Fair Value Measurements and Marketable Securities

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements and Marketable Securities

3. Fair Value Measurements and Marketable Securities

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands):

	Fair Value Measurements at June 30, 2019 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	—	$	64,462	$	—	$	64,462
Commercial paper		—		2,489		—		2,489
Total cash equivalents		—		66,951		—		66,951
Marketable securities:
U.S. government securities		—		13,473		—		13,473
Corporate bonds		—		4,020		—		4,020
Commercial paper		—		14,782		—		14,782
Total marketable securities		—		32,275		—		32,275
Total cash equivalents and marketable securities	$	—	$	99,226	$	—	$	99,226
Liabilities:
Derivative liabilities:
Anti-dilution rights	$	—	$	—	$	223	$	223
	$	—	$	—	$	223	$	223

	Fair Value Measurements at December 31, 2018 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	—	$	22,327	$	—	$	22,327
Commercial paper		—		6,389		—		6,389
Total cash equivalents		—		28,716		—		28,716
Marketable securities:
U.S. government securities		—		37,815		—		37,815
Corporate bonds		—		26,672		—		26,672
Commercial paper		—		16,876		—		16,876
Total marketable securities		—		81,363		—		81,363
Total cash equivalents and marketable securities	$	—	$	110,079	$	—	$	110,079
Liabilities:
Derivative liabilities:
Anti-dilution rights	$	—	$	—	$	223	$	223
	$	—	$	—	$	223	$	223

Excluded from the tables above is cash of $4.2 million and $5.4 million as of as of June 30, 2019, and December 31, 2018, respectively. During the six months ended June 30, 2019, there were no transfers between Level 1, Level 2 and Level 3 categories.

Marketable Securities

The Company’s marketable securities are classified as Level 2 assets under the fair value hierarchy as these assets were primarily determined from independent pricing sources, which generally derive security prices from recently reported trades for identical or similar securities. 

The following table summarizes the gross unrealized gains and losses of the Company’s marketable securities as of June 30, 2019, and December 31, 2018 (in thousands):

	June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Assets:
U.S. government securities	$	13,468	$	5	$	—	$	13,473
Corporate bonds		4,019		1		—		4,020
Commercial paper		14,782		—		—		14,782
	$	32,269	$	6	$	—	$	32,275

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Assets:
U.S. government securities	$	37,819	$	—	$	(4	)	$	37,815
Corporate bonds		26,696		—		(24	)		26,672
Commercial paper		16,876		—		—			16,876
	$	81,391	$	—	$	(28	)	$	81,363

As of June 30, 2019, and December 31, 2018, all of the Company’s marketable securities had remaining contractual maturity dates of one year or less from the respective consolidated balance sheet date.

Anti-Dilution Rights

In connection with the issuance of non-controlling interests in certain of the Company’s subsidiaries (see Note 8), 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 rights as a derivative liability on its consolidated balance sheet because they are freestanding instruments that represent a conditional obligation to issue a variable number of shares. The Company remeasures the derivative liability associated with the anti-dilution rights to fair value at each reporting date, and recognizes changes in the fair value of the derivative liability as a component of other income (expense) in the consolidated statement of operations and comprehensive loss. The fair value of these derivative liabilities was determined using a discounted cash flow model. As of June 30, 2019 and December 31, 2018, the Company’s fair value of the anti-dilution rights of $0.2 million relates only to the anti-dilution rights held by the minority investor in Spero Gyrase, Inc., which represents amounts funded to the entity that could be settled by the issuance of equity.

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 Biota Pharmaceuticals, Inc. (now Aviragen Therapeutics, Inc.) (“Aviragen”), the Company granted to Aviragen certain anti-dilution rights (see Note 8). The fair value of the derivative liability related to the anti-dilution rights upon issuance in March 2016 was $1.6 million.

The most significant assumption impacting the fair value of the anti-dilution rights was the probability that the Company would fund the maximum amount of investment providing anti-dilution protection. Upon issuance of the rights and through December 31, 2016, the probability of such funding was determined 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 of the acquired technology. The fair value of the derivative liability decreased accordingly by $1.4 million to $0.2 million by June 30, 2017. As of June 30, 2019 and December 31, 2018, the value of the derivative liability of $0.2 million represents amounts funded to the entity that would be settled by the issuance of equity.