, Cambodia, China, Indonesia, Laos,Malaysia, Myanmar, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam, where Meiji will have exclusive rights to commercialize SPR994.With Meiji, we have established a joint development committee for the management of the development of SPR994, including any joint, cross-territorystudies that may be undertaken by the parties, if any. In addition, the parties will establish a joint commercialization committee to coordinate informationsharing relative to commercialization of the new formulation. Meiji and we have granted each other exclusive cross licenses to our respective tebipenem intellectual property, including know-how and regulatorydocumentation. The license granted to us by Meiji includes certain know-how that Meiji received from Global Pharma, as described below. As such, ourrights to the Global Pharma know-how component are non-exclusive. Under the Meiji License, we have paid Meiji a one-time nonrefundable upfront fee of $0.6 million and are obligated to pay Meiji future clinical andregulatory milestone payments up to an aggregate of $3.0 million and royalties of a low single-digit percentage based on net sales of SPR994. In October2017, we 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 SPR994.Additionally, we are obligated to pay Meiji a percentage of certain amounts received from any sublicensees, up to an aggregate of $7.5 million. Some of the know-how that we received under the Meiji License to support SPR994 development was originally obtained by Meiji through a licensefrom Global Pharma, which we refer to as the head license. Prior to entering into the Meiji License with us, Meiji received written approval from GlobalPharma permitting Meiji to enter into the Meiji License with us. Specifically, in a letter agreement between Global Pharma and Meiji entered into in January2017, Global Pharma consented to Meiji assisting us with the transfer or license of the Global Pharma know-how and Meiji know-how on a non-exclusivebasis outside of those Asian countries identified above, as well as certain related matters. This letter agreement does not contemplate us having any right tosublicense the Global Pharma know-how. Global Pharma retains rights to its know-how outside of those Asian countries identified above. The Meiji License continues in effect until the expiration of all payment obligations thereunder (including royalty payments and licensee revenue) ona product-by-product and country-by-country basis, unless earlier terminated by the parties. Pursuant to the terms of the Meiji License, in addition to eachparty’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, wealso have unilateral termination rights (i) in the event that we abandon the development and commercialization of SPR994 for efficacy, safety, legal orbusiness factors, and (ii) under certain circumstances arising out of the head license with Global Pharma. 20 Potentiator Platform Agreements Northern License Agreement In February 2015, our subsidiary, Spero Potentiator, Inc., or Spero Potentiator, entered into a license agreement, or the 2015 Northern LicenseAgreement, with Northern Antibiotics Oy (Ltd.) of Finland pursuant to which Northern granted to Spero Potentiator an exclusive, worldwide, perpetual andirrevocable license to develop and commercialize certain licensed compounds under certain patents, patent applications and know-how of Northern. Inexchange for such exclusive license, Spero Potentiator issued an equity interest in Spero Potentiator and entered into a subscription agreement andshareholders agreement with Northern. In June 2017, we repurchased Northern’s minority equity interest in Spero Potentiator in exchange for a one-timenonrefundable upfront fee of $1.0 million immediately and agreed to pay Northern $0.1 million within five days of the consummation of our initial publicoffering, or IPO, which event occurred and which amount was paid in November 2017. We also amended and restated the 2015 Northern License Agreement,which, as amended, we refer to as the 2017 Northern License Agreement, to include certain contingent cash payments as described below. The 2017 NorthernLicense Agreement has a perpetual term and no express termination rights. Under the 2017 Northern License Agreement, Northern granted to Spero Potentiator an exclusive, perpetual, irrevocable, worldwide license to developand commercialize certain licensed compounds under certain Northern patents, patent applications and know-how in consideration for one or more near-termmilestone payments up to an aggregate of $2.5 million based on either clinical milestones or the completion of our IPO, which event occurred and whichamount was paid in November 2017, and in consideration for up to an aggregate of $4.5 million upon receipt of marketing approval of SPR741 or othercompounds licensed from Northern which, in either case, is approved to be co-administered with a different antibiotic agent. With Northern, we haveestablished a joint development committee for the exchange of information and ideas regarding development of the licensed compounds, to monitor conductof activities and to provide and receive updates regarding new inventions. In addition, we provide periodic reports to Northern describing the developmentand commercialization of the licensed compounds, including SPR741. Cantab Agreements In June 2016, we entered into a stock purchase agreement, or the Cantab Agreement, with Pro Bono Bio PLC, a corporation organized under the lawsof England, and its affiliates, including PBB Distributions Limited, or PBB, Cantab Anti-Infectives Ltd., or CAI and New Pharma License Holdings Limited,or NPLH, in order to acquire NPLH and its intellectual property rights and assets relating to our Potentiator Platform, and our next-generation potentiatingagents in particular. The intellectual property portfolio we acquired includes patents which cover SPR206 as well as other novel potentiating agents,polymyxin derivatives and other LPS or outer-membrane bacterial disrupting agents. In exchange for the acquisition of NPLH, we paid PBB upfrontconsideration in the amount of $0.3 million and also agreed to pay a total of up to $5.8 million upon the achievement of specified clinical and regulatorymilestones and to pay £5.0 million ($6.7 million as of December 31, 2017) upon the achievement of a specified commercial milestone. We also agreed to payroyalties of a low single-digit percentage based on net sales of products licensed under the agreement. In addition, Spero Cantab issued an equity interest inSpero Cantab and entered into a subscription agreement and shareholders agreement with PBB. In July 2017, we repurchased PBB’s minority equity interestin Spero Cantab in exchange for a one-time nonrefundable upfront fee of approximately $0.2 million and we also amended the Cantab Agreement to increasethe contingent milestone payments to PBB by an aggregate of $0.1 million. The Cantab Agreement continues indefinitely, with royalty payment obligationsthereunder 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 suchcountry or the expiration in such country of the last to expire valid claim of any of the applicable patents. In addition, Spero holds a NIAID contract that partially funds the next-generation potentiating agent development program. That contract was novatedfrom CAI to Spero in December 2017. If NIAID exercises future contract options and we receive further funding from NIAID, then we will pay a portion of theproceeds to PBB pursuant to the Cantab Agreement. Vertex Assignment and License Agreement In May 2016, we entered into an agreement with Vertex Pharmaceuticals Incorporated, or Vertex, pursuant to which Vertex assigned to us rights topatents relating to SPR720 and SPR719 (an active metabolite). The acquired patent portfolio includes protection for composition of matter, method of use,and specific key intermediates used in the manufacture of SPR719 and SPR720. We also obtained certain know-how and a license to research, develop,manufacture and sell products for a proprietary compound, as well as a transfer of materials as part of the transaction. In return, we granted Vertex an exclusivelicense to the assigned patents and know-how for use outside of the diagnosis, treatment or prevention of bacterial infections. In exchange for the assignedpatents, we paid Vertex an upfront, one-time, non-refundable, non-creditable fee of $0.5 million, which was recognized as research and development expense,and we also agreed to pay Vertex future clinical, regulatory and commercial milestones up to $81.1 million in the aggregate and a royalty on the net sales oflicensed products ranging from mid-single digits to low double digits. The agreement continues in effect until the expiration of all payment obligationsthereunder, with royalty payment obligations continuing on a21 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 ofexpiration in such country of the last to expire applicable patent. Further, Vertex has the right to terminate the agreement if provided with notification fromus of our intent to cease all development or if no material development or commercialization efforts occur for a period of 12 consecutive months. Government Awards We have commitments of up to an aggregate of $10.1 million in non-dilutive funding from NIAID, the DoD and CARB-X. As noted above, ourPotentiator Platform program is partially funded by a $1.5 million award from the DoD and an award of $1.9 million from CARB-X. The DoD fundingsupports next-generation Potentiator Platform discovery and screening of SPR741 partner antibiotics. The CARB-X award supports screening and selectionof SPR741 partner antibiotics (with the exception of azithromycin) with the goal of taking one SPR741/partner combination through IND-enabling studies,culminating in the completion of a Phase 1 clinical trial. Our NIAID award provides up to $1.0 million of support for our SPR720 program. The scope of theprogram includes in vitro and in vivo assessments of SPR720 against tuberculous as well as nonclinical and manufacturing activities in support of bothtuberculous and NTM indications. Finally, NIAID is providing up to $5.7 million of funding for our next-generation Potentiator Platform molecules. Intellectual Property We strive to protect the proprietary technology that we believe is important to our business, including seeking and maintaining patents intended tocover our product candidates and compositions, their methods of use and processes for their manufacture and any other inventions that are commerciallyimportant to the development of our business. We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do notconsider appropriate for, patent protection. Our success will significantly depend on our ability to obtain and maintain patent and other proprietary protection for commercially importanttechnology and inventions and know-how related to our business, defend and enforce our patents, preserve the confidentiality of our trade secrets and operatewithout infringing the valid and enforceable patents and proprietary rights of third parties. We also rely on know-how and continuing technologicalinnovation to develop and maintain our proprietary position. Spero-Owned Intellectual Property Relating to SPR994 and Other Compounds Under Development We have patent applications directed to the composition of matter, formulation and/or use of SPR994, SPR741, SPR206 and SPR720 pending in theUnited States, Europe, Japan and other countries. Oral Carbapenem (SPR994) Our SPR994 program contains two pending U.S. provisional applications and one patent cooperation treaty, or PCT, application covering novelpreparations of tebipenem pivoxil as of December 31, 2017, all wholly owned by us. The provisional patent applications will be converted to PatentCooperation Treaty, or PCT, applications within one year of their filing dates. U.S. and foreign patents issuing from our tebipenem pivoxil patentapplications will have statutory expiration dates of December 2037 and February 2038. Patent term adjustments or patent term extensions could result in laterexpiration dates. Potentiator Platform (Including SPR741) The intellectual property portfolio for our Potentiator Platform contains patent applications and issued patents directed to composition of matter forSPR741 and analogs thereof, composition of matter with different structural features, combinations of SPR741 or other potentiators with other anti-bacterialcompounds, and methods of use for these novel compounds and compositions. As of December 31, 2017, we owned or were exclusively licensed eight U.S.patents and one U.S. provisional application; 94 foreign patents and nine pending foreign patent applications in a number of jurisdictions, includingAustralia, Brazil, Canada, China, the European Union member states, Israel, India, Indonesia, Japan, South Korea, Mexico, New Zealand, Russia, Singapore,South Africa, and Taiwan; four pending PCT applications; and two pending U.S. provisional patent applications directed to our Potentiator Platform. IssuedU.S. or foreign patents and any patents issuing any pending U.S., foreign or PCT applications covering SPR741 will have a statutory expiration date ofAugust 2027, February 2029, April 2037, May 2037, May 2038 and July 2038. Patent term adjustments or patent term extensions could result in laterexpiration dates. 22 Next-Generation Potentiator Platform Program (Including SPR206) The intellectual property portfolio for our next-generation polymyxin program contains patent applications and issued patents directed tocomposition of matter for polymyxin-like compounds with different structural features, pharmaceutical compositions comprising the same, and methods ofuse for these novel compounds and compositions. As of December 31, 2017, we owned one U.S. patent, three pending U.S. applications, five foreign patentsand 41 pending foreign patent applications in a number of jurisdictions including Argentina, Australia, Brazil, Canada, China, Colombia, Eurasia, theEuropean Union, Hong Kong, Israel, Indonesia, Japan, South Korea, Mexico, Russia, Singapore, South Africa, Taiwan and Vietnam. Issued U.S. or foreignpatents and any patents issuing any pending U.S., foreign or PCT applications covering our next-generation polymyxin program will have a statutoryexpiration date of November 2032, May 2034, March 2035 and November 2035. Patent term adjustments or patent term extensions could result in laterexpiration dates. Orphan NTM Infection Program (SPR720) Our intellectual property portfolio for our DNA Gyrase Inhibitor program includes issued patents and pending patent applications directed tocomposition of matter for SPR720, and its close analogs and prodrugs, novel solid forms of SPR720 and its prodrugs, methods of manufacture, and methodsof treatment using SPR720 alone and in combination with other antibiotic compounds. All patents and patent applications in the portfolio are wholly ownedby us. As of December 31, 2017, we owned ten issued U.S. patents, one pending U.S. patent application, 62 issued foreign patents, and 27 pending foreignpatent applications. The issued and foreign patents are in a number of jurisdictions including the European Union and its member states, Argentina, Australia,Brazil, Canada, China, Hong Kong, Indonesia, Israel, Japan, South Korea, Mexico, New Zealand, the Philippines, Russia, Singapore, South Africa, andTaiwan. Issued U.S. and foreign patents, and patents issuing from pending U.S. and foreign applications will have statutory expiration dates of January 2032,June 2032 and July 2033. Patent term adjustments or patent term extensions could result in later expiration dates. Patent Term and Patent Term Extensions The term of individual patents depends upon the legal term for patents in the countries in which they are obtained. In most countries, including theUnited States, the patent term is 20 years from the earliest filing date of a non-provisional patent application. In the United States, a patent’s term may belengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in examining andgranting a patent, or may be shortened if a patent is terminally disclaimed over an earlier filed patent. The term of a patent that covers a drug, biologicalproduct or medical device approved pursuant to a pre-market approval may also be eligible for patent term extension when FDA approval is granted,provided statutory and regulatory requirements are met. The length of the patent term extension is related to the length of time the drug is under regulatoryreview while the patent is in force. The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, permits a patent termextension of up to five years beyond the expiration date set for the patent. Patent extension cannot extend the remaining term of a patent beyond a total of 14years from the date of product approval, only one patent applicable to each regulatory review period may be granted an extension and only those claimsreading on the approved drug are extended. Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent thatcovers an approved drug. Trade Secrets We rely, in some circumstances, on trade secrets to protect our unpatented technology. However, trade secrets can be difficult to protect. We seek toprotect our trade secrets and proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisorsand contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises andphysical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems,agreements or security measures may be breached. We may not have adequate remedies for any breach and could lose our trade secrets through such a breach.In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors orcollaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting trade secrets, know-howand inventions. 23 Competition The biopharmaceutical industry is characterized by intense competition and rapid innovation. Our potential competitors include large pharmaceuticaland biotechnology companies, specialty pharmaceutical companies and generic drug companies. Many of our potential competitors have greater financial,technical human resources than we do, as well as greater experience in the discovery and development of product candidates, obtaining FDA and otherregulatory approvals of products and the commercialization of those products. Accordingly, our potential competitors may be more successful than us inobtaining FDA approval drugs and achieving widespread market acceptance. We anticipate that we will face intense and increasing competition as new drugsenter the market and advanced technologies become available. Finally, the development of new treatment methods for the diseases we are targeting couldrender our product candidates non-competitive or obsolete. We believe the key competitive factors that will affect the development and commercial success of most advanced product candidate, SPR994, ifapproved, will be efficacy, coverage of drug-resistant strains bacteria, safety and tolerability profile, reliability, convenience of oral dosing, price, availabilityof reimbursement from governmental and other third-party payers and susceptibility to drug resistance. We are developing SPR994 as an oral antibiotic for use as a monotherapy for the treatment of resistant and MDR infections. If approved, SPR994would compete with several antibiotics currently in clinical development, including C-Scape from Achaogen, Inc., sulopenem from Iterum TherapeuticsLimited, eravacycline from Tetraphase Pharmaceuticals, Inc. and omadacycline from Paratek Pharmaceuticals, Inc. We also expect that SPR994, if approved, would compete with future and current generic versions of marketed antibiotics. If approved, we believe that SPR994 would compete effectively against these compounds on the basis of SPR994’s potential: •broad range of activity against a wide variety of resistant and MDR Gram-negative bacteria; •low probability of drug resistance; •a favorable safety and tolerability profile; •a convenient oral dosing regimen and opportunity to step-down from IV-administered therapy; and •as a monotherapy treatment for MDR Gram-negative infections. We are also developing our Potentiator Platform, SPR741 and SPR206, as IV-administered agents for Gram-negative infections in the hospital. Ifapproved, SPR741 or our single-agent candidate SPR206 would compete with several IV-administered product candidates marketed for the treatment ofGram-negative infections, including Avycaz from Allergan plc and Pfizer Inc. and Zerbaxa from Merck & Co. There are also a number of IV-administeredproduct candidates in late-stage clinical development that are intended to treat Gram-negative infections, including plazomicin from Achaogen Inc.,meropenem-vaborbactam from The Medicines Company, cefiderocol from Shionogi & Co. Ltd., eravacycline IV from Tetraphase Pharmaceuticals Inc. andrelabactam from Merck & Co. Each of these products and product candidates employs a mechanism of action that differs from the mechanism of actionemployed by SPR741. We are developing SPR720 as the first approved oral treatment for NTM infection. There are currently no approved agents to treat NTMinfection. Current SOC is a combination of generically available options. There is one drug in late-stage development, Arikayce from Insmed. It is aninhaled version of a commonly used drug in the hospital setting called amikacin. If approved, it would potentially compete with SPR720. It should be notedthat combination therapy is recommended for treating this condition. Government Regulation and Product Approval Government authorities in the United States, at the federal, state and local level, and in other countries, extensively regulate, among other things, theresearch, development, clinical trials, testing, manufacture, including any manufacturing changes, authorization, pharmacovigilance, adverse event reporting,recalls, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, import and export of pharmaceutical products andproduct candidates such as those we are developing. The processes for obtaining regulatory approvals in the United States and in foreign countries, alongwith subsequent compliance with applicable statutes and regulations, require the expenditure of substantial time and financial resources. 24 Recent Changes in the Regulatory Landscape The FDA’s Division of Anti-Infective Products, or DAIP, has undergone evolution in recent years, primarily driven by concerns that increasingly lesseffective antibiotics may have been approved in the last 10 to 15 years and a desire to bring what DAIP perceives to be greater statistical rigor to theiranalyses. The impact of this was a rethinking of how antibiotic efficacy is measured in clinical trials, and a review of the statistical tools used to analyze thedata. In February 2015, the FDA published guidance documents for industry entitled “Complicated Urinary Tract Infections: Developing Drugs forTreatment” and guidance entitled “Complicated Intra-Abdominal Infections: Developing Drugs for Treatment.” The purpose of these guidance documents isto address considerations surrounding the clinical development of drugs for cUTI and cIAI indications, including clinical trial design and efficacy.Additionally, in August 2017, the FDA published a guidance document entitled “Antibacterial Therapies for Patients With an Unmet Medical Need for theTreatment of Serious Bacterial Diseases,” setting forth its current thinking with respect to development programs and clinical trial designs for antibacterialdrugs to treat serious bacterial diseases. On December 13, 2016, President Obama signed into law the Cures Act, which is intended to accelerate medical product development. Section 3042of the Cures Act establishes the limited population pathway for certain antibacterial or antifungal drugs intended to treat targeted groups of patients sufferingfrom serious or life-threatening infections where unmet need exists. Approvals of these limited population drugs are expected to rely on data from smallerclinical trials than would ordinarily be required by the FDA. To date, the FDA has not approved any drugs utilizing the limited population pathway. Fordrugs approved through this pathway, the statement “Limited Population” will appear prominently next to the drug’s name in labeling, which is intended toprovide notice to healthcare providers that the drug is indicated for use in a limited and specific population of patients. U.S. Government Regulation In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations. The process ofobtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires theexpenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product developmentprocess, approval process or after approval, may subject an applicant to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approvepending NDAs, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters, product recalls, product seizures, total or partialsuspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil and/or criminal penalties.The process required by the FDA before a drug may be marketed in the United States generally involves the following: •completion of preclinical laboratory tests, animal studies and formulation studies in compliance with GLP regulations; •submission to the FDA of an IND which must become effective before human clinical trials may begin; •approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated; •performance of adequate and well-controlled human clinical trials in accordance with GCP to establish the safety and efficacy of theproposed drug product for each indication; •submission to the FDA of an NDA; •satisfactory completion of an FDA advisory committee review, if applicable; •satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the product is produced toassess compliance with current good manufacturing practices, or cGMP, and to assure that the facilities, methods and controls areadequate to preserve the drug’s identity, strength, quality and purity; •satisfactory completion of audits of clinical trial sites conducted by FDA to assure compliance with GCPs and the integrity of clinicaldata; and •payment of user fees and securing FDA review and approval of the NDA.Preclinical Studies Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess potential safetyand efficacy. Preclinical tests intended for submission to the FDA to support the safety of a product candidate must be conducted in compliance with GLPregulations and the United States Department of Agriculture’s Animal Welfare Act. A drug sponsor must submit the results of the preclinical tests, togetherwith manufacturing information, analytical data and any available clinical data or literature, among other things, to the FDA as part of an IND. Somenonclinical testing may continue even25 after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns orquestions related to one or more proposed clinical trials and places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA mustresolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials tocommence. Clinical Trials Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators inaccordance with GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participationin any clinical trial along with the requirement to ensure that the data and results reported from the clinical trials are credible and accurate. Clinical trials areconducted under protocols detailing, among other things, the objectives of the trial, the criteria for determining subject eligibility, the dosing plan, theparameters to be used in monitoring safety, the procedure for timely reporting of adverse events, and the effectiveness criteria to be evaluated. A protocol foreach clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each institutionparticipating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution. Information about certainclinical trials must be submitted within specific timeframes to the NIH for public dissemination on its www.clinicaltrials.gov website.Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined: Phase 1: The drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosagetolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness. During Phase 1 clinical trials,sufficient information about the investigational drug’s or biological product’s pharmacokinetics and pharmacological effects may be obtained to permit thedesign of well-controlled and scientifically valid Phase 2 clinical trials. Phase 2: The drug is administered to a larger, but still limited patient population to identify possible adverse effects and safety risks, to preliminarilyevaluate the efficacy of the product for specific targeted indications and to determine dosage tolerance and optimal dosage. Phase 2 clinical trials aretypically well-controlled and closely monitored. Phase 3: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlledclinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profileof the product, and to provide adequate information for the labeling of the product. Phase 3 clinical trials usually involve a larger number of participants thana Phase 2 clinical trial. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse eventsoccur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Results from one trial may not bepredictive of results from subsequent trials. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds,including a finding that the research subjects are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of aclinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated withunexpected serious harm to patients. Marketing Approval Assuming successful completion of the required clinical testing, the results of the nonclinical studies and clinical trials, together with detailedinformation relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDArequesting approval to market the product for one or more indications. In most cases, the submission of an NDA is subject to a substantial application userfee. Under the Prescription Drug User Fee Act, or PDUFA, guidelines that are currently in effect, the FDA has a goal of ten months from the date of “filing” ofa standard NDA for a new molecular entity to review and act on the submission. This review typically takes twelve months from the date the NDA issubmitted to FDA because the FDA has approximately two months to make a “filing” decision. Furthermore, the FDA is not required to complete its reviewwithin the established ten-month timeframe and may extend the review process by issuing requests for additional information or clarification. 26 The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whetherthey are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event,the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it forfiling. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA to determine, among otherthings, whether the drug is safe and effective and whether the facilities in which it is manufactured, processed, packaged or held meet standards designed toassure the product’s continued safety, quality and purity. In addition, under the Pediatric Research Equity Act of 2003, as amended and reauthorized, certain NDAs or supplements to an NDA must contain datathat are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosingand administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of theapplicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults or full or partial waivers from thepediatric data requirements. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan designation. The FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, plan to mitigate any identified or suspected serious risks.The REMS plan could include medication guides, physician communication plans, assessment plans, and elements to assure safe use, such as restricteddistribution methods, patient registries, or other risk minimization tools. The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, includingclinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and underwhat conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when makingdecisions. Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve anapplication unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistentproduction of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical trialsites to assure compliance with GCP. The FDA generally accepts data from foreign clinical trials in support of an NDA if the trials were conducted under an IND. If a foreign clinical trial isnot conducted under an IND, the FDA nevertheless may accept the data in support of an NDA if the study was conducted in accordance with GCPs and theFDA is able to validate the data through an on-site inspection, if deemed necessary. Although the FDA generally requests that marketing applications besupported by some data from domestic clinical trials, the FDA may accept foreign data as the sole basis for marketing approval if (1) the foreign data areapplicable to the U.S. population and U.S. medical practice, (2) the studies were performed by clinical investigators with recognized competence, and (3) thedata may be considered valid without the need for an on-site inspection or, if the FDA considers the inspection to be necessary, the FDA is able to validatethe data through an on-site inspection or other appropriate means. The testing and approval process for an NDA requires substantial time, effort and financial resources, and each may take several years to complete.Data obtained from preclinical and clinical testing are not always conclusive and may be susceptible to varying interpretations, which could delay, limit orprevent regulatory approval. The FDA may not grant approval on a timely basis, or at all. After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding themanufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response lettergenerally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional clinical orpreclinical testing in order for FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide thatthe application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA willtypically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specificindications. Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings orprecautions be included in the product labeling , require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug’ssafety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, includingdistribution and use restrictions or other risk management mechanisms under a REMS which can materially affect the potential market and profitability of theproduct. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. After approval,some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to furthertesting requirements and FDA review and approval. 27 Special FDA Expedited Review and Approval Programs The FDA has various programs, including fast track designation, accelerated approval and priority review, that are intended to expedite or simplify theprocess for the development and FDA review of drugs that are intended for the treatment of serious or life threatening diseases or conditions and demonstratethe potential to address unmet medical needs. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDAreview procedures. To be eligible for a fast track designation, the FDA must determine, based on the request of a sponsor, that a product is intended to treat a serious orlife threatening disease or condition and demonstrates the potential to address an unmet medical need, or if the drug qualifies as a QIDP under the GAIN Act.The FDA will determine that a product will fill an unmet medical need if it will provide a therapy where none exists or provide a therapy that may bepotentially superior to existing therapy based on efficacy or safety factors. Fast track designation provides additional opportunities for interaction with theFDA’s review team and may allow for rolling review of NDA components before the completed application is submitted, if the sponsor provides a schedulefor the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsorpays any required user fees upon submission of the first section of the NDA. The FDA may decide to rescind the fast track designation if it determines that thequalifying criteria no longer apply. The FDA may give a priority review designation to drugs that offer major advances in treatment for a serious condition, or provide a treatment whereno adequate therapy exists. Most products that are eligible for fast track designation are also likely to be considered appropriate to receive a priority review.A priority review means that the goal for the FDA to review an application is six months, rather than the standard review of ten months under current PDUFAguidelines. Under the current PDUFA agreement, these six and ten month review periods are measured from the “filing” date rather than the receipt date forNDAs for new molecular entities, which typically adds approximately two months to the timeline for review and decision from the date of submission. In addition, products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeuticbenefit over existing treatments may receive accelerated approval, meaning that it may be approved on (i) the basis of adequate and well-controlled clinicaltrials establishing that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or (ii) on an intermediateclinical endpoint that can be measured earlier than irreversible morbidity or mortality and that is reasonably likely to predict an effect on irreversiblemorbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack ofalternative treatments. As a condition of approval, the FDA may require a sponsor of a drug receiving accelerated approval to perform post-marketing studiesto verify and describe the predicted effect on irreversible morbidity or mortality or other clinical endpoint, and the drug may be subject to acceleratedwithdrawal procedures. Moreover, under the provisions of the Food and Drug Administration Safety and Innovation Act, or FDASIA, enacted in 2012, a sponsor can requestdesignation of a product candidate as a “breakthrough therapy.” A breakthrough therapy is defined as a drug that is intended, alone or in combination withone or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstratesubstantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early inclinical development. Drugs designated as breakthrough therapies are also eligible for accelerated approval. The FDA must take certain actions, such asholding timely meetings and providing advice, intended to expedite the development and review of an application for approval of a breakthrough therapy. Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions forqualification or decide that the time period for FDA review or approval will not be shortened. Post-Approval Requirements Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among otherthings, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverseexperiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject toprior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which suchproducts are manufactured, as well as new application fees for supplemental applications with clinical data. The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness aftercommercialization. 28 In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register theirestablishments with the FDA and some state agencies, and are subject to periodic unannounced inspections by the FDA for compliance with cGMPrequirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulationsalso require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the sponsor and anythird-party manufacturers. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control tomaintain cGMP compliance. The FDA strictly regulates the marketing, labeling, advertising and promotion of drug products that are placed on the market. A product cannot becommercially promoted before it is approved, and approved drugs may generally be promoted only for their approved indications. Promotional claims mustalso be consistent with the product’s FDA-approved label, including claims related to safety and effectiveness. The FDA and other federal agencies alsoclosely regulate the promotion of drugs in specific contexts such as direct-to-consumer advertising, industry-sponsored scientific and education activities,and promotional activities involving the Internet and social media. Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or ifproblems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or withmanufacturing processes, or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safetyinformation; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMSprogram. Other potential consequences of regulatory non-compliance include, among other things: •restrictions on, or suspensions of, the marketing or manufacturing of the product, complete withdrawal of the product from the market orproduct recalls; •interruption of production processes, including the shutdown of manufacturing facilities or production lines or the imposition of newmanufacturing requirements; •fines, warning letters or other enforcement letters or holds on post-approval clinical trials; •refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license approvals; •product seizure or detention, or refusal to permit the import or export of products; or •injunctions or the imposition of civil or criminal penalties.In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates thedistribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states.Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability indistribution.Exclusivity and Approval of Competing ProductsHatch-Waxman Exclusivity Market and data exclusivity provisions under the FDCA can delay the submission or the approval of certain applications for competing products. TheFDCA provides a five-year period of non-patent data exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemicalentity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the moleculeor ion responsible for the activity of the drug substance. We believe that our product candidates are new chemical entities. During the exclusivity period, theFDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company that references thepreviously approved drug. However, an ANDA or 505(b)(2) NDA may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA, or supplement to an existing NDA or 505(b)(2) NDAif new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant, are deemed by the FDA to be essential tothe approval of the application or supplement. Three-year exclusivity may be awarded for changes to a previously approved drug product, such as newindications, dosages, strengths or dosage forms of an existing drug. This three-year exclusivity covers only the conditions of use associated with the newclinical investigations and, as a general matter, does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for generic versions of the original,unmodified drug product. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting afull NDA would be required to conduct or obtain a right of reference to all of the29 preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness. For drug products that contain an“antibiotic” ingredient approved prior to 1997, the statute imposes certain limitations on the award of non-patent exclusivity. However, we do not believethese limitations would apply to SPR994 or any of our other investigational antibiotics. Qualified Infectious Disease Product Exclusivity Under the GAIN Act provisions of FDASIA, which was signed into law in July 2012, the FDA may designate a product as a qualified infectious diseaseproduct, or QIDP. In order to receive this designation, a drug must qualify as an antibiotic or antifungal drug for human use intended to treat serious or life-threatening infections, including those caused by either (i) an antibiotic or antifungal resistant pathogen, including novel or emerging infectious pathogens,or (ii) a so-called “qualifying pathogen” found on a list of potentially dangerous, drug-resistant organisms to be established and maintained by the FDAunder the new law. A sponsor must request such designation before submitting a marketing application. We obtained a QIDP designation for the oralformulation of SPR994 for cUTI in November 2016 and CABP and DFI in April 2017, and expect to request QIDP designations for our other productcandidates prior to submitting a marketing application for such product candidates, as appropriate. Upon approving an application for a qualified infectious disease product, the FDA will extend by an additional five years any non-patent marketingexclusivity period awarded, such as a five-year exclusivity period awarded for a new molecular entity. This extension is in addition to any pediatricexclusivity extension awarded, and the extension will be awarded only to a drug first approved on or after the date of enactment. The GAIN Act provisions prohibit the grant of an exclusivity extension where the application is a supplement to an application for which anextension is in effect or has expired, is a subsequent application for a specified change to an approved product, or is an application for a product that does notmeet the definition of qualified infectious disease product based on the uses for which it is ultimately approved.Foreign Regulation In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales anddistribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities offoreign countries or economic areas, such as the European Union and Australia, before we may commence clinical trials or market products in those countriesor areas. The approval process and requirements governing the conduct of clinical trials, product authorization, pricing and reimbursement vary greatly fromplace to place, and the time may be longer or shorter than that required for FDA approval. Before clinical trials may be conducted in any EU Member State, a sponsor must submit a clinical trial authorization application, or CTA, which mustbe approved in each country in which the sponsor intends to perform a clinical trial. The procedure for submitting a CTA was set forth in an existing EUClinical Trial Directive. However, the way clinical trials are conducted in the EU will undergo a major change when the Clinical Trial Regulation becomeseffective in 2019. The Regulation harmonizes the assessment and supervision processes for clinical trials throughout the EU, via an EU portal and database.The European Medicines Agency, or the EMA, will set up and maintain the portal and database, in collaboration with the Member States and the EuropeanCommission.The goal of Clinical Trial Regulation is to create an environment that is favorable to conducting clinical trials in the EU, with the highest standards ofsafety for participants and increased transparency of trial information. The Regulation will require consistent rules for conducting clinical trials throughoutthe EU and information on the authorization, conduct and results of each clinical trial carried out in the EU to be publicly available.When the Regulation becomes applicable, it will replace the existing EU Clinical Trial Directive and national legislation that was put in place toimplement the Directive. It will also apply to trials authorized under the previous legislation if they are still ongoing three years after the Regulation becomeseffective. The authorization and oversight of clinical trials will remain the responsibility of Member States, with EMA managing the database andsupervising content publication on the public website. Under European Union regulatory systems, a company may submit marketing authorization applications either under a centralized or decentralizedprocedure. The centralized procedure is compulsory for medicinal products produced by biotechnology or those medicinal products containing new activesubstances for specific indications such as the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, viral diseases and designated orphanmedicines, and optional for other medicines which are highly innovative. Under the centralized procedure, a marketing application is submitted to theEuropean Medicines Agency where it will be evaluated by the Committee for Medicinal Products for Human Use and a favorable opinion typically results inthe grant by the European Commission of a single marketing authorization that is valid for all European Union member states within 67 days of receipt of theopinion. The initial marketing authorization is valid for five years, but once renewed is usually valid for an unlimited period.30 The decentralized procedure provides for approval by one or more “concerned” member states based on an assessment of an application performed by onemember state, known as the “reference” member state. Under the decentralized approval procedure, an applicant submits an application, or dossier, andrelated materials to the reference member state and concerned member states. The reference member state prepares a draft assessment and drafts of the relatedmaterials within 120 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report, each concernedmember state must decide whether to approve the assessment report and related materials. If a member state does not recognize the marketing authorization,the disputed points are eventually referred to the European Commission, whose decision is binding on all member states. Pharmaceutical Coverage and Reimbursement Sales of our products will depend, in part, on the availability and extent of coverage and reimbursement by third-party payors, such as governmenthealth programs, including Medicare and Medicaid, commercial insurance and managed healthcare organizations. These third-party payors are increasinglychallenging the price and limiting the coverage and reimbursement amounts for medical products and services. The containment of healthcare costs has become a priority for federal and state governments, and the prices of drugs have been a focus in this effort.The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, includingprice controls, restrictions on coverage and reimbursement, and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue andresults. Decreases in third-party reimbursement for our product candidates or a decision by a third-party payor to not cover our product candidates couldreduce physician usage of the product candidate and have a material adverse effect on our sales, results of operations and financial condition. In the United States, the federal government provides health insurance for people who are 65 or older, and certain people with disabilities or certainconditions irrespective of their age, through the Medicare program, which is administered by the Centers for Medicare & Medicaid Services, or CMS.Coverage and reimbursement for products and services under Medicare are determined in accordance with the Social Security Act and pursuant to regulationspromulgated by CMS, as well as the agency’s coverage and reimbursement guidance and determinations. Drugs and other products that are utilized withinthe hospital in-patient setting are typically reimbursed under a prospective payment system, or a predetermined payment amount that is based on diagnosisrelated groups, or DRGs for Medicare patients and under a bundled payment for commercially insured patients. These payment amounts differ by type ofdiagnoses, procedures performed and the severity of the patient’s condition, among other things. A drug that is used in a treatment or procedure under aspecific DRG or bundled payment is generally not eligible for any separate payment. For catastrophic cases where costs greatly exceed the bundled paymentamount, the hospital may be eligible for an outlier payment that is intended to cover part of the expense above the standard payment. Medicaid is a health insurance program for low-income children, families, pregnant women, and people with disabilities that is jointly funded by thefederal and state governments, but administered by the states. In general, state Medicaid programs are required to cover drugs and biologicals ofmanufacturers that have entered into a Medicaid Drug Rebate Agreement, although such drugs and biologicals may be subject to prior authorization or otherutilization controls. The U.S. Congress and state legislatures from time to time propose and adopt initiatives aimed at cost containment, which could impact our ability tosell our products profitably. For example, the federal Patient Protection and Affordable Care Act, as amended by the Health Care and EducationReconciliation Act of 2010, known collectively as the ACA, among other things, contains provisions that may reduce the profitability of drug productsthrough increased rebates for drugs reimbursed by Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discountsfor certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal health care programs. Adoption ofgeneral controls and measures, coupled with the tightening of restrictive policies in jurisdictions with existing controls and measures, could limit paymentsfor pharmaceutical drugs. The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebateagreement with the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds for manufacturers’outpatient drugs furnished to Medicaid patients. The ACA also expanded the universe of Medicaid utilization subject to drug rebates by requiringpharmaceutical manufacturers to pay rebates on Medicaid managed care utilization and by enlarging the population potentially eligible for Medicaid drugbenefits. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. Both Congress and President Trump haveexpressed their intention to repeal or repeal and replace the ACA, and as a result certain sections of the ACA have not been fully implemented or effectivelyrepealed. The uncertainty around the future of the ACA, and in particular the impact to reimbursement levels, may lead to uncertainty or delay in thepurchasing decisions of our customers, which may in turn negatively impact our product sales. If there are not adequate reimbursement levels, our businessand results of operations could be adversely affected.31 In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirementsgoverning drug pricing vary widely from country to country. For example, in the EU, the sole legal instrument at the EU level governing the pricing andreimbursement of medicinal products is Council Directive 89/105/EEC, or the Price Transparency Directive. The aim of this Directive is to ensure that pricingand reimbursement mechanisms established in the EU Member States are transparent and objective, do not hinder the free movement of and trade inmedicinal products in the EU, and do not hinder, prevent or distort competition on the market. The Price Transparency Directive does not provide anyguidance concerning the specific criteria on the basis of which pricing and reimbursement decisions are to be made in individual EU Member States, nor doesit have any direct consequence for pricing or reimbursement levels in individual EU Member States. The EU Member States are free to restrict the range ofmedicinal products for which their national health insurance systems provide reimbursement, and to control the prices and/or reimbursement levels ofmedicinal products for human use. An EU Member State may approve a specific price or level of reimbursement for the medicinal product, or alternativelyadopt a system of direct or indirect controls on the profitability of the company responsible for placing the medicinal product on the market, includingvolume-based arrangements, caps and reference pricing mechanisms. Health Technology Assessment, or HTA, of medicinal products is becoming an increasingly common part of the pricing and reimbursementprocedures in some EU Member States, including the United Kingdom, France, Germany, Ireland, Italy and Sweden. The HTA process in the EU MemberStates is governed by the national laws of these countries. HTA is the procedure according to which the assessment of the public health impact, therapeuticimpact, and the economic and societal impact of use of a given medicinal product in the national healthcare systems of the individual country is conducted.HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost-effectiveness of individual medicinal products as well as theirpotential implications for the healthcare system. Those elements of medicinal products are compared with other treatment options available on the market.The outcome of HTA regarding specific medicinal products will often influence the pricing and reimbursement status granted to these medicinal products bythe competent authorities of individual EU Member States. The extent to which pricing and reimbursement decisions are influenced by the HTA of thespecific medicinal product vary between EU Member States. A negative HTA of one of our products by a leading and recognized HTA body, such as theNational Institute for Health and Care Excellence in the United Kingdom, could not only undermine our ability to obtain reimbursement for such product inthe EU Member State in which such negative assessment was issued, but also in other EU Member States. For example, EU Member States that have not yetdeveloped HTA mechanisms could rely to some extent on the HTA performed in countries with a developed HTA framework, such as the United Kingdom,when adopting decisions concerning the pricing and reimbursement of a specific medicinal product.Other Healthcare Laws Although we currently do not have any products on the market, if our product candidates are approved and we begin commercialization, we may besubject to additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions in which weconduct our business. Such laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy and security and physiciansunshine laws and regulations. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, wemay be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations,exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate ourbusiness and our financial results.Manufacturing We do not own or operate manufacturing facilities for the production of any of our product candidates, nor do we have plans to develop our ownmanufacturing operations in the foreseeable future. We currently rely on a limited number of third-party contract manufacturers for all of our required rawmaterials, drug substance, and finished drug product for our preclinical research and clinical trials. We currently employ internal resources to manage ourmanufacturing. We intend to have two suppliers for SPR994’s active pharmaceutical ingredient. Each supplier would be capable of producing kilogramquantities for commercial scale and would be able to produce over 10kg of active pharmaceutical ingredient under cGMP conditions.32 Employees As of December 31, 2017, we had 35 full-time employees, including a total of 12 employees with M.D. or Ph.D. degrees. 22 employees were primarilyengaged in research and development activities, with the rest providing administrative, business and operations support. None of our employees arerepresented by labor unions or covered by collective bargaining agreements. We consider our employee relations to be good. Our Corporate Information We were formed as Spero Therapeutics, LLC in December 2013 under the laws of the State of Delaware. On June 30, 2017, through a series oftransactions, Spero Therapeutics, LLC merged with and into Spero Therapeutics, Inc. (formerly known as Spero OpCo, Inc.), a Delaware corporation. Ourprincipal executive offices are located at 675 Massachusetts Avenue, Cambridge, Massachusetts 02139, and our telephone number is (857) 242-1600. Ourwebsite address is www.sperotherapeutics.com. Available Information Financial and other information about us is available on our website. We make available on our website, free of charge, copies of our Annual Reporton Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and ExchangeCommission, or the SEC. In addition, we have previously filed registration statements and other documents with the SEC. Any document we file may beinspected, without charge, at the SEC’s public reference room at 100 F Street NE, Washington, DC 20549, or at the SEC’s internet address at www.sec.gov.These website addresses are not intended to function as hyperlinks, and the information contained in our website and in the SEC’s website is not intended tobe a part of this filing. Information related to the operation of the SEC’s public reference room may be obtained by calling the SEC at 800-SEC-0330. Item 1A. Risk Factors.Careful consideration should be given to the following risk factors, in addition to the other information set forth in this Annual Report on Form 10-K, including the section of this Annual Report on Form 100-K titled “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and our consolidated financial statements and related notes, and in other documents that we file with the SEC, in evaluating our company andour business. Investing in our common stock involves a high degree of risk. If any of the events described in the following risk factors and the risks describedelsewhere in this Annual Report on Form 10-K occurs, our business, financial condition, results of operations and future growth prospects could bematerially and adversely affected and the trading price of our common stock could decline. Our actual results could differ materially from those anticipatedin the forward-looking statements as a result of factors that are described below and elsewhere in this Annual Report on Form 10-K.Risks Related to Our Financial Position and Need for Additional CapitalWe have incurred net losses in each year since our inception and anticipate that we will continue to incur significant losses for the foreseeable future, andif we are unable to achieve and sustain profitability, the market value of our common stock will likely decline.We are a clinical-stage biopharmaceutical company with a limited operating history. We have not generated any revenue from the sale of products andhave incurred losses in each year since our inception in 2013. Our net loss was $39.9 million and $32.6 million for the years ended December 31, 2017 and2016, respectively. All of our product candidates are in development, none have been approved for sale and we may never have a product candidateapproved for commercialization. We have financed our operations primarily through private placements of our preferred stock, collaborations andgovernment funding for research and development. We have devoted substantially all of our financial resources and efforts to research and development,including preclinical and clinical development.33 We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future as we continue to advance our productcandidates through preclinical and clinical development and seek marketing approval for such candidates if clinical trials are successful. Our expenses willalso increase substantially if and as we: •conduct additional clinical trials and studies of our product candidates; •continue to discover and develop additional product candidates; •establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we may obtain marketingapproval; •establish manufacturing and supply chain capacity sufficient to provide commercial quantities of any product candidates for which we mayobtain marketing approval; •maintain, expand and protect our intellectual property portfolio; •hire additional clinical, scientific and commercial personnel; •add operational, financial and management information systems and personnel, including personnel to support our product development andplanned future commercialization efforts, as well as to support our transition to a public reporting company; and •acquire or in-license other product candidates and technologies.If our product candidates fail to demonstrate safety and efficacy in clinical trials, do not gain regulatory approval, or do not achieve market acceptancefollowing regulatory approval and commercialization, we may never become profitable. Even if we achieve profitability in the future, we may not be able tosustain profitability in subsequent periods. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect onour stockholders’ equity and working capital. If we are unable to achieve and sustain profitability, the market value of our common stock will likely decline.Because of the numerous risks and uncertainties associated with developing biopharmaceutical products, we are unable to predict the extent of anyfuture losses or when, if ever, we will become profitable. Our expenses could increase if we are required by the FDA, or any comparable foreign regulatoryauthority to perform studies in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of any ofour product candidates.We expect that we will need substantial additional funding. If we are unable to raise capital when needed, or do not receive payment under ourgovernment awards, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive and uncertainprocess that takes years to complete. We expect that our expenses will increase substantially as we commence and advance our planned clinical trials andother studies of SPR994, seek marketing approval for SPR994 if clinical trials are successful, and evaluate the advancement of our other product candidates,including SPR741, SPR206 and SPR720. If we obtain marketing approval for SPR994 or any other product candidate, we expect to incur significantcommercialization expenses related to product sales, marketing, distribution and manufacturing. Some of these expenses may be incurred in advance ofmarketing approval, and could be substantial. Accordingly, we will be required to obtain further funding through public or private equity offerings, debtfinancings, collaborations, licensing arrangements, government funding or other sources. Adequate additional financing may not be available to us onacceptable terms, or at all. Our failure to raise capital as and when needed would have a negative effect on our financial condition and our ability to pursueour business strategy.We believe that our existing cash and cash equivalents as of December 31, 2017 will enable us to fund our operating expenses and capital expenditurerequirements into the second quarter of 2019. Our cash forecasts are based on assumptions that may prove to be wrong, and we could use our available capitalresources sooner than we currently expect. Changing circumstances could cause us to consume capital significantly faster than we currently anticipate, andwe may need to spend more than currently expected because of circumstances beyond our control. Our future funding requirements, both short-term and long-term, will depend on many factors, including: •the timing and costs of our ongoing and planned clinical trials of SPR994; •the timing and costs of our ongoing clinical trials of SPR741; •the initiation, progress, timing, costs and results of preclinical studies and clinical trials of our other product candidates and potential productcandidates; •the amount of funding that we receive under government awards that we have applied for;34 •the number and characteristics of product candidates that we pursue; •the outcome, timing and costs of seeking regulatory approvals; •the costs of commercialization activities for SPR994 and other product candidates if we receive marketing approval, including the costs andtiming of establishing product sales, marketing, distribution and manufacturing capabilities; •the receipt of marketing approval and revenue received from any potential commercial sales of SPR994; •the terms and timing of any future collaborations, licensing or other arrangements that we may establish; •the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing,prosecution, defense and enforcement of any patents or other intellectual property rights, including milestone and royalty payments and patentprosecution fees that we are obligated to pay pursuant to our license agreements; •the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defendingagainst any intellectual property related claims; •the costs of operating as a public company; and •the extent to which we in-license or acquire other products and technologies.As of December 31, 2017, our non-dilutive sources of funding consisted of awards from CARB-X and the DoD that provide partial funding for thedevelopment of our Potentiator Platform product candidates, including SPR741, and an award from NIAID, for our SPR720 program. Our DoD cooperativeagreement is structured as a single, two-year $1.5 million award. We are eligible for the full funding from the DoD and there are no options to be exercised ata later date. The NIAID award is structured as a base period followed by a single option. For the base period of March 1, 2017 through February 28, 2018,NIAID committed funding of approximately $0.6 million for the SPR720 program. In February 2018 NIAID exercised the approximately $0.4 million option,which will have a period of performance from March 1, 2018 through February 28, 2019. The CARB-X award is structured as a base period followed by twosequential options. In March 2017, CARB-X committed funds of $1.5 million to support SPR741 development efforts for the period from April 1, 2017 toMarch 31, 2018. On March 12, 2018, CARB-X committed an additional $0.4 million related to the first option for a period from December 1, 2017 to March31, 2018. There will be no additional options exercised under the CARB-X award. The NIAID and CARB-X awards are subject to termination forconvenience at any time by NIAID and CARB-X. Neither organization is obligated to provide funding to Spero beyond the base period amounts fromCongressionally approved annual appropriations.Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or productcandidates.Unless and until we can generate a substantial amount of revenue from our product candidates, we expect to finance our future cash needs throughpublic or private equity offerings, debt financings or collaborations, licensing arrangements and government funding arrangements. In addition, we may seekadditional capital due to favorable market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or futureoperating plans.To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interestof our then existing stockholders may be materially diluted, and the terms of these securities could include liquidation or other preferences and anti-dilutionprotections that could adversely affect the rights of our stockholders. In addition, debt financing, if available, would result in increased fixed paymentobligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt,making capital expenditures or declaring dividends, which could adversely affect our ability to conduct our business. In addition, securing additionalfinancing would require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention awayfrom day-to-day activities, which may adversely affect our management’s ability to oversee the development of our product candidates.If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we mayhave to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.Our independent registered public accounting firm has included in its report on our audited consolidated financial statements for the fiscal year endedDecember 31, 2016 an explanatory paragraph relating to our ability to continue as a going concern.The report from our independent registered public accounting firm for the year ended December 31, 2016 includes an explanatory paragraph statingthat our recurring losses from operations since inception and required additional funding to finance our operations raise substantial doubt about our ability tocontinue as a going concern. If we are unable to obtain sufficient funding, our35 business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a goingconcern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets arecarried on our audited financial statements, and it is likely that investors will lose all or a part of their investment. Future reports from our independentregistered public accounting firm may also contain statements expressing substantial doubt about our ability to continue as a going concern. If we seekadditional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern,investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.Our ability to use our net operating loss carryforwards may be limited.As of December 31, 2017, we had U.S. federal, state and foreign net operating loss carryforwards, or NOLs, of $76.4 million, $76.0 million and$4.3 million, respectively. Our NOLs begin to expire in 2033. Utilization of these NOLs depends on many factors, including our future income, which cannotbe assured. These NOLs could expire unused and be unavailable to offset our future income tax liabilities. In addition, under Section 382 of the InternalRevenue Code of 1986, as amended, or the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which isgenerally defined as a greater than 50% change, by value, in its equity ownership by 5% stockholders over a three-year period, the corporation’s ability touse its pre-change NOLs and other pre-change tax attributes to offset its post-change income may be limited. We have not determined if we have experiencedSection 382 ownership changes in the past and if a portion of our NOLs is subject to an annual limitation under Section 382. In addition, we may experienceownership changes in the future as a result of subsequent changes in our stock ownership, some of which may be outside of our control. If we determine thatan ownership change has occurred and our ability to use our historical NOLs is materially limited, it would harm our future operating results by effectivelyincreasing our future tax obligations.We have a limited operating history and no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects forour future viability.We were established in 2013 and began operations in 2014. Our operations to date have been limited to financing and staffing our company,developing our technology and developing SPR994 and our other product candidates. We have not yet demonstrated an ability to successfully complete alarge-scale, pivotal clinical trial, obtain marketing approval, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, orconduct sales and marketing activities necessary for successful product commercialization. Consequently, predictions about our future success or viabilitymay not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceuticalproducts.We will need to transition from a development-focused company to a company with commercial activities, and we may experience difficulties in managingthis transition, which could disrupt our operations.We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our business objectives.We will eventually need to transition from a company with a development focus to a company capable of supporting commercial activities. We may not besuccessful in such a transition.We expect our financial condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year due to a varietyof factors, many of which are beyond our control. Accordingly, stockholders should not rely upon the results of any quarterly or annual periods as indicationsof future operating performance.36 Risks Related to Product Development and CommercializationWe are heavily dependent on the success of SPR994, which is still under development, and our ability to develop, obtain marketing approval for andsuccessfully commercialize SPR994. If we are unable to develop, obtain marketing approval for and successfully commercialize SPR994, or if weexperience significant delays in doing so, our business could be materially harmed.We currently have no products approved for sale and have invested a significant portion of our efforts and financial resources in the development ofSPR994 as a product candidate for the treatment of MDR bacterial infections. Our near-term prospects are substantially dependent on our ability to develop,obtain marketing approval for and successfully commercialize SPR994. The success of SPR994 will depend on several factors, including the following: •successful completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreignregulatory authority; •receipt of marketing approvals from applicable regulatory authorities; •establishment of arrangements with third-party manufacturers to obtain manufacturing supply; •obtainment and maintenance of patent, trade secret protection and regulatory exclusivity, both in the United States and internationally,including our ability to maintain our license agreement with Meiji with respect to SPR994; •protection of our rights in our intellectual property portfolio; •launch of commercial sales of SPR994, if approved, whether alone or in collaboration with others; •acceptance of SPR994, if approved, by patients, the medical community and third-party payors; •competition with other therapies; and •a continued acceptable safety profile of SPR994 following approval.Successful development of SPR994 for any additional indications would be subject to these same risks.Many of these factors are beyond our control, including clinical development, the regulatory submission process, potential threats to our intellectualproperty rights and the manufacturing, marketing and sales efforts of any future collaborator. If we are unable to develop, receive marketing approval for, orsuccessfully commercialize SPR994, or if we experience delays as a result of any of these factors or otherwise, our business could be materially harmed.We have no experience as a company in obtaining regulatory approval for a drug.As a company, we have never obtained regulatory approval for, or commercialized, a drug. It is possible that the FDA may refuse to accept any or all ofour planned new drug applications, or NDAs, for substantive review or may conclude after review of our data that our application is insufficient to obtainregulatory approval for any current or future product candidates. If the FDA does not approve any of our planned NDAs, it may require that we conductadditional costly clinical, nonclinical or manufacturing validation studies before it will reconsider our applications. Depending on the extent of these or anyother FDA-required studies, approval of any NDA or other application that we submit may be significantly delayed, possibly for several years, or may requireus to expend more resources than we have available. Any failure or delay in obtaining regulatory approvals would prevent us from commercializing SPR994or any of our other product candidates for which we may seek regulatory approval, generating revenues and achieving and sustaining profitability. It is alsopossible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve any NDA or other application that wesubmit. If any of these outcomes occur, we may be forced to abandon the development of our product candidates, which would materially adversely affect ourbusiness and could potentially cause us to cease operations. We face similar risks for our applications in foreign jurisdictions.If clinical trials of SPR994 or any other product candidate that we may advance to clinical trials fail to demonstrate safety and efficacy to the satisfactionof the FDA or comparable foreign regulatory authorities or do not otherwise produce favorable results, we may incur additional costs or experience delaysin completing, or ultimately be unable to complete, the development and commercialization of SPR994 or any other product candidate.We may not commercialize, market, promote, or sell any product candidate in the United States without obtaining marketing approval from the FDAor in other countries without obtaining approvals from comparable foreign regulatory authorities, such as the European Medicines Agency, or EMA, and wemay never receive such approvals. We must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of ourproduct candidates in humans before we will be able to obtain these approvals. Clinical testing is expensive, difficult to design and implement, can takemany years to complete and is inherently uncertain as to outcome. We have not previously submitted an NDA to the FDA or similar applications tocomparable foreign regulatory authorities for any of our product candidates.37 The clinical development of SPR994 and any of our other product candidates is susceptible to the risk of failure inherent at any stage of drugdevelopment, including failure to demonstrate efficacy in a trial or across a broad population of patients, the occurrence of severe adverse events, failure tocomply with protocols or applicable regulatory requirements, and determination by the FDA or any comparable foreign regulatory authority that a drugproduct is not approvable. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks inclinical trials, even after promising results in earlier nonclinical studies or clinical trials. The results of preclinical and other nonclinical studies and/or earlyclinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Notwithstanding any promising results in earlynonclinical studies or clinical trials, we cannot be certain that we will not face similar setbacks. For example, although SPR994 is a new formulation of theactive pharmaceutical ingredient tebipenem that exhibited a favorable safety and efficacy profile during Phase 2 clinical trials conducted by Meiji and aglobal pharmaceutical company, which we refer to as Global Pharma, in Japan, we may nonetheless fail to achieve success in our clinical trials. Even if ourclinical trials are completed, the results may not be sufficient to obtain regulatory approval for our product candidates.In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies that believed their productcandidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for the product candidates.Even if we believe that the results of our clinical trials warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree andmay not grant marketing approval of our product candidates.In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due tonumerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, adherence to thedosing regimen and other trial protocols and the rate of dropout among clinical trial participants, among others. It is possible that even if one or more of ourproduct candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one of the factors listed or otherwise.Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actualpositive effect, if any. Similarly, in our clinical trials, we may fail to detect toxicity of or intolerability of our product candidates or may determine that ourproduct candidates are toxic or not well tolerated when that is not in fact the case. In the case of our clinical trials, results may differ on the basis of the type ofbacteria with which patients are infected. We cannot make assurances that any Phase 2, Phase 3 or other clinical trials that we may conduct will demonstrateconsistent or adequate efficacy and safety to obtain regulatory approval to market our product candidates.We may encounter unforeseen events prior to, during, or as a result of, clinical trials that could delay or prevent us from obtaining regulatory approvalfor SPR994 or any of our other product candidates, including: •the FDA or other comparable foreign regulatory authorities may disagree as to the design or implementation of our clinical trials; •we may not reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensivenegotiation and may vary significantly among different CROs and trial sites; •clinical trials of our product candidates may produce unfavorable or inconclusive results; •we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs; •the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trialsmay be slower than we anticipate participants may drop out of these clinical trials at a higher rate than we anticipate or we may fail to recruitsuitable patients to participate in a trial; •our third-party contractors, including those manufacturing our product candidates or conducting clinical trials on our behalf, may fail to complywith regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; •the FDA or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at aprospective trial site; •we may have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants arebeing exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate; •regulators or institutional review boards may require that we or our investigators suspend or terminate clinical trials of our product candidates forvarious reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptablehealth risks, undesirable side effects or other unexpected characteristics of the product candidate;38 •the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturerswith which we enter into agreement for clinical and commercial supplies; •the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may beinsufficient or inadequate; and •the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering ourclinical data insufficient for approval.We could also encounter delays if a clinical trial is suspended or terminated by us, by the institutional review boards, or IRBs, of the institutions inwhich such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, if any, for such trial or by the FDA or other regulatory authorities.Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance withregulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting inthe imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, or changes ingovernmental regulations or administrative actions.If we are required to conduct additional clinical trials or other testing of SPR994 or any other product candidate beyond the trials and testing that wecontemplate, if we are unable to successfully complete clinical trials or other testing of our product candidates, if the results of these trials or tests areunfavorable or are only modestly favorable or if there are safety concerns associated with SPR994 or any other product candidate, we may: •incur additional unplanned costs; •be delayed in obtaining marketing approval for our product candidates; •not obtain marketing approval at all; •obtain approval for indications or patient populations that are not as broad as intended or desired; •obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings; •be subject to additional post-marketing testing or other requirements; or •be required to remove the product from the market after obtaining marketing approval.Our failure to successfully initiate and complete clinical trials of our product candidates and to demonstrate the efficacy and safety necessary to obtainregulatory approval to market any of our product candidates would significantly harm our business. Our product candidate development costs will alsoincrease if we experience delays in testing or marketing approvals and we may be required to obtain additional funds to complete clinical trials. We cannotmake assurances that our clinical trials will begin as planned or be completed on schedule, if at all, or that we will not need to restructure our trials after theyhave begun. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our productcandidates or allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our product candidates,which may harm our business and results of operations. In addition, many of the factors that cause, or lead to, delays of clinical trials may ultimately lead tothe denial of regulatory approval of SPR994 or any other product candidate.If we experience delays or difficulties in the enrollment of patients in clinical trials, clinical development activities could be delayed or otherwise adverselyaffected.The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number ofpatients who remain in the study until its conclusion. We may not be able to initiate, continue or complete clinical trials of SPR994 or any other productcandidate that we develop if we are unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials as required by the FDAor comparable foreign regulatory authorities, such as the EMA. Patient enrollment is a significant factor in the timing of clinical trials, and is affected bymany factors, including: •the size and nature of the patient population; •the severity of the disease under investigation; •the proximity of patients to clinical sites; •the eligibility criteria for participation in the clinical trial; •the design of the clinical trial;39 •our ability to recruit clinical trial investigators with appropriate experience; •competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages and risks of the product candidate being studiedin relation to other available therapies, including any new drugs that may be approved for the indications that we are investigating; •our ability to obtain and maintain patient consents; and •the risk that patients enrolled in clinical trials will drop out of the trials before completion.The inclusion and exclusion criteria for our contemplated Phase 3 clinical trials of SPR994 may adversely affect our enrollment rates for patients inthese trials. In addition, many of our competitors also have ongoing clinical trials for product candidates that would treat the same indications as wecontemplate for SPR994 or our other product candidates, and patients who would otherwise be eligible for any clinical trials we may conduct for suchproduct candidates may instead enroll in clinical trials of our competitors’ product candidates.Our inability to enroll a sufficient number of patients for our clinical trials would result in significant delays or might require us to abandon one ormore clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, slow down orhalt our product candidate development and approval process and jeopardize our ability to seek and obtain the marketing approval required to commenceproduct sales and generate revenue, which would cause the value of our company to decline and limit our ability to obtain additional financing if needed.Future legislation, and/or regulations and policies adopted by the FDA, the EMA or similar regulatory authorities may increase the time and costrequired for us to conduct and complete clinical trials of SPR994 and our other product candidates and potential product candidates.The FDA has established regulations to govern the drug development and approval process, as have foreign regulatory authorities. The policies of theFDA and other regulatory authorities may change and additional laws may be enacted or government regulations may be promulgated that could prevent,limit, delay but also accelerate regulatory review of our product candidates. For example, in December 2016, the 21st Century Cures Act, or Cures Act, wassigned into law. The Cures Act, among other things, is intended to modernize the regulation of drugs and spur innovation, but all of its provisions have notyet been implemented. Among other things, the Cures Act provides a new “limited population” pathway for certain antibacterial and antifungal drugs, orLPAD, but the FDA has not yet issued guidance regarding the LPAD. Additionally, in August 2017, FDA issued final guidance setting forth its currentthinking with respect to development programs and clinical trial designs for antibacterial drugs to treat serious bacterial diseases in patients with an unmetmedical need. We cannot predict what if any effect the Cures Act or any existing or future guidance from FDA will have on the development of our productcandidates.Our clinical program for SPR994 is subject to a number of specific risks that may affect the outcome of the trial, including the use of a new formulation ofthe active pharmaceutical ingredient, tebipenem.Our planned pivotal Phase 3 clinical trial of SPR994 is subject to a number of specific risks arising from our clinical program and the design of thetrial. We have not conducted a clinical trial of SPR994 in patients with cUTI, who will be the subjects of the clinical trial, and we have no direct clinicalevidence that SPR994 is effective in treating cUTIs in humans. Although we believe that SPR994 has the potential to treat cUTI in humans based on theresults of our nonclinical in vitro and in vivo animal model studies, together with Meiji’s and Global Pharma’s Phase 2 clinical trial results, these results arenot necessarily predictive of the results of our planned clinical trials and we cannot guarantee that SPR994 will demonstrate the expected efficacy in ourplanned pivotal Phase 3 clinical trial patients. We also cannot guarantee that the projections made from the pharmacokinetic and pharmacodynamic modelsthat we developed from our nonclinical and clinical SPR994 studies will be validated in our planned pivotal Phase 3 clinical trial.In addition, we may face competition in enrolling suitable patients as a result of other companies conducting clinical trials for antibiotic productcandidates that are intended to treat similar infections, resulting in slower than anticipated enrollment in our trials. Enrollment delays in the trial may resultin increased development costs for SPR994, or slow down or halt our product development for SPR994.40 To support our accelerated clinical development strategy for SPR994, we are relying, in part, on clinical data from two exploratory Phase 2 clinical trialsconducted by Meiji (ME1211) and Global Pharma (L-084 04) in Japan, which were not conducted in accordance with FDA guidance for clinical trials inpatients with cUTI. To the extent that these clinical trial design differences limit our use of the clinical data, our proposed clinical trial plan for SPR994with the FDA could be materially delayed and we may incur material additional costs.There are significant differences in the trial design for the two exploratory Phase 2 clinical trials conducted by Meiji and Global Pharma in Japancompared to the clinical trial design described by the FDA in its guidance for clinical trials in patients with cUTI, including: •The studies were not randomized and were open-label and had no comparator arm. Treatment assignments were made by the investigators. •The inclusion criteria specified complicated UTI as an entry criterion, but other than retained residual volume (100 ml) there were no othercriteria defining “complicated” UTI. •While L-084 04 excluded patients who received prior antibiotics and who had no clinical response, there were no parameters or limits forinclusion (e.g., less than 24 hours of a potentially effective antibiotic or number of doses). ME1211 did not specifically mention prior antibioticuse. •While urine cultures were obtained at baseline, these were not quantitative, and there was no minimum requirement for bacterial load for entry. •While microbiological outcome was assessed, the definitions did not include a minimum reduction in bacterial counts (i.e., a reduction to lessthan 104 cfu/ml). •Clinical outcomes were global assessments by the investigators and did not specifically mention the resolution of baseline signs and symptoms. •The primary endpoint was not a composite of both clinical and microbiological outcomes.If the FDA were to discount significantly the value of these clinical data as support for our clinical plan to proceed from a Phase 1 dose-selectionclinical trial directly to a pivotal Phase 3 clinical trial of SPR994, then our clinical pathway for SPR994 could be materially delayed and we could incurmaterial costs associated with conducting additional clinical trials.A Phase 2 clinical trial of SPR741 would be subject to a number of specific risks that may affect the outcome of the trials, including the need to co-administer SPR741 with a companion antibiotic and identifying available development funding.A Phase 2 clinical trial of SPR741 would be subject to a number of specific risks arising from our clinical program and the design of the trial. We havenot conducted a clinical trial of SPR741 in patients with cUTI, who would be the subjects of any such clinical trial, and we have no direct clinical evidencethat SPR741 as a potentiator in combination with a partner antibiotic has the potential to treat cUTI in humans. Although we believe that SPR741 as apotentiator in combination with a partner antibiotic has the potential to treat cUTI in humans based upon our nonclinical in vitro and in vivo animal modelstudy results, these results are not necessarily predictive of the results in humans. We cannot guarantee that SPR741 as a potentiator in combination with apartner antibiotic will demonstrate the efficacy we expect to observe in patients in a Phase 2 clinical trial of SPR741. We also cannot guarantee that theprojections made from the pharmacokinetic and pharmacodynamic models that we developed from our nonclinical and clinical SPR741 studies would bevalidated in a Phase 2 clinical trial.In addition, we may face competition in enrolling suitable patients in any such trial as a result of other companies conducting clinical trials forantibiotic product candidates that are intended to treat similar infections, resulting in slower than anticipated enrollment in our trials. Enrollment delays inany such trial may result in increased development costs for SPR741, or slow down or halt our product development and approval process for SPR741.Serious adverse events or undesirable side effects or other unexpected properties of SPR994 or any other product candidate may be identified duringdevelopment or after approval that could delay, prevent or cause the withdrawal of regulatory approval, limit the commercial potential, or result insignificant negative consequences following marketing approval.Serious adverse events or undesirable side effects caused by, or other unexpected properties of, our product candidates could cause us, an institutionalreview board, or regulatory authorities to interrupt, delay or halt our clinical trials and could result in a more restrictive label, the imposition of distribution oruse restrictions or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. If SPR994 or any of our other productcandidates is associated with serious or unexpected adverse events or undesirable side effects, the FDA, the IRBs at the institutions in which our studies areconducted, or a DSMB, could suspend or terminate our clinical trials or the FDA or comparable foreign regulatory authorities could order us to cease clinicaltrials41 or deny approval of our product candidates for any or all targeted indications. Treatment-related side effects could also affect patient recruitment or theability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financialcondition and prospects significantly.While the active pharmaceutical ingredient in SPR994, tebipenem, is approved in Japan, our formulation of tebipenem, SPR994, has not yet beentested extensively in patients. There may be unforeseen serious adverse events or side effects that differ from those seen in the Japanese studies. To date,patients treated with the active ingredient in SPR994 have experienced drug-related side effects including diarrhea, temporary increases in hepatic enzymes,allergic reactions, rash, and convulsions. To date, SPR741 has generally been well tolerated in clinical trials conducted in healthy subjects and there havebeen no reports of serious adverse events related to SPR741, but additional adverse events may emerge in any subsequent clinical trials.If unexpected adverse events occur in any of our planned clinical trials, we may need to abandon development of our product candidates, or limitdevelopment to lower doses or to certain uses or subpopulations in which the undesirable side effects or other unfavorable characteristics are less prevalent,less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in clinical or earlier stage testing are laterfound to cause undesirable or unexpected side effects that prevented further development of the compound.Undesirable side effects or other unexpected adverse events or properties of SPR994 or any of our other product candidates could arise or becomeknown either during clinical development or, if approved, after the approved product has been marketed. If such an event occurs during development, ourtrials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of, or coulddeny approval of, SPR994 or our other product candidates. If such an event occurs after such product candidates are approved, a number of potentiallysignificant negative consequences may result, including: •regulatory authorities may withdraw the approval of such product; •we may be required to recall a product or change the way such product is administered to patients; •regulatory authorities may require additional warnings on the label or impose distribution or use restrictions; •regulatory authorities may require one or more post-market studies; •regulatory authorities may require the addition of a “black box” warning; •we may be required to implement a REMS including the creation of a medication guide outlining the risks of such side effects for distribution topatients; •we could be sued and held liable for harm caused to patients; •our product may become less competitive; and •our reputation may suffer.Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate, if approved, or couldsubstantially increase commercialization costs and expenses, which could delay or prevent us from generating revenue from the sale of our products and harmour business and results of operations.Even if a product candidate does obtain regulatory approval, it may never achieve the market acceptance by physicians, patients, hospitals, third-partypayors and others in the medical community that is necessary for commercial success and the market opportunity may be smaller than we estimate.Even if we obtain FDA or other regulatory approvals and are able to launch SPR994 or any other product candidate commercially, the productcandidate may not achieve market acceptance among physicians, patients, hospitals (including pharmacy directors) and third-party payors and, ultimately,may not be commercially successful. For example, physicians are often reluctant to switch their patients from existing therapies even when new andpotentially more effective or convenient treatments enter the market. Further, patients often acclimate to the therapy that they are currently taking and do notwant to switch unless their physicians recommend switching products or they are required to switch therapies due to lack of coverage and reimbursement forexisting therapies. Market acceptance of any product candidate for which we receive approval depends on a number of factors, including: •the efficacy and safety of the product candidate as demonstrated in clinical trials; •relative convenience and ease of administration; •the clinical indications for which the product candidate is approved;42 •the potential and perceived advantages and disadvantages of the product candidates, including cost and clinical benefit relative to alternativetreatments; •the willingness of physicians to prescribe the product; •the willingness of hospital pharmacy directors to purchase the product for their formularies; •acceptance by physicians, patients, operators of hospitals and treatment facilities and parties responsible for coverage and reimbursement of theproduct; •the availability of coverage and adequate reimbursement by third-party payors and government authorities; •the effectiveness of our sales and marketing efforts; •the strength of marketing and distribution support; •limitations or warnings, including distribution or use restrictions, contained in the product’s approved labeling or an approved risk evaluationand mitigation strategy; •whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy for particularinfections; •the approval of other new products for the same indications; •the timing of market introduction of the approved product as well as competitive products; •adverse publicity about the product or favorable publicity about competitive products; •the emergence of bacterial resistance to the product; and •the rate at which resistance to other drugs in the target infections grows.Any failure by SPR994 or any other product candidate that obtains regulatory approval to achieve market acceptance or commercial success wouldadversely affect our business prospects.We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indicationsthat may be more profitable or for which there is a greater likelihood of success.Because we have limited financial and managerial resources, we intend to focus on developing product candidates for specific indications that weidentify as most likely to succeed, in terms of both their potential for marketing approval and commercialization. As a result, we may forego or delay pursuitof opportunities with other product candidates or for other indications that may prove to have greater commercial potential.Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending oncurrent and future research and development programs and product candidates for specific indications may not yield any commercially viable productcandidates. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights tothat product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us toretain sole development and commercialization rights to the product candidate.If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution agreements with third parties, wemay not be successful in commercializing SPR994 or any other product candidate if such product candidate is approved.We do not have a sales, marketing or distribution infrastructure and we have no experience in the sale, marketing or distribution of pharmaceuticalproducts. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource those functionsto third parties. We intend to build a commercial organization in the United States and recruit experienced sales, marketing and distribution professionals.The development of sales, marketing and distribution capabilities will require substantial resources, will be time-consuming and could delay any productlaunch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and distribution capabilities is delayed ordoes not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization costs. This may be costly, and our investmentwould be lost if we cannot retain or reposition our sales and marketing personnel. In addition, we may not be able to hire a sales force in the United States thatis sufficient in size or has adequate expertise in the medical markets that we intend to target. If we are unable to establish a sales force and marketing anddistribution capabilities, our operating results may be adversely affected.43 Factors that may inhibit our efforts to commercialize our products on our own include: •our inability to recruit and retain adequate numbers of effective sales and marketing personnel; •the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products; •the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies withmore extensive product lines; and •unforeseen costs and expenses associated with creating an independent sales and marketing organization.We intend to use collaborators to assist with the commercialization of SPR994 and any other product candidate outside the United States. As a resultof entering into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of theseproduct revenues to us would likely be lower than if we were to directly market and sell products in those markets.Furthermore, we may be unsuccessful in entering into the necessary arrangements with third parties or may be unable to do so on terms that arefavorable to us. In addition, we likely would have little control over such third parties, and any of them might fail to devote the necessary resources andattention to sell and market our products effectively.If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successfulin commercializing our product candidates.We face substantial competition from other pharmaceutical and biotechnology companies and our operating results may suffer if we fail to competeeffectively.The development and commercialization of new drug products is highly competitive. We face competition from major pharmaceutical companies,specialty pharmaceutical companies and biotechnology companies worldwide with respect to SPR994 and our other product candidates that we may seek todevelop and commercialize in the future. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products orare pursuing the development of product candidates for the treatment of resistant infections. Potential competitors also include academic institutions,government agencies and other public and private research organizations. Our competitors may succeed in developing, acquiring or licensing technologiesand drug products that are more effective or less costly than SPR994 or any other product candidates that we are currently developing or that we maydevelop, which could render our product candidates obsolete and noncompetitive.There are a variety of available oral therapies marketed for the treatment of multi-drug resistant infections that we would expect would compete withSPR994, such as Levaquin, Cipro and Bactrim. Many of the available therapies are well established and widely accepted by physicians, patients and third-party payors. Insurers and other third-party payors may also encourage the use of generic products, for example in the fluoroquinolone class. If SPR994 isapproved, the pricing may be at a significant premium over other competitive products. This may make it difficult for SPR994 to compete with theseproducts.There are also a number of oral product candidates in clinical development by third parties that are intended to treat UTIs. Some mid- to late-stageproduct candidates include C-Scape from Achaogen, Inc., sulopenem from Iterum Therapeutics Limited, eravacycline from Tetraphase Pharmaceuticals, Inc.and omadacycline from Paratek Pharmaceuticals, Inc. If our competitors obtain marketing approval from the FDA or comparable foreign regulatoryauthorities for their product candidates more rapidly than us, it could result in our competitors establishing a strong market position before we are able toenter the market.There are several IV-administered products marketed for the treatment of infections resistant to first-line therapy for Gram-negative infections,including Avycaz from Allergan plc and Pfizer Inc. and Zerbaxa from Merck & Co. There are also a number of IV-administered product candidates in late-stage clinical development that are intended to treat resistant Gram-negative infections, including plazomicin from Achaogen, Inc., meropenem vaborbactamfrom The Medicines Company, cefiderocol from Shionogi & Co. Ltd., eravacycline IV from Tetraphase Pharmaceuticals, Inc. and relabactam from Merck &Co.Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing,conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical andbiotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early stagecompanies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These thirdparties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration forclinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.44 In July 2012, the Food and Drug Administration Safety and Innovation Act was passed, which included the Generating Antibiotics Incentives NowAct, or the GAIN Act. The GAIN Act is intended to provide incentives for the development of new, qualified infectious disease products. In December 2016,the Cures Act was passed, providing additional support for the development of new infectious disease products. These incentives may result in morecompetition in the market for new antibiotics, and may cause pharmaceutical and biotechnology companies with more resources than we have to shift theirefforts towards the development of product candidates that could be competitive with SPR994 and our other product candidates.Even if we are able to commercialize SPR994 or any other product candidate, the product may become subject to unfavorable pricing regulations, orthird-party payor coverage and reimbursement policies that could harm our business.Marketing approvals, pricing, coverage and reimbursement for new drug products vary widely from country to country. Some countries requireapproval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensingapproval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initialapproval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delayour commercial launch of the product, possibly for lengthy time periods, which may negatively affect the revenues that we are able to generate from the saleof the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if ourproduct candidates obtain marketing approval.We currently expect that some of our product candidates, if approved, will be administered in a hospital inpatient setting. In the United States,governmental and other third-party payors generally reimburse hospitals a single bundled payment established on a prospective basis intended to cover allitems and services provided to the patient during a single hospitalization. Hospitals bill third-party payors for all or a portion of the fees associated with thepatient’s hospitalization and bill patients for any deductibles or co-payments. Because there is typically no separate reimbursement for drugs administered ina hospital inpatient setting, some of our target customers may be unwilling to adopt our product candidates in light of the additional associated cost. If we areforced to lower the price we charge for our product candidates, if approved, our gross margins may decrease, which would adversely affect our ability toinvest in and grow our business.To the extent SPR994 or any other product candidate we develop is used in an outpatient setting, the commercial success of our product candidateswill depend substantially, both domestically and abroad, on the extent to which coverage and reimbursement for these products and related treatments areavailable from government health programs and third-party payors. If coverage is not available, or reimbursement is limited, we may not be able tosuccessfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow usto establish or maintain pricing sufficient to realize a sufficient return on our investments. Government authorities and third-party payors, such as healthinsurers and managed care organizations, publish formularies that identify the medications they will cover and the related payment levels. The healthcareindustry is focused on cost containment, both in the United States and elsewhere. Government authorities and third-party payors have attempted to controlcosts by limiting coverage and the amount of reimbursement for particular medications, which could affect our ability to sell our product candidatesprofitably.Increasingly, third-party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies and are challengingthe prices charged. We cannot be sure that coverage will be available for SPR994 or any other product candidate that we commercialize and, if available, thatthe reimbursement rates will be adequate. Further, the net reimbursement for outpatient drug products may be subject to additional reductions if there arechanges to laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. An inability topromptly obtain coverage and adequate payment rates from both government-funded and private payors for any approved products used on an outpatientbasis that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and ouroverall financial condition.We cannot predict whether bacteria may develop resistance to SPR994 or our other product candidates, which could affect their revenue potential.We are developing SPR994 and certain of our other product candidates to treat drug-resistant bacterial infections. The bacteria responsible for theseinfections evolve quickly and readily transfer their resistance mechanisms within and between species. We cannot predict whether or when bacterialresistance to SPR994 or any of such other product candidates may develop.Specifically, neither SPR994 nor SPR741 (as a potentiator in combination with a partner antibiotic) are highly active against infections causedby Pseudomonas aeruginosa. As with some commercially available carbapenems, SPR994 is not active against organisms expressing a resistance mechanismmediated by enzymes known as carbapenemases. Although occurrence of this resistance mechanism is currently rare, we cannot predict whethercarbapenemase-mediated resistance will become widespread in regions where we intend to market SPR994 if it is approved. The growth of drug resistantinfections in community settings or in countries with poor public health infrastructures, or the potential use of SPR994 or any of our other product candidatesoutside of controlled hospital settings, could contribute to the rise of resistance. If resistance to SPR994 or any of our other product candidates becomesprevalent, our ability to generate revenue from SPR994 or such product candidates could suffer.45 If we are not successful in discovering, developing and commercializing additional product candidates, our ability to expand our business andachieve our strategic objectives would be impaired.Although a substantial amount of our efforts will focus on planned clinical trials and potential approval of our lead product candidate, SPR994, ourlead Potentiator Platform product candidates, SPR741 and SPR206, and SPR 720, a key element of our strategy is to discover, develop and commercialize aportfolio of therapeutics to treat drug resistant bacterial infections. We are seeking to do so through our internal research programs and are exploring, andintend to explore in the future, strategic partnerships for the development of new product candidates. Other than SPR994 and SPR741, all of our potentialproduct candidates remain in the discovery and preclinical stages.Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidatesare ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidatesfor clinical development for many reasons, including the following: •the research methodology used may not be successful in identifying potential product candidates; •we may be unable to successfully modify candidate compounds to be active in Gram-negative bacteria or defeat bacterial resistance mechanismsor identify viable product candidates in our screening campaigns; •competitors may develop alternatives that render our product candidates obsolete; •product candidates that we develop may nevertheless be covered by third parties’ patents or other exclusive rights; •a product candidate may, on further study, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effectiveor otherwise does not meet applicable regulatory criteria; •a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; •a product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors; and •the development of bacterial resistance to potential product candidates may render them ineffective against target infections.If we are unsuccessful in identifying and developing additional product candidates, our potential for growth may be impaired.Product liability lawsuits against us could divert our resources, cause us to incur substantial liabilities and limit commercialization of any products thatwe may develop.We face an inherent risk of product liability claims as a result of the clinical testing of our product candidates despite obtaining appropriate informedconsents from our clinical trial participants. We will face an even greater risk if we obtain marketing approval for and commercially sell SPR994 or any otherproduct candidate. For example, we may be sued if any product that we develop allegedly causes injury or is found to be otherwise unsuitable during clinicaltesting, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failureto warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protectionacts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercializationof our product candidates. Regardless of the merits or eventual outcome, liability claims may result in: •reduced resources for our management to pursue our business strategy; •decreased demand for our product candidates or products that we may develop; •injury to our reputation and significant negative media attention; •withdrawal of clinical trial participants; •initiation of investigations by regulators; •product recalls, withdrawals or labeling, marketing or promotional restrictions; •significant costs to defend resulting litigation; •substantial monetary awards to trial participants or patients; •loss of revenue; and •the inability to commercialize any products that we may develop.46 Although we maintain general liability insurance and clinical trial liability insurance, this insurance may not fully cover potential liabilities that wemay incur. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. We will need to increase ourinsurance coverage if and when we receive marketing approval for and begin selling SPR994 or any other product candidate. In addition, insurance coverageis becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect againstpotential product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidates, which couldadversely affect our business, financial condition, results of operations and prospects.If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that couldhave a material adverse effect on our business.We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling,use, storage, treatment and disposal of hazardous materials and wastes. From time to time and in the future, our operations may involve the use of hazardousand flammable materials, including chemicals and biological materials, and may also produce hazardous waste products. Even if we contract with thirdparties for the disposal of these materials and wastes, we cannot completely eliminate the risk of contamination or injury resulting from these materials. In theevent of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability couldexceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws andregulations.We maintain workers’ compensation insurance to cover us for costs and expenses that we may incur due to injuries to our employees resulting from theuse of hazardous materials, but this insurance may not provide adequate coverage against potential liabilities. Moreover, we do not currently maintaininsurance for environmental liability or toxic tort claims that may be asserted against us.In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Current orfuture environmental laws and regulations may impair our research, development or production efforts, which could adversely affect our business, financialcondition, results of operations or prospects. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or othersanctions.Our internal computer systems, or those of our contract research organizations or other contractors or consultants, may fail or suffer security breaches,which could result in a material disruption of our product development programs.We utilize information technology systems and networks to process, transmit and store electronic information in connection with our businessactivities. As the use of digital technologies has increased, cyber incidents, including deliberate attacks and attempts to gain unauthorized access tocomputer systems and networks, have increased in frequency and sophistication. These threats pose a risk to the security of our systems and networks and theconfidentiality, availability and integrity of our data. There can be no assurance that we will be successful in preventing cyber-attacks or successfullymitigating their effects.Despite the implementation of security measures, our internal computer systems and those of our contract research organizations and other contractorsand consultants are vulnerable to damage or disruption from hacking, computer viruses, software bugs, unauthorized access, natural disasters, terrorism, war,and telecommunication, equipment and electrical failures. While we have not, to our knowledge, experienced any significant system failure, accident orsecurity breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs. Forexample, the loss of clinical trial data from completed or ongoing clinical trials for any of our product candidates could result in delays in our developmentand regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breachresults in a loss of or damage to our data or applications, or inappropriate disclosure or theft of confidential or proprietary information, we could incurliability, the further development of our product candidates could be delayed or our competitive position could be compromised.Risks Related to Our Dependence on Third PartiesWe expect to depend on collaborations with third parties for the development and commercialization of some of our product candidates. Our prospectswith respect to those product candidates will depend in part on the success of those collaborations.Although we expect to commercialize SPR994 ourselves in the United States, we intend to commercialize both product candidates outside the UnitedStates through collaboration arrangements. If we develop SPR741 to be co-administered in combination with branded and not generic antibiotic compounds,then we will be required to obtain and maintain rights from third-party collaborators for the development and commercialization of SPR741 co-administered with such other branded antibiotic compounds. In addition, we may seek third-party collaborators for development and commercialization ofcertain of our product candidates. Our47 likely collaborators for any marketing, distribution, development, licensing or broader collaboration arrangements include large and mid-size pharmaceuticalcompanies, regional and national pharmaceutical companies and biotechnology companies. We are not currently party to any such arrangements.We may derive revenue from research and development fees, license fees, milestone payments and royalties under any collaborative arrangement intowhich we enter. Our ability to generate revenue from these arrangements will depend on our collaborators’ abilities to successfully perform the functionsassigned to them in these arrangements. In addition, our collaborators may have the right to abandon research or development projects and terminateapplicable agreements, including funding obligations, prior to or upon the expiration of the agreed upon terms. As a result, we can expect to relinquish someor all of the control over the future success of a product candidate that we license to a third party.We face significant competition in seeking and obtaining appropriate collaborators. Collaborations involving our product candidates may pose anumber of risks, including the following: •collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations; •collaborators may not perform their obligations as expected; •collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew developmentor commercialization programs based on clinical trial results, changes in the collaborators’ strategic focus or available funding, or externalfactors, such as an acquisition, that divert resources or create competing priorities; •collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a productcandidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing; •product candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their own product candidates orproducts, which may cause collaborators to cease to devote resources to the commercialization of our product candidates; •a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing anddistribution of such product or products; •disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development,might cause delays or termination of the research, development or commercialization of product candidates, might lead to additionalresponsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming andexpensive; •collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as toinvite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation; •collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and •collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development orcommercialization of the applicable product candidates.Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If acollaborator of ours is involved in a business combination, it could decide to delay, diminish or terminate the development or commercialization of anyproduct candidate licensed to it by us.We may have to alter our development and commercialization plans if we are not able to establish collaborations.We will require additional funds to complete the development and potential commercialization of SPR994 and our other product candidates. For someof our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development and potentialcommercialization of those product candidates. For SPR741, if we develop such product candidate to be co-administered in combination with branded andnot generic antibiotic compounds, we will be required to obtain and maintain rights from third-party collaborators for such development andcommercialization of SPR741 co-administered with such collaborator’s branded antibiotic compound. Moreover, we intend to utilize a variety of types ofcollaboration arrangements for the potential commercialization of our product candidates outside the United States.48 We face significant competition in seeking and obtaining appropriate collaborators. Whether we reach a definitive agreement for a collaboration willdepend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration andthe proposed collaborator’s evaluation of a number of factors. Those factors may include: •the design or results of clinical trials; •the likelihood of approval by the FDA or comparable foreign regulatory authorities; •the potential market for the subject product candidate; •the costs and complexities of manufacturing and delivering such product candidate to patients; •the potential for competing products; •our patent position protecting the product candidate, including any uncertainty with respect to our ownership of our technology or our licensor’sownership of technology we license from them, which can exist if there is a challenge to such ownership without regard to the merits of thechallenge; •the need to seek licenses or sub-licenses to third-party intellectual property; and •industry and market conditions generally.The collaborator may also consider alternative product candidates or technologies for similar indications that may be available for collaboration andwhether such a collaboration could be more attractive than the one with us for our product candidate. We may also be restricted under future licenseagreements from entering into agreements on certain terms with potential collaborators. In addition, there have been a significant number of recent businesscombinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.If we are unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to curtail thedevelopment of a product candidate, reduce or delay its development program or one or more of our other development programs, delay its potentialcommercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercializationactivities at our own expense. If we elect to fund and undertake development or commercialization activities on our own, we may need to obtain additionalexpertise and additional capital, which may not be available to us on acceptable terms or at all. If we fail to enter into collaborations and do not havesufficient funds or expertise to undertake the necessary development and commercialization activities, we may not be able to further develop our productcandidates or bring them to market and our business may be materially and adversely affected.We rely on third parties to conduct some of our preclinical studies and all of our clinical trials. If these third parties do not successfully carry out theircontractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize any of our product candidates. If theydo not perform satisfactorily, our business may be materially harmed.We do not independently conduct nonclinical studies that comply with good laboratory practice requirements. We also do not have the ability toindependently conduct clinical trials of any of our product candidates. We rely on third parties, such as contract research organizations, clinical datamanagement organizations, medical institutions, and clinical investigators, to conduct our clinical trials of SPR994 and SPR741 and expect to rely on thesethird parties to conduct clinical trials of our other product candidates and potential product candidates. Any of these third parties may terminate theirengagements with us at any time. If we need to enter into alternative arrangements, it would delay our product development activities.Our reliance on these third parties for clinical development activities limits our control over these activities but we remain responsible for ensuringthat each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards. For example, notwithstanding theobligations of a contract research organization for a trial of one of our product candidates, we remain responsible for ensuring that each of our clinical trials isconducted in accordance with the general investigational plan and protocols for the trial. While we will have agreements governing their activities, wecontrol only certain aspects of their activities and have limited influence over their actual performance. The third parties with whom we contract forexecution of our GLP studies and our clinical trials play a significant role in the conduct of these studies and trials and the subsequent collection andanalysis of data. Although we rely on these third parties to conduct our GLP-compliant nonclinical studies and clinical trials, we remain responsible forensuring that each of our nonclinical studies and clinical trials are conducted in accordance with applicable laws and regulations, and our reliance on theCROs does not relieve us of our regulatory responsibilities. The FDA and regulatory authorities in other jurisdictions also require us to comply withstandards, commonly referred to as good clinical practices, or GCPs, for conducting, monitoring, recording and reporting the results of clinical trials to assurethat data and reported results are accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. The FDAenforces these GCPs through periodic inspections of trial sponsors, principal investigators, clinical trial sites and institutional review boards. If we or ourthird-party contractors fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA mayrequire us to perform additional clinical trials before approving our product candidates, which would49 delay the regulatory approval process. We cannot make assurances that, upon inspection, the FDA will determine that any of our clinical trials comply withGCPs. We are also required to register clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov,within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.Furthermore, the third parties conducting clinical trials on our behalf are not our employees, and except for remedies available to us under ouragreements with such contractors, we cannot control whether or not they devote sufficient time and resources to our ongoing development programs. Thesecontractors may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials orother drug development activities, which could impede their ability to devote appropriate time to our clinical programs. If these third parties do notsuccessfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our statedprotocols, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates. If that occurs, we may not be ableto, or may be delayed in our efforts to, successfully commercialize our product candidates. In such an event, our financial results and the commercialprospects for SPR994 or our other product candidates could be harmed, our costs could increase and our ability to generate revenue could be delayed,impaired or foreclosed.We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributorscould delay clinical development or marketing approval of our product candidates or commercialization of any resulting products, producing additionallosses and depriving us of potential product revenue.We contract with third parties for the manufacture of preclinical and clinical supplies of SPR994 and SPR741 and expect to continue to do so inconnection with any future commercialization and for any future clinical trials and commercialization of our other product candidates and potentialproduct candidates. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantitiesat an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.We do not currently have nor do we plan to build the internal infrastructure or capability to manufacture SPR994 or our other product candidates foruse in the conduct of our preclinical research, our clinical trials or for commercial supply. We currently rely on and expect to continue to rely on third-partycontract manufacturers to manufacture supplies of SPR994 and our other product candidates, and we expect to rely on third-party contract manufacturers tomanufacture commercial quantities of any product candidate that we commercialize following approval for marketing by applicable regulatory authorities, ifany. Reliance on third-party manufacturers entails risks, including: •manufacturing delays if our third-party manufacturers give greater priority to the supply of other products over our product candidates orotherwise do not satisfactorily perform according to the terms of the agreement between us; •the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us; •the possible breach of the manufacturing agreement by the third party; •the failure of the third-party manufacturer to comply with applicable regulatory requirements; and •the possible misappropriation of our proprietary information, including our trade secrets and know-how.We currently rely on a small number of third-party contract manufacturers for all of our required raw materials, drug substance and finished product forour preclinical research and clinical trials. We do not have long-term agreements with any of these third parties. We also do not have any current contractualrelationships for the manufacture of commercial supplies of any of our product candidates. If any of our existing manufacturers should become unavailable tous for any reason, we may incur delays in identifying or qualifying replacements.If any of our product candidates are approved by any regulatory agency, we intend to enter into agreements with third-party contract manufacturers forthe commercial production of those products. This process is difficult and time consuming and we may face competition for access to manufacturing facilitiesas there are a limited number of contract manufacturers operating under cGMPs that are capable of manufacturing our product candidates. Consequently, wemay not be able to reach agreement with third-party manufacturers on satisfactory terms, which could delay our commercialization.Third-party manufacturers are required to comply with cGMPs and similar regulatory requirements outside the United States. Facilities used by ourthird-party manufacturers must be approved by the FDA after we submit an NDA and before potential approval of the product candidate. Similar regulationsapply to manufacturers of our product candidates for use or sale in foreign countries. We do not control the manufacturing process and are completelydependent on our third-party manufacturers for compliance with the applicable regulatory requirements for the manufacture of our product candidates. If ourmanufacturers cannot successfully manufacture material that conforms to the strict regulatory requirements of the FDA and any applicable foreign regulatoryauthority,50 they will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for commercial manufacture, wemay need to find alternative manufacturing facilities, which could result in delays in obtaining approval for the applicable product candidate. In addition,our manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance withcGMPs and similar regulatory requirements. Failure by any of our manufacturers to comply with applicable cGMPs or other regulatory requirements couldresult in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions,interruptions in supply and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates and have amaterial adverse effect on our business, financial condition and results of operations.Our current and anticipated future dependence upon others for the manufacture of SPR994 and our other product candidates and potential productcandidates may adversely affect our future profit margins and our ability to commercialize any products for which we receive marketing approval on a timelyand competitive basis.If we fail to comply with our obligations in the agreements under which we in-license or acquire development or commercialization rights to products,technology or data from third parties, including those for SPR994, we could lose such rights that are important to our business.We are a party to agreements with Meiji for SPR994, Northern for SPR741, Vertex Pharmaceuticals for SPR720 and PBB Distributions Limited forSPR206, and we may enter into additional agreements, including license agreements, with other parties in the future that impose diligence, development andcommercialization timelines, milestone payments, royalties, insurance and other obligations on us.For example, we have an exclusive know-how license with Meiji, or the Meiji License, that gives Spero rights outside of specified countries in Asia todevelop, manufacture, and commercialize SPR994 as well as the right to use, cross-reference, file or incorporate by reference any information and relevantMeiji regulatory documentation to support any regulatory filings outside of Asia. In addition, Spero has the right to develop, manufacture and havemanufactured SPR994 in Asia solely for the purpose of furthering development, manufacturing and commercialization of SPR994 outside of Asia. Inexchange for those rights, Spero is obligated to satisfy diligence requirements, including using commercially reasonable efforts to develop andcommercialize SPR994 and to implement a specified development plan, meeting specified development milestones and providing an update on progress onan annual basis. The Meiji License requires us to pay milestone payments of up to $3.0 million upon the achievement of specified clinical and regulatorymilestones and royalties of a low single-digit percentage on net sales on a country-by-country basis.If we fail to comply with our obligations to Meiji or any of our other partners, our counterparties may have the right to terminate these agreements, inwhich event we might not be able to develop, manufacture or market any product candidate that is covered by these agreements, which could materiallyadversely affect the value of the product candidate being developed under any such agreement. Termination of these agreements or reduction or eliminationof our rights under these agreements may result in our having to negotiate new or reinstated agreements with less favorable terms, or cause us to lose ourrights under these agreements, including our rights to important intellectual property or technology.Our reliance on government funding for certain of our programs adds uncertainty to our research and commercialization efforts with respect to thoseprograms and may impose requirements that increase the costs of commercialization and production of product candidates developed under thosegovernment-funded programs.Aspects of our development programs are currently being supported, in part, with funding from CARB-X, the DoD and NIAID.Contracts and grants awarded by the U.S. government, its agencies, and its partners, including our awards from CARB-X, the DoD and NIAID, includeprovisions that reflect the government’s substantial rights and remedies, many of which are not typically found in commercial contracts, including powers ofthe government to: •terminate agreements, in whole or in part, for any reason or no reason; •reduce or modify the government’s obligations under such agreements without the consent of the other party; •claim rights, including intellectual property rights, in products and data developed under such agreements; •audit contract-related costs and fees, including allocated indirect costs; •suspend the contractor or grantee from receiving new contracts pending resolution of alleged violations of procurement laws or regulations; •impose U.S. manufacturing requirements for products that embody inventions conceived or first reduced to practice under such agreements;51 •suspend or debar the contractor or grantee from doing future business with the government; •control and potentially prohibit the export of products; •pursue criminal or civil remedies under the False Claims Act, False Statements Act and similar remedy provisions specific to governmentagreements; and •limit the government’s financial liability to amounts appropriated by the U.S. Congress on a fiscal-year basis, thereby leaving some uncertaintyabout the future availability of funding for a program even after it has been funded for an initial period.We may not have the right to prohibit the U.S. government from using certain technologies developed by us, and we may not be able to prohibit third-party companies, including our competitors, from using those technologies in providing products and services to the U.S. government. The U.S. governmentgenerally takes the position that it has the right to royalty-free use of technologies that are developed under U.S. government contracts.In addition, government contracts and grants, and subcontracts and subawards awarded in the performance of those contracts and grants, normallycontain additional requirements that may increase our costs of doing business, reduce our profits, and expose us to liability for failure to comply with theseterms and conditions. These requirements include, for example: •specialized accounting systems unique to government awards; •mandatory financial audits and potential liability for price adjustments or recoupment of government funds after such funds have been spent; •adhering to stewardship principals imposed by CARB-X as a condition of the award; •public disclosures of certain award information, which may enable competitors to gain insights into our research program; and •mandatory socioeconomic compliance requirements, including labor standards, non-discrimination and affirmative action programs andenvironmental compliance requirements.As an organization, we are relatively new to government contracting and new to the regulatory compliance obligations that such contracting entails. Ifwe fail to maintain compliance with those obligations, we may be subject to potential liability and to termination of our contracts.As a U.S. government contractor, we are subject to financial audits and other reviews by the U.S. government of our costs and performance on theircontracts, as well as our accounting and general business practices related to these contracts. Based on the results of its audits, the government may adjust ourcontract-related costs and fees, including allocated indirect costs. Although adjustments arising from government audits and reviews have not had a materialadverse effect on our financial condition or results of operations in the past, we cannot make assurances that future audits and reviews will not have thoseeffects.Risks Related to Our Intellectual PropertyIf we are unable to obtain and maintain sufficient patent protection for our technology or our product candidates, or if the scope of the patent protection isnot sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability tosuccessfully commercialize our technology and product candidates may be adversely affected.Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to ourproprietary chemistry technology and product candidates. If we do not adequately protect our intellectual property, competitors may be able to use ourtechnologies and erode or negate any competitive advantage that we may have, which could harm our business and ability to achieve profitability. Toprotect our proprietary position, we file patent applications in the United States and abroad related to our novel technologies and product candidates that areimportant to our business. The patent application and approval process is expensive and time-consuming. We may not be able to file and prosecute allnecessary or desirable patent applications at a reasonable cost or in a timely manner. We may also fail to identify patentable aspects of our research anddevelopment before it is too late to obtain patent protection.The patent position of biotechnology and pharmaceutical companies generally is highly uncertain. No consistent policy regarding the breadth ofclaims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, thedetermination of patent rights with respect to pharmaceutical compounds and technologies commonly involves complex legal and factual questions, whichhas in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights arehighly uncertain. Furthermore, recent changes in patent laws in the United States, including the America Invents Act of 2011, may affect the scope, strengthand enforceability of our patent rights or the nature of proceedings which may be brought by us related to our patent rights.52 Our pending and future patent applications may not result in patents being issued which protect our technology or product candidates, in whole or inpart, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation ofthe patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.The laws of foreign countries may not protect our rights to the same extent or in the same manner as the laws of the United States. For example, evenassuming the other requirements for patentability are met, currently, in the United States, the first to make the claimed invention is entitled to the patent,while outside the United States, the first to file a patent application is entitled to the patent. Publications of discoveries in the scientific literature often lagbehind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, orin some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, orthat we were the first to file for patent protection of such inventions. As a result of the America Invents Act of 2011, the United States transitioned to a first-inventor-to-file system in March 2013, under which, assuming the other requirements for patentability are met, the first inventor to file a patent application isentitled to the patent. However, as a result of the lag in the publication of patent applications following filing in the United States, we are still not be able tobe certain upon filing that we are the first to file for patent protection for any invention. Moreover, we may be subject to a third-party preissuance submissionof prior art to the U.S. Patent and Trademark Office, or become involved in opposition, derivation, reexamination, inter partes review or interferenceproceedings, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such submission,proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or product candidatesand compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patentrights.Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitorsfrom competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patentsby developing similar or alternative technologies or products in a non-infringing manner. Our competitors may seek to market generic versions of anyapproved products by submitting Abbreviated New Drug Applications to the FDA in which they claim that patents owned or licensed by us are invalid,unenforceable and/or not infringed. Alternatively, our competitors may seek approval to market their own products similar to or otherwise competitive withour products. In these circumstances, we may need to defend and/or assert our patents, including by filing lawsuits alleging patent infringement. In any ofthese types of proceedings, a court or other agency with jurisdiction may find our patents invalid and/or unenforceable. Even if we have valid andenforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may bechallenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patentclaims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializingsimilar or identical technology and products, or limit the duration of the patent protection of our technology and products. In addition, given the amount oftime required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortlyafter such candidates are commercialized.We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming andunsuccessful.Competitors may infringe our patents, trademarks, copyrights or other intellectual property, or those of our licensors. To counter infringement orunauthorized use, we may be required to file infringement claims, which can be expensive and time consuming and divert the time and attention of ourmanagement and scientific personnel. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against usalleging that we infringe their patents. In addition, in a patent infringement proceeding, there is a risk that a court will decide that a patent of ours is invalidor unenforceable, in whole or in part, and that we do not have the right to stop the other party from using the invention at issue. There is also a risk that, evenif the validity of such patents is upheld, the court will construe the patent’s claims narrowly or decide that we do not have the right to stop the other partyfrom using the invention at issue on the grounds that our patents do not cover the invention. An adverse outcome in a litigation or proceeding involving ourpatents could limit our ability to assert our patents against those parties or other competitors, and may curtail or preclude our ability to exclude third partiesfrom making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, businessprospects and financial condition. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid orunenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we couldultimately be forced to cease use of such trademarks.53 In any infringement litigation, any award of monetary damages we receive may not be commercially valuable. Furthermore, because of the substantialamount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could becompromised by disclosure during litigation. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursuesuch infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of suchlitigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings.If we are sued for infringing intellectual property rights of third parties, or otherwise become involved in disputes regarding our intellectual propertyrights, such litigation could be costly and time consuming and could prevent or delay us from developing or commercializing our product candidates.Our commercial success depends, in part, on our ability to develop, manufacture, market and sell our product candidates and use our proprietarychemistry technology without infringing the intellectual property and other proprietary rights of third parties. Numerous third-party U.S. and non-U.S. issuedpatents and pending applications exist in the area of antibacterial treatment, including compounds, formulations, treatment methods and synthetic processesthat may be applied towards the synthesis of antibiotics. If any of their patents or patent applications cover our product candidates or technologies, we maynot be free to manufacture or market our product candidates as planned.There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, orthreatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our technology or product candidates,including interference proceedings before the U.S. Patent and Trademark Office. Intellectual property disputes arise in a number of areas including withrespect to patents, use of other proprietary rights and the contractual terms of license arrangements. Third parties may assert claims against us based onexisting or future intellectual property rights. The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantifiedin advance. With respect to our Meiji License of certain know-how used in SPR994, we are neither a party to, nor an express third-party beneficiary of, theletter agreement between Meiji and Global Pharma consenting to Meiji’s arrangement with us. As such, if any dispute among the parties were to occur, ourdirect enforcement rights with respect to the letter agreement may be limited or uncertain. A termination or early expiration of the head license between Meijiand Global Pharma (which currently by its terms is set to expire in January 2022) or any restriction on our ability to use the Global Pharma know-how couldhave a negative impact on our development of SPR994 and adversely affect our business.If we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease developing, manufacturingor commercializing the infringing product candidate or product. Alternatively, we may be required to obtain a license from such third party in order to use theinfringing technology and continue developing, manufacturing or marketing the infringing product candidate. However, we may not be able to obtain anyrequired license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving ourcompetitors access to the same technologies licensed to us. In addition, we could be found liable for monetary damages, including treble damages andattorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidatesor force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidentialinformation or trade secrets of third parties could have a similar negative effect on our business.We may be subject to claims that we or our employees have misappropriated the intellectual property of a third party, or claiming ownership of what weregard as our own intellectual property.Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors orpotential competitors. Although we try to ensure that our employees do not use the intellectual property and other proprietary information or know-how ofothers in their work for us, we may be subject to claims that we or these employees have used or disclosed such intellectual property or other proprietaryinformation. Litigation may be necessary to defend against these claims.In addition, while we typically require our employees, consultants and contractors who may be involved in the development of intellectual propertyto execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in factdevelops intellectual property that we regard as our own. To the extent that we fail to obtain such assignments or such assignments are breached, we may beforced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectualproperty. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights orpersonnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to ourmanagement and scientific personnel.54 If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our businesswould be harmed.In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technologyand other proprietary information, in seeking to develop and maintain a competitive position. We seek to protect these trade secrets, in part, by enteringinto non-disclosure and confidentiality agreements with parties who have access to them, such as our consultants, independent contractors, advisors,corporate collaborators, outside scientific collaborators, contract manufacturers, suppliers and other third parties. We, as well as our licensors, also enter intoconfidentiality and invention or patent assignment agreements with employees and certain consultants. Any party with whom we have executed such anagreement may breach that agreement and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequateremedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming,and the outcome is unpredictable. In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we wouldhave no right to prevent such third party, or those to whom they communicate such technology or information, from using that technology or information tocompete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our business and competitive position couldbe harmed.We have not yet registered our trademarks. Failure to secure those registrations could adversely affect our business.We have not yet registered our trademarks in the United States or other countries. If we do not secure registrations for our trademarks, we mayencounter more difficulty in enforcing them against third parties than we otherwise would, which could adversely affect our business. We have also not yetregistered trademarks for any of our product candidates in any jurisdiction. When we file trademark applications for our product candidates thoseapplications may not be allowed for registration, and registered trademarks may not be obtained, maintained or enforced. During trademark registrationproceedings in the United States and foreign jurisdictions, we may receive rejections. We are given an opportunity to respond to those rejections, but we maynot be able to overcome such rejections. In addition, in the United States Patent and Trademark Office and in comparable agencies in many foreignjurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition orcancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings.In addition, any proprietary name we propose to use with SPR994 or any other product candidate in the United States must be approved by the FDA,regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names,including an evaluation of potential for confusion with other product names. If the FDA objects to any of our proposed proprietary product names, we may berequired to expend significant additional resources in an effort to identify a suitable proprietary product name that would qualify under applicable trademarklaws, not infringe the existing rights of third parties and be acceptable to the FDA.Risks Related to Regulatory Approval and Other Legal Compliance MattersIf we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize SPR994 or our otherproduct candidates, and our ability to generate revenue will be materially impaired.Our product candidates and the activities associated with their development and commercialization, including their design, testing, manufacture,safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDAand other regulatory agencies in the United States and by comparable foreign regulatory authorities, with regulations differing from country to country.Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate. We currently do not have anyproducts approved for sale in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain marketingapprovals and expect to rely on third-party contract research organizations to assist us in this process.The time required to obtain approval, if any, by the FDA and comparable foreign authorities is unpredictable but typically takes many years followingthe commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition,approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’sclinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that none ofour existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval. Neither we nor anyfuture collaborator is permitted to market any of our product candidates in the United States until we or they receive regulatory approval of an NDA from theFDA.55 In order to obtain approval to commercialize a product candidate in the United States or abroad, we or our collaborators must demonstrate to thesatisfaction of the FDA or foreign regulatory agencies, that such product candidates are safe and effective for their intended uses. Results from nonclinicalstudies and clinical trials can be interpreted in different ways. Even if we believe that the nonclinical or clinical data for our product candidates arepromising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. The FDA may also require us to conductadditional nonclinical studies or clinical trials for our product candidates either prior to or post-approval, and it may otherwise object to elements of ourclinical development program.We have not submitted an NDA for any of our product candidates. An NDA must include extensive preclinical and clinical data and supportinginformation to establish the product candidate’s safety and efficacy for each desired indication. The NDA must also include significant information regardingthe chemistry, manufacturing and controls for the product candidate. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. The FDAhas substantial discretion in the review and approval process and may refuse to accept for filing any application or may decide that our data are insufficientfor approval and require additional nonclinical, clinical or other studies. Foreign regulatory authorities have differing requirements for approval of drugs withwhich we must comply prior to marketing. Obtaining marketing approval for marketing of a product candidate in one country does not ensure that we will beable to obtain marketing approval in other countries, but the failure to obtain marketing approval in one jurisdiction could negatively affect our ability toobtain marketing approval in other jurisdictions. The FDA or any foreign regulatory bodies can delay, limit or deny approval of our product candidates orrequire us to conduct additional nonclinical or clinical testing or abandon a program for many reasons, including: •the FDA or the applicable foreign regulatory agency’s disagreement with the design or implementation of our clinical trials; •negative or ambiguous results from our clinical trials or results that may not meet the level of statistical significance required by the FDA orcomparable foreign regulatory agencies for approval; •serious and unexpected drug-related side effects experienced by participants in our clinical trials or by individuals using drugs similar to ourproduct candidates; •our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory body that our product candidates are safe andeffective for the proposed indication; •the FDA’s or the applicable foreign regulatory agency’s disagreement with the interpretation of data from nonclinical studies or clinical trials; •our inability to demonstrate the clinical and other benefits of our product candidates outweigh any safety or other perceived risks; •the FDA’s or the applicable foreign regulatory agency’s requirement for additional nonclinical studies or clinical trials; •the FDA’s or the applicable foreign regulatory agency’s disagreement regarding the formulation, labeling and/or the specifications for ourproduct candidates; or •the potential for approval policies or regulations of the FDA or the applicable foreign regulatory agencies to significantly change in a mannerrendering our clinical data insufficient for approval.Of the large number of drugs in development, only a small percentage complete the FDA or foreign regulatory approval processes and are successfullycommercialized. The lengthy review process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatoryapproval, which would significantly harm our business, financial condition, results of operations and prospects.Even if we eventually receive approval of an NDA or foreign marketing application for our product candidates, the FDA or the applicable foreignregulatory agency may grant approval contingent on the performance of costly additional clinical trials, often referred to as Phase 4 clinical trials, and theFDA may require the implementation of a Risk Evaluation and Mitigation Strategy, or REMS, which may be required to ensure safe use of the drug afterapproval. The FDA or the applicable foreign regulatory agency also may approve a product candidate for a more limited indication or patient populationthan we originally requested, and the FDA or applicable foreign regulatory agency may not approve the labeling that we believe is necessary or desirable forthe successful commercialization of a product candidate. Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay orprevent commercialization of that product candidate and would materially adversely impact our business and prospects.56 We may seek fast track designation for SPR994 or one or more of our other product candidates, but we might not receive such designation, and in anycase, such designation may not actually lead to a faster development or regulatory review or approval process.If a drug is intended for the treatment of a serious condition and nonclinical or clinical data demonstrate the potential to address unmet medical needfor this condition, a drug sponsor may apply for fast track designation by the FDA for the particular indication under study. If fast track designation isobtained, the FDA may initiate review of sections of an NDA before the application is complete. This “rolling review” is available if the applicant providesand the FDA approves a schedule for the remaining information. If we seek fast track designation for a product candidate, we may not receive it from the FDA.However, even if we receive fast track designation, fast track designation does not ensure that we will receive marketing approval or that approval will begranted within any particular timeframe. We may not experience a faster development or regulatory review or approval process with fast track designationcompared to conventional FDA procedures. In addition, the FDA may withdraw fast track designation if it believes that the designation is no longersupported by data from our clinical development program. Fast track designation alone does not guarantee qualification for the FDA’s priority reviewprocedures.If we are unable to obtain marketing approval in international jurisdictions, we will not be able to market our product candidates abroad.In order to market and sell SPR994 or our other product candidates in the European Union and many other jurisdictions, we must obtain separatemarketing approvals and comply with numerous and varying regulatory requirements. Approval by the FDA does not ensure approval by regulatoryauthorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatoryauthorities in other countries or jurisdictions or by the FDA. The approval procedure varies among countries and can involve additional testing. In addition,clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. The time required to obtain approval may differsubstantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risksassociated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved forreimbursement before the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United Stateson a timely basis or at all.If we receive regulatory approval for any product candidate, we will be subject to ongoing obligations and continuing regulatory review, which may resultin significant additional expense. Our product candidates, if approved, could be subject to restrictions or withdrawal from the market, and we may besubject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and ifapproved.Any product candidate for which we obtain marketing approval will also be subject to ongoing regulatory requirements for labeling, packaging,storage, distribution, advertising, promotion, record keeping and submission of safety and other post-market information. For example, approved products,manufacturers and manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control andmanufacturing procedures conform to cGMPs. As such, we and our contract manufacturers will be subject to continual review and periodic inspections toassess compliance with cGMPs. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatorycompliance, including manufacturing, production and quality control. We will also be required to report certain adverse reactions and production problems,if any, to the FDA and to comply with requirements concerning advertising and promotion for our products.In addition, even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for whichthe product may be marketed, may be subject to significant conditions of approval or may impose requirements for costly post-marketing testing andsurveillance to monitor the safety or efficacy of the product. The FDA may also require a REMS as a condition of approval of our product candidates, whichcould include requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distributionmethods, patient registries and other risk minimization tools. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure thatdrugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling and regulatory requirements. The FDAalso imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we do not restrict the marketing of our products only totheir approved indications, we may be subject to enforcement action for off-label marketing.57 If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, orproblems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, it may impose restrictionson that product or us. In addition, if any product fails to comply with applicable regulatory requirements, a regulatory agency may: •issue fines, warning letters, untitled letters or impose holds on clinical trials if any are still on-going; •mandate modifications to promotional materials or require provision of corrective information to healthcare practitioners; •impose restrictions on the product or its manufacturers or manufacturing processes; •impose restrictions on the labeling or marketing of the product; •impose restrictions on product distribution or use; •require post-marketing clinical trials; •require withdrawal of the product from the market; •refuse to approve pending applications or supplements to approved applications that we submit; •require recall of the product; •require entry into a consent decree, which can include imposition of various fines (including restitution or disgorgement of profits or revenue),reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance; •suspend or withdraw marketing approvals; •refuse to permit the import or export of the product; •seize or detain supplies of the product; or •issue injunctions or impose civil or criminal penalties.Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws andregulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and futureearnings.Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any product candidates forwhich we may obtain marketing approval. Our future arrangements with third-party payors and customers will expose us to broadly applicable fraud andabuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, selland distribute any products for which we obtain marketing approval and reimbursement. These laws and regulations include, for example, the false claimsand anti-kickback statutes and regulations. At such time as we market, sell and distribute any products for which we obtain marketing approval andreimbursement, it is possible that our business activities could be subject to challenge under one or more of these laws and regulations. Restrictions underapplicable federal and state healthcare laws and regulations include the following: •the federal healthcare Anti-Kickback Statute, among other things, prohibits persons from knowingly and willfully soliciting, offering, receivingor providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase,order or recommendation of, any good or service for which payment may be made under federally funded healthcare programs such as Medicareand Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate the statute in order to havecommitted a violation. In addition, the government may assert that a claim that includes items or services resulting from a violation of the federalAnti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act; •the federal False Claims Act imposes criminal and civil penalties, which can be enforced by private citizens through civil whistleblower and quitam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for paymentthat are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; •the federal ban on physician self referrals, which prohibits, subject to certain exceptions, physician referrals of Medicare or Medicaid patients toan entity providing certain “designated health services” if the physician or an immediate family member of the physician has any financialrelationship with the entity;58 •the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme todefraud any healthcare benefit program or for making any false statements relating to healthcare matters; as in the case of the federal healthcareAnti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate the statute in order tohave committed a violation; •HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, also imposes obligations on certain coveredentities as well as their business associates that perform certain services involving the use or disclosure of individually identifiable healthinformation, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individuallyidentifiable health information, and require notification to affected individuals and regulatory authorities of certain breaches of security ofindividually identifiable health information; •the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making anymaterially false statement in connection with the delivery of or payment for healthcare benefits, items or services; •the federal transparency or “sunshine” requirements under the Patient Protection and Affordable Care Act, as amended by the Health Care andEducation Affordability Reconciliation Act, or collectively, the ACA, requires manufacturers of drugs, devices, biologics and medical supplies toreport to the U.S. Department of Health and Human Services information related to physician payments and other transfers of value and physicianownership and investment interests; and •analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claimsinvolving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state lawsrequire pharmaceutical companies to implement compliance programs and to track and report gifts, compensation and other remunerationprovided to physicians, in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcareproviders or marketing expenditures and pricing information. State laws also govern the privacy and security of health information in somecircumstances, and many such state laws differ from each other in significant ways and often are not preempted by HIPAA, thus complicatingcompliance efforts.We will be required to spend substantial time and money to ensure that our business arrangements with third parties, and our business generally,comply with applicable healthcare laws and regulations. Even then, governmental authorities may conclude that our business practices, includingarrangements we may have with physicians and other healthcare providers, some of whom may receive stock options as compensation for services provided,do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. Ifgovernmental authorities find that our operations violate any of these laws or any other governmental regulations that may apply to us, we may be subject tosignificant civil, criminal and administrative penalties, damages, imprisonment, fines, exclusion from government funded healthcare programs, such asMedicare and Medicaid, and we may be required to curtail or restructure our operations. Moreover, we expect that there will continue to be federal and statelaws and regulations, proposed and implemented, that could affect our operations and business. The extent to which future legislation or regulations, if any,relating to healthcare fraud and abuse laws or enforcement, may be enacted or what effect such legislation or regulation would have on our business remainsuncertain.Recently enacted and future policies and legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize ourproduct candidates and may affect the reimbursement made for any product candidate for which we receive marketing approval.The pricing and reimbursement environment may become more challenging due to, among other reasons, policies advanced by the new presidentialadministration, federal agencies, new healthcare legislation passed by the U.S. Congress or fiscal challenges faced by all levels of government healthadministration authorities. Among policy makers and payors in the United States and foreign countries, there is significant interest in promoting changes inhealthcare systems with the stated goals of containing healthcare costs, improving quality and expanding access to healthcare. In the United States, thepharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. We expect toexperience pricing pressures in connection with the sale of any products for which we obtain marketing approval, due to the trend toward managedhealthcare, the increasing influence of health maintenance organizations and additional legislative proposals. Resulting legislative, administrative, or policychanges from payors may reduce payments for any products for which we obtain marketing approval and could affect future revenues.The ACA became law in the United States in March 2010 with the goals of broadening access to health insurance, reducing or constraining the growthof healthcare spending, enhancing remedies against fraud and abuse, adding new transparency requirements for the health care and health insuranceindustries and imposing additional health policy reforms. Provisions of ACA may negatively affect our future revenues. For example, the ACA requires,among other things, that annual fees be paid by manufacturers for certain branded prescription drugs, that manufacturers participate in a discount program forcertain outpatient drugs under Medicare Part D,59 and that manufacturers provide increased rebates under the Medicaid Drug Rebate Program for outpatient drugs dispensed to Medicaid recipients. The ACAalso addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for line extensions andexpands oversight and support for the federal government’s comparative effectiveness research of services and products.Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. As a result, there have been delays in theimplementation of certain aspects of the ACA. Both Congress and President Trump have expressed their intention to repeal or repeal and replace the ACA,and as a result certain sections of the ACA have not been fully implemented or effectively repealed. The uncertainty around the future of the ACA, and inparticular the impact to reimbursement levels, may lead to uncertainty or delay in the purchasing decisions of our customers, which may in turn negativelyimpact our product sales. If there are not adequate reimbursement levels, our business and results of operations could be adversely affected. Beginning on April 1, 2013, Medicare payments for all items and services under Part A and B, including drugs and biologicals, and most payments toplans under Medicare Part D were reduced by 2%, or automatic spending reductions, required by the Budget Control Act of 2011, or BCA, as amended by theAmerican Taxpayer Relief Act of 2012. The BCA requires sequestration for most federal programs, excluding Medicaid, Social Security, and certain otherprograms. The BCA caps the cuts to Medicare payments for items and services and payments to Part D plans at 2%. Subsequent legislation extended the 2%reduction, on average, to 2025. As long as these cuts remain in effect, they could adversely affect payment for our product candidates. We expect thatadditional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governmentswill pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.Moreover, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products. There havebeen several U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, reduce the cost ofprescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government programreimbursement methodologies for drugs. Individual states in the United States have also become increasingly active in passing legislation and implementingregulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certainproduct access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries andbulk purchasing.Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities forpharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance orinterpretations will be changed, or what the effect of such changes on the marketing approvals of our product candidates, if any, may be. In addition,increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to morestringent product labeling and post-marketing testing and other requirements.If we successfully commercialize one of our product candidates, failure to comply with our reporting and payment obligations under U.S. governmentalpricing programs could have a material adverse effect on our business, financial condition and results of operations.If we participate in the Medicaid Drug Rebate Program if and when we successfully commercialize a product candidate, we will be required to reportcertain pricing information for our product to the Centers for Medicare & Medicaid Services, the federal agency that administers the Medicaid and Medicareprograms. We may also be required to report pricing information to the U.S. Department of Veterans Affairs. If we become subject to these reportingrequirements, we will be liable for errors associated with our submission of pricing data, for failure to report pricing data in a timely manner, and forovercharging government payers, which can result in civil monetary penalties under the Medicaid statute, the federal civil False Claims Act, and other lawsand regulations.Our employees, independent contractors, principal investigators, contract research organizations, consultants or vendors may engage in misconduct orother improper activities, including noncompliance with regulatory standards and requirements.We are exposed to the risk that our employees, independent contractors, principal investigators, contract research organizations, consultants orvendors may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct ordisclosure of unauthorized activities to us that violates: FDA regulations, including those laws requiring the reporting of true, complete and accurateinformation to the FDA; manufacturing standards; federal and state healthcare fraud and abuse laws and regulations; or laws that require the true, completeand accurate reporting of financial information or data. Specifically, sales, marketing and business arrangements in the healthcare industry are subject toextensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict orprohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business60 arrangements. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials orcreating fraudulent data in our preclinical studies or clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is notalways possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent this activitymay not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuitsstemming from a failure to be in compliance with such laws or regulations. Additionally, we are subject to the risk that a person could allege such fraud orother misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights,those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetaryfines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm,diminished potential profits and future earnings, and curtailment of our operations, any of which could adversely affect our business, financial condition,results of operations or prospects.The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act,” or TCJA, which significantly reforms the Internal RevenueCode of 1986, as amended, or the Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitationson the deductibility of interest and net operating loss carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration froma “worldwide” system of taxation to a territorial system. Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate,and the impact, if any, will be recognized in our tax expense in the year of enactment. We continue to examine the impact this tax reform legislation mayhave on our business. The impact of this tax reform is uncertain and could be adverse. We urge our investors to consult with their legal and tax advisors withrespect to such legislation and the potential tax consequences of investing in our common stock.Risks Related to Employee Matters and Managing GrowthOur future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualifiedpersonnel.Our industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the development,regulatory, commercialization and business development expertise of Ankit Mahadevia, M.D., our President and Chief Executive Officer, as well as the otherprincipal members of our management, scientific and clinical team. Although we have formal employment agreements with our executive officers, theseagreements do not prevent them from terminating their employment with us at any time.If we lose one or more of our executive officers or key employees, our ability to implement our business strategy successfully could be seriouslyharmed. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limitednumber of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize productcandidates successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional keypersonnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We alsoexperience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants andadvisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultantsand advisors may be engaged by entities other than us and may have commitments under consulting or advisory contracts with other entities that may limittheir availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to develop and commercialize product candidateswill be limited.We expect to grow our organization, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of productcandidate development, regulatory affairs and sales, marketing and distribution. Our management may need to divert a disproportionate amount of itsattention away from our day-to-day activities to devote time to managing these growth activities. To manage these growth activities, we must continue toimplement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualifiedpersonnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth,we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. Our inability to effectivelymanage the expansion of our operations may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, lossof employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divertfinancial resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage ourexpected growth, our expenses may increase more than expected, our potential ability to generate revenue could be reduced and we may not be able toimplement our business strategy.61 If foreign approvals are obtained, we will be subject to additional risks in conducting business in international markets.Even if we are able to obtain approval for commercialization of a product candidate in a foreign country, we will be subject to additional risks relatedto international business operations, including: •potentially reduced protection for intellectual property rights; •the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to importgoods from a foreign market (with low or lower prices) rather than buying them locally; •unexpected changes in tariffs, trade barriers and regulatory requirements; •economic weakness, including inflation, or political instability in particular foreign economies and markets; •workforce uncertainty in countries where labor unrest is more common than in the United States; •production shortages resulting from any events affecting a product candidate and/or finished drug product supply or manufacturing capabilitiesabroad; •business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, hurricanes,typhoons, floods and fires; and •failure to comply with Office of Foreign Asset Control rules and regulations and the Foreign Corrupt Practices Act.These and other risks may materially adversely affect our ability to attain or sustain revenue from international markets.We may engage in acquisitions that could disrupt our business, cause dilution to our stockholders or reduce our financial resources.In the future, we may enter into transactions to acquire other businesses, products or technologies. If we do identify suitable candidates, we may not beable to make such acquisitions on favorable terms, or at all. Any acquisitions we make may not strengthen our competitive position, and these transactionsmay be viewed negatively by customers or investors. We may decide to incur debt in connection with an acquisition or issue our common stock or otherequity securities to the stockholders of the acquired company, which would reduce the percentage ownership of our existing stockholders. We could incurlosses resulting from undiscovered liabilities of the acquired business that are not covered by the indemnification we may obtain from the seller. In addition,we may not be able to successfully integrate the acquired personnel, technologies and operations into our existing business in an effective, timely andnondisruptive manner. Acquisitions may also divert management attention from day-to-day responsibilities, increase our expenses and reduce our cashavailable for operations and other uses. We cannot predict the number, timing or size of future acquisitions or the effect that any such transactions might haveon our operating results.Risks Related to Our Common StockAn active trading market for our common stock may not develop.Our shares of common stock began trading on The Nasdaq Global Select Market on November 2, 2017. Given the limited trading history of ourcommon stock, there is a risk that an active trading market for our shares may not be sustained, which could put downward pressure on the market price of ourcommon stock and thereby affect the ability of stockholders to sell their shares. An inactive trading market for our common stock may also impair our abilityto raise capital to continue to fund our operations by selling shares and may impair our ability to acquire other companies or technologies by using our sharesas consideration.The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for our stockholders.Our stock price may be volatile. The stock market in general and the market for smaller pharmaceutical and biotechnology companies in particularhave experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, ourstockholders may not be able to sell their shares at or above the price they paid for their shares. The market price for our common stock may be influenced bymany factors, including: •the success of existing or new competitive products or technologies; •the timing of clinical trials of SPR994 and any other product candidate; •results of clinical trials of SPR994 and any other product candidate; •failure or discontinuation of any of our development programs; •results of clinical trials of product candidates of our competitors;62 •regulatory or legal developments in the United States and other countries; •developments or disputes concerning patent applications, issued patents or other proprietary rights; •the recruitment or departure of key personnel; •the level of expenses related to any of our product candidates or clinical development programs; •the results of our efforts to develop, in-license or acquire additional product candidates or products; •actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts; •announcement or expectation of additional financing efforts; •sales of our common stock by us, our insiders or other stockholders; •variations in our financial results or those of companies that are perceived to be similar to us; •changes in estimates or recommendations by securities analysts, if any, that cover our stock; •changes in the structure of healthcare payment systems; •market conditions in the pharmaceutical and biotechnology sectors; •general economic, industry and market conditions; and •the other factors described in this “Risk Factors” section.If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and tradingvolume could decline.The trading market for our common stock relies in part on the research and reports that securities or industry analysts publish about us or our business.If few analysts commence coverage of us, the trading price of our stock would likely decrease. If one or more of the analysts covering our business downgradeour stock or change their opinion of our stock, our share price would likely decline. In addition, if one or more of these analysts cease coverage of ourcompany or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume todecline.We have broad discretion in the use of our cash reserves and may not use them effectively.Our management will have broad discretion in the application of our cash reserves, including the proceeds from our IPO, and could spend these fundsin ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these fundseffectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delaythe development of our product candidates. Pending their use, we may invest our cash reserves in a manner that does not produce income or that loses value.We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stockless attractive to investors.We are an “emerging growth company,” as defined in the JOBS Act and may remain an emerging growth company for up to five years. For so long aswe remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to otherpublic companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirementsof Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements ofholding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Wecannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock lessattractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new orrevised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards wouldotherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and we will therefore be subject to the same newor revised accounting standards as other public companies that are not emerging growth companies.63 We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to newcompliance initiatives and corporate governance practices.As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting and otherexpenses that we did not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listingrequirements of The Nasdaq Global Select Market and other applicable securities rules and regulations impose various requirements on public companies,including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and otherpersonnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal andfinancial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may makeit more difficult and more expensive for us to obtain director and officer liability insurance, which could make it more difficult for us to attract and retainqualified members of our board of directors.We are currently evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing ofsuch costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, theirapplication in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertaintyregarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.Pursuant to Section 404 of the Sarbanes-Oxley Act, we will be required to furnish a report by our management on our internal control over financialreporting beginning with our second filing of an Annual Report on Form 10-K with the SEC after we become a public company. However, while we remain anemerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independentregistered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document andevaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internalresources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financialreporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement acontinuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able toconclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify oneor more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financialstatements.A significant portion of our total outstanding shares is restricted from immediate resale but may be sold into the market in the near future, which couldcause the market price of our common stock to decline significantly, even if our business is doing well.Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the marketthat the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. As of March 1, 2018,we had 14,369,182 shares of common stock outstanding. This includes the 5,971,498 shares that we sold in our initial public offering. The remaining8,397,684 shares are currently restricted under securities laws or as a result of lock-up agreements. These restrictions are due to expire April 30, 2018,resulting in these shares becoming eligible for public sale on May 1, 2018, subject to applicable securities laws. Holders of an aggregate of 8,144,366 sharesof our common stock will have rights, subject to conditions, to require us to file registration statements covering their shares or to include their shares inregistration statements that we may file for ourselves or other stockholders. We filed a registration statement on Form S-8 under the Securities Act onDecember 14, 2017, to register all of the shares of our common stock subject to outstanding options and all shares of our common stock otherwise issuablepursuant to our equity compensation plan. As of March 1, 2018, we had options to purchase an aggregate of 2,114,782 shares of our common stockoutstanding. These shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described above.We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. Accordingly, stockholders must rely on capitalappreciation, if any, for any return on their investment.We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance theoperation, development and growth of our business. To the extent that we enter into any future debt agreements, the terms of such agreements may alsopreclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be our stockholders’ sole source of gain for theforeseeable future.64 Our executive officers, directors and principal stockholders maintain the ability to control all matters submitted to stockholders for approval.As of March 1, 2018, our executive officers and directors, combined with our stockholders who as of such date owned more than 5% of ouroutstanding common stock, in the aggregate, beneficially own shares representing approximately 53% of our capital stock. As a result, if these stockholderswere to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs.For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all orsubstantially all of our assets. This concentration of ownership control may: •delay, defer or prevent a change in control; •entrench our management and/or our board of directors; or •impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders,more difficult and may prevent attempts by our stockholders to replace or remove our current management.Provisions in our amended and restated certificate of incorporation and amended and restated by-laws may discourage, delay or prevent a merger,acquisition or other change in control of us that our stockholders may consider favorable, including transactions in which our stockholders might otherwisereceive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our commonstock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of ourmanagement team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making itmore difficult for stockholders to replace members of our board of directors. Among other things, these provisions: •establish a classified board of directors such that all members of the board are not elected at one time; •allow the authorized number of our directors to be changed only by resolution of our board of directors; •limit the manner in which stockholders can remove directors from our board of directors; •establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on atstockholder meetings; •require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by writtenconsent; •limit who may call a special meeting of stockholders; •authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that wouldwork to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our boardof directors; and •require the approval of the holders of at least 75% of the votes that all of our stockholders would be entitled to cast to amend or repeal certainprovisions of our certificate of incorporation or by-laws.Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law,which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after thedate of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in aprescribed manner. This could discourage, delay or prevent someone from acquiring us or merging with us, whether or not it is desired by, or beneficial to, ourstockholders.Item 1B. Unresolved Staff Comments.None.65 Item 2. Properties.Our headquarters are located in Cambridge, Massachusetts, where we lease approximately 7,800 square feet of office space. In January 2018, weentered into an amendment to our Cambridge, Massachusetts facility lease. Pursuant to the amendment, we leased an additional approximately 7,800 squarefeet of office space in the same building. The term for the new office space is seven years from the delivery of the expansion premises to us, which we estimateto be December 1, 2018. In addition, the term of our existing office space lease has been extended so that it is coterminous with the new office space lease.We also sublease approximately 7,000 square feet of laboratory space in Watertown, Massachusetts. Our sublease extends through November 2019. Webelieve that our existing facilities will be sufficient to meet our current needs.Item 3. Legal Proceedings.We are not party to any material legal proceedings.Item 4. Mine Safety Disclosures.Not applicable.66 PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market InformationOur common stock has been publicly traded on The Nasdaq Global Select Market under the symbol “SPRO” since the initial public offering of ourcommon stock on November 2, 2017. Prior to that time, there was no public market for our common stock. The following table sets forth the high and lowsales prices of our common stock as reported on the Nasdaq Global Select Market for the quarter ended December 31, 2017: High Low Year Ended December 31, 2017 Fourth quarter ended December 31, 2017 $15.40 $9.84 Holders of RecordOn March 26, 2018, we had approximately 24 stockholders of record of our common stock. The actual number of stockholders is greater than thisnumber of record holders and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees.DividendsWe have never declared or paid cash dividends on our capital stock since our inception. We currently intend to retain all available funds and futureearnings, if any, for use in the operation of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Anyfuture determination to declare and pay dividends will be made at the discretion of our board of directors and will depend on various factors, includingapplicable laws, our results of operations, our financial condition, our capital requirements, general business conditions, our future prospects and other factorsthat our board of directors may deem relevant. Additionally, our ability to pay dividends on our capital stock could be limited by terms and covenants of anyfuture indebtedness.Stock Performance GraphThe following graph illustrates a comparison of the total cumulative stockholder return on our common stock since November 2, 2017, the date ourcommon stock first began trading on The Nasdaq Global Select Market, to the Nasdaq Composite Index and the Nasdaq Biotechnology Index. The graphassumes an initial investment of $100 in our common stock at the closing price of $11.50 on November 2, 2017 (our initial listing date), and in each of theindexes with relative performance tracked through December 31, 2017, assuming reinvestment of the full amount of all dividends, if any. The stockholderreturn shown in the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholderreturns.67 This graph shall not be deemed “soliciting material” or be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to theliabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act, whether made before orafter the date hereof and irrespective of any general incorporation language in any such filing. Recent Sales of Unregistered SecuritiesFrom January 1, 2017 through December 31, 2017, we sold and issued the following unregistered securities, which share numbers have been adjusted,as appropriate, for the one-for-6.0774 reverse stock split of our common stock that occurred on October 20, 2017: •Prior to filing our registration statement on Form S-8 on December 14, 2017, we issued to certain of our employees, consultants and directors,options to purchase an aggregate of 2,012,106 shares of our common stock under our 2017 Stock Incentive Plan, as amended, at a weighted-average exercise price of $7.24 per share. •On July 17, 2017, we sold 61,880 shares of our Series C preferred stock to Joel Sendek, our Chief Financial Officer, at a price of $1.7749 pershare, for aggregate proceeds of $0.1 million. Upon the closing of our initial public offering on November 6, 2017, all of such shares of Series Cpreferred stock converted into shares of common stock, as described in Note 6 to our consolidated financial statements appearing elsewhere inthis Annual Report on Form 10-K. •On July 17, 2017, we granted to Frank Thomas, a newly appointed member of our board of directors, stock options to purchase 30,515 shares ofour common stock, at an exercise price of $5.90 per share. •On June 30, 2017, as part of the Reorganization, each of the capital units of Spero Therapeutics, LLC issued and outstanding prior to theReorganization was cancelled and converted into and exchanged for one share of Spero Therapeutics, Inc. capital stock of the same class and/orseries as described in Note 1 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.68 •Prior to the Reorganization, we had granted a total of 431,375 incentive units to our employees, directors, and consultants, pursuant to theoperating agreement of Spero Therapeutics, LLC, as amended, at threshold prices ranging between $1.28 and $5.84 per incentive unit. Inconnection with the Reorganization, such incentive units were cancelled as they were deemed to be valueless based on a liquidation valuationbasis for federal income tax purposes and pursuant to contractual rights under the operating agreement of Spero Therapeutics, LLC. Promptlyafter the Reorganization, previous holders of incentive units who were still employed by us at the time of the Reorganization received stockoptions under the 2017 Plan. Such stock options were granted for the same number of shares of our common stock as the number of incentiveunits cancelled, and the stock options were granted on the same vesting terms and with similar rights and restrictions as the incentive units.Effective on July 6, 2017, we granted stock options to purchase an aggregate of 1,511,770 shares of our common stock. All such stock optionshave an exercise price of $5.90. •In March 2017, we issued an aggregate of 29,647,582 Class C preferred units, consisting of (i) 5,321,112 Class C preferred units in exchange for8,500 bridge units and (ii) 24,326,470 Class C preferred units at a price per unit of $1.7749 for an aggregate purchase price of approximately$43,177,052.No underwriters were used in the foregoing transactions, and no discounts or commissions were paid. All sales of securities described above wereexempt from the registration requirements of the Securities Act in reliance on Section 4(a)(2) of the Securities Act, Rule 701 promulgated under the SecuritiesAct or Regulation D promulgated under the Securities Act, relating to transactions by an issuer not involving a public offering. All of the foregoing securitiesare deemed restricted securities for purposes of the Securities Act.With respect to the foregoing transactions, the common units and incentive units, along with associated threshold prices, of Spero Therapeutics, LLChave been presented as if the one-for-6.0774 reverse stock split of our common stock that occurred on October 20, 2017 had been applied to such units andprices.Use of Proceeds from Registered SecuritiesOn November 6, 2017, we completed the initial public offering, or IPO, of our common stock. The offer and sale of all of the shares of our commonstock in our IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-220858), which was declared effectiveby the SEC on November 1, 2017.As of December 31, 2017, we had used approximately $7.4 million from the net proceeds from our IPO.Purchases of Equity Securities by the IssuerNone. 69 Item 6. Selected Financial Data.The following table sets forth selected consolidated financial data as of and for the years ended December 31, 2017, 2016 and 2015. We have derivedthe consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 and the consolidated balance sheet data as ofDecember 31, 2017 and 2016 from our audited consolidated financial statements included in this Annual Report on Form 10-K. We have derived theconsolidated balance sheet data as of December 31, 2015 from our audited financial statements, which are not included in this Annual Report on Form 10-K.This information should be read in conjunction with the consolidated financial statements and the related notes thereto included in Part II, Item 8 of thisAnnual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 ofthis Annual Report on Form 10-K. Year Ended December 31, 2017 2016 2015 (In thousands, except share and per share data) Consolidated Statement of Operations Data: Grant revenue $1,979 $335 $— Operating expenses: Research and development 32,869 26,333 11,125 General and administrative 10,840 7,223 2,202 Total operating expenses 43,709 33,556 13,327 Loss from operations (41,730) (33,221) (13,327)Other income (expense): Change in fair value of derivative liabilities 1,541 580 174 Interest income and other income (expense), net 303 — — Total other income (expense), net 1,844 580 174 Net loss (39,886) (32,641) (13,153)Less: Net loss attributable to non-controlling interest (1,143) (7,150) (2,999)Net loss attributable to Spero Therapeutics, Inc. (38,743) (25,491) (10,154)Accrued return on preferred shares (6,146) (3,441) (932)Accretion of redeemable bridge units and redeemable convertiblepreferred shares to redemption value (1,208) (996) (2,341)Net loss attributable to common stockholders of Spero Therapeutics,Inc. $(46,097) $(29,928) $(13,427) Net loss per share attributable to common stockholders of SperoTherapeutics, Inc. per share, basic and diluted(1) $(17.82) $(95.87) $(53.11) Weighted average shares outstanding, basic and diluted(1): 2,586,865 312,169 252,807 As of December 31, 2017 2016 2015 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $87,288 $10,315 $5,691 Working capital (deficit) 83,902 4,954 (433)Total assets 93,479 13,772 7,176 Bridge units — 7,924 — Redeemable convertible preferred units — 47,685 18,296 Total stockholders' equity (deficit) 84,957 (49,248) (18,553) (1)See Note 15 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for further details on the calculation ofbasic and diluted net loss per share attributable to common stockholders of Spero Therapeutics, Inc. 70 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financialstatements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis orset forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of thisAnnual Report on Form 10-K, our actual results could differ materially from the results described in, or implied by, the forward-looking statementscontained in the following discussion and analysis.Overview We are a multi-asset, clinical-stage biopharmaceutical company focused on identifying, developing and commercializing novel treatments for multi-drug resistant bacterial infections. Our most advanced product candidate, SPR994, is designed to be the first broad-spectrum oral carbapenem-class antibioticfor use in adults to treat MDR Gram-negative infections. Treatment with effective orally administrable antibiotics may prevent hospitalizations for seriousinfections and enable earlier, more convenient and cost-effective treatment of patients after hospitalization. We also have a platform technology known asour Potentiator Platform that we believe will enable us to develop drugs that will expand the spectrum and potency of existing antibiotics, including formerlyinactive antibiotics, against Gram-negative bacteria. Our lead product candidates generated from our Potentiator Platform are two intravenous, or IV,-administered agents, SPR741 and SPR206, designed to treat MDR Gram-negative infections in the hospital setting. In addition, we are developing SPR720,an oral antibiotic designed for the treatment of pulmonary non-tuberculous mycobacterial infections. We believe that our novel product candidates, ifsuccessfully developed and approved, would have a meaningful patient impact and significant commercial applications for the treatment of MDR infectionsin both the community and hospital settings. Since our inception in 2013, we have focused substantially all of our efforts and financial resources onorganizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights, building our intellectualproperty portfolio and conducting research and development activities for our product candidates. We do not have any products approved for sale and havenot generated any revenue from product sales. On November 6, 2017, we completed an initial public offering, or IPO, of our common stock, and issued and sold 5,500,000 shares of common stock ata public offering price of $14.00 per share, resulting in net proceeds of $71.6 million after deducting underwriting discounts and commissions but beforededucting offering costs. On November 14, 2017, we issued and sold an additional 471,498 shares of our common stock at the IPO price of $14.00 per sharepursuant to the underwriters’ partial exercise of their option to purchase additional shares of common stock, resulting in additional net proceeds of$6.1 million after deducting underwriting discounts. Aggregate net proceeds from the IPO totaled $74.2 million after deducting underwriting discounts,commissions and offering costs. Prior to the IPO, we funded our operations with proceeds from the sale of preferred units and bridge units and payments received under a concludedcollaboration agreement and funding from government contracts. Our ability to generate product revenue sufficient to achieve profitability will dependheavily on the successful development and eventual commercialization of one or more of our product candidates. As of December 31, 2017, we had anaccumulated deficit of $96.8 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval forour product candidates. If we obtain regulatory approval for any of our product candidates and do not enter into a commercialization partnership, we expectto incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution. Further,we expect to incur additional costs associated with operating as a public company. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we cangenerate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings,government funding arrangements, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We may be unable to raiseadditional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into suchagreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more ofour product candidates. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timingor amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may notbecome profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue ouroperations at planned levels and be forced to reduce or terminate our operations.71 As of December 31, 2017, we had cash and cash equivalents of $87.3 million. We believe that our existing cash and cash equivalents will enable us tofund our operating expenses and capital expenditure requirements into the second quarter of 2019.The Reorganization On June 30, 2017, we completed a series of transactions pursuant to which Spero Therapeutics, LLC merged with and into Spero Therapeutics, Inc., aDelaware corporation (formerly known as Spero OpCo, Inc.), with Spero Therapeutics, Inc. continuing as the surviving corporation. As part of thetransactions, each issued and outstanding preferred and common unit of Spero Therapeutics, LLC outstanding immediately prior to the Reorganization wasconverted into and exchanged for shares of Spero Therapeutics, Inc. capital stock of the same class and/or series on a one-for-one basis, and previouslyoutstanding incentive units of Spero Therapeutics, LLC were cancelled. In July 2017, previous holders of the cancelled incentive units who were stillemployed by us at the time of the Reorganization received stock options under our 2017 Stock Incentive Plan. Such stock options were granted for the samenumber of shares of our common stock as the number of incentive units cancelled, and the stock options were granted on the same vesting terms as theincentive units. All such stock options have an exercise price of $5.90 per share. Upon consummation of the Reorganization, the historical consolidated financial statements of Spero Therapeutics, LLC became the historicalconsolidated financial statements of Spero Therapeutics, Inc. Recent Developments Initiation of Phase 1 Clinical Trial of SPR994 in Australia In October 2017, we initiated our Phase 1 clinical trial of SPR994 in Australia. SPR994 is our novel antibiotic with potential to be the first broad-spectrum oral carbapenem approved for use in adults. While SPR994 has demonstrated a broad spectrum of activity against MDR Gram-negative bacteria, theclinical trial will focus on the treatment of complicated urinary tract infections, or cUTI. The trial is designed as a double-blind, placebo-controlled,ascending dose, multi-cohort study to assess the safety, tolerability, food effect and pharmacokinetics of SPR994 in healthy subjects. We expect to report top-line data from this trial in mid-2018. Thereafter, we plan to request a pre-Phase 3 meeting with the Food and Drug Administration, or FDA, to confirm that noadditional clinical trials or preclinical studies are required prior to initiating a Phase 3 clinical trial. Subject to feedback from the FDA, we plan to submit aninvestigational new drug application, or IND, and to obtain agreement on the clinical trial protocol in late 2018 and expect to initiate the pivotal Phase 3clinical trial of SPR994 for the treatment of cUTI around year-end 2018 in support of a new drug application, or NDA. Initiation of Phase 1b Clinical Trial of Potentiator SPR741 in the United Kingdom In late November 2017, as described below, we initiated our Phase 1b drug-drug interaction clinical trial of SPR741 in the United Kingdom. SPR741is one of our lead product candidates generated from our Potentiator Platform, such candidates currently consisting of SPR741 and SPR206, which are IV-administered agents designed to treat MDR Gram-negative infections in the hospital setting. SPR741 is our co-administered product candidate designed toexpand the spectrum and increase the potency of a partner antibiotic when administered in combination, and SPR206 is designed to have an antibioticactivity as a single agent. In preclinical studies, SPR741 has shown an ability to potentiate over two dozen existing antibiotics and enable activity againstGram-negative pathogens. The Phase 1b trial enrolled 27 healthy volunteers to evaluate SPR741 as a single dose in combination with compounds from the beta-lactam class ofantibiotics, including cephalosporins (such as ceftazidime), monobactams (such as aztreonam) and beta-lactams/beta-lactamase inhibitors (such aspiperacillin/tazobactum). The trial was designed to assess the impact, if any, on the standalone pharmacokinetics of SPR741 or the standalonepharmacokinetics of the beta-lactam combination drug when the two are dosed together as a single dose. We anticipate top-line data from this Phase 1b trialduring the second quarter of 2018. In addition, we continue to progress the development of our direct-acting Potentiator Platform molecules, exemplified by our product candidateSPR206. SPR206 is designed to also have antibiotic activity as a single agent against MDR and extremely drug resistant, or XDR, bacterial strains, includingvariants isolated in Pseudomonas aeruginosa, Acinetobacter baumannii and carbapenem-resistant Enterobacteriaceae. After we receive results from the Phase 1b clinical trial of SPR741 and our ongoing preclinical toxicology study of SPR206, we intend to prioritize ourproduct candidates for further clinical development. Our decision will be based on which program we believe represents the best opportunity for us within anoptimal timeframe, factoring in the choices we must make to prioritize the opportunities within our portfolio and to best deploy our capital resources.Accordingly, for the balance of 2018, our internal72 operational plans and budget and our estimate of our cash runway being sufficient to fund our operating expenses and capital expenditure requirements intothe second quarter of 2019 are based on us funding the development of SPR994 and SPR720 and either SPR206 or SPR741 during that period. We may seekpartnering opportunities or other non-dilutive funding for further clinical development of the Potentiator candidate we elect to deprioritize.Components of Our Results of OperationsGrant Revenue To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeablefuture. If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future fromproduct sales. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We maynever succeed in obtaining regulatory approval for any of our product candidates. To date, all of our revenue has been derived from government awards. We expect that our revenue for the next several years will be derived primarilyfrom payments under our government awards that we may enter into in the future. U.S. Department of Defense In September 2016, we were awarded a cooperative agreement with the U.S. Department of Defense to further develop anti-infective agents to combatGram-negative bacteria. The agreement is structured as a single, two-year $1.5 million award. We are eligible for the full funding from DoD and there are nooptions to be exercised at a later date. The DoD funding supports next-generation potentiator discovery and screening of SPR741 partner antibiotics. Wereceive funding under the DoD award as we incur qualifying expenses. NIAID In February 2017, we received an award from the U.S. National Institute of Allergy and Infectious Diseases to conduct additional preclinical studies ofSPR720. The award is structured as a 12-month $0.6 million base period, which has already been committed, and a $0.4 million option period. In February2018 NIAID exercised the $0.4 million 12-month option period. We receive funding under the NIAID award as we incur qualifying expenses. In June 2016, we entered into agreements with Pro Bono Bio PLC, a corporation organized under the laws of England, and certain of its affiliates,including PBB Distributions Limited and Cantab Anti-Infectives Limited, in order to acquire certain intellectual property and government fundingarrangements relating to SPR206. Under these agreements, CAI agreed to submit a request to NIAID to assign the CAI-held NIAID contract to us. The NIAIDcontract provides for development funding of up to $5.7 million over a base period and three option periods. As of December 31, 2017, funding for the baseperiod and the first two option periods totaling $5.1 million have been committed. Novation of the NIAID contract was finalized in December 2017. We willpay PBB a percentage of funds received from NIAID up to a maximum of $1.3 million. CARB-X In April 2017, we received an award from the Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator, a public-private partnershipfunded by the Biomedical Advanced Research and Development Authority within the U.S. Department of Health and Human Services, to be used to screen,identify and complete Phase 1 clinical trials with at least one partner compound for SPR741, one of our lead potentiator product candidates. The awardcommitted funding of $1.5 million over a 12-month period. On March 12, 2018, CARB-X committed an additional $0.4 million related to the first option fora period from December 1, 2017 to March 31, 2018. There will be no additional options exercised under the CARB-X award. We receive funding fromCARB-X as we incur qualifying expenses. Operating Expenses Research and Development Expenses Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and thedevelopment of our product candidates, which include: •employee-related expenses, including salaries, related benefits, travel and share-based compensation expense for employees engaged in researchand development functions;73 •expenses incurred in connection with the preclinical and clinical development of our product candidates, including under agreements withcontract research organizations, or CROs; •the cost of consultants and contract manufacturing organizations, or CMOs, that manufacture drug products for use in our preclinical studies andclinical trials; •facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance andsupplies; and •payments made under third-party licensing agreements. In April 2014, we entered into a research and development services and support agreement and an option agreement with Hoffmann-La Roche, Inc.and certain of its affiliates, or Roche, whereby we were required to use our best efforts to research and develop a specified asset while Roche would providepartial funding as well as participate in a joint steering committee for the development of this asset. The nonrefundable payments we received in 2014 and2015 from Roche were recognized as reductions to research and development expense. We terminated our agreement with Roche in August 2016. Prior to novation of the NIAID contract to us, under our agreements with PBB and certain of its affiliates, CAI continued to perform research anddevelopment at our direction. We paid CAI for such research and development services at an agreed-upon rate that took into consideration costs incurred byCAI, net of amounts reimbursed to CAI by NIAID. Thus, prior to novation of the NIAID contract to us, the amount we record as research and developmentexpenses is net of the NIAID reimbursement amount that CAI received. We also paid CAI a portion of the NIAID reimbursement received at rates specified inthe agreement, which we also recorded as research and development expense. Since the fourth quarter of 2016, we have recorded research and development expenses for our SPR741 program conducted by our Australiansubsidiary net of a 43.5% research and development tax incentive we expect to receive for qualified expenses from the Australian government. We expense research and development costs as incurred. Nonrefundable advance payments we make for goods or services to be received in the futurefor use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or theservices are performed. Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid toconsultants, contractors, CMOs and CROs in connection with our preclinical and clinical development activities. License fees and other costs incurred after aproduct candidate has been designated and that are directly related to the product candidate are included in direct research and development expenses forthat program. License fees and other costs incurred prior to designating a product candidate are included in early stage research programs. We do not allocateemployee costs, costs associated with our preclinical programs or facility expenses, including depreciation or other indirect costs, to specific productdevelopment programs because these costs are deployed across multiple product development programs and, as such, are not separately classified. The tablebelow summarizes our research and development expenses incurred by development program: Year Ended December 31, 2017 2016 $ Change (in thousands) Direct research and development expenses by program: SPR994 $9,803 $989 $8,814 SPR741 10,381 11,728 (1,347)SPR720 1,585 1,181 404 SPR206 1,437 — 1,437 Preclinical programs 1,337 6,510 (5,173)Unallocated expenses: Personnel related (including share-based compensation) 5,724 3,633 2,091 Facility related and other 2,602 2,292 310 Total research and development expenses $32,869 $26,333 $6,536 Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinicaldevelopment, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses willincrease substantially in connection with our planned clinical and preclinical development activities in the near term and in the future as we initiateadditional clinical trials and other studies of SPR994 and our other product candidates, continue to discover and develop additional product candidates, hireadditional clinical, scientific and commercial personnel and acquire or in-license other product candidates and technologies.74 At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical andclinical development of any of our product candidates. The successful development and commercialization of our product candidates is highly uncertain.This is due to the numerous risks and uncertainties, including the following: •successful completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreignregulatory authority; •receipt of marketing approvals from applicable regulatory authorities; •establishment of arrangements with third-party manufacturers to obtain manufacturing supply; •obtainment and maintenance of patent, trade secret protection and regulatory exclusivity, both in the United States and internationally,including our ability to maintain our license agreement with Meiji with respect to SPR994; •protection of our rights in our intellectual property portfolio; •launch of commercial sales of SPR994 and our other product candidates, if approved, whether alone or in collaboration with others; •acceptance of SPR994 and our other product candidates, if approved, by patients, the medical community and third-party payors; •competition with other therapies; and •a continued acceptable safety profile of SPR994 and our other product candidates, if approved. A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change thecosts and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our productcandidates. General and Administrative Expenses General and administrative expenses consist primarily of salaries and related costs, including share-based compensation, for personnel in executive,finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional feesfor legal, patent, consulting, investor and public relations, accounting and audit services. We anticipate that our general and administrative expenses willincrease in the future as we increase our headcount to support our continued research activities and development of our product candidates. We alsoanticipate that we will incur increased accounting, audit, legal, regulatory, compliance, and director and officer insurance costs as well as investor and publicrelations expenses associated with operating as a public company. Other Income (Expense) Change in Fair Value of Derivative Liabilities Tranche Rights. Our Class A preferred units and Class B preferred units provided our investors with the right to participate in subsequent offerings ofClass A and Class B preferred units in the event that specified milestones were achieved, which we refer to as tranche rights. We classified the tranche rightsas derivative liabilities on our consolidated balance sheet that we remeasured to fair value at each reporting date, and we recognized changes in the fair valueof the derivative associated with the tranche rights as a component of other income (expense) in our consolidated statement of operations and comprehensiveloss. The tranche rights were settled in 2016. Contingent Prepayment Options. Bridge units issued to our investors in 2016 were automatically convertible into equity units sold in a subsequentround of qualified financing at a discounted rate. We refer to these automatic conversion features as contingent prepayment options. We classified thecontingent prepayment options as a derivative liability on our consolidated balance sheet that we remeasured to fair value at each reporting date, and werecognized changes in the fair value of the derivative liability associated with the contingent prepayment options as a component of other income (expense)in our consolidated statement of operations and comprehensive loss. The contingent prepayment options were settled in the first quarter of 2017 upon theissuance of Class C preferred units. Anti-Dilution Rights. In connection with the issuance of non-controlling interests in certain of our subsidiaries, specifically Spero Potentiator, Inc.,Spero Europe, Ltd. and Spero Gyrase, Inc., we granted the minority investors the right to maintain ownership interests at no additional cost, subject to amaximum ownership percentage, which rights we refer to collectively as anti-dilution75 rights. We classified the anti-dilution rights as derivative liabilities on our consolidated balance sheet that we remeasured to fair value at each reporting date,and we recognized changes in the fair value of the derivative liabilities associated with the anti-dilution rights as a component of other income (expense) inour consolidated statement of operations and comprehensive loss. As of December 31, 2016, anti-dilution rights related to Spero Potentiator, Inc. were fullysettled as the maximum number of shares to be issued to the minority investor had been reached in August 2016. In May 2017, we repurchased 100% of theminority investor’s outstanding shares in Spero Europe, Ltd. and settled the anti-dilution rights associated with the shares. As of December 31, 2017, the derivative liability of $0.2 million recorded on our consolidated balance sheet relates only to the anti-dilution rightsheld by the minority investor in Spero Gyrase, Inc.Interest Income and Other Income (Expense), NetInterest income consists of interest earned on our cash equivalents, which are invested in money market accounts. Our interest income has not beensignificant due to nominal investment balances and low interest earned on those balances. Other income (expense), net, consists of insignificant amounts ofmiscellaneous income and expenses unrelated to our core operations.Income TaxesSince our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year or for our earned research anddevelopment tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating losscarryforwards and tax credits will not be realized. As of December 31, 2017, we had federal and state net operating loss carryforwards of $76.4 million and$76.0 million, respectively, which may be available to offset future income tax liabilities and begin to expire in 2033. In addition, as of December 31, 2017,we had foreign net operating loss carryforwards of $4.3 million, which may be available to offset future income tax liabilities and do not expire. As ofDecember 31, 2017, we also had federal and state research and development tax credit carryforwards of $1.7 million and $0.4 million, respectively, whichbegin to expire in 2033 and 2028, respectively. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.Prior to the Reorganization, our 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 theReorganization, all of Spero Therapeutics, LLC’s directly held subsidiaries (including Spero Therapeutics, Inc.) were treated as corporations for U.S. federalincome tax purposes and were subject to taxation in the United States or in other countries. Upon the Reorganization, Spero Therapeutics, Inc., whoseconsolidated financial statements are presented in this Annual Report on Form 10-K, became the parent company for Spero Therapeutics, LLC’s formersubsidiaries and these entities continue to be subject to taxation in the United States or in other countries.Net Income (Loss) Attributable to Non-Controlling InterestsNet income (loss) attributable to non-controlling interests in our consolidated statement of operations and comprehensive loss is a result of minorityinvestments in our subsidiaries, Spero Europe, Ltd., Spero Potentiator, Inc., Spero Cantab, Inc. and Spero Gyrase, Inc., and consists of the portion of the netincome or loss of these subsidiaries that is not allocated to us. Changes in the amount of net income (loss) attributable to non-controlling interests are directlyimpacted by changes in the net income or loss of our consolidated subsidiaries and by the ownership percentage of the minority investors.In May 2017, we repurchased 100% of the issued and outstanding shares of Spero Europe, Ltd. held by the minority investor. In June 2017, werepurchased 100% of the issued and outstanding shares of Spero Potentiator, Inc. held by the minority investor. In July 2017, we repurchased 100% of theissued and outstanding shares of Spero Cantab, Inc. held by the minority investor. As a result of these repurchases of the non-controlling interests, for periodssubsequent to each repurchase, we no longer attribute net income (loss) to the non-controlling interest. As of December 31, 2017, the remaining non-controlling interest relates only to Spero Gyrase, Inc.Critical Accounting Policies and Significant Judgments and EstimatesOur consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. Thepreparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reportedamount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience, known trends and eventsand various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actualresults may differ from these estimates under different assumptions or conditions.76 We believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financialstatements.Funding Received from Government Contracts, Tax Incentives and CollaborationsSince our inception, we have been able to obtain partial funding for our research and development activities from government contracts, governmenttax incentives and a collaboration arrangement. The classification within our statement of operations and comprehensive loss of the funding received underthese arrangements is subject to management judgment based on the nature of the arrangements we enter into, the source of the funding and whether thefunding is considered central to our business operations.Government ContractsWe generate revenue from government contracts that reimburse us for certain allowable costs for funded projects. For contracts with governmentagencies, when we have concluded that we are the principal in conducting the research and development expenses and where the funding arrangement isconsidered central to our ongoing operations, we classify the recognized funding received as revenue. We have concluded to recognize funding received from the DoD, NIAID and CARB-X as revenue, rather than as a reduction of research anddevelopment expenses, because we are the principal in conducting the research and development activities and these contracts are central to our ongoingoperations. Revenue is recognized as the qualifying expenses related to the contracts are incurred. Revenue recognition commences only once persuasiveevidence of a contract exists, services have been rendered, the reimbursement amounts under the contract are fixed or determinable, and collectibility isreasonably assured. Revenue recognized upon incurring qualifying expenses in advance of receipt of funding is recorded in our consolidated balance sheetas other receivables. The related costs incurred by us are included in research and development expenses in our consolidated statements of operations andcomprehensive loss. Government Tax Incentives For available government tax incentives that we may earn without regard to the existence of taxable income and that require us to forego taxdeductions or the use of future tax credits and net operating loss carryforwards, we classify the funding recognized as a reduction of the related qualifyingresearch and development expenses incurred. Since the fourth quarter of 2016, our operating subsidiary in Australia has met the eligibility requirements to receive a 43.5% tax incentive forqualifying research and development activities. We recognize these incentives as a reduction of research and development expenses in our consolidatedstatements of operations in the same period that the related qualifying expenses are incurred. Reductions of research and development expense recognizedupon incurring qualifying expenses in advance of receipt of tax incentive payments are recorded in our consolidated balance sheet as tax incentivereceivables. Related to these incentives, we recognized reductions of research and development expense of $1.8 million and $0.1 million during the yearsended December 31, 2017 and 2016, respectively. Collaboration Agreements For collaboration agreements with a third party, to determine the appropriate statement of operations classification of the recognized funding, we firstassess whether the collaboration arrangement is within the scope of the accounting guidance for collaboration arrangements. If it is, we evaluate thecollaborative arrangement for proper classification in the statement of operations based on the nature of the underlying activity and we assess the paymentsto and from the collaborative partner. If the payments to and from the collaborative partner are not within the scope of other authoritative accountingguidance, we base the statement of operations classification for the payments received on a reasonable, rational analogy to authoritative accountingguidance, applied in a consistent manner. Conversely, if the collaboration arrangement is not within the scope of accounting guidance for collaborationarrangements, we assess whether the collaboration arrangement represents a vendor/customer relationship. If the collaborative arrangement does not representa vendor/customer relationship, we then classify the funding payments received in our statement of operations and comprehensive loss as a reduction of therelated expense that is incurred. For example, in 2014, we entered into a research and development services and support agreement with Roche and concluded that the agreementswere not within the scope of the accounting guidance for collaboration arrangements. Due to the co-funded nature of the payments and our assessment thatwe did not have a vendor/customer relationship with Roche, we recognized the nonrefundable payments received under the agreement as a reduction to theresearch and development expenses incurred. We terminated our agreement with Roche in August 2016. Related to payments received under this concludedcollaboration, we recognized reductions of research and development expense of $0.9 million and $1.5 million during the years ended December 31, 2016and 2015, respectively. 77 Accrued Research and Development Expenses As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses.This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have beenperformed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced orotherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or whencontractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in theconsolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with theservice providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to: •vendor in connection with the preclinical development activities; •CMOs in connection with the production of preclinical and clinical trial materials; •CROs in connection with preclinical and clinical studies; and •investigative sites in connection with clinical trials. We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotesand contracts with multiple research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial termsof these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in whichpayments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate thetime period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services orthe level of effort varies from the estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our estimates to be materiallydifferent from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of servicesperformed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any materialadjustments to our prior estimates of accrued research and development expenses. Share-Based Compensation Prior to the Reorganization, our former parent company, Spero Therapeutics, LLC, had granted incentive units, which we accounted for as equity-classified awards. Subsequent to the Reorganization on June 30, 2017, we began granting common stock options. We measure all share-based awards granted to employees and directors based on the fair value on the date of grant using the Black-Scholes option-pricing model, and we recognize compensation expense of those awards over the requisite service period, which is generally the vesting period of therespective award. Generally, we issue awards with only service-based vesting conditions and record the expense for these awards using the straight-linemethod. For share-based awards granted to non-employee consultants, we recognize compensation expense over the period during which services are renderedby such consultants until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards isremeasured using the then-current fair value of our common stock or common units and updated assumption inputs in the Black-Scholes option-pricingmodel. The Black-Scholes option-pricing model uses as inputs the fair value of our common stock or common units and assumptions we make for thevolatility of our common stock or common units, the expected term of our common stock options and incentive units, the risk-free interest rate for a periodthat approximates the expected term of our common stock options and incentive units, and our expected dividend yield. Determination of the Fair Value of Common Units and Common Stock As there was no public market for our common units and common stock prior to our IPO, the estimated fair value of our common units and commonstock was determined by our board of directors as of the date of each award grant, with input from management, considering our most recently available third-party valuations and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may havechanged from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with theguidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company EquitySecurities Issued as Compensation. Our common unit and common stock valuations were prepared using the option pricing method, or OPM,78 which used a market approach to estimate our enterprise value. The OPM treats the company’s securities as call options on the total equity value of acompany, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under thismethod, the common stock and, prior to the Reorganization, the common units, have value only if the funds available for distribution to stockholdersexceeded the value of the preferred share liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. A discount for lack ofmarketability of the common units or common stock is then applied to arrive at an indication of value for the common units or common stock. These third-party valuations were performed at various dates, which resulted in valuations of our common units of $4.08 per unit as of February 26, 2016 and $1.95 perunit as of March 10, 2017, and a valuation of our common stock of $5.90 per share as of June 30, 2017. In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common units and commonstock as of each grant date, which may be a date later than the most recent third-party valuation date, including: •the prices at which we sold preferred units and the superior rights and preferences of the preferred stock and preferred units relative to ourcommon stock and common units at the time of each grant; •the progress of our research and development programs, including the status of preclinical studies and clinical trials for our product candidates; •our stage of development and commercialization and our business strategy; •external market conditions affecting the biotechnology industry, and trends within the biotechnology industry; •our financial position, including cash on hand, and our historical and forecasted performance and operating results; •the lack of an active public market for our common and preferred stock and our common units and preferred units; •the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, or a sale of our company in light of prevailing marketconditions; and •the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry. The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application ofmanagement judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our share-basedcompensation expense could be materially different.Valuation of Derivative Liabilities Tranche Rights Our Class A preferred units and Class B preferred units provided our investors with tranche rights, which provided these investors the right toparticipate in subsequent offerings of Class A and Class B preferred units in the event certain milestones were achieved. We classified each of the trancherights as a derivative liability on our consolidated balance sheet because they met the definition of freestanding financial instruments that may require us totransfer assets upon exercise. We remeasured to fair value of the derivative liabilities associated with the tranche rights at each reporting date, and werecognized changes in the fair value of the derivative liabilities as a component of other income (expense) in our consolidated statement of operations andcomprehensive loss. The tranche rights were settled in 2016, and we stopped recognizing changes in the fair value of the derivative liability related to thetranche rights at that time. The fair value of these derivative liabilities was determined using the probability-weighted expected return method, or PWERM, which considered asinputs the probability and time that a milestone would be achieved, the potential fair value of our preferred stock upon the exercise of the tranche right andthe risk-adjusted discount rate. Contingent Prepayment Option Bridge units issued to our investors in 2015 and 2016 contained contingent prepayment options, whereby such units were automatically convertibleinto equity units sold in a subsequent round of qualified financing at a discounted rate. We classified the contingent prepayment options as derivativeliabilities on our consolidated balance sheet because the bridge units were deemed to be more akin to debt than equity and the embedded prepaymentoptions were at a substantial discount, thus meeting the definition of derivative liabilities. We remeasured the fair value of the derivative liabilities at eachreporting date, and we recognized changes in the fair value of the derivative liabilities associated with the contingent prepayment options as a component ofother income (expense) in our consolidated statement of operations and comprehensive loss. The contingent prepayment option associated with the bridgeunits issued in 2015 was settled in 2015 upon the issuance of Class A preferred units. The contingent prepayment option associated with the bridge unitsissued in 2016 was settled in the first quarter of 2017 upon the issuance of Class C preferred units in March 2017. In periods subsequent to the settlement ofany contingent prepayment option, we no longer recognize changes in the fair value of the derivative liability related to the settled contingent prepaymentoption.79 Anti-Dilution Rights In connection with the issuance of non-controlling interests in certain of our subsidiaries, specifically Spero Potentiator, Inc., Spero Europe, Ltd. andSpero Gyrase, Inc., we granted anti-dilution rights to the minority investors. We classify the anti-dilution rights as derivative liabilities on our consolidatedbalance sheet because they are freestanding instruments that represent a conditional obligation to issue a variable number of shares. We remeasure thederivative liabilities associated with the anti-dilution rights to fair value at each reporting date, and we recognize changes in the fair value of the derivativeliabilities as a component of other income (expense) in our consolidated statement of operations and comprehensive loss. As of December 31, 2016, anti-dilution rights related to Spero Potentiator, Inc. were fully settled as the maximum number of shares to be issued to the minority investor had been reached inAugust 2016. In May 2017, we repurchased 100% of the minority investor’s outstanding shares in Spero Europe, Ltd., at which time the anti-dilution rightswere settled. As of December 31, 2017, the derivative liability of $0.2 million recorded on our consolidated balance sheet relates only to the anti-dilutionrights held by the minority investor in Spero Gyrase, Inc. In periods subsequent to the settlement of any anti-dilution rights, we no longer recognize changes in the fair value of the derivative liability relatedto the settled anti-dilution right. The fair value of these derivative liabilities was determined using a discounted cash flow model. The most significantassumption in the discounted cash flow model impacting the fair value of the anti-dilution rights is the probability that we would fund the maximum amountof investment providing anti-dilution protection. The fair value of these derivative liabilities was determined using the PWERM, which considered as inputsthe probability and time that a subsequent round of preferred stock financing would occur and the risk-adjusted discount rate. Investment Option Our concluded collaboration agreement provided our collaboration partner with an investment option, whereby the collaboration partner couldparticipate in our next round of financing subsequent to April 2014 in an amount up to $2.0 million at 90.0% of the per unit price of the related financing.We classified the investment option as a derivative liability on our consolidated balance sheet because it met the definition of a freestanding financialinstrument that may require us to transfer assets upon exercise. We remeasured the fair value of the derivative liability at each reporting date, and werecognized changes in the fair value of the derivative liability associated with the investment option as a component of other income (expense) in ourconsolidated statement of operations and comprehensive loss. The subsequent financing occurred in June 2015 and our collaboration partner elected not toexercise the investment option, which then expired. We stopped recognizing changes in the fair value of the derivative liability related to the investmentoption at that time. The fair value of this derivative liability was determined using the PWERM, which considered as inputs the probability and time that a qualifiedround of preferred stock financing would occur and the risk-adjusted discount rate.Results of OperationsComparison of the Years Ended December 31, 2017 and 2016The following table summarizes our results of operations for the years ended December 31, 2017 and 2016: Year Ended December 31, 2017 2016 $ Change (in thousands) Grant revenue $1,979 $335 $1,644 Operating expenses: Research and development 32,869 26,333 6,536 General and administrative 10,840 7,223 3,617 Total operating expenses 43,709 33,556 10,153 Loss from operations (41,730) (33,221) (8,509)Other income (expense): Change in fair value of derivative liabilities 1,541 580 961 Interest income and other income (expense), net 303 — 303 Total other income (expense), net 1,844 580 1,264 Net loss and comprehensive loss (39,886) (32,641) (7,245)Less: Net loss attributable to non-controlling interest (1,143) (7,150) 6,007 Net loss attributable to Spero Therapeutics, Inc. $(38,743) $(25,491) $(13,252) 80 Grant Revenue Grant revenue recognized during 2017 was primarily due to the reimbursement of qualifying expenses incurred in connection with our CARB-X awardrelated to our SPR741 program of $0.9 million as well as $0.7 million under our award from the DoD, also related to our SPR741 program. We alsorecognized $0.4 million under our award from NIAID related to our SPR720 program. During the year ended December 31, 2016, all recognized revenuerelated to the reimbursement of qualifying expenses incurred in connection with our SPR741 program under our research and development award from theDoD. Research and Development Expenses Year Ended December 31, 2017 2016 $ Change (in thousands) Direct research and development expenses by program: SPR994 $9,803 $989 $8,814 SPR741 10,381 11,728 (1,347)SPR720 1,585 1,181 404 SPR206 1,437 — 1,437 Preclinical programs 1,337 6,510 (5,173)Unallocated expenses: Personnel related (including share-based compensation) 5,724 3,633 2,091 Facility related and other 2,602 2,292 310 Total research and development expenses $32,869 $26,333 $6,536 We designated SPR994 as a product candidate in the fourth quarter of 2016. Direct costs related to our SPR994 program during 2017 were primarilydue to preclinical manufacturing and preclinical costs as we focused efforts on formulation development, manufacturing process and manufacturing ofclinical trial material in anticipation of a Phase 1 clinical trial, which commenced in October 2017. We also incurred $1.6 million of research anddevelopment expense related to a payment of $1.0 million to Meiji Seika Pharma Co. Ltd. that became due and was paid in October 2017 under our know-how license with Meiji upon the enrollment of the first patient in clinical trials and $0.6 million for an upfront license fee paid to Meiji. Direct costs related to our SPR741 program decreased primarily due to a decrease in preclinical costs resulting from costs incurred in the prior year tosupport our CTN filing in Australia in the fourth quarter of 2016, partially offset by an increase in clinical trial costs and manufacturing costs as well asexpense related to a total payment to Northern Antibiotics OY Ltd. of $2.6 million which became due and was paid under our agreements with Northern uponthe completion of our IPO in November 2017. The increase in clinical trial costs and manufacturing costs was due to our Phase 1 clinical trial of SPR741,which was initiated in the fourth quarter of 2016, as well as manufacturing of clinical trial materials for our Phase 1b drug-drug interaction clinical trial ofSPR741 in the United Kingdom, which was initiated in November 2017, and a possible Phase 2 clinical trial. Research and development expenses for ourSPR741 program conducted by our Australian subsidiary were recorded net of a 43.5% research and development tax incentive for qualified expenses fromthe Australian government of $1.8 million in the year ended December 31, 2017. We designated SPR720 as a product candidate in the second half of 2016. Direct costs related to our SPR720 program during the year ended December31, 2017 were primarily due to preclinical and manufacturing costs related to IND-enabling toxicology studies. We designated SPR206 as a product candidate in July 2017. Direct costs related to our SPR206 program during the year ended December 31, 2017were primarily due to preclinical and manufacturing costs related to IND-enabling toxicology studies. Direct costs related to our preclinical programs decreased by $5.2 million during the year ended December 31, 2017 compared to the prior year dueprimarily to the cost of in-licensing technology incurred in 2016 of $5.1 million and to decreased spending on preclinical programs in 2017. The cost of in-licensing technology incurred in 2016 of $5.1 million was a result of the issuance of equity and anti-dilution rights to Promiliad Biopharma Inc., orPromiliad, Biota Pharmaceuticals, Inc. (now Aviragen Therapeutics, Inc.), or Aviragen, and PBB, and a license fee payment of $0.5 million we made to VertexPharmaceuticals Inc., or Vertex. Our research and development expenses related to our preclinical programs decreased in 2017 as compared to 2016 as wefocused development efforts on our product candidates. Direct costs related to our preclinical programs were recorded net of the recognition of fundingreceived from a concluded collaboration agreement of $0.9 million during the year ended December 31, 2016. The increase in personnel-related costs included in unallocated expenses was due to an increase in headcount in our research and developmentfunction. Personnel-related costs for the years ended December 31, 2017 and 2016 included share-based compensation81 expense of $0.4 million and $0.1 million, respectively. The increase in facility-related and other costs was primarily due to new laboratory space and theincreased costs of supporting a larger group of research and development personnel and their research efforts.General and Administrative Expenses Year Ended December 31, 2017 2016 $ Change (in thousands) Personnel related (including share-based compensation) $4,330 $2,243 $2,087 Professional and consultant fees 5,829 4,145 1,684 Facility related and other 681 835 (154)Total general and administrative expenses $10,840 $7,223 $3,617 The increase in personnel-related costs was primarily a result of an increase in headcount in our general and administrative function and an increase instock-based compensation expense related to additional employee stock options granted at a higher fair value of our common stock. Personnel-related costsfor the years ended December 31, 2017 and 2016 included share-based compensation expense of $1.1 million and $0.1 million, respectively. The increase in professional and consultant fees primarily consisted of an increase in professional fees, including accounting, audit, businessdevelopment and legal fees, as well as costs associated with ongoing business activities and our preparations to operate as a public company. We alsoincurred increased legal fees in connection with the Reorganization. Other Income (Expense), Net Other income, net was $1.8 million for the year ended December 31, 2017, compared to $0.6 million for the year ended December 31, 2016. Theincrease in other income was primarily due to a decrease of $1.5 million in the fair value of the derivative liability for anti-dilution rights granted to minorityinvestors in Spero Gyrase Inc. and Spero Europe Ltd. resulting from our discontinuation of the underlying development programs of these subsidiaries. Wealso had interest income of $0.3 million in the twelve months ended December 31, 2017 as a result of interest earned on invested cash balances. Comparison of the Years Ended December 31, 2016 and 2015The following table summarizes our results of operations for the years ended December 31, 2016 and 2015: Year Ended December 31, 2016 2015 $ Change (in thousands) Grant revenue $335 $— $335 Operating expenses: Research and development 26,333 11,125 15,208 General and administrative 7,223 2,202 5,021 Total operating expenses 33,556 13,327 20,229 Loss from operations (33,221) (13,327) (19,894)Other income (expense): Change in fair value of derivative liabilities 580 174 406 Total other income (expense), net 580 174 406 Net loss and comprehensive loss (32,641) (13,153) (19,488)Less: Net loss attributable to non-controlling interest (7,150) (2,999) (4,151)Net loss attributable to Spero Therapeutics, Inc. $(25,491) $(10,154) $(15,337) Grant Revenue During the year ended December 31, 2016, all recognized grant revenue related to the reimbursement of qualifying expenses incurred in connectionwith our SPR741 program under our research and development award from the DoD. 82 Research and Development Expenses Year Ended December 31, 2016 2015 $ Change (in thousands) Direct research and development expenses by program: SPR994 $989 $— $989 SPR741 11,728 6,144 5,584 SPR720 1,181 — 1,181 SPR206 and other preclinical programs 6,510 2,479 4,031 Unallocated expenses: Personnel related (including share-based compensation) 3,633 1,742 1,891 Facility related and other 2,292 760 1,532 Total research and development expenses $26,333 $11,125 $15,208 We designated SPR994 as a product candidate in the second half of 2016. Direct costs related to our SPR994 program during the year endedDecember 31, 2016 were primarily due to preclinical and manufacturing costs as we focused efforts on formulation development, manufacturing process andmanufacturing of clinical trial material in anticipation of a Phase 1 clinical trial. Direct costs related to our SPR741 program increased by $5.6 million, primarily due to an increase of $8.4 million in preclinical costs, partially offsetby the cost of in-licensing technology under the program incurred in 2015 of $3.5 million. The increase in preclinical costs was primarily due to costsincurred to support our CTN filing in Australia in the fourth quarter of 2016. The cost of in-licensing technology under the SPR741 program incurred in 2015of $3.5 million was a result of the issuance of equity and anti-dilution rights to Northern Antibiotics Oy Ltd., or Northern. Research and developmentexpenses for our SPR741 program conducted by our Australian subsidiary were recorded net of a 43.5% research and development tax incentive from theAustralian government of $0.1 million in the year ended December 31, 2016. We designated SPR720 as a product candidate in the second half of 2016. Direct costs related to our SPR720 program during the year endedDecember 31, 2016 were primarily due to preclinical costs related to IND-enabling toxicology studies and other preclinical studies. Direct costs related to our SPR206 program and other preclinical programs increased by $4.0 million primarily due to the cost of in-licensing technology of $5.1 million, partially offset by a decrease in preclinical costs as we increased our focus on our more advanced programs, includingSPR994 and SPR720, which we designated as product candidates in the second half of 2016. The cost of in-licensing technology incurred in 2016 of$5.1 million was a result of the issuance of equity and anti-dilution rights to Promiliad, Aviragen and PBB and a license fee payment of $0.5 million we madeto Vertex in the first half of 2016. Our preclinical programs expense was recorded net of the recognition of funding received from a concluded collaborationagreement of $1.5 million and $0.9 million in the years ended December 31, 2015 and 2016, respectively. The increase in personnel-related costs included in unallocated expenses of $1.9 million was due to an increase in headcount in our research anddevelopment function. Personnel-related costs for the years ended December 31, 2015 and 2016 included share-based compensation expense of less than$0.1 million and $0.1 million, respectively. The increase in facility-related and other costs was primarily due to new laboratory space and the increased costsof supporting a larger group of research and development personnel and their research efforts. General and Administrative Expenses Year Ended December 31, 2016 2015 $ Change (in thousands) Personnel related (including share-based compensation) $2,243 $896 $1,347 Professional and consultant fees 4,145 1,109 3,036 Facility related and other 835 197 638 Total general and administrative expenses $7,223 $2,202 $5,021 The increase in professional and consultant fees of $3.0 million was primarily due to increases in legal fees relating to business development,regulatory and patent costs, accounting and audit fees and public and investor relations fees due to ongoing business activities. Personnel-related costsincreased by $1.3 million as a result of an increase in headcount in our general and administrative function. Personnel-related costs for the years endedDecember 31, 2015 and 2016 included share-based compensation expense of less than $0.1 million and $0.1 million, respectively. The increase in facility-related and other costs of $0.6 million was primarily due to the lease of office space that we entered into at the end of 2015, software costs and generalsupport costs for the increase in headcount. 83 Other Income (Expense), Net Other income, net was $0.6 million for the year ended December 31, 2016, compared to $0.2 million for the year ended December 31, 2015. Theincrease of $0.4 million was primarily due to a decrease of $0.6 million in the fair value of the derivative liability associated with the Class B tranche rightsresulting from a decrease in the fair value of our Class B preferred units over the same period, partially offset by an increase of $0.2 million in the fair value ofthe derivative liability associated with the investment option held by our former collaboration partner. Liquidity and Capital Resources Since our inception, we have incurred significant operating losses. We have generated limited revenue to date from funding arrangements with theDoD, NIAID and CARB-X. We have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of anyproduct candidates for several years, if at all. To date, we have funded our operations with proceeds from the sales of preferred units and bridge units,payments received under a concluded collaboration agreement and funding from government contracts and, in November 2017, with proceeds from the IPOof our common stock. As of December 31, 2017, we had cash and cash equivalents of $87.3 million. On November 6, 2017, we completed an IPO of our common stock, and issued and sold 5,500,000 shares of common stock at a public offering price of$14.00 per share, resulting in net proceeds of $71.6 million after deducting underwriting discounts and commissions but before deducting offering costs. OnNovember 14, 2017, we issued and sold an additional 471,498 shares of our common stock at the IPO price of $14.00 per share pursuant to the underwriters’partial exercise of their option to purchase additional shares of common stock, resulting in additional net proceeds of $6.1 million after deductingunderwriting discounts and commissions. Aggregate net proceeds from the IPO totaled $74.2 million after deducting underwriting discounts, commissionsand offering costs.Cash FlowsThe following table summarizes our sources and uses of cash for the years ended December 31, 2017, 2016 and 2015: Year Ended December 31, 2017 2016 2015 (in thousands) Cash used in operating activities $(39,111) $(28,959) $(9,608)Cash used in investing activities (27) (830) (232)Cash provided by financing activities 116,111 34,413 15,275 Net increase in cash and cash equivalents $76,973 $4,624 $5,435 Operating Activities Net cash used in operating activities for the year ended December 31, 2017 was $39.1 million, primarily resulting from our net loss of $39.9 million,adjusted for net non-cash items of $0.3 million. Net cash used by changes in our operating assets and liabilities was $0.4 million and consisted primarily of a$2.5 million increase in receivables related to the Australian research and development tax incentive and to our government contracts, partially offset by anincrease in accounts payable and accrued expenses and other current liabilities of $3.7 million. During the year ended December 31, 2016, operating activities used $29.0 million of cash, primarily resulting from our net loss of $32.6 million andcash used by changes in our operating assets and liabilities of $0.8 million, partially offset by net non-cash charges of $4.5 million. Net cash used by changesin our operating assets and liabilities for the year ended December 31, 2016 consisted primarily of a $1.0 million increase in prepaid expenses and othercurrent assets, a $0.9 million decrease in advance payments from collaborator, a $0.6 million decrease in accounts payable, a $0.4 million increase inreceivables related to our government awards and the Australian research and development tax incentive, partially offset by a $2.3 million increase inaccrued expenses and other current liabilities. The decrease in advance payments from collaborator was primarily a result of the recognition of researchfunding received in prior periods as an offset to research and development expense as well as the termination of our collaboration agreement in August 2016,at which time we recognized the remaining portion of the liability that had been recorded in a prior year. During the year ended December 31, 2015, operating activities used $9.6 million of cash, primarily resulting from our net loss of $13.2 million,partially offset by net non-cash charges of $3.4 million and cash provided by changes in our operating assets and liabilities of $0.2 million. Net cashprovided by changes in our operating assets and liabilities for the year ended December 31, 2015 consisted primarily of a $0.7 million increase in accountspayable and a $0.4 million increase in accrued expenses and other current84 liabilities, partially offset by a decrease in advance payments from collaborator of $0.5 million as a result of the recognition of payments received in 2014 asan offset to research and development expenses, an increase in prepaid expenses and other current assets of $0.3 million and an increase in deposits of$0.2 million. Changes in accounts payable, accrued expenses and other current liabilities, and prepaid expenses and other current assets in all periods weregenerally due to growth in our business, the advancement of our development programs and the timing of vendor invoicing and payments. Investing Activities We did not use any significant cash for investing activities during the year ended December 31, 2017. During the years ended December 31, 2016 and2015, net cash used in investing activities was $0.8 million and $0.2 million, respectively, consisting of purchases of property and equipment, primarily forour new office and laboratory spaces. Financing Activities During the year ended December 31, 2017, net cash provided by financing activities was $116.1 million, consisting primarily of net proceeds of $74.2million from the completion of our IPO in November 2017, as well as $43.1 million from the sale of our Class C preferred units, partially offset by $1.2million of cash used to purchase outstanding shares of Spero Potentiator, Inc. and Spero Cantab, Inc. from the minority interest holders. During the year ended December 31, 2016, net cash provided by financing activities was $34.4 million, consisting of net proceeds of $25.9 millionfrom the sale of our Class B preferred units and proceeds of $8.5 million the sale of our 2016 bridge units. During the year ended December 31, 2015, net cash provided by financing activities was $15.3 million, consisting primarily of proceeds of$8.0 million from the sale of our 2015 bridge units and net proceeds of $7.3 million from the sale of our Class A preferred units. Funding Requirements We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities andclinical trials for our product candidates in development. In addition, we expect to incur additional costs associated with operating as a public company. Thetiming and amount of our operating expenditures will depend largely on: •the timing and costs of our planned clinical trials of SPR994; •the initiation, progress, timing, costs and results of preclinical studies and clinical trials of our other product candidates and potential newproduct candidates; •the amount of funding that we receive under government contracts that we have applied for; •the number and characteristics of product candidates that we pursue; •the outcome, timing and costs of seeking regulatory approvals; •the costs of commercialization activities for SPR994 and other product candidates if we receive marketing approval, including the costs andtiming of establishing product sales, marketing, distribution and manufacturing capabilities; •the receipt of marketing approval and revenue received from any potential commercial sales of SPR994; •the terms and timing of any future collaborations, licensing or other arrangements that we may establish; •the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing,prosecution, defense and enforcement of any patents or other intellectual property rights, including milestone and royalty payments and patentprosecution fees that we are obligated to pay pursuant to our license agreements; •the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defendingagainst any intellectual property related claims; •the costs of operating as a public company; and •the extent to which we in-license or acquire other products and technologies.85 Based on our current plans, we believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capitalexpenditure requirements into the second quarter of 2019. However, we do not expect that these funds will be sufficient to fund the development of ourproduct candidates through regulatory approval and commercialization. In particular, we anticipate that these funds will not be sufficient to enable us tocomplete our pivotal Phase 3 clinical trial of SPR994. After we receive results from the Phase 1b clinical trial of SPR741 and our ongoing preclinicaltoxicology study of SPR206, we intend to prioritize our product candidates for further clinical development. Our decision will be based on which program webelieve represents the best opportunity for us within an optimal timeframe, factoring in the choices we must make to prioritize the opportunities within ourportfolio and to best deploy our capital resources. Accordingly, for the balance of 2018, our internal operational plans and budget and our estimate of ourcash runway being sufficient to fund our operating expenses and capital expenditure requirements into the second quarter of 2019 are based on us fundingthe development of SPR994 and SPR720 and either SPR206 or SPR741 during that period. We may seek partnering opportunities or other non-dilutivefunding for further clinical development of the potentiator candidate we elect to deprioritize. We have based these estimates on assumptions that may proveto be wrong, and we could utilize our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated withresearch, development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of our working capitalrequirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including those listed above.Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equityofferings, debt financings, government funding, collaborations, strategic alliances and marketing, distribution or licensing arrangements. To the extent thatwe raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms ofthese securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equityfinancing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additionaldebt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing,distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, researchprograms or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debtfinancings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or futurecommercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Contractual Obligations and CommitmentsThe following table summarizes our contractual obligations as of December 31, 2017 and the effects that such obligations are expected to have on ourliquidity and cash flows in future periods: Payments Due by Period Total Less Than 1Year 1 to 3 Years 4 to 5 Years More than 5Years (in thousands) Operating lease commitments (1) 2,127 820 1,307 — — Total $2,127 $820 $1,307 $— $— (1)Reflects payments due for our leases of office and laboratory space under operating lease agreements that expire in 2019 and 2020. In addition to the lease obligations above, on January 17, 2018, we entered into an amendment, or the Amendment, to our operating lease agreementfor our corporate headquarters located at 675 Massachusetts Avenue, Cambridge, Massachusetts, to add approximately 7,800 square feet of office space. TheAmendment also extends the expiration date of the original lease from 2020 to 2025. The Amendment requires additional annual payments of $0.5 millionbeginning in December 2018. As further described below, under various licensing and related agreements with third parties, we have agreed to make milestone payments and payroyalties to third parties. We have not included any contingent payment obligations, such as milestones or royalties, in the table above as the amount, timingand likelihood of such payments are not known. Under our license agreement with Meiji, we are obligated (i) to make milestone payments of up to $3.0 million upon the achievement of specifiedclinical and regulatory milestones, (ii) to pay royalties, on a product-by-product and country-by-country basis, of a low single-digit percentage based on netsales of products licensed under the agreement and (iii) to pay to Meiji a low double-digit percentage of any sublicense fees received by us up to$7.5 million. In October 2017, we paid a $1.0 million milestone payment to Meiji upon the enrollment of the first patient in our Phase 1 clinical trial ofSPR994.86 Under our license agreement with Northern, we are obligated to make milestone payments of up to an aggregate of $7.0 million upon the achievementof specified clinical, commercial and other milestones. Upon the closing of our IPO in November 2017, we paid Northern $2.6 million in connection with thislicense agreement. Under an agreement we entered into with PBB, we are obligated to make milestone payments of up to $5.8 million upon the achievement of specifiedclinical milestones and a payment of £5.0 million ($6.7 million as of December 31, 2017) upon the achievement of a specified commercial milestone. Inaddition, we have agreed to pay to PBB royalties, on a product-by-product and country-by-country basis, of a low single-digit percentage based on net salesof products licensed under the agreement. Under our agreement with Vertex, we are obligated to make milestone payments of up to $81.1 million upon the achievement of specified clinical,regulatory and commercial milestones and to pay to Vertex tiered royalties, on a product-by-product and country-by-country basis, of a mid single-digit tolow double-digit percentage based on net sales of products licensed under the agreement. Under our agreement with Aviragen, we are obligated to make milestone payments of up to an aggregate of $12.0 million upon the achievement ofspecified clinical, regulatory and commercial milestones and to pay royalties of low single-digit percentages based on net sales of products we acquiredunder the agreement. We are no longer pursuing development of the technology acquired under the agreement. We enter into contracts in the normal course of business with CROs, CMOs and other third parties for clinical trials, preclinical research studies andtesting, manufacturing and other services. These contracts are cancelable by us upon prior notice. Payments due upon cancellation consist only of paymentsfor services provided or expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation. These payments arenot included in the table of contractual obligations and commitments above. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules andregulations of the SEC. Recently Adopted Accounting PronouncementsPlease refer to Note 2 to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” of thisAnnual Report on Form 10-K for a description of recent accounting pronouncements applicable to our business.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Our cash and cash equivalents as of December 31, 2017 consisted of cash and money market accounts. Our primary exposure to market risk is interestincome sensitivity, which is affected by changes in the general level of interest rates. Because of the short-term nature of the instruments in our portfolio, asudden change in market interest rates would not be expected to have a material impact on our financial position or results of operations. 87 Item 8. Financial Statements and Supplementary Data.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm89Consolidated Balance Sheets90Consolidated Statements of Operations and Comprehensive Loss91Consolidated Statements of Bridge Units, Redeemable Convertible Preferred Shares and Stockholders’ Equity (Deficit)92Consolidated Statements of Cash Flows93Notes to Consolidated Financial Statements94 88 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo 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 as of December 31, 2017 and 2016 and therelated consolidated statements of operations and comprehensive loss, of bridge units, redeemable convertible preferred shares and stockholders’ equity(deficit) and of cash flows for each of the three years in the period ended December 31, 2017, 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 theCompany as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December31, 2017 in conformity with accounting principles generally accepted in the United States of America. 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’sconsolidated 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 theapplicable 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 planand perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due toerror or fraud. 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 disclosuresin 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. Emphasis of Matter As discussed in Note 1 to the consolidated financial statements, the Company will require additional financing to fund future operations. Management’splans in regard to this matter are described in Note 1. /s/ PricewaterhouseCoopers LLPBoston, MassachusettsApril 2, 2018 We have served as the Company’s auditor since 2016. 89 SPERO THERAPEUTICS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except unit, share and per share amounts) December 31, 2017 2016 Assets Current assets: Cash and cash equivalents $87,288 $10,315 Other receivables 1,011 304 Tax incentive receivables, current 1,932 — Prepaid expenses and other current assets 1,828 1,253 Total current assets 92,059 11,872 Tax incentive receivables — 144 Property and equipment, net 1,164 1,500 Deposits 206 206 Restricted cash 50 50 Total assets $93,479 $13,772 Liabilities, Bridge Units, Redeemable Convertible Preferred Shares and Stockholders' Equity(Deficit) Current liabilities: Accounts payable $3,470 $1,139 Accrued expenses and other current liabilities 4,321 2,928 Derivative liabilities 223 2,708 Deferred rent 143 143 Total current liabilities 8,157 6,918 Deferred rent, net of current portion 365 493 Total liabilities 8,522 7,411 Commitments and contingencies (Note 11) Bridge units — 7,924 Redeemable convertible preferred units (Class A, B, C and Junior); no units authorized, issued oroutstanding as of December 31, 2017; 13,549,685 units issued and outstanding as of December 31,2016, aggregate liquidation preference of $50,326 as of December 31, 2016 — 47,685 Stockholders' equity (deficit): Common units, zero and 335,281 units issued and outstanding as of December 31, 2017 and 2016,respectively — — Preferred stock, $0.001 par value; 10,000,000 and zero shares authorized as of December 31, 2017and 2016, respectively — — Common stock, $0.001 par value; 60,000,000 shares authorized as of December 31, 3017;14,369,182 shares issued and outstanding as of December 31, 2017; no shares authorized, issuedor outstanding as of December 31, 2016 14 — Additional paid-in capital 181,428 — Accumulated deficit (96,840) (45,440)Total Spero Therapeutics, Inc. stockholders' equity (deficit) 84,602 (45,440)Non-controlling interests 355 (3,808)Total stockholders' equity (deficit) 84,957 (49,248)Total liabilities, redeemable convertible preferred units, and stockholders' equity (deficit) $93,479 $13,772 The accompanying notes are an integral part of these consolidated financial statements.90 SPERO THERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(In thousands, except share and per share data) Year Ended December 31, 2017 2016 2015 Grant revenue $1,979 $335 $— Operating expenses: Research and development 32,869 26,333 11,125 General and administrative 10,840 7,223 2,202 Total operating expenses 43,709 33,556 13,327 Loss from operations (41,730) (33,221) (13,327)Other income (expense): Change in fair value of derivative liabilities 1,541 580 174 Interest income and other income (expense), net 303 — — Total other income (expense), net 1,844 580 174 Net loss and comprehensive loss (39,886) (32,641) (13,153)Less: Net loss attributable to non-controlling interest (1,143) (7,150) (2,999)Net loss attributable to Spero Therapeutics, Inc. (38,743) (25,491) (10,154)Cumulative dividends on redeemable convertible preferred shares (6,146) (3,441) (932)Accretion of redeemable bridge units and redeemable convertible preferred shares toredemption value (1,208) (996) (2,341)Net loss attributable to common shareholders of Spero Therapeutics, Inc. $(46,097) $(29,928) $(13,427) Net loss per share attributable to common shareholders per share, basic and diluted $(17.82) $(95.87) $(53.11) Weighted average shares outstanding, basic and diluted: 2,586,865 312,169 252,807 The accompanying notes are an integral part of these consolidated financial statements. 91 SPERO THERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF BRIDGE UNITS, REDEEMABLE CONVERTIBLE PREFERRED SHARES ANDSTOCKHOLDERS’ EQUITY (DEFICIT)(In thousands, except unit and share amounts) Additional Spero Therapeutics, Inc. Non- Total Bridge Units Preferred Units Preferred Stock Common Units Common Stock Paid-in Accumulated Stockholders' controlling Stockholders' Units Amount Units Amount Shares Amount Units Par Value Shares Par Value Capital Deficit Equity (Deficit) Interest Equity (Deficit) Balances atDecember 31, 2014 — $— 3,438,318 $3,513 — $— 356,397 $— — $— $65 $(6,178) $(6,113) $— $(6,113)Issuance of bridge units,net of derivativeliability of $2,307 8,000 5,693 — — — — — — — — — — — — — Deemed contribution ofcapital forreduction inconversion discount — — — — — — — — — — 1,419 — 1,419 — 1,419 Conversion of bridgeunits into Class Apreferred units, netof tranche rightsderivative liabilityof $1,301 (8,000) (8,000) 2,279,202 7,587 — — — — — — — — — — — Issuance of Class Apreferred units, netof tranche rights of$1,100 and offeringcosts of $170 — — 1,923,076 6,230 — — — — — — — — — — — Cumulative dividends onredeemableconvertiblepreferred units — — — 932 — — — — — — (932) (932) — (932)Accretion of bridgeunits to redemptionvalue — 2,307 — — — — — — — — (539) (1,768) (2,307) — (2,307)Accretion of preferredunits to redemptionvalue — — — 34 — — — — — — (34) — (34) — (34)Share-basedcompensation expense — — — — — — — — — — 21 — 21 — 21 Issuance of 49.9% non-controlling interestin Spero Potentiatorin exchange forlicensed technology — — — — — — — — — — — — — 1,087 1,087 Issuance of additionalshares in SperoPotentiator tominority investorunder anti-dilutionrights — — — — — — — — — — — — — 1,459 1,459 Net loss — — — — — — — — — — — (10,154) (10,154) (2,999) (13,153)Balances at December31, 2015 — — 7,640,596 18,296 — — 356,397 — — — — (18,100) (18,100) (453) (18,553)Deemed contribution ofcapital forsettlement of ClassA preferred unittranche rights — — — — — — — — — — 2,408 2,408 2,408 Issuance of Class Bpreferred units, netof tranche rightsderivative liabilityof $909 andoffering costs of$112 — — 5,909,089 24,979 — — — — — — — — — — — Issuance of bridge units,net of contingentprepayment optionderivative liabilityof $908 8,500 7,897 — — — — — — — — — — — — — Repurchase of unvestedcommon units — — — — — — (21,116) — — — — — — — — Cumulative dividends onredeemableconvertiblepreferred units — — — 3,441 — — — — — — (2,503) (938) (3,441) — (3,441)Accretion ofredeemablepreferred units toredemption value — — — 969 — — — — — — (58) (911) (969) — (969)Accretion of bridgeunits to redemptionvalue — 27 — — — — — — — — (27) — (27) — (27)Issuance of 20% non-controlling interestin Spero Gyrase inexchange foracquiredtechnology — — — — — — — — — — — — — 1,080 1,080 Issuance of 5% non-controlling interestin Spero Europe inexchange forlicensed technology — — — — — — — — — — — — — 100 100 Issuance of 12.5% non-controlling interestin Spero Cantab inexchange forlicensed technology — — — — — — — — — — — — — 1,635 1,635 Issuance of additionalshares in SperoPotentiator tominority investorunder anti-dilutionrights — — — — — — — — — — — — — 980 980 Share-basedcompensation expense — — — — — — — — 180 180 — 180 Net loss — — — — — — — — — — — (25,491) (25,491) (7,150) (32,641)Balances at December31, 2016 8,500 7,924 13,549,685 47,685 — — 335,281 — — — — (45,440) (45,440) (3,808) (49,248)Accretion of bridgeunits to redemptionvalue — 576 — — — — — — — — (123) (453) (576) — (576)Conversion of bridgeunits into Class Cpreferred units (8,500) (8,500) 5,321,112 9,444 — — — — — — — — — — — Issuance of Class Cpreferred units, netof issuance costs of$176 — — 24,326,470 43,001 — — — — — — — — — — — Purchase of non-controlling interest inSpero Europe — — — — — — — — — (14) (14) 14 — Purchase of non-controlling interestin Spero Potentiator — — — — — — — — — (7,395) (7,395) 6,395 (1,000)Purchase of non-controlling interest inSpero Cantab — — — — — — — — 928 — 928 (1,103) (175)Cumulative dividends onredeemableconvertiblepreferred units — — — 3,261 — — — — — — — (3,261) (3,261) — (3,261)Accretion ofredeemablepreferred units toredemption value — — — 369 — — — — — — — (369) (369) — (369)Exchange of units inSperoTherapeutics, LLCfor shares in SperoTherapeutics, Inc.on a one-for-onebasis — — (43,197,267) (103,760) 43,197,267 103,760 (335,281) — 335,281 — — — — — Issuance of Series Cpreferred stock — — — — 61,880 110 — — — — — — — — — Cumulative dividends onredeemableconvertiblepreferred shares — — — — — 2,885 — — — — (1,983) (902) (2,885) — (2,885)Accretion of preferredstock to redemptionvalue — — — — — 263 — — — — — (263) (263) — (263)Issuance of commonstock, conversionof preferred stockto common stock — — — — (43,259,147) (107,018) — — 8,062,403 8 107,010 — 107,018 — 107,018 Issuance of commonstock, initial publicoffering net ofissuance costs of$3,574 — — — — — — — — 5,971,498 6 74,169 — 74,175 — 74,175 Share-basedcompensation expense — — — — — — — — — — 1,427 — 1,427 — 1,427 Net loss — — — — — — — — — — — (38,743) (38,743) (1,143) (39,886)Balances at December31, 2017 — $— — $— — $— — $— 14,369,182 $14 $181,428 $(96,840) $84,602 $355 $84,957 The accompanying notes are an integral part of these consolidated financial statements. 92 SPERO THERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) 2017 2016 2015 Cash flows from operating activities: Net loss (39,886) $(32,641) $(13,153)Adjustments to reconcile net loss to net cash used in operating activities: Non-cash research and development expense — 4,595 3,517 Depreciation and amortization 363 279 11 Change in fair value of derivative liabilities (1,541) (580) (174)Share-based compensation 1,427 180 21 Unrealized foreign currency transaction loss 83 — — Changes in operating assets and liabilities: Other receivables (707) (294) (10)Prepaid expenses and other current assets (575) (966) (280)Tax incentive receivables (1,811) (144) — Deposits — (53) (150)Accounts payable 2,349 (644) 671 Accrued expenses and other current liabilities 1,315 2,322 409 Deferred rent (128) (84) — Advance payments from collaborator — (929) (470)Net cash used in operating activities (39,111) (28,959) (9,608)Cash flows from investing activities: Purchases of property and equipment (27) (830) (232)Net cash used in investing activities (27) (830) (232)Cash flows from financing activities: Proceeds from initial public offering of common stock, net of commissions and underwriting discounts 77,749 — — Payment of initial public offering costs (3,574) — — Proceeds from issuance of Class A preferred units, net of issuance costs — — 7,330 Proceeds from issuance of bridge units — 8,500 8,000 Changes in restricted cash — — (30)Payment of offering costs related to 2016 issuance of Class B preferred units — — (25)Proceeds from issuance of Class B preferred units, net of issuance costs — 25,913 — Proceeds from issuance of Class C preferred units, net of issuance costs 43,111 — — Cash payment for non-controlling interests (1,175) — — Net cash provided by financing activities 116,111 34,413 15,275 Net increase in cash and cash equivalents 76,973 4,624 5,435 Cash and cash equivalents at beginning of period 10,315 5,691 256 Cash and cash equivalents at end of period $87,288 $10,315 $5,691 Supplemental disclosure of non-cash investing and financing activities: Conversion of bridge units into preferred units $8,500 $— $8,000 Conversion of preferred stock to common stock $107,018 $— $— Settlement of derivative liabilities upon issuance of preferred units $944 $— $888 Issuance of tranche rights with preferred units $— $909 $2,401 Deemed contribution of capital $— $2,408 $1,419 Settlement of derivative liability upon issuance of bridge units $— $305 $— Issuance of contingent prepayment option with bridge units $— $908 $— Cumulative dividends on redeemable convertible preferred shares $6,146 $3,441 $932 Accretion of redeemable convertible preferred units and stock to redemption value $632 $969 $34 Accretion of bridge units to redemption value $576 $27 $2,307 Issuance of additional shares of common stock to minority investors under anti-dilution rights $— $980 $1,459 Purchases of property and equipment included in accounts payable, accrued expenses and deferred rent $— $— $728 Deferred offering costs included in accounts payable and accrued expenses $— $— $11 The accompanying notes are an integral part of these consolidated financial statements. 93 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”), is a multi-asset, clinical-stage biopharmaceutical companyfocused on identifying, developing and commercializing novel treatments for multi-drug resistant (“MDR”) bacterial infections. The Company’s mostadvanced product candidate, SPR994, is designed to be the first broad-spectrum oral carbapenem-class antibiotic for use in adults to treat MDR Gram-negative infections. Treatment with effective orally administrable antibiotics may prevent hospitalizations for serious infections and enable earlier, moreconvenient and cost-effective treatment of patients after hospitalization. The Company also has a platform technology known as its Potentiator Platform thatit believes will enable it to develop drugs that will expand the spectrum and potency of existing antibiotics, including formerly inactive antibiotics, againstGram-negative bacteria. The Company’s lead product candidates generated from its Potentiator Platform are two intravenous, or IV,-administered agents,SPR741 and SPR206, designed to treat MDR Gram-negative infections in the hospital setting. In addition, the Company is developing SPR720, an oralantibiotic designed for the treatment of pulmonary non-tuberculous mycobacterial infections. The Company believes that its novel product candidates, ifsuccessfully developed and approved, would have a meaningful patient impact and significant commercial applications for the treatment of MDR infectionsin both the community and hospital settings. The Company was formed as Spero Therapeutics, LLC in December 2013 under the laws of the State of Delaware. On June 30, 2017, through a seriesof transactions, Spero Therapeutics, LLC merged with and into Spero Therapeutics, Inc. (formerly known as Spero OpCo, Inc.), a Delaware corporation. Aspart of the transactions, holders of preferred units and common units of Spero Therapeutics, LLC exchanged their units for shares of Spero Therapeutics, Inc.on a one-for-one basis. These transactions are collectively referred to as the Reorganization. Upon completion of the Reorganization, the historicalconsolidated financial statements of Spero Therapeutics, LLC became the historical consolidated financial statements of Spero Therapeutics, Inc. because theReorganization was accounted for as a reorganization of entities under common control. The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to,development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance withgovernment regulations and the ability to secure additional capital to fund operations. Product candidates currently under development will requiresignificant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization. Theseefforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if theCompany’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales. On October 20, 2017, the Company effected a one-for-6.0774 reverse stock split of its issued and outstanding shares of common stock and aproportional adjustment to the existing conversion ratios for each series of the Company’s Preferred Stock (see Note 5). Accordingly, all share and per shareamounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, whereapplicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios. In addition, all common units and incentive units as wellas the conversion ratios of preferred units of Spero Therapeutics, LLC have been presented as if the reverse stock split of the common stock of SperoTherapeutics, Inc. had been applied to such units and ratios of Spero Therapeutics, LLC. On November 6, 2017, Spero Therapeutics, Inc. completed an initial public offering (“IPO”) of its common stock, and issued and sold 5,500,000 sharesof common stock at a public offering price of $14.00 per share, resulting in net proceeds of $71.6 million after deducting underwriting discounts andcommissions but before deducting offering costs. On November 14, 2017, Spero Therapeutics, Inc., issued and sold an additional 471,498 shares of itscommon stock at the IPO price of $14.00 per share pursuant to the underwriters’ partial exercise of their option to purchase additional shares of commonstock, resulting in additional net proceeds of $6.1 million after deducting underwriting discounts and commissions. Upon the closing of the IPO in November2017, the Company’s outstanding convertible preferred shares automatically converted into shares of common stock (see Note 6). The accompanying consolidated financial statements of the Company have been prepared in conformity with accounting principles generallyaccepted in the United States of America (“GAAP”) and include the accounts of the Company and its consolidated subsidiaries. All intercompany accountsand transactions have been eliminated in consolidation. In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a GoingConcern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubtabout the Company’s ability to continue as a going concern within one year after the date94SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS that the consolidated financial statements are issued. Since inception, the Company has funded its operations with proceeds from sales of preferred units(including bridge units, which converted into preferred units), payments received in connection with a concluded collaboration agreement and funding fromgovernment contracts, and most recently, with proceeds from the IPO completed in November 2017. The Company has incurred recurring losses sinceinception, including net losses attributable to Spero Therapeutics, Inc. of $38.7 million, $25.5 million and $10.2 million for the years ended December 31,2017, 2016 and 2015, respectively. In addition, as of December 31, 2017, the Company had an accumulated deficit of $96.8 million. The Company expectsto continue to generate operating losses for the foreseeable future. As of the issuance date of the annual consolidated financial statements, the Companyexpects that its cash and cash equivalents, would be sufficient to fund its operating expenses, capital expenditure requirements through at least 12 monthsfrom the issuance date of these annual consolidated financial statements. However, the future viability of the Company beyond that point is dependent on itsability to raise additional capital to finance its future operations. The Company will seek additional funding through public or private financings, debtfinancing, collaboration agreements or government grants. The inability to obtain funding, as and when needed, would have a negative impact on theCompany’s financial condition and ability to pursue its business strategies. If the Company is unable to obtain funding, the Company could be forced todelay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which couldadversely affect its business prospects, or the Company may be unable to continue operations. Although management intends to pursue plans to obtainadditional funding to finance its operations, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable tothe Company to fund continuing operations, if at all. 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 whichcontemplates 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 reportedamounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts ofexpenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limitedto, the accrual for research and development expenses, the valuation of common shares prior to the Company’s IPO, the valuation of share-based awards andthe valuation of derivative liabilities. The Company bases its estimates on historical experience, known trends and other market-specific or other relevantfactors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates, as there are changes incircumstances, facts and experience. Actual results may differ from those estimates or assumptions.Consolidation The Company consolidates entities in which it has a controlling financial interest. The Company evaluates each of its subsidiaries to determinewhether the entity represents a variable interest entity (“VIE”), for which consolidation should be evaluated under the VIE model, or, alternatively, if theentity is a voting interest entity, for which consolidation should be evaluated using the voting interest model. The Company has concluded that none of itssubsidiaries is a VIE and has consolidated each subsidiary under the voting interest model because it has majority voting control of each subsidiary. Ownership interests in the Company’s subsidiaries that are held by entities other than the Company are reported as non-controlling interests in theconsolidated balance sheets. Losses attributed to non-controlling interests and to the Company are reported separately in the consolidated statements ofoperations and comprehensive loss. As of December 31, 2016, the Company consolidated the following subsidiaries that were not wholly owned: Subsidiary Relationship CountryDomiciled Year ofInclusion Spero Potentiator, Inc. Controlling interest United States 2014 Spero Europe, Ltd. Controlling interest United Kingdom 2015 Spero Gyrase, Inc. Controlling interest United States 2016 Spero Cantab, Inc. Controlling interest United States 2016 95SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All of the non-controlling interests in Spero Europe, Ltd., Spero Potentiator, Inc. and Spero Cantab, Inc. were repurchased by the Company during theyear ended December 31, 2017 (see Note 9). 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. TheCompany maintains most of its cash and cash equivalents at one accredited financial institution. The Company does not believe that it is subject to unusualcredit 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, theCompany relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceuticalingredients and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply of activepharmaceutical ingredients and formulated drugs. Deferred Offering Costs The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equityfinancings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded instockholders’ deficit as a reduction of additional paid-in capital generated as a result of the offering. Should the planned equity financing be abandoned, thedeferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statement of operations and comprehensive loss. 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 equivalents consisted of money market funds at December 31, 2017. The Company did not have any cash equivalents as of December 31, 2016. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is recognized usingthe straight-line method over the estimated useful life of each asset as follows: Estimated Useful LifeLaboratory equipment 5 yearsComputer software and equipment 3 yearsOffice furniture and equipment 7 yearsLeasehold 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 aboveguidelines once placed into service. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization areremoved from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance are charged toexpense as incurred. Impairment of Long-Lived Assets Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes inbusiness circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when toperform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economictrends 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 forrecoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived assetgroup to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of anasset 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 fairvalue, determined based on discounted cash flows. The Company did not record any impairment losses on long-lived assets during the years endedDecember 31, 2017, 2016 or 2015.96SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 orpaid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between marketparticipants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use ofunobservable 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 valuehierarchy, 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, quotedprices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated byobservable 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 assetsor liabilities, including pricing models, discounted cash flow methodologies and similar techniques. The Company’s cash equivalents and derivative liabilities are carried at fair value, determined according to the fair value hierarchy described above(see Note 3). The carrying values of the Company’s accounts payable and accrued expenses approximate their fair values due to the short-term nature of theseliabilities. Derivative Liabilities In connection with certain equity financings, licensing transactions and research collaborations, the Company has identified certain embedded andfreestanding derivatives, which are recorded as liabilities on the Company’s consolidated balance sheet and are remeasured to fair value at each reportingdate until the derivative is settled. Changes in the fair value of the derivative liabilities are recognized as other income (expense) in the consolidatedstatement of operations and comprehensive loss. Classification and Accretion of Bridge Units and Redeemable Convertible Preferred Shares The Company has classified bridge units and redeemable convertible preferred shares outside of stockholders’ equity (deficit) because the sharescontain certain redemption features that are not solely within the control of the Company. The carrying values of these instruments are accreted to theirrespective redemption values from the date of issuance through the earliest date of redemption. Segment Information The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company’ssingular focus is on identifying, developing and commercializing novel treatments for MDR bacterial infections. All of the Company’s tangible assets areheld in the United States. Government Contracts and Revenue Recognition The Company generates revenue from government contracts that reimburse the Company for certain allowable costs for funded projects. For contractswith government agencies, when the Company has concluded that it is the principal in conducting the research and development expenses and where thefunding arrangement is considered central to the Company’s ongoing operations, the Company classifies the recognized funding received as revenue. The Company has concluded to recognize funding received from the U.S. Department of Defense (“DoD”), the National Institute of Allergy andInfectious Diseases (“NIAID”) of the National Institutes of Health (“NIH”) and Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator(“CARB-X”) as revenue, rather than as a reduction of research and development expenses, because the Company is the principal in conducting the researchand development activities and these contracts are central to its ongoing operations. Revenue is recognized as the qualifying expenses related to thecontracts are incurred. Revenue recognition commences only once persuasive evidence of a contract exists, services have been rendered, the reimbursementamounts under the contract are fixed or determinable, and collectibility is reasonably assured. Revenue recognized upon incurring qualifying expenses inadvance of receipt of funding is recorded in the Company’s consolidated balance sheet as other receivables. The related costs incurred97SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS by the Company are included in research and development expense in the Company’s consolidated statements of operations and comprehensive loss. 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 Companyto forego tax deductions or the use of future tax credits and net operating loss carryforwards, the Company classifies the funding recognized as a reduction ofthe 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 43.5% tax incentivefor qualifying research and development activities (see Note 14). The Company recognizes these incentives as a reduction of research and developmentexpenses 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 arerecorded in the consolidated balance sheet as tax incentive receivables. Collaboration Agreements For collaboration agreements with a third party, to determine the appropriate statement of operations classification of the recognized funding, theCompany first assesses whether the collaboration arrangement is within the scope of the accounting guidance for collaboration arrangements. If it is, theCompany evaluates the collaborative arrangement for proper classification in the statement of operations based on the nature of the underlying activity andthe Company assesses the payments to and from the collaborative partner. If the payments to and from the collaborative partner are not within the scope ofother authoritative accounting guidance, the Company bases the statement of operations classification for the payments received on a reasonable, rationalanalogy to authoritative accounting guidance, applied in a consistent manner. Conversely, if the collaboration arrangement is not within the scope ofaccounting guidance for collaboration arrangements, the Company assesses whether the collaboration arrangement represents a vendor/customerrelationship. If the collaborative arrangement does not represent a vendor/customer relationship, the Company then classifies the funding payments receivedin the statement of operations and comprehensive loss as a reduction of the related expense that is incurred. In 2014, the Company entered into a research and development services and support agreement with Hoffmann-La Roche Inc. and certain of itsaffiliates (“Roche”) and concluded that the agreements were not within the scope of the accounting guidance for collaboration arrangements (see Note 13).Due to the co-funded nature of the payments and the Company’s assessment that it did not have a vendor/customer relationship with Roche, the Companyrecognized the nonrefundable payments received under the agreement as a reduction to the research and development expenses incurred, based on aproportional methodology comparing the total expenses incurred in the period under the project to the total expenses expected to be incurred under theproject. The Company terminated the agreement with Roche in August 2016. Research and Development Costs Research and development costs are expensed as incurred. Research and development expenses are comprised of costs incurred in performing researchand development activities, including salaries, share-based compensation and benefits, facilities costs, depreciation, manufacturing expenses and externalcosts of outside vendors engaged to conduct preclinical development activities and trials as well as the cost of licensing technology. Upfront payments andmilestone payments made for the licensing of technology are expensed as research and development in the period in which they are incurred. Nonrefundableadvance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Theprepaid amounts are expensed as the related goods are delivered or the services are performed. Research Contract Costs and Accruals The Company has entered into various research and development contracts with research institutions and other companies both inside and outside ofthe United States. These agreements are generally cancelable, and related payments are recorded as research and development expenses as incurred. TheCompany records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress ofthe studies or trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made indetermining the accrued balances at98SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not beenmaterially different from the actual costs. Patent Costs All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty aboutthe 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-Scholesoption-pricing model. Compensation expense of those awards is recognized over the requisite service period, which is generally the vesting period of therespective award. Generally, the Company issues awards with only service-based vesting conditions and records the expense for these awards using thestraight-line method. For share-based awards granted to non-employee consultants, compensation expense is recognized over the period during which services are renderedby such consultants until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards isremeasured using the then-current fair value of the Company’s common shares and updated assumption inputs in the Black-Scholes option-pricing model. The Company classifies share-based compensation expense in its consolidated statements of operations and comprehensive loss in the same manner inwhich 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 (deficit) that result from transactions and economic events otherthan those with shareholders. There was no difference between net loss and comprehensive loss for each of the periods presented in the accompanyingconsolidated financial statements. Net Income (Loss) per Share Attributable to Spero Therapeutics, Inc. The Company follows the two-class method when computing net income (loss) per share, as the Company has issued shares that meet the definition ofparticipating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according todividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to commonstockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if allincome 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 commonstockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) attributable to commonstockholders is computed by adjusting net income (loss) attributable to common stockholders to reallocate undistributed earnings based on the potentialimpact 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 commonshares assuming the dilutive effect of common stock equivalents. The Company’s preferred stock contractually entitles the holders of such shares to participate in dividends but does not contractually require theholders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss, such losses are not allocatedto such participating securities. In periods in which the Company reports a net loss attributable to common stockholders of Spero Therapeutics, Inc., dilutednet loss per share attributable to common stockholders of Spero Therapeutics, Inc. is the same as basic net loss per share attributable to common stockholdersof Spero Therapeutics, Inc., since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net lossattributable to common stockholders of Spero Therapeutics, Inc. for the years ended December 31, 2017, 2016 and 2015.99SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income Taxes The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities forthe expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferredtax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enactedtax 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 forincome 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 valuationallowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxableprofits 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 todetermine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained uponexternal examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed todetermine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largestamount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of anyresulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. Recently Adopted Accounting Pronouncements In August 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Abilityto Continue as a Going Concern (“ASU 2014-15”). The amendments in this update explicitly require a company’s management to assess an entity’s abilityto continue as a going concern and to provide related footnote disclosures in certain circumstances. The new standard is effective for annual periods endingafter December 15, 2016 and for interim periods thereafter. The Company adopted ASU 2014-15 as of the required effective date of December 31, 2016. Thisguidance relates to footnote disclosure only, and its adoption had no impact on the Company’s financial position, results of operations or cash flows. In November 2014, the FASB issued ASU No. 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Formof a Share Is More Akin to Debt or to Equity (“ASU 2014-16”). The guidance requires an entity to determine the nature of the host contract by considering allstated and implied substantive terms and features of the hybrid financial instrument, weighing each term and feature on the basis of the relevant facts andcircumstances (commonly referred to as the whole-instrument approach). The Company adopted the standard retrospectively to all periods presented on therequired effective date of January 1, 2016, and its adoption had no impact on the Company’s financial position, results of operations or cash flows. In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”),which requires deferred tax liabilities and assets to be classified as non-current in the consolidated balance sheet. ASU 2015-17 is required to be adopted forannual periods beginning after December 15, 2016, including interim periods within those fiscal years. The amendment may be applied either prospectivelyto all deferred tax liabilities and assets or retrospectively to all periods presented. The Company elected to early adopt the standard on January 1, 2016 andhas reflected the adoption retrospectively to all periods presented. The adoption of ASU 2015-17 had no material impact on the Company’s financialposition, results of operations or cash flows. In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting (“ASU 2016-09”). ASU 2016-09 involves several aspects of the accounting for share-based transactions, including the income taxconsequences, classification of awards as either equity or liabilities, an option to recognize gross share compensation expense with actual forfeituresrecognized as they occur and certain classifications on the statement of cash flows. Certain of these changes are required to be applied retrospectively, whileother changes are required to be applied prospectively. The Company adopted ASU 2016-09 as of the required effective date of January 1, 2017 and haselected to account for forfeitures as they occur rather than apply an estimated forfeiture rate to share-based compensation expense. The adoption of ASU2016-09 had no material impact on the Company’s financial position, results of operations or cash flows. 100SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recently Issued Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes existingrevenue recognition guidance under GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods orservices to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Thestandard outlines a five-step process to achieve this principle, and will require companies to use more judgment and make more estimates than under thecurrent guidance. The Company expects that these judgments and estimates will include identifying performance obligations in the customer contract,estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performanceobligation. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising fromcustomer contracts. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,which delays the effective date of ASU 2014-09 such that the standard is effective for public entities for annual periods beginning after December 15, 2017and for interim periods within those fiscal years. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606):Principal versus Agent Considerations (“ASU 2016-08”), which further clarifies the implementation guidance on principal versus agent considerations inASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligationsand Licensing, clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments in this updatereduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separatelyidentifiable. The amendments in this update also provide implementation guidance on determining whether an entity’s promise to grant a license provides acustomer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property(which is satisfied over time). In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-ScopeImprovements and Practical Expedients (“ASU 2016-12”), which clarifies the objective of the collectability criterion, presentation of taxes collected fromcustomers, non-cash consideration, contract modifications at transition, completed contracts at transition and how guidance in ASU 2014-09 isretrospectively applied. ASU 2016-08, ASU 2016-10 and ASU 2016-12 have the same effective dates and transition requirements as ASU 2014-09. TheCompany plans to adopt this standard using the modified retrospective approach. The Company’s preliminary assessment is that government grant revenue isoutside the scope of ASC 606. Therefore, the Company does not believe the adoption of ASC 606 will impact the Company’s financial position, results ofoperations or cash flows as its only existing revenue source as of December 31, 2017 is government grants. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition,measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dualapproach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by thelessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term ofthe lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardlessof their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The guidance iseffective for public entities for annual reporting periods beginning after December 15, 2018 and for interim periods within those fiscal years, and earlyadoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU2016-15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Thestandard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company does notbelieve that the adoption of ASU 2016-15 will have a material impact on its consolidated financial statements. In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230) (“ASU 2016-18”), which requires that amounts generallydescribed as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period andend-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interimperiods within those fiscal years and should be applied using a retrospective transition method to each period presented. Early adoption is permitted. TheCompany does not believe the adoption of ASU 2016-18 will have a material impact on its consolidated financial statements. In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). Theamendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactionsshould be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting includingacquisitions, disposals, goodwill and consolidation. The standard is101SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not believe theadoption of ASU 2017-01 will materially impact its consolidated financial statements. In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance,modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a resultof the change in terms or conditions. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within thosefiscal years. Early adoption is permitted. The Company does not believe the adoption of ASU 2017-09 will materially impact its consolidated financialstatements. In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives andHedging (Topic 815) I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for MandatorilyRedeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down-round features.Part II replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments ofnonpublic entities contained within ASC Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemableinstruments. ASU 2017-11 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscalyears. The Company is currently evaluating the impact that the adoption of ASU 2017-11 will have on its consolidated financial statements.3. Fair Value of Financial Assets and LiabilitiesThe 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, 2017 Using: Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $— $83,121 $— $83,121 $— $83,121 $— $83,121 Liabilities: Derivative liabilities: Anti-dilution rights $— $— $223 $223 $— $— $223 $223 Fair Value Measurements at December 31, 2016 Using: Level 1 Level 2 Level 3 Total Liabilities: Derivative liabilities: Anti-dilution rights $— $— $1,806 $1,806 Contingent prepayment option — — 902 902 $— $— $2,708 $2,708 During the years ended December 31, 2017 and 2016, there were no transfers between Level 1, Level 2 and Level 3.Tranche Rights The Company’s sales of Class A-1 preferred units (“Class A preferred units”) and Class B-1 preferred units (“Class B preferred units”) (see Note 6)provided investors with the right to participate in subsequent offerings of Class A and Class B preferred units in the event specified development andregulatory milestones were achieved. The Company classified each of the tranche rights as a derivative liability on its consolidated balance sheet becausethey met the definition of freestanding financial instruments that could have required the Company to transfer assets upon exercise. The Companyremeasured the derivative liabilities associated with tranche rights to fair value at each reporting date, and recognized changes in the fair value of thederivative liabilities as a component of other income (expense) in the consolidated statement of operations and comprehensive loss. 102SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of these derivative liabilities was determined using the probability-weighted expected return method (“PWERM”), which considered asinputs the probability and time that a milestone would be achieved, the potential fair value of preferred stock upon the exercise of the tranche right and therisk-adjusted discount rate. Class A Tranche Rights The fair value of the tranche right related to the Company’s Class A preferred unit financing (see Note 6) upon issuance in June 2015 was $2.4 million,which increased slightly as of December 31, 2015. Upon the issuance of the Class B preferred units in February 2016, the tranche right was cancelled and thesettlement of the fair value of the derivative liability of $2.4 million was recorded as an increase to additional paid-in capital as a deemed capitalcontribution from the Class A preferred unit investors. Class B Tranche Rights The fair value of the tranche right related to the Company’s Class B preferred unit financing upon issuance in February 2016 was $0.9 million. Uponthe issuance of bridge units in December 2016, the tranche rights were cancelled and the fair value of the derivative liability, which had decreased by$0.6 million to $0.3 million as of the date of settlement due to a decrease in the fair value of the Company’s underlying units, was settled (see Note 6).Anti-Dilution Rights In connection with the issuance of non-controlling interests in certain of the Company’s subsidiaries (see Note 9), specifically Spero Potentiator, Inc.,Spero Europe, Ltd. and Spero Gyrase, Inc., the Company granted anti-dilution rights to the minority investors. The Company classifies the anti-dilution rightsas a derivative liability on its consolidated balance sheet because they are freestanding instruments that represent a conditional obligation to issue a variablenumber of shares. The Company remeasures the derivative liability associated with the anti-dilution rights to fair value at each reporting date, and recognizeschanges in the fair value of the derivative liability as a component of other income (expense) in the consolidated statement of operations and comprehensiveloss. The fair value of these derivative liabilities was determined using a discounted cash flow model. Spero Potentiator In connection with the Company’s issuance of a non-controlling interest in its subsidiary, Spero Potentiator Inc. (“Spero Potentiator”), to NorthernAntibiotics Oy Ltd. (“Northern”) in February 2015, the Company granted to Northern certain anti-dilution rights (see Note 9). The fair value of the derivativeliability related to the anti-dilution rights upon issuance in February 2015 was $2.4 million. In November 2015, the Company issued an additional 2,736 shares of Spero Potentiator’s common shares for no additional cost to Northern as a resultof the anti-dilution rights. Upon issuance, the fair value of the additional shares of Spero Potentiator issued to Northern of $1.5 million was recorded as areduction of the derivative liability and as an increase to the non-controlling interest. In January and August 2016, the Company issued an additional 2,160shares of Spero Potentiator’s common shares for no additional cost to Northern as a result of the anti-dilution rights. Upon issuance, the fair value of theadditional shares of Spero Potentiator issued to Northern of $1.0 million was recorded as a reduction of the derivative liability and as an increase to the non-controlling interest. At that time, the derivative liability related to the anti-dilution rights issued to Northern was fully settled as Northern had received themaximum number of shares it was entitled to under the anti-dilution rights. The most significant assumption impacting the fair value of the anti-dilution rights was the probability that the Company would fund the maximumamount of investment providing anti-dilution protection. Upon issuance of the rights and through August 2016, the date the maximum anti-dilutionprotection was reached, the Company’s assumption for the probability of such funding was 100%. Spero Europe, Ltd. In January 2016, in connection with the issuance of a non-controlling interest in its subsidiary, Spero Europe, Ltd. (“Spero Europe”), to PromiliadBiopharma Inc. (“Promiliad”), the Company granted to Promiliad certain anti-dilution rights (see Note 9). The fair value of the derivative liability related tothe anti-dilution rights upon issuance in January 2016 was $0.2 million. The change in the fair value of the derivative liability associated with the anti-dilution rights was insignificant during the year ended December 31,2016. During 2017, the fair value of the derivative liability decreased by $0.2 million to $0 by May 2017. In May 2017, the non-controlling interest in SperoEurope, Ltd. was repurchased and the anti-dilution rights were settled.103SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The most significant assumption impacting the fair value of the anti-dilution rights was the probability that the Company would fund the maximumamount of investment providing anti-dilution protection. Upon the issuance of the rights and through December 31, 2016, the probability of such fundingwas determined to be 100%. During 2017, the probability of funding Spero Europe, Ltd. was reduced to 0% due to the Company’s decision to no longerpursue development of the licensed technology. Spero Gyrase, Inc. In March 2016, in connection with the issuance of a non-controlling interest in its subsidiary, Spero Gyrase, Inc. (“Spero Gyrase”), to BiotaPharmaceuticals, Inc. (now Aviragen Therapeutics, Inc.) (“Aviragen”), the Company granted to Aviragen certain anti-dilution rights (see Note 9). The fairvalue of the derivative liability related to the anti-dilution rights upon issuance in March 2016 was $1.6 million. The change in the fair value of the derivative liability associated with the anti-dilution rights was insignificant during the year ended December 31,2016. During 2017, the fair value of the derivative liability decreased by $1.4 million to $0.2 million by June 30, 2017, and remained unchanged as ofDecember 31, 2017. The most significant assumption impacting the fair value of the anti-dilution rights was the probability that the Company would fund the maximumamount of investment providing anti-dilution protection. Upon issuance of the rights and through December 31, 2016, the probability of such funding wasdetermined to be 100%. During 2017, the probability of such funding was reduced to 0% due to the Company’s decision to no longer pursue development ofthe acquired technology. As of December 31, 2017, the value of the derivative liability of $0.2 million represents amounts funded to the entity that could besettled by the issuance of equity.Contingent Prepayment Options Bridge units issued to investors in January 2015 and December 2016 contained contingent prepayment options whereby such units wereautomatically convertible into equity units sold in a subsequent round of qualified financing at a discounted rate. The Company classified the contingentprepayment options as derivative liabilities on its consolidated balance sheet because the bridge units were deemed to be more akin to debt than equity andthe embedded prepayment options were at a substantial discount, thus meeting the definition of derivative liabilities. The Company remeasured thederivative associated with the contingent prepayment options to fair value at each reporting date, and recognized changes in the fair value of the derivativeliabilities as a component of other income (expense) in its consolidated statement of operations and comprehensive loss.The fair value of these derivative liabilities was determined using the PWERM, which considered as inputs the probability and time that a subsequentround of preferred stock financing would occur and the risk-adjusted discount rate.January 2015 Bridge Units The fair value of the derivative liability related to the contingent prepayment option associated with bridge units issued in January 2015 was $2.3million. The option was settled in June 2015 upon the issuance of Class A preferred units. As a condition to the June 2015 financing, the Company and theholders of the bridge units agreed to reduce the previously agreed-upon discount to the per unit conversion price from 20% to 10% of the per unit price of$3.90 to be paid for the sale of the Class A preferred units. The reduction of the discount resulted in a decrease to the fair value of the derivative liability of$1.4 million, which was recorded as an increase to additional paid-in capital as a deemed capital contribution by the holders of the bridge units. Theremaining fair value of the derivative liability of $0.9 million was settled upon conversion of the bridge notes into Class A preferred units. December 2016 Bridge Units The fair value of the derivative liability related to the contingent prepayment option associated with bridge units issued in December 2016 was $0.9million. The change in the fair value of the derivative liability associated contingent prepayment option was not material during the year endedDecember 31, 2016. The fair value of the derivative liability increased by less than $0.1 million as of March 2017, at which time the contingent prepaymentoption was settled upon the issuance of Class C preferred units.Investment Option The Company’s concluded collaboration agreement provided its collaboration partner with an option to participate in the next round of financingsubsequent to April 2014 in an amount up to $2.0 million at 90.0% of the per unit price of the related financing.104SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company classified the investment option as a derivative liability on its consolidated balance sheet because it met the definition of a freestandingfinancial instrument that may require the Company to transfer assets upon exercise. The Company remeasured the derivative liability to fair value at eachreporting date, and recognized changes in the fair value of the derivative liability as a component of other income (expense) in the consolidated statement ofoperations and comprehensive loss. The fair value of the derivative liability related to the investment option was $0.2 million as of December 31, 2014.The fair value of the derivative liability associated with investment option decreased by $0.1 million as of June 2015, at which time the subsequentfinancing occurred and the collaboration partner elected not to exercise the investment option, which then expired. Upon expiration, the Company recordedother income equal to the fair value of the derivative liability upon expiration of $0.1 million.The fair value of this derivative liability was determined using the PWERM, which considered as inputs the probability and time that a qualifiedround of preferred stock financing would occur and the risk-adjusted discount rate.The following table provides a roll forward of the aggregate fair values of the Company’s derivative liabilities, for which fair value was determined byLevel 3 inputs (in thousands): Contingent Anti- Prepayment Tranche Dilution Options Rights Rights Total Balance at December 31, 2015 $— $2,404 $980 $3,384 Fair value at issuance 908 909 1,780 3,597 Change in fair value (6) (600) 26 (580)Settlement — (2,713) (980) (3,693)Balance at December 31, 2016 902 — 1,806 2,708 Change in fair value 42 — (1,583) (1,541)Settlement (944) — — (944)Balance at December 31, 2017 $— $— $223 $223 105SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Property and Equipment, NetProperty and equipment, net consisted of the following (in thousands): December 31, 2017 2016 Laboratory equipment $510 $484 Computer software and equipment 181 185 Office furniture and equipment 201 201 Leasehold improvements 915 920 1,807 1,790 Less: Accumulated depreciation and amortization (643) (290) $1,164 $1,500 Depreciation and amortization expense was $0.4 million, $0.3 million and less than $0.1 million for the years ended December 31, 2017, 2016 and2015, respectively.5. Accrued Expenses and Other Current LiabilitiesAccrued expenses and other current liabilities consisted of the following (in thousands): December 31, 2017 2016 Accrued external research and development expenses $1,770 $627 Accrued payroll and related expenses 1,369 1,018 Accrued professional fees 878 1,062 Accrued other 304 221 $4,321 $2,928 6. Redeemable Convertible Preferred Shares As of December 31, 2016, the operating agreement of Spero Therapeutics, LLC, as amended and restated, provided for the issuance of Junior preferredunits, Class A preferred units, Class B preferred units and bridge units, but did not specify an authorized number of each for issuance. Subsequent to theReorganization (see Note 1), the Company’s amended and restated certificate of incorporation authorized the issuance of 43,297,267 shares of preferredstock, par value $0.001 per share. 2015 Bridge Units In January 2015, the Company issued and sold 8,000 bridge units to existing investors at a price of $1,000 per unit for gross proceeds of $8.0 million(the “2015 bridge units”). The bridge units did not have any stated rate of return and were automatically convertible into the same type of units issuable upona qualified financing at a discount of either 20.0% or 25.0% to the per unit price paid by investors in a qualified financing, depending on the timing of suchfinancing. The Company classified this contingent prepayment option as a derivative liability on its consolidated balance sheet on the date of issuance (seeNote 3), and the fair value of contingent prepayment option on the date of issuance of $2.3 million was recorded as both a derivative liability and as areduction to the carrying value of the bridge units. Class A Preferred Unit Financing In June 2015, the Company issued and sold 1,923,076 Class A preferred units at a price of $3.90 per unit for proceeds of $7.3 million, net of issuancecosts of $0.2 million. The sale of Class A preferred units met the definition of a qualified financing under the 2015 bridge unit agreements. As a condition to the June 2015 Class A preferred unit financing, the Company and the holders of the 2015 bridge units agreed to reduce thepreviously agreed-upon discount to the per unit conversion price from 20% to 10% of the price to be paid for the sale of Class A preferred units of $3.90 perunit. Accordingly, the Company issued 2,279,202 Class A preferred units upon the conversion of the 2015 bridge units in the amount of $8.0 million, at aconversion price of $3.51 per unit. The conversion was accounted for as an extinguishment for accounting purposes. Accordingly, the Company recorded theClass A preferred units issued upon conversion of the 2015 bridge units at their aggregate fair value of $8.9 million and recorded a corresponding adjustmentto extinguish the then-106SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS current carrying value of the 2015 bridge units of $8.0 million and the then-current fair value of the derivative liability related to the contingent prepaymentoption associated with the 2015 bridge units of $0.9 million (see Note 3). There was no gain or loss recognized upon the extinguishment.The Class A preferred unit financing included a provision for the issuance of an additional 3,295,455 Class A preferred units at a price of $4.40 perunit in exchange for gross proceeds of $14.5 million in the event the Company achieved a regulatory milestone. The Company classified this tranche right asa derivative liability on its consolidated balance sheet on the date of issuance, and the fair value of tranche right on the date of issuance of $2.4 million wasrecorded as both a derivative liability and as a reduction to the carrying value of the Class A preferred units. Upon issuance of the Class B preferred units inFebruary 2016, the tranche right was cancelled (see Note 3).Class B Preferred Unit FinancingIn February 2016, the Company issued and sold 5,909,089 Class B preferred units at a price of $4.40 per unit for proceeds of $25.9 million, net ofissuance costs of $0.1 million.The Class B preferred unit financing included a provision for the issuance of an additional 1,609,846 Class B preferred units at a price of $5.28 perunit in exchange for gross proceeds of $8.5 million in the event the Company achieved a regulatory milestone. The Company classified this tranche right as aderivative liability on its consolidated balance sheet on the date of issuance, and the fair value of the tranche right on the date of issuance of $0.9 million wasrecorded as both a derivative liability and as a reduction to the carrying value of the Class B preferred units.2016 Bridge UnitsThe regulatory milestone related to the Class B tranche right was achieved in the fourth quarter of 2016; however, the Company and the holders of theClass B preferred units agreed to replace the second closing of Class B preferred units with the issuance of bridge units that would be convertible in the nextqualified financing at a 10% discount. Accordingly, in December 2016, the Company issued and sold 8,500 bridge units to existing investors at a price of$1,000 per unit for gross proceeds of $8.5 million (the “2016 bridge units”). Upon issuance of the 2016 bridge units, the fair value of the derivative liabilityassociated with the Class B tranche right of $0.3 million was settled, resulting in a decrease to the carrying value of the derivative liability and an increase tothe carrying value of the 2016 bridge units (see Note 3). The bridge units did not provide for any stated rate of return and were automatically convertible intothe same type of units issuable upon a qualified financing at a 10% discount to the per unit price paid by investors in a qualified financing. The Companyclassified this contingent prepayment option as a derivative liability on its consolidated balance sheet on the date of issuance, and the fair value of thecontingent prepayment option on the date of issuance of $0.9 million was recorded as both a derivative liability and as a reduction to the carrying value ofthe bridge units. Class C Preferred Unit Financing In March 2017, the Company issued and sold 24,326,470 Class C preferred units at a price of $1.7749 per unit for proceeds of $43.0 million, net ofissuance costs of $0.2 million. The sale of Class C preferred units met the definition of a qualified financing under the 2016 bridge unit agreements. The Company issued 5,321,112 Class C preferred units upon the conversion of the 2016 bridge units in the amount of $8.5 million, at a conversionprice of $1.60 per unit, which represented a discount of 10% to the price per unit paid by other investors in the Class C preferred unit financing. Theconversion was accounted for as an extinguishment for accounting purposes. Accordingly, the Company recorded the Class C preferred units issued uponconversion of the 2016 bridge units at their aggregate fair value of $9.4 million and recorded a corresponding adjustment to extinguish the then-currentcarrying value of the 2016 bridge units of $8.5 million and the then-current fair value of the derivative liability related to the contingent prepayment optionassociated with the 2016 bridge units of $0.9 million (see Note 3). There was no gain or loss recognized upon the extinguishment.In July 2017 the Company sold to its Chief Financial Officer 61,880 shares of the Company’s Series C preferred stock at a price of $1.7749 per share,for proceeds of $0.1 million. Shares of Preferred Stock of Spero Therapeutics, Inc. Issued upon the Reorganization On June 30, 2017, pursuant to the terms of the Reorganization (see Note 1), holders of outstanding preferred units of Spero Therapeutics, LLCexchanged their units for preferred stock of Spero Therapeutics, Inc. on a one-for-one basis. The rights and preferences of each class of stock (as describedbelow) were the same both before and after the Reorganization. Upon the closing of107SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the Company’s IPO in November 2017, all of the then outstanding convertible preferred shares automatically converted into shares of common stock (seeNote 7). The Junior preferred stock, the Series A preferred stock, the Series B preferred stock and the Series C preferred stock are collectively referred to as the“Preferred Stock”. The holders of the Preferred Stock have the following rights and preferences: Voting The holders of Preferred Stock are entitled to vote, together with the holders of common stock, on all matters submitted to stockholders for a vote. Theholders of Preferred Stock are entitled to the number of votes equal to the number of common shares into which each such share of Preferred Stock couldconvert. Conversion Each share of Preferred Stock is convertible at the option of the holder at any time after the date of issuance. Each share of Preferred Stock would beautomatically converted into shares of common stock at the applicable conversion ratio then in effect (i) upon the closing of a firm commitment publicoffering with at least $50.0 million of proceeds to the Company or (ii) upon the written consent of the holders of at least 60% of the then-outstanding sharesof Series B and Series C preferred stock, voting together as a single class. The conversion ratio of each series of Preferred Stock is determined by dividing the Original Issue Price of each series by the Conversion Price of eachseries. The Original Issue Price is $1.00 per share for Junior preferred stock, $3.90 per share for Series A preferred stock, $4.40 per share for Series B preferredstock and $1.7749 per share for Series C preferred stock. The Conversion Price at issuance was $6.0774 per share for Junior preferred stock, $23.7019 pershare for Series A preferred stock, $26.7406 per share for Series B preferred stock and $10.7868 per share for Series C preferred stock, subject to appropriateadjustment in the event of any stock split, stock dividend, combination or other similar recapitalization and other adjustments as set forth in the Company’scertificate of incorporation, as amended and restated. In March and July 2017, as a result of the issuances of Series C preferred stock at a price per share lessthan the Series A and Series B preferred stock Conversion Price, the Conversion Price for each of Series A and Series B preferred stock was adjusted accordingto their terms. Prior to the Company’s Reorganization in June 2017, the Conversion Price of Series A and Series B preferred stock was $15.5715 per share and$16.7256 per share, respectively. The Conversion Price for Junior preferred stock was not adjusted according to its terms. In July 2017, after theconsummation of the Reorganization, the Company sold to its Chief Financial Officer 61,880 shares of the Company’s Series C preferred stock at a price of$1.7749 per share, for proceeds of $0.1 million. Because the price per share of the Series C preferred stock in this transaction was lower than the ConversionPrice of the Company’s Series A and Series B preferred stock, in accordance with the Company’s certificate of incorporation, as amended and restated, theConversion Price of Series A preferred stock was adjusted from $15.5715 to $15.5654 per share and the Conversion Price of Series B preferred stock wasadjusted from $16.7256 to $16.7177 per share. The Conversion Price for Junior preferred stock was not adjusted according to its terms. On October 20, 2017, the Company effected a one-for-6.0774 reverse stock split of its issued and outstanding shares of common stock and aproportional adjustment to the existing conversion rations for each series or the Company’s Preferred Stock. Upon the closing of the Company’s IPO inNovember 2017, the Company’s outstanding preferred shares automatically converted into shares of common stock.Dividends Holders of the Series A, Series B and Series C preferred stock are entitled to receive, out of funds legally available, cumulative dividends at an annualrate of 8%, compounded annually, when and if declared by the board of directors. Holders of the Junior preferred stock are entitled to receive, out of fundslegally available, noncumulative dividends at an annual rate of 5%, when and if declared by the board of directors. The Company may not declare, pay or setaside any dividends on shares of any other series of capital stock of the Company, other than dividends on common stock payable in common stock, unlessthe holders of the Series C preferred stock first receive, or simultaneously receive, a dividend on each outstanding share of Series C preferred stock to whichthey are entitled. The Company may not declare, pay or set aside any dividends on shares of any other series of capital stock of the Company, other thandividends on shares of Series C preferred stock and dividends on common stock payable in common stock, unless the holders of the Series B preferred stockfirst receive, or simultaneously receive, a dividend on each outstanding share of Series B preferred stock to which they are entitled. The Company may notdeclare, pay or set aside any dividends on shares of any other series of capital stock of the Company, other than dividends on shares of Series B preferredstock or Series C preferred stock and dividends on common stock payable in common stock, unless the holders of the Series A preferred stock first receive, orsimultaneously receive, a dividend on each outstanding share of Series A preferred stock to which they are entitled. The Company may not declare, pay or setaside any dividends on shares of any other series of capital stock of the Company, other than dividends on108SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS shares of Series A, Series B or Series C preferred stock and dividends on common stock payable in common stock, unless the holders of the Junior preferredstock first receive, or simultaneously receive, a dividend on each outstanding share of Junior preferred stock to which they are entitled. ThroughDecember 31, 2017 and 2016, no cash dividends have been declared or paid by the Company’s board of directors.Liquidation In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company or Liquidating Event (as described below), theholders of shares of Preferred Stock will receive, in preference to the common stockholders, an amount equal to the greater of (i) the Original Issue Price pershare of the respective share of preferred stock, plus all dividends declared but unpaid on such shares or (ii) the amount the holders would receive if thePreferred Stock were converted into common stock prior to such liquidation event. If, upon any such liquidation event, the assets of the Company availablefor distribution are insufficient to permit payment in full to the holders of Preferred Stock, the holders of the Series C preferred stock are entitled to receivesuch amount prior to and in preference of the holders of the Series B, Series A, Junior preferred stock and common stock. After payment in full to holders ofSeries C preferred stock, the holders of the Series B preferred stock are entitled to receive such amount prior to and in preference of the holders of the Series A,Junior preferred stock and common stock. After payment in full to holders of Series C and Series B preferred stock, the holders of the Series A preferred stockare entitled to receive such amount prior to and in preference of the holders of the Junior preferred stock and common stock. After payment in full to holdersof Series C, Series B and Series A preferred stock, the holders of the Junior preferred stock are entitled to receive such amount prior to and in preference of theholders of the common stock. In the event that the assets available for distribution to the Company’s stockholders are not sufficient to permit payment to anyclass of holders in order of preference and in the full amount to which they are entitled, the assets available for distribution are distributed on a pro rata basis.In addition, solely if (i) proceeds are received in connection with the sale or merger of Spero Potentiator, Inc. and (ii) contracted distribution thresholds inrelation to anti-dilution clauses are satisfied, then distributions to the Series A holders shall be made until their Adjusted Potentiator Shortfall Amount, asdefined, is met, after payments to Series C and Series B preferred stock have been made in full but prior to and in preference of the holders of the Juniorpreferred stock and common stock. After the payment of all preferential amounts to the holders of the Preferred Stock then, to the extent available, theremaining assets available for distribution shall be distributed among the holders of the Preferred Stock and common stock ratably in proportion to thenumber of shares of stock held as converted to common stock.Unless the holders of 60% of the then-outstanding shares of Series B and Series C preferred stock, voting together as a single class, and holders of 60%of the then-outstanding shares of Series C preferred stock elect otherwise, a Liquidating Event shall include a merger or consolidation (other than one inwhich stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) or a sale, lease,transfer, exclusive license or other disposition of all or substantially all of the assets of the Company.Redemption At any time on or after February 1, 2021, shares of each of the Junior preferred stock, Series A, Series B and Series C preferred stock are subject tomandatory redemption by the Company in three equal annual installments beginning 60 days after receipt of a notice of redemption from the holders of atleast 60% of the combined voting power of the holders of the outstanding Series B and Series C preferred stock, voting as a single class at the Original IssuePrice, subject to appropriate adjustment for any stock splits, stock dividends, combinations or any other similar recapitalization affecting such shares, plusany dividends declared but unpaid thereon plus cumulative dividends. If, upon any such redemption, the assets of the Company available for distribution areinsufficient to permit payment in full to the holders of Preferred Stock, the holders of the Series C preferred stock are entitled to receive such amount prior toand in preference of the holders of the Series B, Series A and Junior preferred stock. After payment in full to holders of Series C preferred stock, the holders ofthe Series B preferred stock are entitled to receive such amount prior to and in preference of the holders of the Series A and Junior preferred stock. Afterpayment in full to holders of Series C and Series B preferred stock, the holders of the Series A preferred stock are entitled to receive such amount prior to andin preference of the holders of the Junior preferred stock. In the event that the assets are not sufficient to permit payment of the redemption amount to anyclass of holders in order of preference and in the full amount to which they are entitled, the assets available for distribution are distributed on a pro rata basis.7. Common Stock As of December 31, 2016, the operating agreement of Spero Therapeutics, LLC, as amended and restated, provided for the issuance of common units,but did not specify an authorized number for issuance.109SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Subsequent to the Reorganization on June 30, 2017 (see Note 1), the Company’s amended and restated certificate of incorporation authorized theissuance of 61,917,986 shares of common stock, par value $0.001 per share. Subsequent to the Company’s IPO on November 6, 2017 (See Note 1), theCompany’s amended and restated certificate of incorporation authorized the issuance of 60,000,000 shares of common stock, par value $0.001 per share.Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are notentitled to receive dividends, unless declared by the board of directors.In 2014, the Company issued and sold restricted common units, which were subject to vesting requirements. In 2016, the Company repurchased21,116 unvested common units upon forfeiture at the original issuance price of $0.001 per unit. As of December 31, 2015 and 2016, there were 75,210 unitsand 7,062 units, respectively, of unvested restricted common units outstanding. There were no unvested common units outstanding as of December 31, 2017.On June 30, 2017, pursuant to the terms of the Reorganization (see Note 1), holders of common units of Spero Therapeutics, LLC exchanged theirunits for common stock of Spero Therapeutics, Inc. on a one-for-one basis. On October 20, 2017, the Company effected a one-for-6.0774 reverse stock split ofits issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s PreferredStock (see Note 6). Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notesthereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios. Inaddition, all common units and incentive units as well as the conversion ratios of preferred units of Spero Therapeutics, LLC have been presented as if thereverse stock split of the common stock of Spero Therapeutics, Inc. had been applied to such units and ratios of Spero Therapeutics, LLC.8. Share-Based Compensation Prior to the Reorganization, the Company’s operating agreement, as amended and restated, provided for the granting of incentive units to officers,directors, employees, consultants and advisors. Under the terms of the incentive unit grant agreements, such incentive units were subject to a vestingschedule, with 25% of the incentive units vesting following one year of continued employment or service and the balance vesting in equal monthlyinstallments for 36 months beginning on the one-year anniversary of the holder’s employment or service with the Company. Holders of incentive units wereentitled to receive distributions in proportion to their ownership percent interest, when and if distributed, that were in excess of the strike price of the awardset by the board of directors on the date of grant. The Company determined that the underlying terms of the incentive units and the intended purpose of theawards were more akin to an equity-based compensation award than a performance bonus or profit-sharing arrangement and, therefore, the incentive unitswere equity-classified awards. The total number of incentive units that could have been issued under the Company’s operating agreement was 573,156 as of December 31, 2016, ofwhich 159,890 units remained available for future issuance as of December 31, 2016. Upon the Reorganization on June 30, 2017 (see Note 1), the Companycould no longer issue incentive units. In addition, in June 2017, in connection with the Reorganization, the Company cancelled the then-outstanding402,857 incentive units. The following table summarizes the Company’s incentive unit activity since December 31, 2016: Number ofUnits WeightedAverageStrike Price WeightedAverageContractualTerm AggregateIntrinsic Value (in years) (in thousands) Outstanding as of December 31, 2016 413,266 $2.75 9.1 $779 Granted 9,132 1.28 — — Exercised — — — — Forfeited (19,541) 4.99 — — Cancelled (402,857) 2.62 — — Outstanding as of December 31, 2017 — $— — $— As of December 31, 2016, total unrecognized compensation cost related to the unvested share-based awards was $0.8 million, which was expected tobe recognized over a weighted average period of 3.1 years. As of December 31, 2017, all of the incentive units were cancelled; however, the Company willcontinue to recognize compensation costs related to these awards (see below). 2017 Stock Incentive Plan 110SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On June 28, 2017, the Company’s stockholders approved the 2017 Stock Incentive Plan (the “2017 Plan”). The 2017 Plan provides for the grant ofincentive stock options, nonstatutory stock options, stock grants and stock-based awards. The 2017 Plan is administered by the board of directors, or at thediscretion of the board of directors, by a committee of the board. The exercise prices, vesting and other restrictions are determined at the discretion of theboard 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 marketvalue 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 initiallyreserved 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 forissuance 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 theCompany’s IPO, 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 ofshares of common stock that may be issued under the 2017 Plan will automatically increase on each January 1, beginning with the fiscal year endingDecember 31, 2019 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2027, equal to the lowest of (i) 607,324shares 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 directorsor compensation committee. As of December 31, 2017, there were 685,105 shares remaining available to be issued under the 2017 Plan. In July 2017, the Company additionally granted options for the purchase of 1,154,989 shares of common stock at an exercise price of $5.90 per shareunder the 2017 Plan. The options vest over four years and the fair value of these option grants was $3.96 per share.In July 2017, previous holders of the cancelled incentive units who were still employed by the Company at the time of the Reorganization receivedstock options under the 2017 Stock Incentive Plan (described below). Such stock options were granted for the same number of shares of common stock as thenumber of incentive units cancelled, and the stock options were granted on the same vesting terms as the incentive units. All such stock options have anexercise price of $5.90 per share. The Company accounted for the cancellation of the incentive units and the issuance of new awards as a modification of theawards for accounting purposes in the three months ended September 30, 2017. Unrecognized compensation expense related to the original award is beingrecognized over the remaining service period of the modified award. The incremental fair value of the replacement options, based on the positive differencebetween the fair value of the modified award and the fair value of the original award immediately before it was modified was not material. Incentive Unit and Stock Option Valuation The fair value of each incentive unit award and stock options are estimated using the Black-Scholes option-pricing model. The Company does nothave sufficient company-specific historical and implied volatility information and it therefore estimates its expected share volatility based on the historicalvolatility 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 regardingthe volatility of its own traded share price. The Company has estimated the expected term of the Company’s incentive units utilizing the “simplified” methodfor 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 ofthe 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 neverpaid 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 incentive unit and stock optionawards granted to employees and directors were as follows, presented on a weighted average basis: Year Ended December 31, 2017 2016 2015 Risk-free interest rate 2.0% 1.3% 1.5%Expected term (in years) 6.1 6.3 6.3 Expected volatility 77.1% 76.5% 62.6%Expected dividend yield 0.0% 0.0% 0.0% 111SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes stock option activity during 2017: Number ofShares WeightedAverageExercise Price WeightedAverageContractualTerm AggregateIntrinsic Value (in years) (in thousands) Outstanding as of December 31, 2016 — $— — $— Granted 2,012,106 7.24 — — Exercised — — — — Forfeited (810) 5.90 — — Cancelled — — — — Outstanding as of December 31, 2017 2,011,296 $7.24 9.38 $9,074 Outstanding as of December 31, 2017 - vested and expected tovest 2,011,296 $7.24 9.38 $9,074 Exercisable at December 31, 2017 357,494 $5.90 9.29 $2,091 The weighted average grant-date fair value of stock options granted during 2017 was $4.72 per share. No stock options were exercised during 2017.The weighted average grant-date fair value of awards granted during the years ended December 31, 2016 and 2015 was $3.40 per unit and $1.03 per unit,respectively. As of December 31, 2017, total unrecognized compensation cost related to unvested stock option grants was approximately $7.7 million. This amountis expected to be recognized over a weighted average period of approximately 3.4 years. The Company recorded share-based compensation expense, for both incentive units and stock options in the following expense categories of itsconsolidated statements of operations and comprehensive loss (in thousands): Year Ended December 31, 2017 2016 2015 Research and development expenses $371 $66 $13 General and administrative expenses 1,056 114 8 Total $1,427 $180 $21 9. Non-Controlling Interests Spero Potentiator In February 2015, the Company’s wholly owned subsidiary, Spero Potentiator, issued 996 shares of its common stock with an aggregate fair value of$1.1 million to Northern in exchange for an exclusive license to develop and commercialize certain licensed compounds and licensed products. TheCompany recognized research and development expense of $1.1 million upon acquisition of the license and recorded a non-controlling interest in SperoPotentiator in a corresponding amount.In connection with the acquisition of the license, Northern obtained anti-dilution rights to maintain its 49.9% ownership percentage in SperoPotentiator at no additional cost to Northern in the event that Spero Potentiator completed subsequent equity financings, subject to a maximum amount ofsuch financings. The maximum amount of gross proceeds from equity financings subject to the anti-dilution rights was $5.0 million through the date theCompany filed an investigational new drug application (“IND”) related to the licensed technology. Subsequent to the filing of an IND, the maximum amountof gross proceeds from equity financings subject to the anti-dilution rights was $6.5 million.The Company accounted for the anti-dilution rights as a derivative liability on its consolidated balance sheet (see Note 3). The fair value of thederivative liability associated with the anti-dilution rights upon issuance in February 2015 of $2.4 million was recorded as research and developmentexpenses as it was deemed to represent additional consideration for the license.In November 2015, Northern was issued an additional 2,736 common shares of Spero Potentiator for no additional cost as a result of the anti-dilutionrights. The Company valued these shares at $1.5 million and recorded the amount as an increase in the non-112SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS controlling interest and a reduction in the carrying value of the derivative liability. In January and August 2016, Northern was issued an additional 2,160common shares of Spero Potentiator for no additional cost. The Company valued these shares at $1.0 million and recorded the amount as an increase in thenon-controlling interest and a reduction of the derivative liability. At that time, the anti-dilution rights issued to Northern were fully settled as Northern hadreceived the maximum number of shares it was entitled to under the anti-dilution rights (See Note 3).In June 2017, the Company repurchased all of the shares of Spero Potentiator held by Northern in exchange for a cash payment of $1.0 million andcontingent consideration of $0.1 million. As a condition of the repurchase of the shares from Northern, the Company amended the license agreement withNorthern such that the Company will be obligated to make milestone payments of up to $7.0 million upon the achievement of specified clinical, commercialand other milestones, including a payment of $2.5 million upon the closing of an IPO, which occurred and was paid in November 2017. As a result of thistransaction, during the six months ended June 30, 2017, the Company reclassified the balance of the non-controlling interest of $6.4 million as of the date ofthe transaction to accumulated deficit as an increase to that account. Additionally, the cash payment of $1.0 million was recorded as an increase toaccumulated deficit. The Company will record the contingent payments as research and development expense when it becomes probable that the paymentswill be due. For periods subsequent to the acquisition, the Company no longer reports a non-controlling interest related to Spero Potentiator.Spero EuropeIn January 2016, the Company entered into an agreement with Promiliad whereby Promiliad granted to Spero Europe certain know-how and asublicense to research, develop, manufacture and sell certain compounds. In exchange for the know-how and sublicense, Spero Europe provided Promiliadwith a 5% equity ownership interest in Spero Europe, with a fair value of $0.1 million. In addition, Spero Europe agreed to make payments to Promiliad uponthe achievement of future regulatory and commercial milestones of $4.1 million and to pay to Promiliad royalties of a mid single-digit percentage on netsales of licensed products under the agreement. Spero had the right to terminate the agreement with thirty days’ notice. The Company recognized researchand development expense of $0.1 million upon the acquisition of the license and recorded a non-controlling interest in Spero Europe in a correspondingamount.In connection with the acquisition of the license, Promiliad obtained anti-dilution rights to maintain their 5% equity ownership in Spero Europe at noadditional cost to Promiliad in the event that Spero Europe completed subsequent funding events, subject to a maximum amount of such funding of $5.0million.The Company accounted for the anti-dilution rights as a derivative liability on its consolidated balance sheet (see Note 3). The fair value of thederivative liability associated with the anti-dilution rights upon issuance in January 2016 of $0.2 million was recorded as research and developmentexpenses as it was deemed to represent additional consideration for the license.In May 2017, the Company repurchased all of the shares of Spero Europe from Promiliad in exchange for the return of the license. As a result of thetransaction, the Company reclassified the balance of the non-controlling interest in Spero Europe of less than $0.1 million as of the date of the transaction toaccumulated deficit as an increase to that account. For periods subsequent to the repurchase, the Company no longer reports a non-controlling interest relatedto Spero Europe.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-howrelated to certain compounds. In connection with the transaction, the Company established Spero Gyrase, a Delaware corporation, and issued to Aviragen 200common shares of Spero Gyrase with a fair value of $1.1 million, which represented a 20% equity ownership interest in Spero Gyrase. In addition, SperoGyrase agreed to make future milestone and royalty payments in exchange for the intellectual property. The Company accounted for the acquisition oftechnology as an asset acquisition because it did not meet the definition of a business. The Company recorded the acquired technology as research anddevelopment expense in the consolidated statement of operations and comprehensive loss in the amount of $1.1 million, because the acquired technologyhad not reached commercial feasibility and had no alternative future use, and recorded a non-controlling interest in Spero Gyrase in a corresponding amount.In connection with the agreement, Aviragen obtained anti-dilution rights to maintain their 20% equity ownership of Spero Gyrase at no additionalcost to Aviragen in the event that Spero Gyrase completed subsequent funding events, subject to a maximum amount of such funding of $8.0 million.113SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company accounted for the anti-dilution rights as a derivative liability on its consolidated balance sheet (see Note 3). The fair value of thederivative liability associated with the anti-dilution rights upon issuance in March 2016 of $1.6 million was recorded as research and development expensesas it was deemed to represent additional consideration for the license.Spero Cantab In June 2016, the Company entered into a stock purchase agreement and related agreements (the “Cantab Agreements”) with Pro Bono Bio PLC, acorporation organized under the laws of England, and certain of its affiliates, including PBB Distributions Limited (“PBB”), Cantab Anti-Infectives Ltd.(“CAI”) and New Pharma License Holdings Limited (“NPLH”) in order to acquire NPLH and its intellectual property rights and assets relating to theCompany’s Potentiator Platform.Under the Cantab Agreements, CAI agreed to submit a request to NIAID to novate the CAI-held NIAID contract to the Company. The NIAID contractprovides for development funding of up to $5.7 million over a base and three option periods. As of December 31, 2017, funding for the base period and thefirst two option periods totaling $5.1 million had been committed to CAI. Novation of the NIAID contract to the Company was finalized in December 2017.The Company shall pay PBB a percentage of funds received from NIAID up to a maximum of $1.3 million.Consideration under Cantab Agreements consisted of: (i) 125 shares of Spero Cantab, the Company’s subsidiary, which represented a 12.5%ownership interest in Spero Cantab, and anti-dilution rights (as described below) issued to PBB, with a combined fair value of $1.6 million, (ii) upfrontconsideration of $0.3 million (to be credited against future payments payable to CAI), (iii) contingent milestone payments due upon the achievement ofcertain clinical, regulatory and commercial milestones (see Note 13), (iv) royalty payments of low single-digit percentages based on net sales of productsfrom the licensed technology, and (v) a specified portion of funding payments made by NIAID.The Company accounted for the acquisition of NPLH as an asset acquisition because NPLH did not meet the definition of a business. The Companyrecognized research and development expense of $1.6 million upon the acquisition of NPLH because the acquired technology had not reached commercialfeasibility and had no alternative future use. Upon the issuance of the shares and anti-dilution rights, the Company recorded a non-controlling interest inSpero Cantab of $1.6 million. The $0.3 million payment was recognized as research and development expenses as the services were performed by CAI. TheCompany records the contingent payments outlined in (iii), (iv) and (v) as research and development expense when it becomes probable that the paymentswill be due. Novation of the NIAID contract to Spero was finalized in December 2017. Prior to the contract novation, CAI performed research anddevelopment services at the Company’s direction and applied for reimbursement from NIAID. The Company paid CAI for such research and developmentservices at an agreed-upon rate which took into consideration costs incurred by CAI, amounts reimbursed to CAI by NIAID and the portion of the NIAIDreimbursement the Company paid to CAI. In connection with the Cantab Agreements, PBB obtained anti-dilution rights to maintain a certain equity ownership, ranging from 5% to 12.5%, ofSpero Cantab at no additional cost to PBB in the event that Spero Cantab completed subsequent funding events, subject to maximum amount of suchfunding of $8.0 million. These anti-dilution rights represent a conditional obligation to issue a variable number of shares but are not freestanding and,therefore, do not require bifurcation for accounting purposes from the 125 shares issued. In July 2017, the Company repurchased all of the outstanding shares of Spero Cantab owned by PBB in exchange for a cash payment of $0.2 millionand an amendment to the licensing agreement to increase the first two contingent milestone payments by a total of $0.1 million. For periods subsequent tothe repurchase, the Company no longer reports a non-controlling interest related to Spero Cantab.As of each balance sheet date, non-controlling interests’ balances were as follows (in thousands): December 31, Entity 2017 2016 Spero Potentiator $— $(5,470)Spero Europe — (21)Spero Gyrase 355 380 Spero Cantab — 1,303 $355 $(3,808) 114SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Income TaxesPrior to the Reorganization (see Note 1), the Company’s former parent company, Spero Therapeutics, LLC, was treated as a partnership for federalincome 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 forU.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 inother 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, 2017, 2016 and 2015, the Company recorded no income tax benefits for the net operating losses incurred ineach 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, 2017 2016 2015 Domestic $(38,706) $(27,148) $(12,832)Foreign $(1,180) (5,493) (321)Loss before income taxes $(39,886) $(32,641) $(13,153) 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, 2017 2016 2015 Federal statutory income tax rate (34.0) (34.0) (34.0)Federal and state research and development tax credit (3.3) (1.7) (0.9)State taxes, net of federal benefit (5.3) (4.4) (5.2)Foreign rate differential 0.1 2.3 0.3 Nondeductible items (0.1) 4.8 10.2 Effect of US tax reform 23.8 — — Increase in deferred tax asset valuation allowance 18.8 33.0 29.6 Effective income tax rate — — — Net deferred tax assets as of December 31, 2017 and 2016 consisted of the following (in thousands): December 31, 2017 2016 Net operating loss carryforwards $21,754 $16,406 Research and development tax credit carryforwards 2,022 697 Other 743 49 Total deferred tax assets 24,519 17,152 Valuation allowance (24,519) (17,152) Net deferred tax assets $— $— As of December 31, 2017, the Company had U.S. federal and state net operating loss carryforwards of $76.4 million and $76.0 million, respectively,which may be available to offset future income tax liabilities and begin to expire in 2033. In addition, as of December 31, 2017, the Company had foreign netoperating loss carryforwards of $4.3 million, which may be available to offset future income tax liabilities and do not expire. As of December 31, 2017, theCompany also had federal and state research and development tax credit carryforwards of $1.7 million and $0.4 million, respectively, which may be availableto offset future income tax liabilities and begin to expire in 2033 and 2028, respectively.Utilization of the U.S. net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annuallimitation under Section 382 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurredpreviously or that could occur in the future. These ownership changes may limit the115SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, resultsfrom transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-yearperiod. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of controlsince inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined bySection 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would besubject 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 ownershipchange by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expirationof a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization. Further, until a study is completedby 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 consideredthe Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue fromproduct 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, 2017 and 2016. Management reevaluates thepositive and negative evidence at each reporting period.Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2017 and 2016 related primarily to the increase in netoperating loss carryforwards, capitalized research and development expenses and research and development tax credit carryforwards and were as follows (inthousands): December 31, 2017 2016 Valuation allowance as of beginning of year $(17,152) $(6,157)Decreases recorded as benefit to income tax provision — — Increases recorded to income tax provision (7,367) (10,995)Valuation allowance as of end of year $(24,519) $(17,152) The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2017 or 2016. The Company’s policy is to recordinterest and penalties related to income taxes as part of its income tax provision. As of December 31, 2017 and 2016, the Company had no accrued interest orpenalties related to uncertain tax positions and no amounts had been recognized in the Company’s statement of operations and comprehensive loss.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 groupexcept for its Massachusetts Securities Corporation subsidiary, which is a separate income tax filing. The statute of limitations for assessment by the InternalRevenue Service and Massachusetts tax authorities remains open for all years since 2013. To the extent the Company has tax attribute carryforwards, the taxyears in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state authorities to the extent utilizedin a future period. No federal or state tax audits are currently in process.On December 22, 2017, President Trump signed into law the “the Tax Cuts and Jobs Act” ( “TCJA”). The TCJA includes a number of changes toexisting 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 flatrate 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 eliminationof net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such net operating lossesmay 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% federalrate 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. Thisamount was offset by a corresponding reduction in the valuation allowance. There was no impact to the Company’s consolidated statements of operationsand 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 consolidatedfinancial statements. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and includedthese amounts in its consolidated financial statements for the year ended December 31, 2017. While the Company believes these estimates are116SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS reasonable, the ultimate impact may differ from these provisional amounts due to further review of the enacted legislation, changes in interpretations andassumptions it has made, and additional accounting and regulatory guidance that may be issued. 11. 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 13). Operating Leases In August 2015, the Company entered into an operating lease agreement for office space that commenced in January 2016 and expires in December2020. The lease requires annual payments of $0.4 million over the five-year term. The lease provides for a renewal option to extend the lease for an additionalfive years. Under the terms of the lease, the Company provided a security deposit of $0.2 million to the landlord, which is included in long-term assets in theaccompanying consolidated balance sheets. The lease includes annual rent escalations as well as tenant incentives in the amount of $0.7 million, of which$0.3 million is reimbursed to the landlord over the term of the lease. In July 2016, the Company entered into an agreement to lease laboratory space through November 30, 2019 from a sublessor, which requires annuallease payments of $0.3 million, subject to certain escalations. On January 17, 2018, the Company entered into an amendment (the “Amendment”) to the lease agreement with respect to its corporate headquarterslocated at 675 Massachusetts Avenue, Cambridge, Massachusetts. The Amendment makes certain changes to the original Lease Agreement, dated August 24,2015 (the “Original Lease”), by and between the Company and U.S. REIF Central Plaza Massachusetts, LLC (the “Landlord”), including (i) the addition ofapproximately 7,800 square feet of office space in the same building (the “Expansion Premises”) and (ii) an extension of the expiration date of the OriginalLease to seven years following the delivery date of the Expansion Premises (the “Lease Term”), which is estimated to be December 1, 2018. Under the Amendment, the Company has two consecutive options to extend the Lease Term for an additional period of five years (the “OptionTerms”), subject to certain conditions, upon notice to the Landlord. The Amendment provides for annual base rent for the Expansion Premises ofapproximately $0.5 million in the first year of the Lease Term, which increases on an annual basis to approximately $0.6 million in the final year of the LeaseTerm, 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 forsuch Option Terms. The Company is also obligated to pay the Landlord certain costs, taxes and operating expenses, subject to certain exclusions. Rent escalations and tenant incentives for operating leases are included in deferred rent in the consolidated balance sheet, and rent expense isrecognized on a straight-line basis over the terms of occupancy. The following table summarizes the future minimum payments due under the operating leases as of December 31, 2017 (in thousands): Year Ending December 31, 2018 $820 2019 808 2020 499 2021 — $2,127 Rent expense for the years ended December 31, 2017, 2016 and 2015 was $0.8 million, $0.4 million and $0.1 million, respectively. Indemnification Agreements In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners andother parties with respect to certain matters including, but not limited to, losses arising out of breach of such117SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreementswith members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise byreason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make underthese 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 does not believe that the outcome of any claims under indemnification arrangements 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 31,2017, 2016 or 2015. 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 lossamount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting forcontingencies. The Company expenses as incurred the costs related to such legal proceedings. 12. Government Contracts U.S. Department of Defense In September 2016, the Company was awarded a cooperative agreement with the DoD to further develop anti-infective agents to combat Gram-negative bacteria. The agreement is structured as a single, two-year $1.5 million award. The Company is eligible for the full funding from the DoD, and thereare no options to be exercised at a later date. The DoD funding supports next-generation potentiator discovery and screening of SPR741 partners. TheCompany recognizes revenue under this agreement as qualifying expenses are incurred. During the year ended December 31, 2017, the Company recognized$0.7 million of revenue under this agreement, of which $0.1 million was invoiced but unpaid and included in other receivables at December 31, 2017. Duringthe year ended December 31, 2016, $0.3 million of revenue was recognized under this agreement, of which $0.3 million was invoiced but unpaid andincluded in other receivables at December 31, 2016. NIAID In February 2017, the Company was awarded a grant from NIAID to conduct additional preclinical studies of SPR720, the Company’s novel oralbacterial gyrase inhibitor, for the treatment of non-tuberculous mycobacterial infections. The award is structured as a 12-month $0.6 million base period and$0.4 million option period. Through December 31, 2017, only the base period funds had been committed. In February 2018 NIAID exercised the $0.4 million12-month option period. The Company recognized $0.4 million of revenue in the year ended December 31, 2017 under this agreement, of which less than$0.1 million was invoiced but unpaid and included in other receivables at December 31, 2017. In June 2016, the Company entered into agreements with Pro Bono Bio PLC (“PBB”), a corporation organized under the laws of England, and certainof its affiliates, including PBB Distributions Limited and Cantab Anti-Infectives Limited (“CAI”), in order to acquire certain intellectual property andgovernment funding arrangements relating to SPR206. Under these agreements, CAI agreed to submit a request to NIAID to assign the CAI-held NIAIDcontract to Spero. The NIAID contract provides for development funding of up to $5.7 million over a base period and three option periods. As of December31, 2017, funding for the base period and the first two option periods totaling $5.1 million have been committed. Novation of the NIAID contract to Sperowas finalized in December 2017. Spero shall pay PBB a percentage of funds received from NIAID up to a maximum of $1.3 million. CARB-X In April 2017, the Company was awarded a grant from CARB-X, a public-private partnership funded by the Biomedical Advanced Research andDevelopment Authority (“BARDA”) within the U.S. Department of Health and Human Services to be used to screen, identify and complete Phase 1 trials withat least one partner compound for SPR741, the Company’s lead Potentiator compound. The award committed to funding of $1.5 million over a 12-monthperiod. On March 12, 2018, CARB-X committed an additional $0.4 million related to the first option for a period from December 1, 2017 to March 31, 2018.There will be no additional options exercised under the CARB-X award. The Company recognized $0.9 million of revenue in the year ended December 31,2017 under this agreement, of which $0.7 million was invoiced but unpaid and included in other receivables at December 31, 2017.118SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Collaboration and License AgreementsThe Company has certain obligations under license agreements with third parties that include annual maintenance fees and payments that arecontingent upon achieving various development, regulatory and commercial milestones. Pursuant to these license agreements, the Company is required tomake milestone payments if certain development, regulatory and commercial milestones are achieved, and may have certain additional research fundingobligations. Also, pursuant to the terms of each of these license agreements, when and if commercial sales of a product commence, the Company will payroyalties to its licensors on net sales of the respective products.Roche Collaboration Agreements In April 2014, the Company and Roche entered into a research and development services and support agreement (“Research and DevelopmentAgreement”) and an option agreement (“Option Agreement”), whereby the Company was required to use its best efforts to research and develop a specifiedasset, while Roche would provide partial funding as well as participate on a joint steering committee for the development of this asset. As part of theseagreements, the Company provided Roche with the option to participate in the Company’s next financing subsequent to April 2014 in an amount up to $2.0million at 90.0% of the per unit price of the related financing (see Note 3). The subsequent financing occurred in June 2015 and, as Roche elected not toexercise its option, the option expired. As consideration for the agreements, Roche made nonrefundable upfront payments aggregating to $2.0 million in 2014 and paid annualnonrefundable maintenance fees of $1.0 million in 2015. Due to the cooperative nature of the development plans as driven by the joint steering committeeand the partial defrayment of development costs, the nonrefundable payments were considered reductions to research and development expense. Uponreceipt, the payments the Company received in 2014 and 2015 from Roche were deferred and were recognized as reductions to research and developmentexpense. In June 2016, the Company provided notification to Roche that it intended to terminate its Research and Development Agreement with Roche basedon its rights under the agreement, effective August 2016, resulting in a recognition of the remaining deferred advance research and development payments.There was no termination fee required under the agreement. Related to payments received under the concluded collaboration, the Company recognizedreductions of research and development expense of $0.9 million and $1.5 million for the years ended December 31, 2016 and 2015, respectively.MGH License Agreement In March 2014, the Company entered into a license agreement with The General Hospital Corporation, doing business as Massachusetts GeneralHospital, (“MGH”) to obtain an exclusive worldwide license to research, develop, manufacture and sell products based on technology related to inhibitors ofbacteria quorum sensing and technology pertaining to the methods for identifying compounds for treating, reducing or preventing pathogenic infections. Upon signing of the license agreement, the Company issued to MGH 24,681 common units. The Company also agreed to reimburse MGH for allpatent costs related to the exclusive patent for the duration of the agreement. In November 2016, the Company terminated its license agreement with MGH.There were no termination payments required.Ascenion License AgreementIn September 2014, the Company entered into a license agreement with Ascenion GmbH (formerly known as Helmholtz Zentrum furInfektionsforschung GmbH) to obtain an exclusive worldwide license to research, develop, manufacture and sell products based on Ascenion’s PqsRmodulator technology. Upon signing of the license agreement, the Company issued to Ascenion 9,625 common units. In November 2016, the Companyterminated its license agreement with Ascenion. There were no termination payments required.Aviragen AgreementUnder the Company’s agreement with Aviragen (see Note 9) for certain intellectual property and know-how relating to developing a gyrase inhibitorto develop therapies for Gram-negative infections, the Company is obligated to make milestone payments of up to an aggregate of $12.0 million upon theachievement of specified clinical, regulatory and commercial milestones and to pay royalties of low single-digit percentages based on net sales of productsthe Company acquired under the agreement.119SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cantab License AgreementUnder the Cantab Agreements (see Note 9), the Company is obligated to make milestone payments of up to $5.8 million upon the achievement ofspecified clinical and regulatory milestones and a payment of £5.0 million ($6.7 million and $6.2 million as of December 31, 2017 and 2016, 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 andcountry-by-country basis, of a low single-digit percentage based on net sales of products licensed under the agreement.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 expirevalid claim of any of the applicable patents.Vertex License AgreementIn May 2016, the Company entered into an agreement with Vertex Pharmaceuticals Incorporated (“Vertex”) whereby Vertex granted the Companycertain know-how and a sublicense to research, develop, manufacture and sell products for a proprietary compound, as well as a transfer of materials. Inexchange for the know-how, sublicense and materials, Spero paid Vertex an upfront, one-time, nonrefundable, non-creditable fee of $0.5 million, which wasrecognized as research and development expense. As part of the agreement, the Company is obligated to make future milestone payments of up to$81.1 million upon the achievement of specified clinical, regulatory and commercial milestones and to pay Vertex tiered royalties, on a product-by-productand country-by-country basis, of a mid single-digit to low double-digit percentage based on net sales of products licensed under the agreement.The agreement continues in effect until the expiration of all payment obligations thereunder, with royalty payment obligations continuing on aproduct-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 ofexpiration in such country of the last to expire applicable patent. Further, Vertex has the right to terminate the agreement if provided with notification fromthe Company of intent to cease all development or if no material development or commercialization efforts occur for one year.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 theCompany certain know-how and a license to research, develop, manufacture and sell products for a proprietary compound in the licensed territory. Inexchange for the know-how and license, the Company paid Meiji an upfront, one-time, nonrefundable, non-creditable fee of $0.6 million, which wasrecognized as research and development expense. As part of the agreement, the Company is obligated to make milestone payments of up to $3.0 millionupon the achievement of specified clinical and regulatory milestones, to pay royalties, on a product-by-product and country-by-country basis, of a lowsingle-digit percentage based on net sales of products licensed under the agreement and to pay Meiji a low double-digit percentage of any sublicense feesreceived 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 firstpatient in the Company’s Phase 1 clinical trial of SPR994. The payment was recorded as research and development expense in the statement of operationsand comprehensive loss for the year ended December 31, 2017.The agreement continues in effect until the expiration of all payment obligations thereunder (including royalty payments and licensee revenue) on aproduct-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’sright to terminate the agreement upon the other party’s material breach (if not cured within a specified period after receipt of notice) or insolvency, theCompany also has unilateral termination rights (i) in the event that the Company abandons the development and commercialization of SPR994 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 (see Note 9), the Company amended its licenseagreement with Northern such that the Company agreed to pay Northern up to $7.0 million upon the achievement of specified clinical, regulatory and othermilestones, including a total payment of $2.5 million upon the closing of an initial public offering. In addition, under an exchange agreement the Companyentered 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. Theagreement has a perpetual term and no express termination rights. Upon the closing of the Company’s IPO in November 2017, the Company paid $2.6million to Northern in120SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS connection with both the license and exchange agreements. This payment was recorded as research and development expense in the Company’s statement ofoperations and comprehensive loss for the year ended December 31, 2017.14. 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 Companyestablished Spero Potentiator Australia Pty Limited to carry out certain research and development activities. As this subsidiary meets the eligibilityrequirements of the Australian tax law, it is eligible to receive a 43.5% tax incentive for qualified research and development activities. For the years endedDecember 31, 2017 and 2016, $1.8 million and $0.1 million, respectively, was recorded as a reduction to research and development expenses in theconsolidated statements of operations and comprehensive loss associated with this tax incentive, representing 43.5% of the Company’s qualified researchand development spending in Australia. The refund is denominated in Australian dollars and, therefore, the receivable is re-measured to U.S. dollars as ofeach reporting date. As of December 31, 2017 and 2016, the Company’s tax incentive receivables from the Australian government totaled $1.9 million and$0.1 million, respectively. 15. Net Loss per ShareBasic and diluted net loss per share attributable to common stockholders of Spero Therapeutics, Inc. was calculated as follows (in thousands, exceptshare and per share amounts): Year Ended December 31, 2017 2016 2015 Numerator: Net loss $(39,886) $(32,641) $(13,153) Less: Net loss attributable to non-controlling interests (1,143) (7,150) (2,999) Plus: Cumulative dividends on redeemable convertible preferredshares (6,146) (3,441) (932) Plus: Accretion of bridge units and redeemable convertiblepreferred shares to redemption value (1,208) (996) (2,341) Net loss attributable to common stockholders of SperoTherapeutics, Inc. $(46,097) $(29,928) $(13,427) Denominator: Weighted average common shares outstanding, basic and diluted 2,586,865 312,169 252,807 Net loss per share attributable to common stockholders of SperoTherapeutics, Inc., basic and diluted $(17.82) $(95.87) $(53.11) The Company excluded potentially dilutive securities from the computation of diluted net loss per share as the effect would be to reduce the net lossper share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable tocommon stockholders of Spero Therapeutics, Inc. is the same. The Company excluded the following potential common shares, presented based on amountsoutstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated becauseincluding them would have had an anti-dilutive effect: December 31, 2017 2016 2015 Options to purchase common stock 2,011,296 — — Redeemable convertible preferred shares (as converted to commonshares) — 2,229,518 1,257,213 Incentive units — 413,266 171,758 2,011,296 2,642,784 1,428,971 121SPERO THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Retirement PlanThe Company has a defined-contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers allemployees who meet defined minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre-taxbasis. As currently established, the Company is not required to make and to date has not made any contributions to the 401(k) Plan. The Company did notmake any matching contributions during the years ended December 31, 2017, 2016 and 2015.17. Quarterly Financial Data (unaudited) March 31,2017 June 30,2017 September 30,2017 December 31,2017 Grant revenue $140 $249 $597 $993 Operating expenses 7,739 10,414 10,563 14,993 Net loss and comprehensive loss (6,411) (9,763) (9,844) (13,868)Net loss attributable to Spero Therapeutics, Inc. (5,876) (9,169) (9,836) (13,862)Net loss attributable to common shareholders of SperoTherapeutics, Inc. (7,130) (12,121) (12,076) (14,770)Net loss per share attributable to common shareholders pershare, basic and diluted $(21.60) $(36.21) $(36.02) $(1.59)Weighted average shares outstanding, basic and diluted: 330,075 334,788 335,285 9,273,783 March 31,2016 June 30,2016 September 30,2016 December 31,2016 Grant Revenue $— $— $— $335 Operating expenses 8,417 8,080 7,914 9,145 Net loss and comprehensive loss (8,430) (8,096) (7,918) (8,197)Net loss attributable to Spero Therapeutics, Inc. (5,905) (6,059) (6,316) (7,211)Net loss attributable to common shareholders of SperoTherapeutics, Inc. (6,257) (7,928) (7,410) (8,333)Net loss per share attributable to common shareholders pershare, basic and diluted $(21.51) $(25.30) $(23.23) $(25.68)Weighted average shares outstanding, basic and diluted: 290,884 313,414 318,948 324,521 18. Subsequent Events On January 17, 2018, the Company entered into an amendment to the lease agreement with respect to its corporate headquarters located at 675Massachusetts Avenue, Cambridge, Massachusetts. The Amendment makes certain changes to the original lease, by and between the Company and U.S. REIFCentral Plaza Massachusetts, LLC (the “Landlord”), including (i) the addition of approximately 7,800 square feet of office space in the same building (the“Expansion Premises”) and (ii) an extension of the expiration date of the Original Lease to seven years following the delivery date of the Expansion Premises(the “Lease Term”), which is estimated to be December 1, 2018. Under the Amendment, the Company has two consecutive options to extend the Lease Term for an additional period of five years (the “OptionTerms”), subject to certain conditions, upon notice to the Landlord. The Amendment provides for annual base rent for the Expansion Premises ofapproximately $0.5 million in the first year of the Lease Term, which increases on an annual basis to approximately $0.6 million in the final year of the LeaseTerm, 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 forsuch Option Terms. The Company is also obligated to pay the Landlord certain costs, taxes and operating expenses, subject to certain exclusions. 122 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.None.Item 9A. Controls and Procedures.Evaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principalfinancial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017. The term “disclosure controlsand procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controlsand other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controlsand procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reportsthat it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive andprincipal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures,no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies itsjudgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and proceduresas of December 31, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures wereeffective at the reasonable assurance level.Management’s Annual Report on Internal Controls Over Financial ReportingThis Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or anattestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.Changes in Internal Control Over Financial ReportingNo change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during thethree months ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other Information.None. 123 PART IIIItem 10. Directors, Executive Officers and Corporate Governance.The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Management and CorporateGovernance Matters,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Conduct and Ethics” in the Company’s proxy statementfor the 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form10-K.Item 11. Executive Compensation.The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Executive Officer and DirectorCompensation,” “Management and Corporate Governance Matters - Compensation Committee Interlocks and Insider Participation,” “CompensationCommittee Report” and “Compensation Practices and Policies Relating to Risk Management” in the Company’s proxy statement for the 2018 AnnualMeeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Security Ownership of CertainBeneficial Owners and Management” and “Equity Compensation Plan Information” in the Company’s proxy statement for the 2018 Annual Meeting ofStockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.Item 13. Certain Relationships and Related Transactions, and Director Independence.The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Certain Relationships and RelatedTransactions” and “Management and Corporate Governance Matters” in the Company’s proxy statement for the 2018 Annual Meeting of Stockholders to befiled with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.Item 14. Principal Accounting Fees and Services.The response to this item is incorporated by reference from the discussion responsive thereto under the caption “Independent Public Accountants” inthe Company’s proxy statement for the 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal yearcovered by this Annual Report on Form 10-K.124 PART IVItem 15. Exhibits, Financial Statement Schedules.(1)Consolidated Financial StatementsSee Index to Consolidated Financial Statements at Item 8 herein. (2)Financial Statement SchedulesAll schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notesthereto.(3)ExhibitsThe following is a list of exhibits filed as part of this Annual Report on Form 10-K. Exhibit Number Exhibit Description Filed withthisReport Incorporated byReference hereinfrom Form orSchedule Filing Date SEC File /RegistrationNumber 3.1 Amended and Restated Certificate of Incorporation of the Registrant Form 8-K(Exhibit 3.1) 11/6/2017 001-38266 3.2 Amended and Restated Bylaws of the Registrant Form 8-K(Exhibit 3.1) 11/6/2017 001-38266 4.1 Form of Common Stock Certificate Form S-1(Exhibit 4.1) 10/6/2017 333-220858 4.2 Investors’ Rights Agreement, dated as of June 30, 2017, by andbetween the Registrant and the other parties thereto Form S-1(Exhibit 4.2) 10/6/2017 333-220858 10.1# 2017 Stock Incentive Plan, as amended Form 10-Q(Exhibit 10.1) 12/14/2017 333-220858 10.2# Form of Stock Option Agreement under the 2017 Stock Incentive Plan,as amended Form 10-Q(Exhibit 10.2) 12/14/2017 333-220858 10.3# Form of Director and Officer Indemnification Agreement Form S-1(Exhibit 10.4) 10/6/2017 333-220858 10.4# Non-Employee Director Compensation Policy Form S-1/A(Exhibit 10.20) 10/23/2017 333-220858 10.5# Employment Agreement, dated October 20, 2017, by and between theRegistrant and Ankit Mahadevia, M.D. Form S-1/A(Exhibit 10.5) 10/23/2017 333-220858 10.6# Employment Agreement, dated October 20, 2017, by and between theRegistrant and Joel Sendek Form S-1/A(Exhibit 10.6) 10/23/2017 333-220858 10.7# Employment Agreement, dated October 20, 2017, by and between theRegistrant and Thomas Parr Jr., Ph.D. Form S-1/A(Exhibit 10.7) 10/23/2017 333-220858 10.8# Employment Agreement, dated October 20, 2017, by and between theRegistrant and Cristina Larkin Form S-1/A(Exhibit 10.8) 10/23/2017 333-220858 10.9# Employment Agreement, dated December 13, 2017, by and betweenthe Registrant and David Melnick, M.D. X 10.10# Letter Agreement, dated June 24, 2015, by and between the Registrantand John Tomayko, M.D. Form S-1(Exhibit 10.9) 10/6/2017 333-220858 125 Exhibit Number Exhibit Description Filed withthisReport Incorporated byReference hereinfrom Form orSchedule Filing Date SEC File /RegistrationNumber 10.11# Termination and Release, dated April 14, 2017, by and between theRegistrant and John Tomayko, M.D. Form S-1(Exhibit 10.10) 10/6/2017 333-220858 10.12 Lease Agreement, dated August 24, 2015, by and between theRegistrant and U.S. REIF Central Plaza Massachusetts, LLC Form S-1(Exhibit 10.11) 10/6/2017 333-220858 10.13 First Amendment to Lease Agreement, dated January 17, 2018, by andbetween the Registrant and U.S. REIF Central Plaza Massachusetts,LLC Form 8-K(Exhibit 99.1) 1/23/2018 001-38266 10.14 Sublease, dated July 6, 2016, by and between the Registrant andTetraphase Pharmaceuticals, Inc. Form S-1(Exhibit 10.12) 10/6/2017 333-220858 10.15† Stock Purchase Agreement, dated June 6, 2016, by and among SperoCantab, Inc., the Registrant, Spero Cantab UK Limited, PBBDistributions Limited, New Pharma License Holdings Limited, CantabAnti-Infectives Ltd and Pro Bono Bio PLC, as amended by Amendmentto Stock Purchase Agreement, dated July 18, 2017 Form S-1(Exhibit 10.13) 10/6/2017 333-220858 10.16† Assignment and License Agreement, dated May 9, 2016, by and amongSpero Trinem, Inc., the Registrant and Vertex PharmaceuticalsIncorporated Form S-1/A(Exhibit 10.14) 10/23/2017 333-220858 10.17† License Agreement, dated June 14, 2017, by and between theRegistrant and Meiji Seika Pharma Co., Ltd., as supplemented byAddendum to License Agreement, dated June 14, 2017 Form S-1(Exhibit 10.15) 10/6/2017 333-220858 10.18† Amended and Restated License Agreement, dated June 28, 2017, byand between Spero Potentiator, Inc. and Northern Antibiotics Oy (Ltd.) Form S-1/A(Exhibit 10.16) 10/23/2017 333-220858 10.19 Form of Proprietary Information and Inventions Assignment Agreement Form S-1/A(Exhibit 10.17) 10/23/2017 333-220858 16.1 Letter of KPMG LLP, dated August 25, 2017, regarding changes in theRegistrant's certifying accountants Form S-1(Exhibit 10.15) 10/6/2017 333-220858 21.1 List of Subsidiaries of the Registrant X 23.1 Consent of PricewaterhouseCoopers LLP, independent registeredpublic accounting firm X 31.1 Certification of Principal Executive Officer pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002 X 31.2 Certification of Principal Financial Officer pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002 X 32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 101.INS XBRL Instance Document X 126 Exhibit Number Exhibit Description Filed withthisReport Incorporated byReference hereinfrom Form orSchedule Filing Date SEC File /RegistrationNumber 101.SCH XBRL Taxonomy Extension Schema Document X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF XBRL Taxonomy Extension Definition X 101.LAB XBRL Taxonomy Extension Label Linkbase Document X 101.PRE XBRL Taxonomy Presentation Linkbase Document X †Confidential treatment received as to portions of the exhibit. Confidential materials omitted and filed separately with the SEC.#Management contract or compensatory plan.Item 16. Form 10-K Summary.None.127 SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report tobe signed on its behalf by the undersigned, thereunto duly authorized. SPERO THERAPEUTICS, INC. Date: April 2, 2018 By:/s/ Ankit Mahadevia, M.D. Ankit Mahadevia, M.D. President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Ankit Mahadevia,M.D. and Joel Sendek his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do andperform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could doin person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes or substitute, may lawfully do or cause to be done byvirtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his name.Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons onbehalf of the registrant in the capacities and on the dates indicated. Name Title Date /s/ Ankit Mahadevia, M.D. President, Chief Executive Officer and Director April 2, 2018Ankit Mahadevia, M.D. (Principal Executive Officer) /s/ Joel Sendek Chief Financial Officer and Treasurer April 2, 2018Joel Sendek (Principal Financial Officer and Principal Accounting Officer) /s/ Casper Breum Director April 2, 2018Casper Breum /s/ Milind Deshpande, Ph.D. Director April 2, 2018Milind Deshpande, Ph.D. /s/ Jean-François Formela, M.D. Director April 2, 2018Jean-François Formela, M.D. /s/ David P. Southwell Director April 2, 2018David P. Southwell /s/ Frank E. Thomas Director April 2, 2018Frank E. Thomas /s/ Patrick Vinik, M.D. Director April 2, 2018Patrick Vinik, M.D. 128 Exhibit 10.9EXECUTIVE EMPLOYMENT AGREEMENTThis Executive Employment Agreement (this “Agreement”) is made and entered into this 13th day of December, 2017 (the“Effective Date”) by and between Spero Therapeutics, Inc., a Delaware corporation (“Company”), and David A. Melnick(“Executive”).WHEREAS, Executive and Company desire to set forth the terms and conditions for the employment of the Executive bythe Company to assure the harmonious performance of the affairs of Company as well as to enter into a Proprietary Information andInventions Assignment Agreement (the “Restrictive Covenant Agreement”).NOW, THEREFORE, in consideration of the mutual promises, terms, provisions, and conditions contained herein,Company and Executive hereby agree as follows: 1.Roles and Duties. Subject to the terms and conditions of this Agreement, Company shall employ Executive as itsChief Medical Officer reporting to Company’s Chief Executive Officer (“CEO”). The Executive shall have such duties andresponsibilities as are reasonably determined by the Board of Directors and are consistent with the duties customarily performed by aChief Medical Officer of a similarly situated company in the United States. Executive accepts such employment upon the terms andconditions set forth herein, and agrees to perform such duties and discharge such responsibilities to the best of Executive’sability. During Executive’s employment, Executive shall devote all of Executive’s business time and energies to the business andaffairs of Company. Notwithstanding the foregoing, nothing herein shall preclude Executive from (i) performing services for suchother companies as Company may designate or permit; (ii) serving, with the prior written consent of the Board, which consent shall notbe unreasonably withheld, as a member of the boards of directors or advisory boards (or their equivalents in the case of a non-corporateentity) of non-competing businesses or charitable, educational or civic organizations; (iii) engaging in charitable activities andcommunity affairs; and (iv) managing Executive's personal investments and affairs; provided, however, that the activities set out inclauses (i), (ii), (iii) and (iv) shall be limited by Executive so as not to materially interfere, individually or in the aggregate, with theperformance of Executive's duties and responsibilities hereunder.2.Term of Employment.(a)Term. Subject to the terms hereof, Executive’s employment hereunder shall commence on January 4,2018 (the “Start Date”) and continue until terminated hereunder by either party (such term of employment referred to herein as the“Term”).(b)Termination. Notwithstanding anything else contained in this Agreement, Executive’s employmenthereunder shall terminate upon the earliest to occur of the following:(i)Death. Immediately upon Executive’s death;  (ii)Termination by Company.(A)If because of Executive’s Disability (as defined below in Section 2(c)), writtennotice by Company to Executive that Executive’s employment is being terminated as a result ofExecutive’s Disability, which termination shall be effective on the date of such notice or such later dateas specified in writing by Company;(B)If for Cause (as defined below in Section 2(d)), written notice by Company toExecutive that Executive’s employment is being terminated for Cause, which termination shall beeffective on the date of such notice or such later date as specified in writing by Company, provided thatif prior to the effective date of such termination Executive has cured the circumstances giving rise to theCause (if capable of being cured as provided in Section 2(d)), then such termination shall not beeffective; or(C)If by Company for reasons other than under Sections 2(b)(ii)(A) or (B), writtennotice by Company to Executive that Executive’s employment is being terminated, which terminationshall be effective thirty (30) days after the date of such notice.(iii)Termination by Executive. (A)If for Good Reason (as defined below in Section 2(e)), written notice byExecutive to Company that Executive is terminating Executive’s employment for Good Reason andthat sets forth the factual basis supporting the alleged Good Reason, which termination shall be effectivethirty (30) days after the date of such notice; provided that if prior to the effective date of suchtermination Company has cured the circumstances giving rise to the Good Reason if capable of beingcured as provided in Section 2(e), then such termination shall not be effective; or(B)If without Good Reason, written notice by Executive to Company that Executiveis terminating Executive’s employment, which termination shall be effective no fewer than sixty (60)days after the date of such notice unless waived, in whole or in part, by Company.Notwithstanding anything in this Section 2(b), Company may at any point, under the conditions set forth in Section 2(b)(ii)(B), terminate Executive’s employment for Cause prior to the effective date of any other termination contemplated hereunder; providedthat if prior to the effective date of such for-Cause termination Executive has cured the circumstances giving rise to the Cause (ifcapable of being cured as provided in Section 2(d)), then such termination shall not be effective. (c)Definition of “Disability”. For purposes of this Agreement, “Disability” shall mean Executive’sincapacity or inability to perform Executive’s duties and responsibilities as contemplated herein by reason of a medically determinablemental or physical impairment for one hundred twenty (120) days or more within any one (1) year period (cumulative or consecutive),2 which impairment can reasonably be expected to result in death or can be expected to last for a continuous period of not less than six(6) months. The determination that Executive is disabled hereunder, if disputed by the parties, shall be resolved by a physicianreasonably satisfactory to Executive and Company, at Company’s expense, and the determination of such physician shall be final andbinding upon both Executive and Company. Executive hereby consents to such examination and consultation by aphysician. Company will keep all information it receives as a result of such inquiry and determination confidential and will not use itfor any purpose other than in connection with exercising its rights under this Agreement.(d)Definition of “Cause”. As used herein, “Cause” shall mean: (i) Executive’s conviction of (A) a felonyor (B) any misdemeanor involving moral turpitude, deceit, dishonesty or fraud; (ii) Executive’s willful failure or refusal to comply withlawful directions of the CEO, which failure or refusal continues for more than thirty (30) days after written notice is given to Executiveby the CEO, which notice sets forth in reasonable detail the nature of such failure or refusal; (iii) willful and material breach byExecutive of a written Company policy applicable to Executive or Executive’s covenants and/or obligations under this Agreement orthe material breach of the Restrictive Covenant Agreement; and/or (iv) material misconduct by Executive that seriously discredits ordamages Company or any of its affiliates. Except in the case of (ii) above, it is not necessary that the Company’s finding of Causeoccur prior to Executive’s termination of service. If Company determines, subsequent to Executive’s termination of service, that priorto Executive’s termination Executive engaged in conduct which would constitute “Cause,” (other than pursuant to (ii) above) thenExecutive shall have no right to any benefit or compensation under this Agreement. (e)Definition of “Good Reason”. As used herein, “Good Reason” shall mean: (i) relocation of Executive’sprincipal business location to a location more than thirty (30) miles from Executive’s then-current business location; (ii) a material diminution in Executive’s duties, authority or responsibilities; (iii) a material reduction in Executive’s Base Salary; or (iv) willful andmaterial breach by Company of its covenants and/or obligations under this Agreement; provided that, in each of the foregoing clauses(i) through (iv) (A) Executive provides Company with written notice that Executive intends to terminate Executive’s employmenthereunder for one of the grounds set forth in this Section 2(e) within thirty (30) days of such ground occurring, (B) if such ground iscapable of being cured, Company has failed to cure such ground within a period of thirty (30) days from the date of such writtennotice, and (C) Executive terminates by written notice Executive’s employment within sixty-five (65) days from the date that Executiveprovides the notice contemplated by clause (A) of this Section 2(e). For purposes of clarification, the above-listed conditions shallapply separately to each occurrence of Good Reason, and failure to adhere to such conditions in the event of Good Reason shall notdisqualify Executive from asserting Good Reason for any subsequent occurrence of Good Reason. In addition, Executive mayterminate his employment for Good Reason within one (1) year following a Change of Control (as defined below) if, after the Changeof Control, Executive is not an executive of the parent company, provided that Executive’s roles, responsibilities and scope of authoritywithin the subsidiary are not comparable to Executive’s roles, responsibilities and scope of authority with Company prior to theChange of Control. For purposes of this Agreement, “Good Reason” shall be interpreted in a manner, and limited to the extentnecessary, so that it shall not cause adverse tax consequences for either party with respect to Section 409A (“Section 409A”) of theInternal Revenue Code of 1986, as amended (the “Code”) and any successor statute, regulation and guidance thereto.3 3.Compensation.(a)Base Salary. Commencing on the Start Date Company shall pay Executive a base salary (the “BaseSalary”) at the annual rate of Three Hundred Eighty Thousand Dollars ($380,000). The Base Salary shall be payable in substantiallyequal periodic installments in accordance with Company’s payroll practices as in effect from time to time. Company shall deduct fromeach such installment all amounts required to be deducted or withheld under applicable law or under any employee benefit plan inwhich Executive participates. The Board or an appropriate committee thereof shall, on an annual basis, review the Base Salary, whichmay be adjusted upward (but not downward) at Company’s discretion.(b)Annual Performance Bonus. Commencing with fiscal 2018, Executive shall be eligible to receive anannual cash bonus (the “Annual Performance Bonus”), with the target amount of such Annual Performance Bonus equal to thirty-fivepercent (35%) of Executive’s Base Salary in the year to which the Annual Performance Bonus relates; provided that the actual amountof the Annual Performance Bonus may be greater or less than such target amount. The amount of the Annual Performance Bonusshall be determined by the Board of Directors or an appropriate committee thereof in its sole discretion, and shall be paid to Executiveno later than March 15th of the calendar year immediately following the calendar year in which it was earned. Except as provided inSection 4, Executive must be employed by Company on the last day of the applicable fiscal year to which the Annual PerformanceBonus relates in order to be eligible for, and to be deemed as having earned, such Annual Performance Bonus. Company shall deductfrom the Annual Performance Bonus all amounts required to be deducted or withheld under applicable law or under any employeebenefit plan in which Executive participates.(c)Equity. On the Start Date, the Company shall award Executive a stock option under its 2017 StockIncentive Plan (the “Plan”) to purchase 135,000 shares of the Company’s common stock at a per share exercise price equal to the fairmarket value (as defined in the Plan) of the Company’s common stock on such date (the “Option”). The Option will be evidenced inwriting by, and subject to the terms of, the Company’s standard form of stock option agreement, which agreement will specify vestingover four (4) years, 25% on the first anniversary of the Start Date with the balance to vest in equal monthly installments over thefollowing 36 months and exercise of vested options for up to ten (10) years except as otherwise provided in the stock option agreementor by the Plan. Commencing in fiscal year 2019, Executive will be eligible to be considered for the grant of stock options and/or otherequity-based awards commensurate with Executive’s position and responsibilities. The amount, terms and conditions of any stockoption or other equity-based award will be determined by the Board of Directors or an appropriate committee thereof in its discretionand set forth in the applicable equity plan and other documents governing the award.(d)Paid Time Off. In addition to standard paid holidays, Executive may take up to twenty (20) days ofpaid time off (“PTO”) per year, to be scheduled so as not to materially disrupt Company’s operations, pursuant to the terms andconditions of Company policy and practices as applied to Company senior executives. 4 (e)Fringe Benefits. Executive shall be entitled to participate in all benefit/welfare plans and fringe benefitsprovided to Company senior executives. Executive understands that, except when prohibited by applicable law, Company’s benefitplans and fringe benefits may be amended by Company from time to time in its sole discretion. The terms of any such benefits shall begoverned by the applicable plan documents and Company policies in effect from time to time.(f)Reimbursement of Expenses. Company shall reimburse Executive for all ordinary and reasonable out-of-pocket business expenses incurred by Executive in furtherance of Company’s business in accordance with Company’s policies withrespect thereto as in effect from time to time. Executive must submit any request for reimbursement no later than ninety (90) daysfollowing the date that such business expense is incurred. All reimbursements provided under this Agreement shall be made orprovided in accordance with the requirements of Section 409A including, where applicable, the requirement that (i) any reimbursementis for expenses incurred during Executive’s lifetime (or during a shorter period of time specified in this Agreement); (ii) the amount ofexpenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any othercalendar year; (iii) the reimbursement of an eligible expense shall be made no later than the last day of the calendar year following theyear in which the expense is incurred; and (iv) the right to reimbursement or in-kind benefits is not subject to liquidation or exchangefor another benefit.(g)Indemnification. Executive shall be entitled to indemnification with respect to Executive’s servicesprovided hereunder pursuant to Delaware law, the terms and conditions of Company’s certificate of incorporation and/or by-laws, andCompany’s standard indemnification agreement for directors and officers as executed by Company and Executive. Executive shall beentitled to coverage under the Company’s Directors’ and Officers’ (“D&O”) insurance policies that it may hold now or in the future tothe same extent and in the same manner (i.e., subject to the same terms and conditions) that the Company’s other executive officers areentitled to coverage under any of the Company’s D&O insurance policies that it may have.(h)Relocation Expenses. For the 2018 calendar year, Company shall reimburse Executive for or will payon Executive’s behalf reasonable relocation expenses for Executive’s relocation to the Boston area, provided such expenses do notexceed $20,000 (the “Relocation Expenses”). Executive will submit all such Relocation Expenses for approval in accordance withCompany’s expense reimbursement policy. The amounts paid to or on behalf of Executive under this Section will be deemed imputedadditional income to Executive to the extent required by law. In the event that Executive’s employment hereunder is terminated byExecutive for any reason prior to the one (1) year anniversary of the Start Date, Executive shall repay Company the amount ofRelocation Expenses within fifteen (15) days of Executive’s termination date. You hereby agree that any repayment of RelocationExpenses may be deducted from payments to be made by the Company upon termination, including from the Accrued Obligations.(i)Sign-On Bonus. Company shall pay Executive a sign-on bonus (the) in the amount of Ten ThousandDollars ($10,000) “Sign-On Bonus”), on the first payroll date following the Start Date provided that in the event that Executive resignsExecutive’s employment with Company without Good Reason or the Company terminates Executive for Cause within one (1) yearfollowing the Start Date, Executive shall repay Company the amount of the Sign-On Bonus5 within fifteen (15) days of Executive’s termination date. Company shall deduct from the Sign-On Bonus all amounts required to bededucted or withheld under applicable law or under any employee benefit plan in which Executive participates. You hereby agree thatany repayment of the Sign-On Bonus may be deducted from payments to be made by the Company upon termination, including fromthe Accrued Obligations.(j)Forfeiture/Clawback. All compensation shall be subject to any forfeiture or clawback policy establishedby Company generally for senior executives from time to time and any other such policy required by applicable law.4.Payments Upon Termination.(a)Definition of Accrued Obligations. For purposes of this Agreement, “Accrued Obligations” means: (i)the portion of Executive’s Base Salary that has accrued prior to any termination of Executive’s employment with Company and has notyet been paid; (ii) any accrued but unused PTO pursuant to Company’s standard policy and practices; and (iii) the amount of anyexpenses properly incurred by Executive on behalf of Company prior to any such termination and not yet reimbursed. Executive’sentitlement to any other compensation or benefit under any plan of Company shall be governed by and determined in accordance withthe terms of such plans, except as otherwise specified in this Agreement.(b)Termination by Company for Cause. If Executive’s employment hereunder is terminated by Companyfor Cause, then Company shall pay the Accrued Obligations to Executive promptly following the effective date of such terminationand shall have no further obligations with respect to any benefit or compensation under this Agreement to Executive hereunder.(c)Termination by Executive Without Good Reason. If Executive’s employment hereunder is terminatedby Executive without Good Reason, then Company shall pay the Accrued Obligations and any accrued and unpaid AnnualPerformance Bonus for the prior fiscal year to Executive promptly following the effective date of such termination and shall have nofurther obligations with respect to any benefit or compensation under this Agreement to Executive hereunder. (d)Termination as a Result of Executive’s Disability or Death. If Executive’s employment hereunderterminates as a result of Executive’s Disability or death, promptly after such termination Company shall pay to Executive (i) theAccrued Obligations; (ii) any accrued and unpaid Annual Performance Bonus for the prior fiscal year; and (iii) the Pro Rated Bonus(as defined below) and, shall have no further obligations with respect to any benefit or compensation under this Agreement toExecutive hereunder. As used in this Section 4, “Pro Rated Bonus” shall mean an amount in cash equal to the target of AnnualPerformance Bonus for which Executive would have been eligible with respect to the year in which termination of Executive’semployment occurs multiplied by a fraction, the numerator of which is the number of days during which Executive is employed byCompany during the year of termination and the denominator of which is 365.6 (e)Termination by Company Without Cause or by Executive For Good Reason. In the event thatExecutive’s employment is terminated by action of Company other than for Cause, or Executive terminates Executive’s employmentfor Good Reason, then, in addition to the Accrued Obligations and any accrued and unpaid Annual Performance Bonus for the priorfiscal year, Executive shall receive the following, subject to the terms and conditions described in Section 4(g) (including Executive’sexecution of the Release (as defined herein)):(i)Severance Payments. Continuation of payments in an amount equal to Executive’s then-current Base Salary for a nine (9) month period, less all customary and required taxes and employment-relateddeductions, in accordance with Company’s normal payroll practices (provided such payments shall be made atleast monthly), commencing on the first payroll date following the date on which the Release required by Section4(g) becomes effective and non-revocable, but not after seventy (70) days following the effective date oftermination from employment; provided, that if the 70th day falls in the calendar year following the year duringwhich the termination or separation from service occurred, then the payments will commence in such subsequentcalendar year; provided further that if such payments commence in such subsequent year, the first such paymentshall be a lump sum in an amount equal to the payments that would have come due since Employee’s separationfrom service.(ii)Pro Rata Bonus. Payment of the Pro Rated Bonus, paid to Executive no later than March 15of the calendar year next preceding the year of termination of employment, after deduction of all amounts requiredto be deducted or withheld under applicable law.(iii)Benefits Payments. Upon completion of appropriate forms and subject to applicable termsand conditions under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”),Company shall continue to provide Executive medical insurance coverage to the same extent that such insurancecontinues to be provided to similarly situated executives at the time of Executive’s termination with the cost of theregular premium for such benefits shared in the same relative proportion by Company and Executive as in effecton the last day of employment (the “COBRA Payment”), until the earlier to occur of: (i) twelve (12) monthsfollowing Executive’s termination date, or (ii) the date Executive becomes eligible for medical benefits withanother employer. Notwithstanding the foregoing, if Executive’s COBRA Payment would cause the applicablegroup health plan to be discriminatory and, therefore, result in adverse tax consequences to Executive, Companyshall, in lieu of the COBRA Payment, provide Executive with an equivalent monthly cash payment, minusdeduction of all amounts required to be deducted or withheld under applicable law, for any period of timeExecutive is eligible to receive the COBRA Payment. Executive shall bear full responsibility for applying forCOBRA continuation coverage and Company shall have no obligation to provide Executive such coverage ifExecutive fails to elect COBRA benefits in a timely fashion.7 Payment of the above described severance payments and benefits are expressly conditioned on Executive’s executionwithout revocation of the Release and return of Company property under Section 6.(f)Termination by Company Without Cause or by Executive For Good Reason Following a Change ofControl. In the event that a Change of Control (as defined below) occurs and within a period of one (1) year following the Change ofControl, or ninety (90) days preceding the earlier to occur of a Change of Control or the execution of a definitive agreement theconsummation of which would result in a Change of Control, Executive’s employment is terminated other than for Cause, orExecutive terminates Executive’s employment for Good Reason, then, in addition to the Accrued Obligations and any accrued andunpaid Annual Performance Bonus for the prior fiscal year, Executive shall receive the following, subject to the terms and conditionsdescribed in Section 4(g) (including Executive’s execution of the Release):(i)Lump Sum Severance Payment. Payment of a lump sum amount equal to twelve (12) monthsof Executive’s then-current Base Salary plus the Pro Rated Bonus, less all customary and required taxes andemployment-related deductions, paid on the first payroll date following the date on which the Release required byParagraph 4(g) becomes effective and non-revocable, but not after seventy (70) days following the effective dateof termination from employment. (ii)Equity Acceleration. (A) All of Executive’s unvested equity awards will accelerate and vestimmediately on the date of termination of Executive’s employment if such employment commenced at leasttwenty-four (24) months prior to a Change of Control, (B) 50% of Executive’s unvested equity awards will vestimmediately on the date of termination of Executive’s employment if such employment commenced fewer thantwenty-four (24) months but at least twelve (12) months prior to a Change of Control, and (C) 25% of Executive’sunvested equity awards will vest immediately on the date of termination of Executive’s employment if suchemployment commenced fewer than twelve (12) months prior to a Change of Control.(iii)Benefit Payments. Upon completion of appropriate forms and subject to applicable termsand conditions under COBRA, Company shall continue to provide Executive medical insurance coverage to thesame extent that such insurance continues to be provided to similarly situated executives at the time of Executive’stermination with the cost of the regular premium for such benefits shared in the same relative proportion byCompany and Executive as in effect on the last day of employment, until the earlier to occur of: (i) twelve (12)months following Executive’s termination date, or (ii) the date Executive becomes eligible for medical benefitswith another employer. Notwithstanding the foregoing, if Executive’s COBRA Payment would cause theapplicable group health plan to be discriminatory and, therefore, result in adverse tax consequences to Executive,Company shall, in lieu of the COBRA Payment, provide Executive with an equivalent monthly cash payment,minus deduction of all amounts required to be deducted or withheld under applicable law, for any period of timeExecutive is eligible to receive the COBRA Payment. Executive shall bear full responsibility8 for applying for COBRA continuation coverage and Company shall have no obligation to provide Executive suchcoverage if Executive fails to elect COBRA benefits in a timely fashion.Payment of the above described severance payments and benefits are expressly conditioned on Executive’s executionwithout revocation of the Release and return of Company property under Section 6. In the event that Executive is eligible for theseverance payments and benefits under this Section 4(f), Executive shall not be eligible for any of the severance payments and benefitsas provided in Section 4(e).As used herein, a “Change of Control” shall mean the occurrence of any of the following events: (i) Ownership. Any“Person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the“Beneficial Owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Company representing fiftypercent (50%) or more of the total voting power represented by Company’s then outstanding voting securities (excluding for thispurpose any such voting securities held by Company, or any affiliate, parent or subsidiary of Company, or by any employee benefitplan of Company) pursuant to a transaction or a series of related transactions; or (ii) Merger/Sale of Assets. (A) A merger orconsolidation of Company whether or not approved by the Board, other than a merger or consolidation which would result in thevoting securities of Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or bybeing converted into voting securities of the surviving entity or the parent of such corporation) at least fifty percent (50%) of the totalvoting power represented by the voting securities of Company or such surviving entity or parent of such corporation, as the case maybe, outstanding immediately after such merger or consolidation; (B) or Company’s stockholders approve an agreement for the sale ordisposition by Company of all or substantially all of Company’s assets; or (iii) Change in Board Composition. A change in thecomposition of the Board, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors”shall mean directors who either (A) are directors of Company as of the date of this Agreement, or (B) are elected, or nominated forelection, to the Board with the affirmative votes of at least a majority of the Incumbent Directors, or by a committee of the Board madeup of at least a majority of the Incumbent Directors, at the time of such election or nomination (but shall not include an individualwhose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors). (g)Execution of Release of Claims. Company shall not be obligated to pay Executive any of the severancepayments or benefits described in this Section 4 unless and until Executive has executed (without revocation) a release of claims asdescribed below (the “Release”). The Release shall contain reasonable and customary provisions including a general release of claimsagainst Company and its affiliated entities and each of their officers, directors and employees as well as mutual non-disparagement,confidentiality, cooperation and the like. The Release must be provided to Executive not later than fifteen (15) days following theeffective date of termination of Executive’s employment by Company and executed by Executive and returned to Company withinsixty (60) days after such effective date. If Executive fails or refuses to return the Release within such 60-day period, Executive’sseverance payments and benefits to be paid hereunder shall be forfeited.9 (h)No Other Payments or Benefits Owing. Except as expressly set forth herein, the payments and benefitsset forth in this Section 4: (a) shall be the sole amounts owing to Executive upon termination of Executive’s employment for thereasons set forth above, and Executive shall not be eligible for any other payments or other forms of compensation or benefits; (b) shallbe the sole remedy, if any, available to Executive in the event that Executive brings any claim against Company relating to thetermination of Executive’s employment under this Agreement; and (c) shall not be subject to set-off by Company or any obligation onthe part of Executive to mitigate or to offset compensation earned by Executive in other pursuits after termination of employment, otherthan as specified herein with respect medical benefits provided by another employer.5.Prohibited Competition and Solicitation. Executive expressly acknowledges that: (a) there are competitive andproprietary aspects of the business of Company; (b) during the course of Executive’s employment, Company shall furnish, disclose ormake available to Executive confidential and proprietary information and may provide Executive with unique and specialized training;(c) such Confidential Information and training have been developed and shall be developed by Company through the expenditure ofsubstantial time, effort and money, and could be used by Executive to compete with Company; and (d) in the course of Executive’semployment, Executive shall be introduced to customers and others with important relationships to Company, and any and all“goodwill” created through such introductions belongs exclusively to Company, including, but not limited to, any goodwill created asa result of direct or indirect contacts or relationships between Executive and any customers of Company. In light of the foregoingacknowledgements, and as a condition of employment hereunder, Executive hereby approves the Restrictive Covenant Agreemententered into on the date hereof as a binding obligation of the Executive, enforceable in accordance with its terms. 6.Property and Records. Upon the termination of Executive’s employment hereunder for any reason or for noreason, or if Company otherwise requests, Executive shall: (a) return to Company all tangible business information and copies thereof(regardless how such Confidential Information or copies are maintained), and (b) deliver to Company any property of Company whichmay be in Executive’s possession, including, but not limited to, Blackberry-type devices, smart phones, laptops, cell phones (theforegoing, “electronic devices”), products, materials, memoranda, notes, records, reports or other documents or photocopies of thesame. Executive may retain copies of any exclusively personal data contained in or on Company-owned electronic devices returned toCompany pursuant to the foregoing. The foregoing notwithstanding, Executive understands and agrees that Company propertybelongs exclusively to Company, it should be used for Company business, and Executive has no reasonable expectation of privacy onany Company property or with respect to any information stored thereon.7.Cooperation. During and after Executive’s employment, Executive shall fully cooperate with Company to theextent reasonable in the defense or prosecution of any claims or actions now in existence or which may be brought in the future againstor on behalf of Company (other than claims directly or indirectly against Executive) which relate to events or occurrences thattranspired while Executive was employed by Company. Executive’s cooperation in connection with such claims or actions shallinclude, but not be limited to, being available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf ofCompany at mutually convenient times. During and after Executive’s employment, Executive also shall fully10 cooperate with Company to the extent reasonable in connection with any investigation or review of any federal, state or localregulatory authority as any such investigation or review relates to events or occurrences that transpired while Executive was employedby Company. Company shall reimburse Executive for any reasonable out-of-pocket expenses incurred in connection with theExecutive’s performance of obligations pursuant to this section. In addition, Company shall compensate Executive on an hourly basis,based on a rate commensurate with Executive’s Base Salary in effect prior to termination, for time Executive spends in excess of 10hours in any calendar quarter providing services to the Corporation after termination.8.Code Sections 409A and 280G. (a)In the event that the payments or benefits set forth in Section 4 of this Agreement constitute “non-qualified deferred compensation” subject to Section 409A, then the following conditions apply to such payments or benefits:(i)Any termination of Executive’s employment triggering payment of benefits under Section 4must constitute a “separation from service” under Section 409A(a)(2)(A)(i) of the Code and Treas. Reg. §1.409A-1(h) before distribution of such benefits can commence. To the extent that the termination of Executive’semployment does not constitute a separation of service under Section 409A(a)(2)(A)(i) of the Code and Treas.Reg. §1.409A-1(h) (as the result of further services that are reasonably anticipated to be provided by Executive toCompany at the time Executive’s employment terminates), any such payments under Section 4 that constitutedeferred compensation under Section 409A shall be delayed until after the date of a subsequent event constitutinga separation of service under Section 409A(a)(2)(A)(i) of the Code and Treas. Reg. §1.409A-1(h). For purposesof clarification, this Section 8(a) shall not cause any forfeiture of benefits on Executive’s part, but shall only act asa delay until such time as a “separation from service” occurs. (ii)Notwithstanding any other provision with respect to the timing of payments under Section 4if, at the time of Executive’s termination, Executive is deemed to be a “specified employee” of Company (withinthe meaning of Section 409A(a)(2)(B)(i) of the Code), then limited only to the extent necessary to comply with therequirements of Section 409A, any payments to which Executive may become entitled under Section 4 which aresubject to Section 409A (and not otherwise exempt from its application) shall be withheld until the first (1st)business day of the seventh (7th) month following the termination of Executive’s employment, at which timeExecutive shall be paid an aggregate amount equal to the accumulated, but unpaid, payments otherwise due toExecutive under the terms of Section 4.(b)It is intended that each installment of the payments and benefits provided under Section 4 of thisAgreement shall be treated as a separate “payment” for purposes of Section 409A. Neither Company nor Executive shall have theright to accelerate or defer the delivery of any such payments or benefits except to the extent specifically permitted or required bySection 409A.11 (c)Notwithstanding any other provision of this Agreement to the contrary, this Agreement shall beinterpreted and at all times administered in a manner that avoids the inclusion of compensation in income under Section 409A, or thepayment of increased taxes, excise taxes or other penalties under Section 409A. The parties intend this Agreement to be in compliancewith Section 409A. Executive acknowledges and agrees that Company does not guarantee the tax treatment or tax consequencesassociated with any payment or benefit arising under this Agreement, including but not limited to consequences related to Section409A.(d)If any payment or benefit Executive would receive under this Agreement, when combined with anyother payment or benefit Executive receives pursuant to a Change of Control (for purposes of this section, a “Payment”) would: (i)constitute a “parachute payment” within the meaning of Section 280G the Code; and (ii) but for this sentence, be subject to the excisetax imposed by Section 4999 of the Code (the “Excise Tax”), then such Payment shall be either: (A) the full amount of such Payment;or (B) such lesser amount (with cash payments being reduced before stock option compensation) as would result in no portion of thePayment being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state andlocal employments taxes, income taxes, and the Excise Tax, results in Executive’s receipt, on an after-tax basis, of the greater amountof the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. Notwithstanding theforegoing, if, prior to the closing of an initial public offering, any Payment can be exempt from the definition of “parachute payment”and the Excise Tax pursuant to the shareholder approval requirements described in Treas. Regs. § 1.280G-1, Q&A 6, the Companywill, at the Executive’s election (and subject to the Executive signing an appropriate waiver) seek shareholder approval to exempt suchPayment from the definition of “parachute payment” and the Excise Tax.9.General.(a)Notices. Except as otherwise specifically provided herein, any notice required or permitted by thisAgreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (i) by personal delivery whendelivered personally; (ii) by overnight courier upon written verification of receipt; (iii) by telecopy or facsimile transmission uponacknowledgment of receipt of electronic transmission; or (iv) by certified or registered mail, return receipt requested, upon verificationof receipt.Notices to Executive shall be sent to the last known address in Company’s records or such other address as Executive mayspecify in writing.Notices to Company shall be sent to: Spero Therapeutics, Inc.675 Massachusetts Ave., 14th FloorCambridge, MA 02139Attn: CEO (b)Modifications and Amendments. The terms and provisions of this Agreement may be modified oramended only by written agreement executed by the parties hereto.12 (c)Waivers and Consents. The terms and provisions of this Agreement may be waived, or consent for thedeparture therefrom granted, only by a written document executed by the party entitled to the benefits of such terms or provisions. Nosuch waiver or consent shall be deemed to be or shall constitute a waiver or consent with respect to any other terms or provisions ofthis Agreement, whether or not similar. Each such waiver or consent shall be effective only in the specific instance and for the purposefor which it was given and shall not constitute a continuing waiver or consent.(d)Assignment. Company may assign its rights and obligations hereunder to any person or entity thatsucceeds to all or substantially all of Company’s business or that aspect of Company’s business in which Executive is principallyinvolved. Executive may not assign Executive’s rights and obligations under this Agreement without the prior written consent ofCompany.(e)Governing Law/Dispute Resolution. This Agreement and the rights and obligations of the partieshereunder shall be construed in accordance with and governed by the law of the Commonwealth of Massachusetts without givingeffect to the conflict of law principles thereof. Any legal action or proceeding with respect to this Agreement shall be brought in thecourts of the Commonwealth of Massachusetts or of the United States of America for the District of Massachusetts. By execution anddelivery of this Agreement, each of the parties hereto accepts for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts.(f)Jury Waiver. ANY, ACTION, DEMAND, CLAIM, OR COUNTERCLAIM ARISING UNDEROR RELATING TO THIS AGREEMENT SHALL BE RESOLVED BY A JUDGE ALONE, AND EACH OF COMPANYAND EXECUTIVE WAIVES ANY RIGHT TO A JURY TRIAL THEREOF.(g)Headings and Captions. The headings and captions of the various subdivisions of this Agreement arefor convenience of reference only and shall in no way modify or affect the meaning or construction of any of the terms or provisionshereof.(h)Entire Agreement. This Agreement, together with the other agreements specifically referenced herein,embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedesall prior oral or written agreements and understandings relating to the subject matter hereof. No statement, representation, warranty,covenant or agreement of any kind not expressly set forth in this Agreement shall affect, or be used to interpret, change or restrict, theexpress terms and provisions of this Agreement.(i)Counterparts. This Agreement may be executed in two or more counterparts, and by different partieshereto on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the sameinstrument. For all purposes a signature by fax shall be treated as an original.[Signature Page to Follow]13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. DAVID A. MELNICK SPERO THERAPEUTICS, INC. /s/ David A. Melnick By:/s/Ankit Mahadevia, MDSignature Name: Ankit Mahadevia, MD Title: President and CEO 14Exhibit 21.1 SUBSIDIARIES OF SPERO THERAPEUTICS, INC. Subsidiary JurisdictionNew Pharma License Holdings MaltaSpero Cantab, Inc. DelawareSpero Cantab UK Limited England and WalesSpero Europe, Ltd. England and WalesSpero Gyrase, Inc. DelawareSpero Legacy STI, Inc. DelawareSpero Potentiator, Inc. DelawareSpero Potentiator PTY LTD AustraliaSpero Securities Corporation Massachusetts Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statement on Form S‑8 (No. 333- 222060) of Spero Therapeutics, Inc. of our reportdated April 2, 2018 relating to the financial statements, which appears in this Form 10‑K./s/ PricewaterhouseCoopers LLP Boston, MassachusettsApril 2, 2018  Exhibit 31.1CERTIFICATION PURSUANT TORULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Ankit Mahadevia, M.D., certify that:1.I have reviewed this Annual Report on Form 10-K of Spero Therapeutics, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrants auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting. Date: April 2, 2018 By:/s/ Ankit Mahadevia, M.D. Ankit Mahadevia, M.D. President and Chief Executive Officer(Principal Executive Officer)  Exhibit 31.2CERTIFICATION PURSUANT TORULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Joel Sendek, certify that:1.I have reviewed this Annual Report on Form 10-K of Spero Therapeutics, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting. Date: April 2, 2018 By:/s/ Joel Sendek Joel Sendek Chief Financial Officer and Treasurer(Principal Financial Officer and Principal Accounting Officer)  Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Spero Therapeutics, Inc. (the “Company”) for the period ended December 31, 2017, as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of theSarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of theCompany. Date: April 2, 2018 By:/s/ Ankit Mahadevia, M.D. Ankit Mahadevia, M.D. President and Chief Executive Officer(Principal Executive Officer)  Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Spero Therapeutics, Inc. (the “Company”) for the period ended December 31, 2017, as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of theSarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of theCompany. Date: April 2, 2018 By:/s/ Joel Sendek Joel Sendek Chief Financial Officer and Treasurer(Principal Financial Officer and Principal Accounting Officer) 

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