The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Annual Report"), including the audited consolidated financial statements and notes thereto contained in our 2020 Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described, in or implied, by these forward-looking statements. In this Quarterly Report on Form 10-Q, unless otherwise stated or as the context otherwise requires, references to "Evelo," "Evelo Biosciences ," the "Company," "we," "us," "our" and similar references refer toEvelo Biosciences, Inc. and its consolidated subsidiaries. Overview We are discovering and developing a new class of oral biologics that are intended to act on cells in the small intestine to produce therapeutic effects throughout the body. The target cells in the small intestine play a central role in governing human immune, metabolic and neurological systems. We refer to this biology as the small intestinal axis, or SINTAXTM. We have built a platform to discover and develop novel oral medicines which target the small intestinal axis. By harnessing the small intestinal axis, we have the potential to transform healthcare via medicines that have the potential to be effective, safe, convenient and affordable and to thereby treat patients at all stages of diseases and to treat patients globally. Our first product candidates are orally delivered pharmaceutical preparations of naturally occurring, specific single strains of microbes. In preclinical models, our product candidates engaged immune cells in the small intestine and drove changes in systemic biology without any observed systemic exposure. We have observed in early clinical trials and preclinical studies that our approach led to modulated immune responses throughout the body by acting on the small intestinal axis. Our most advanced product candidate, EDP1815 is being developed for the treatment of inflammatory diseases and the hyperinflammatory response associated with COVID-19. Additional product candidates include EDP1867 and EDP2939 for the treatment of inflammatory disease and EDP1908 for the treatment of cancer. Impact of COVID-19
On
The COVID-19 pandemic has had, and for an extended period of time is expected to have, negative impacts on our operations and supply chain. Our ability to continue to operate without any significant negative impacts will, in part, depend on our ability to protect our employees and our supply chain. We have endeavored to follow recommended actions of government and health authorities to protect our employees with particular measures in place for those working in our laboratories, such as staggered work shifts and flexible schedules, and telecommuting for office workers. We are working with our contract manufacturing organizations ("CMOs") to minimize delays and disruptions to scheduled manufacturing batch runs for our product candidates and to ensure conformity to product specifications. The COVID-19 pandemic has impacted and continues to impact our enrollment of new patients into, and the retention of existing patients in, our ongoing clinical trials, due primarily to lower patient participation. The pandemic likely will impact enrollment and retention of patients in new and existing clinical trials. We continue to recruit individuals in line with the local and national guidelines of the clinical research sites. We are keeping in close contact with our contract research organizations ("CROs") and clinical sites to provide support and guidance to ensure the safety of the patients in our clinical trials. We have prioritized our drug supply operations to secure the re-supply of patients currently enrolled in our clinical trials. 23 -------------------------------------------------------------------------------- Table of Contents The extent to which the COVID-19 pandemic impacts our business and finances will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, travel restrictions and social distancing inthe United States , theUnited Kingdom and other countries, business closures or business disruptions and the effectiveness of actions taken inthe United States , theUnited Kingdom and other countries to contain and treat the disease. See "Risk Factors - The COVID-19 pandemic has adversely impacted and may continue to adversely impact our business, including our preclinical studies and clinical trials and finances." in Part II, Item 1A of this Quarterly Report on Form 10-Q. Clinical Programs EDP1815
EDP1815 is an investigational oral biologic being developed for the treatment of a broad range of inflammatory diseases, including clinical programs in psoriasis, atopic dermatitis, and COVID-19. It is a strain of Prevotella histicola, selected for its specific pharmacology. Psoriasis and atopic dermatitis
Phase 2 clinical trial in psoriasis
Based on previously reported positive clinical data in two cohorts of individuals with mild to moderate psoriasis in a Phase 1b clinical trial, we advanced EDP1815 into a double-blind, placebo-controlled, dose-ranging Phase 2 study designed to evaluate three doses of an enteric capsule formulation of EDP1815 versus placebo in 249 patients with mild and moderate psoriasis over a 16-week treatment period. In the study, the Psoriasis Area and Severity Index ("PASI") scores were assessed by both mean changes from baseline and responder rates, for example PASI-50. The primary endpoint was the mean percentage reduction in PASI score between treatment and placebo at 16 weeks and was prespecified as a Bayesian analysis. The Bayesian approach provides an estimate of the probability that EDP1815 is superior to placebo. Secondary endpoints included the proportion of study participants who achieved a 50% or greater improvement in PASI from baseline ("PASI-50") at the week 16 timepoint and other clinical measures of disease such as Physicians Global Assessment ("PGA"), Body Surface Area ("BSA"), PGA x BSA, Psoriasis Symptom Inventory ("PSI"), and Dermatology Life Quality Index ("DLQI"). InSeptember 2021 , we announced data from our Phase 2 clinical trial of EDP1815 in psoriasis. The 16-week primary endpoint gave probabilities that EDP1815 is superior to placebo ranging from 80% to 90% across the cohorts using the prespecified Bayesian analyses. The PASI-50 responder endpoint reports the proportion of patients who had a meaningful clinical response, which is defined as a patient achieving a PASI-50 response. 25% to 32% of patients across the three cohorts who were treated with EDP1815 achieved a PASI-50 at week 16 compared to 12% across the pooled placebo group. In cohorts 1 and 2 this difference in response rate was statistically significant (p <0.05). Cohort 3 was not statistically significant, but directionally similar (25% vs. 12%). The pooled PASI-50 response across all three EDP1815 cohorts, an exploratory analysis, was 29% vs. 12% for the pooled placebo group and was also statistically significant with a p-value of 0.027. An increase in the number of capsules of EDP1815 did not lead to a dose response. A post hoc sensitivity analysis was performed, evaluating the proportion of subjects that reached clear skin (PGA =0) or nearly clear skin (PGA=1). These scores represent the treatment targets for subjects with moderate or mild psoriasis. The analyses used a Cochran-Mantel-Haenszel test which allows for stratification of the baseline variables. The test was performed using both a 5% BSA threshold and a PGA 2 or 3 threshold. These thresholds were chosen as they represent different definitions of mild disease and moderate disease. As no dose response was evident between the treatment groups, all of the EDP1815 treated cohorts were combined. There was a statistically significant difference between the EDP1815 treated groups and the placebo groups with both definitions. When PGA was used as the stratification variable, the p value = 0.05, and when a threshold of 5% BSA was used, the p value = 0.049. This data provides further evidence of the potential of EDP1815 to drive clinically meaningful benefit in a proportion of patients. Additionally, several patients on EDP1815 achieved a PASI-75 or better, which was sustained or continued to improve post treatment. For individuals who had a PASI-50 response or better, consistent improvements in patient reported outcomes such as DLQI and PSI were observed.
EDP1815 was observed to be well tolerated in the Phase 2 trial. The safety results were comparable to placebo and consistent with what was previously reported in a Phase 1b study. Adverse events ("AEs") classified as
24 -------------------------------------------------------------------------------- Table of Contents "gastrointestinal" were comparable between active and placebo groups, with no clinically meaningful differences in rates of diarrhea, abdominal pain, nausea, or vomiting. There were no related serious adverse events. Based on the aggregate data from the Phase 2 trial to date, we currently intend to advance EDP1815 towards registration trials in psoriasis. Additionally, we anticipate that initial data from Part B of the Phase 2 clinical trial of EDP1815 in psoriasis, assessing the durability of treatment response following completion of 16 weeks of dosing in 124 participants, will be available in the first quarter of 2022. We anticipate presenting the full Phase 2 trial data set at a medical meeting or scientific congress during 2022.
Phase 2 clinical trial in atopic dermatitis
Based on previously reported positive clinical data in a cohort of patients with mild and moderate atopic dermatitis in a Phase 1b clinical trial, we are advancing EDP1815 into a 16-week, double-blind, placebo-controlled, multiple cohort trial in patients with mild, moderate, and severe atopic dermatitis. Approximately 225 patients will be randomized to receive EDP1815, and 75 patients will be randomized to receive placebo. Patients will receive either 1 capsule once daily, 2 capsules once daily, or 1 capsule twice daily. The primary endpoint will be the percent of patients achieving an Eczema Area and Severity Index ("EASI") score ofEASI -50 at week 16, which is defined as a patient achieving 50% or greater improvement inEASI from baseline ("EASI -50") at the week 16 timepoint. Secondary endpoints will include a number of physician-reported outcomes, such as Investigators Global Assessment ("IGA") and BSA, along with numerous patient-reported outcomes, such as DLQI, SCORing Atopic Dermatitis ("SCORAD"), itch using the daily peak pruritus numerical rating scale, and Patient Oriented Eczema Measure ("POEM"). All trial participants who complete the 16-week trial will be eligible to enroll into an open-label extension trial where they will receive EDP1815. We previously received and responded to a clinical hold letter from the FDA related to our Investigational New Drug Application for the EDP1815 Phase 2 trial in atopic dermatitis. The FDA requested that additional detail be added to the trial protocol around risks to patients that require their current atopic dermatitis medications be discontinued, the manner in which safety data is collected, and defined study halting criteria. The FDA has since lifted the clinical hold. We anticipate reporting results from this trial in the fourth quarter of 2022, which, if positive, will be used to support the dose selection for the Phase 3 atopic dermatitis program.
COVID-19
EDP1815 is being evaluated in an ongoing clinical study for the treatment of hospitalized COVID-19 patients. EDP1815 is included as a treatment arm in the TACTIC-E clinical trial. TACTIC-E is a Phase 2/3 randomized trial, sponsored byCambridge University Hospitals NHS Foundation Trust , that is expected to evaluate up to 469 patients per arm atAddenbrooke's Hospital and other leading clinical centers in theUnited Kingdom , with additional recruitment efforts inBrazil ,Mexico , andIndia . The trial is investigating the safety and efficacy of certain experimental therapies in the prevention and treatment of life-threatening complications associated with COVID-19 in hospitalized individuals at early stages of the disease. The trial is enrolling individuals with COVID-19 who have identified risk factors for developing severe complications and are at risk of progression to the intensive care unit or death. The primary outcome measure of the trial is time to incidence (up to day 14) of any one of the following: death, mechanical ventilation, extracorporeal membrane oxygenation (ECMO), cardiovascular organ support, renal failure, hemofiltration or dialysis. Secondary outcome measures include duration of stay in hospital, duration of oxygen therapy, changes in biomarkers associated with COVID-19 progression, and time to clinical improvement. We continue to actively recruit patients into the phase 2/3 TACTIC-E clinical trial in theUK ,Brazil ,Mexico andIndia . Based on the progress in TACTIC-E and the success of the vaccination program in the US, which has reduced hospitalization rates, we have decided to focus our efforts on the TACTIC-E clinical trial and to close our smaller US phase 2 study, which was also evaluating the safety and efficacy of EDP1815 for the treatment of hospitalized patients with newly diagnosed COVID-19. If EDP1815 is successfully developed and approved as a treatment for COVID-19, we believe that we could rapidly scale the manufacturing of EDP1815 to supply the drug at a reasonable cost. If approved and proven effective for early intervention, we expect that oral EDP1815 could also be useful in the outpatient setting to control the community impact of the COVID-19 pandemic. If the Phase 2 trials are successful in COVID-19, we plan to investigate EDP1815 as a potential therapy for other diseases, such as influenza infection, in which hyperinflammation and cytokine storm can play a key role. 25 -------------------------------------------------------------------------------- Table of Contents We currently intend to evaluate EDP1815 in additional inflammatory disease indications. Potential indications include psoriatic arthritis, asthma, allergy, axial spondylarthritis and rheumatoid arthritis.
EDP1867
EDP1867 is a non-live pharmaceutical preparation of a single strain of Veillonella parvula, isolated from the ileum of a human donor. It is made non-live by y-irradiation in the manufacturing process, making it unable to colonize or persist in the gut, a central feature of SINTAX medicines. EDP1867 is currently in clinical development, and has the potential to treat a wide range of inflammatory and neuroinflammatory diseases.
In preclinical studies, EDP1867 was shown to resolve multiple pathways of inflammation. This observed activity suggests a number of possible initial clinical indications for EDP1867, including Th2-dependent inflammation which underlies atopic diseases and a large spectrum of asthma. We initiated our first Phase 1b clinical trial of EDP1867 in healthy volunteers and patients with moderate atopic dermatitis inFebruary 2021 and, due to slower than expected enrollment, now expect to report interim data in the first half of 2022. Additionally, inOctober 2021 , we presented further preclinical data for EDP1867 at theEuropean Committee for Treatment and Research in Multiple Sclerosis ("ECTRIMS"). In the relevant preclinical study, EDP1867 was tested in a relapsing-remitting autoimmune encephalomyelitis ("EAE") mouse model of neuroinflammation. Oral daily treatment with EDP1867 administered prophylactically or therapeutically reduced the severity of disease as demonstrated by a decreased mean maximum score and a decreased incidence of relapse compared to placebo. Treatment with EDP1867 reduced inflammation and demyelination in the spinal cord as shown in histopathological analysis. Transcriptional profiling of small intestine tissue confirmed that EDP1867 upregulated genes in lymphocyte pathways that resolve inflammation, as well as genes associated with intestinal homeostasis. Orally administered EDP1867 reduced disease severity and incidence of relapse in relapsing-remitting EAE mouse models of multiple sclerosis ("MS"), supporting the potential development of EDP1867 for the treatment of neuroinflammatory diseases.
EDP2939
EDP2939 is an extracellular vesicle ("EV") investigational oral biologic being developed for the treatment of inflammatory diseases. InMay 2021 , we presented preclinical data for EDP2939 at theAmerican Association of Immunologists Meeting . EDP2939 is the first EV product candidate we have nominated in our inflammation program. We anticipate initiation of clinical development in 2022.
EDP1908
InDecember 2020 , we announced EDP1908 as our lead candidate in oncology following presentation of preclinical data at theSociety for Immunotherapy for Cancer meeting inNovember 2020 . Preclinical data presented showed that orally administered EDP1908, an EV, resulted in superior tumor growth control versus the parent microbial strain or anti-PD-1 therapy, with an observed dose-dependent reduction in tumor growth. We anticipate initiation of clinical development in 2022. Collaborations InMarch 2021 , we announced a strategic collaboration to develop and commercialize our lead inflammation product candidate, EDP1815, in theMiddle East ,Turkey , andAfrica withMeddist Company Limited ("ALJ"), a company focused on accelerating access to affordable modern medical care while addressing unmet medical needs in developing markets around the world. Together, we and ALJ will work to address the significant disparity in access to medical care in the fastest-growing populations and growth economies of the developing world.Africa's population is projected to reach 1.7 billion by 2030 and 2.5 billion by 2050. Under the terms of the agreement, we received an upfront payment from ALJ. We will be primarily responsible for the development and manufacturing of EDP1815 worldwide, whilst ALJ will be primarily responsible for development, regulatory submissions and commercialization activities in the agreed-upon regions. ALJ and we will participate in a 50:50 profit share arrangement. See Note 3 of the notes to our unaudited condensed consolidated condensed financial statements in this Quarterly Report on Form 10-Q for additional information regarding the commercialization and license agreement with ALJ. 26 -------------------------------------------------------------------------------- Table of Contents Financing Since our incorporation in 2014, we have devoted substantially all of our resources to developing our clinical and preclinical candidates, building our intellectual property portfolio and process development and manufacturing function, business planning, raising capital and providing general and administrative support for these operations. We are a development stage company and have not generated any revenue. All of our product candidates are in clinical or preclinical development. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. Since our inception, we have incurred significant operating losses and we continue to incur significant research and development and other expenses related to our operations. For the nine months endedSeptember 30, 2021 , our net loss was$93.5 million . As ofSeptember 30, 2021 , we had an accumulated deficit of$386.0 million . We do not expect to generate revenue from sales of any products for the foreseeable future, if at all. We expect that our expenses will increase substantially in connection with our ongoing activities, particularly as we: •continue the ongoing trials for EDP1815 and EDP1867; •initiate additional clinical trials for EDP1815; •initiate or advance the clinical development of any additional product candidates; •conduct research and continue preclinical development of potential product candidates; •make strategic investments in manufacturing capabilities, including potentially planning and building our own manufacturing facility; •maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property; •increase employees and employee-related expenses including salaries, benefits, travel and stock-based compensation expense; and •seek to obtain regulatory approvals for our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so. Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. During the three months and nine months endedSeptember 30, 2021 , pursuant to theJune 2019 sales agreement withCowen and Company, LLC , we sold no shares and 139,734 shares of our common stock, respectively, in "at-the-market" offerings under a registration statement on Form S-3 that we previously filed with theSEC with offering prices ranging between$12.54 to$13.17 per share for gross proceeds of$1.8 million and net proceeds of$1.7 million , after deducting commission and other offering expenses payable by us. 27 -------------------------------------------------------------------------------- Table of Contents InFebruary 2021 , we sold 5,175,000 shares of our common stock, which includes the underwriters' exercise of their option to purchase 675,000 shares to cover the over-allotment, in an underwritten public offering at a public offering price of$15.00 per share, generating gross proceeds of$77.6 million and net proceeds of underwriting discounts and commission of$72.7 million , after deducting underwriting discounts and commission and other offering expenses paid by us. Also inFebruary 2021 , ALJ Health Care purchased$7.5 million of our common stock in a private placement at a purchase price of$15.00 per share, equal to the public offering price per share at which our common stock was sold to the public as referred above. The sale of such shares was not registered under the Securities Act. InJune 2021 , we amended our loan and security agreement withK2 HealthVentures LLC and others (collectively, "K2HV") to, among other things, replace and supersede the existing$15.0 million third tranche commitment with a new$15.0 million fourth tranche commitment, which we drew down onJune 16, 2021 (as amended, the "Amended Credit Facility"). The aggregate principal borrowings available under the Amended Credit Facility is$45.0 million . Pursuant to the Amended Credit Facility, we issued toK2 HealthVentures Equity Trust LLC , an affiliate of K2HV, a warrant to purchase up to 139,770 shares of our common stock with an exercise price of$13.30 per share, subject to customary per share adjustments. In addition, under the Amended Credit Facility, K2HV has the option, exercisable at any time, to convert up to$5.0 million of principal outstanding into shares of our common stock at a conversion price of$13.30 per share, subject to customary per share adjustments. See "-Liquidity and Capital Resources-Debt financing." As ofSeptember 30, 2021 , our principal source of liquidity is cash and cash equivalents, which totaled approximately$95.9 million . Based on our current operating plan, our existing cash and cash equivalents as ofSeptember 30, 2021 will be sufficient to enable us to fund operating expenses and capital expenditure requirements to late third quarter of 2022. Funds for Phase 3 clinical trials are not included in our forecast. We have based these estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. See "Liquidity and Capital Resources." Based on our current operating plan, we believe we do not have sufficient cash and cash equivalents on hand to support current operations for at least one year from the date of issuance of the financial statements appearing within this Quarterly Report on Form 10-Q. To finance our operations beyond that point, we will need to raise additional capital. There can be no assurance that we will be able to obtain additional funding on acceptable terms, if at all. We have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern for at least one year from the date that our unaudited condensed consolidated financial statements for the period endedSeptember 30, 2021 were issued. As such, we plan to seek to raise capital from time to time through future equity financings, debt financings or partnerships to fund our future operations and remain as a going concern. To the extent that we raise additional capital through future equity offerings, the ownership interest of common stockholders will be diluted, which dilution may be significant. See Note 1 of the notes to our unaudited condensed consolidated condensed financial statements in this Quarterly Report on Form 10-Q for additional information on our assessment. Financial Operations Overview Revenue We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. As discussed in Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we have entered into a collaboration agreement that will result in the recognition of$7.5 million of revenue upon regulatory approval of EDP1815 in certain designated markets. If our development efforts for our current product candidates or additional product candidates that we may develop in the future are successful and result in marketing approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements. Operating Expenses Our operating expenses since inception have consisted primarily of research and development activities and general and administrative costs. 28 -------------------------------------------------------------------------------- Table of Contents Research and Development Expenses Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the development of our product candidates, which include: •expenses incurred under agreements with third parties, including investigative sites, external laboratories and CROs that conduct research, preclinical activities and clinical trials on our behalf; •manufacturing process-development costs as well as technology transfer and other expenses incurred with CMOs that manufacture drug substance and drug product for use in our preclinical activities and any current or future clinical trials; •salaries, benefits and other related costs, including stock-based compensation expense, for personnel in our research and development functions; •expenses to acquire technologies to be used in research and development; •costs of outside consultants, including their fees, stock-based compensation and related travel expenses; •the cost of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials; •costs related to compliance with regulatory requirements; and •facility-related expenses, which include depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs. We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed. Our primary focus of research and development since inception has been building a platform to enable us to develop medicines based on an understanding that cells in the small intestine play a central role in governing the immune, metabolic and neurological systems and to show potential clinical utility. Our platform and program expenses consist principally of costs, such as preclinical research, clinical and preclinical manufacturing activity costs, clinical development costs, licensing expenses as well as an allocation of certain indirect costs, facility costs and depreciation expense. We do not allocate personnel costs, which primarily include salaries, discretionary bonus and stock-based compensation costs, as such costs are separately classified as research and development personnel costs. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we continue to implement our business strategy, continue our ongoing clinical trials for our product candidates, including EDP1815 and EDP1867, initiate additional clinical trials for EDP1815, continue to discover and develop additional product candidates, seek regulatory approvals for any products that successfully complete clinical trials, build manufacturing capabilities, hire additional research and development personnel, and expand into additional therapeutic areas. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales or licensing of our product candidates. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of: 29 -------------------------------------------------------------------------------- Table of Contents •our ability to add and retain key research and development personnel; •our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates; •our successful enrollment and completion of clinical trials; •any delays in clinical trials as a result of the COVID-19 pandemic; •the costs associated with the development of our current product candidates and/or any additional product candidates we identify in-house or acquire through collaborations; •our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the impact on disease progression of our product candidates; •our ability to establish an appropriate safety profile with IND-enabling toxicology studies; •our ability to establish and maintain agreements with CMOs and other entities for clinical trial supply and future commercial supply, if our product candidates are approved; •the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder; •our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved; •our receipt of marketing approvals from applicable regulatory authorities; •our ability to commercialize products, if and when approved, whether alone or in collaboration with others; and •the continued acceptable safety profiles of the product candidates following approval. A change in any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We expect our research and development expenses to increase at least over the next several years as we continue to implement our business strategy, advance our current programs, expand our research and development efforts, seek regulatory approvals for any product candidates that successfully complete clinical trials, identify and develop additional product candidates and incur expenses associated with hiring additional personnel to support our research and development efforts. General and Administrative Expenses General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; other professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; and facility-related expenses, which include depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our product candidates. We also expect to continue to incur increased expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance costs and investor and public relations costs. 30 -------------------------------------------------------------------------------- Table of Contents Interest Expense, Net Interest expense, net primarily consists of interest expense incurred on our debt offset by interest earned on our cash, and cash equivalents. During each of the three and nine months endedSeptember 30, 2021 and 2020, interest expense, net consisted primarily of interest at the stated rate on borrowings under our loan and security agreements and amortization of deferred financing costs and interest expense related to the accretion of debt discount offset by interest earned on institutional money market instruments andU.S. treasury securities. Loss on Extinguishment of Debt
Loss on extinguishment of debt for three and nine ended
Other Income (Expense), Net Other income, net for the three and nine months endedSeptember 30, 2021 and 2020 primarily consists of foreign currency gains and government grants related to our operations in theUnited Kingdom . Income Taxes Income tax expense for the three and nine months endedSeptember 30, 2021 and 2020 reflects the provision for income taxes at our wholly ownedUK subsidiary. Since our inception in 2014, we have not recorded anyU.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. Results of Operations Comparison of the Three Months EndedSeptember 30, 2021 and 2020 The following table summarizes our results of operations for the three months endedSeptember 30, 2021 and 2020 (in thousands): Three Months Ended September 30, 2021 2020 Change Operating expenses: Research and development $ 22,599$ 14,910 $ 7,689 General and administrative 10,111 5,272 4,839 Total operating expenses 32,710 20,182 12,528 Loss from operations (32,710) (20,182) (12,528) Other (expense) income: Interest expense, net (1,023) (713) (310) Loss on extinguishment of debt - - - Total other income, net 159 39 120 Total other expense (864) (674) (190) Loss before income taxes (33,574) (20,856) (12,718) Income tax expense (156) (67) (89) Net loss $ (33,730)$ (20,923) $ (12,807) 31
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Table of Contents
Research and Development Expenses (in thousands):
Three Months Ended September 30, 2021 2020 Change Platform expenses$ 3,660 $ 2,591 $ 1,069 Inflammation programs 10,014 5,883 4,131 Oncology programs 501 983 (482)
Research and development personnel costs (including stock-based compensation)
8,424 5,453 2,971 Total research and development expenses$ 22,599
Research and development expenses were$22.6 million for the three months endedSeptember 30, 2021 , compared to$14.9 million for the three months endedSeptember 30, 2020 . The increase of$7.7 million was primarily driven by$4.1 million for higher inflammation program costs from the progression of EDP1815 into two Phase 2 studies, one for psoriasis and one for atopic dermatitis, and progression of EDP1867 in a Phase 1 clinical trial, partially offset by the closeout of the EDP1066 program. In addition, there were higher personnel costs of$3.0 million due to increases in clinical development and technical operations headcount to support increased clinical program activities and higher platform expenses of$1.1 million primarily driven by higher spend for preclinical studies and lab supplies. These increases were partially offset by$0.5 million decrease in our oncology programs primarily related to the wind down of the EDP1503 program. Overall, we expect that our research and development expenses will continue to increase in the foreseeable future as we continue our clinical trials for our product candidates, including EDP1815 and EDP1867, initiate new clinical trials, expand into additional therapeutic areas, continue discovery and development efforts for additional product candidates, hire additional research and development personnel, and seek to increase manufacturing capabilities.
General and Administrative Expenses (in thousands):
Three Months
Ended
2021 2020 Change General and administrative personnel costs (including stock-based compensation) $ 6,147$ 2,798 $ 3,349 Professional fees 2,316 1,254 1,062 Facility costs, office expense and other 1,648 1,220 428 Total general and administrative expenses $ 10,111
General and administrative expenses were$10.1 million for the three months endedSeptember 30, 2021 , compared to$5.3 million for the three months endedSeptember 30, 2020 . The increase of$4.8 million was primarily driven by$3.3 million related to increased headcount and$1.1 million in professional fees to support our business activities. We expect general and administrative expenses to increase due to higher personnel and related costs, professional, legal, and patent fees and consulting expenses in support of our continued growth.
Total Other Expense, Net
Total other expense, net for the three months endedSeptember 30, 2021 was expense of$0.9 million compared to expense of$0.7 million for the three months endedSeptember 30, 2020 . The$0.2 million increase in other expenses was primarily driven by the$0.3 million increase in interest expense due to higher outstanding principal balances on our debt facility. 32 -------------------------------------------------------------------------------- Table of Contents Net Loss Net loss for the three months endedSeptember 30, 2021 was$33.7 million , compared to$20.9 million for the three months endedSeptember 30, 2020 . The increase of$12.8 million was primarily the result of the increases in research and development expenses, general and administrative expenses and decrease in total other income, net discussed above.
Comparison of the Nine Months Ended
The following table summarizes our results of operations for the nine months
ended
Nine Months Ended September 30, 2021 2020 Change Operating expenses: Research and development $ 64,762$ 47,503 $ 17,259 General and administrative 23,075 16,185 6,890 Total operating expenses 87,837 63,688 24,149 Loss from operations (87,837) (63,688) (24,149) Other (expense) income: Interest expense, net (2,602) (1,353) (1,249) Loss on extinguishment of debt (3,226) - (3,226) Other income, net 472 646 (174) Total other expense (5,356) (707) (4,649) Loss before income taxes (93,193) (64,395) (28,798) Income tax expense (331) (221) (110) Net loss$ (93,524) $ (64,616) $ (28,908)
Research and Development Expenses (in thousands):
Nine Months Ended September 30, 2021 2020 Change Platform expenses $ 9,634$ 8,840 $ 794 Inflammation programs 30,281 18,153 12,128 Oncology programs 2,226 4,066 (1,840) Research and development personnel costs (including stock-based compensation) 22,621 16,444 6,177 Total research and development expenses $ 64,762
Research and development expenses were$64.8 million for the nine months endedSeptember 30, 2021 , compared to$47.5 million for the nine months endedSeptember 30, 2020 . The increase of$17.3 million was primarily driven by$12.1 million for higher inflammation program costs from the progression of EDP1815 into two Phase 2 studies, one for psoriasis and one for atopic dermatitis, and progression of EDP1867 in a Phase 1 clinical trial, partially offset by the closeout of the EDP1066 program. In addition, there were higher personnel costs of$6.2 million due to increases in clinical development and technical operations headcount to support increased clinical program activities and$0.8 million for higher spend for preclinical studies and lab supplies. These increases were partially offset by a$1.8 million decrease in our oncology programs primarily related to the wind down of the 33 -------------------------------------------------------------------------------- Table of Contents EDP1503 program. Overall, we expect that our research and development expenses will continue to increase in the foreseeable future as we continue our clinical trials for our product candidates, including EDP1815 and EDP1867, initiate new clinical trials, expand into additional therapeutic areas, continue discovery and development efforts for additional product candidates, hire additional research and development personnel, and seek to increase manufacturing capabilities.
General and Administrative Expenses (in thousands):
Nine Months
Ended
2021 2020 Change General and administrative personnel costs (including stock-based compensation) $ 13,982$ 8,704 $ 5,278 Professional fees 5,378 4,032 1,346 Facility costs, office expense and other 3,715 3,449 266 Total general and administrative expenses $ 23,075
General and administrative expenses were$23.1 million for the nine months endedSeptember 30, 2021 , compared to$16.2 million for the nine months endedSeptember 30, 2020 . The increase of$6.9 million was primarily driven by$5.3 million related to increased headcount and$1.3 million for professional fees to support our business activities. We expect general and administrative expenses to increase due to higher personnel and related costs, professional, legal, and patent fees and consulting expenses in support of our continued growth.
Total Other Expense, Net
Total other expense, net for the nine months endedSeptember 30, 2021 , was$5.4 million compared to$0.7 million for the nine months endedSeptember 30, 2020 . The$4.6 million increase in other expenses was primarily driven by (i) a non-cash loss on extinguishment of debt of$3.2 million related to the entry into the Amended Credit Facility, (ii) a decrease in interest income as a result of lower interest rates and an increase in interest expense as a result of a greater principal balance from the Amended Credit Facility , and (iii) a decrease in foreign currency gains and a grant related to our operations in theUnited Kingdom . Net Loss Net loss for the nine months endedSeptember 30, 2021 was$93.5 million , compared to$64.6 million for the nine months endedSeptember 30, 2020 . The increase of$28.9 million was primarily the result of the increases in research and development expenses, general and administrative expenses and decrease in total other income, net discussed above. Liquidity and Capital Resources We have incurred losses and generated negative operating cash flows since our inception and anticipate that we will continue to incur losses for at least the next several years. We incurred net losses of approximately$93.5 million and$64.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. To date, we have financed our operations primarily with proceeds from public and private offerings of our common stock, sales of our convertible preferred stock to our equity investors and borrowings under our debt facilities. From our inception throughSeptember 30, 2021 , we have received gross proceeds of$429.7 million from such transactions, including a net$45.0 million borrowed under our debt facilities. As ofSeptember 30, 2021 , we had cash and cash equivalents of$95.9 million and an accumulated deficit of$386.0 million . For the three months and nine months endedSeptember 30, 2021 , pursuant to theJune 2019 sales agreement withCowen and Company, LLC , we sold no shares and 139,734 shares of our common stock, respectively, in "at-the-market" offerings under a registration statement on Form S-3 that we previously filed with theSEC with offering prices ranging between$12.54 to$13.17 per share for gross proceeds of$1.8 million and net proceeds of$1.7 million , after deducting commission and other offering expenses payable by us. 34
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OnFebruary 2, 2021 , we sold 5,175,000 shares of our common stock in an underwritten public offering at a public offering price of$15.00 per share, including the underwriters' exercise of their option to purchase 675,000 shares to cover over-allotment, generating gross proceeds of$77.6 million and net proceeds of$72.7 million , after deducting underwriting discounts and commission and other offering expenses paid by us. OnFebruary 2, 2021 , ALJ Health Care purchased$7.5 million of our common stock in a private placement at a purchase price of$15.00 per share, equal to the public offering price per share at which our common stock was sold to the public as referred above. The sale of such shares was not registered under the Securities Act. Debt financing OnJuly 19, 2019 we entered into the 2019 Credit Facility with K2HV providing for up to$45.0 million of current and future potential debt financing. The aggregate principal amount was available in three tranches of term loans of$20.0 million ,$10.0 million , and$15.0 million , respectively. At closing onJuly 19, 2019 , we borrowed$20.0 million , representing the first tranche under the 2019 Credit Facility. OnJuly 14, 2020 , we drew down the second tranche of$10.0 million and availability of the third tranche expired onJanuary 15, 2021 . Interest on the outstanding loan balance will accrue at a variable rate equal to the greater of (i) 8.65% and (ii) the prime rate as published in theWall Street Journal , plus 3.15%. OnJune 16, 2021 , or the Amended Credit Facility Effective Date, we entered into the Amended Credit Facility with K2HV, pursuant to which (i) the existing$15.0 million third tranche commitment was replaced and superseded with a new$15.0 million fourth tranche commitment, which we drew down onJune 16, 2021 , (ii) K2HV may convert up to$5.0 million of outstanding principal of the Loans (as defined in the 2019 Credit Facility) into shares of our common stock, (iii) the interest-only period is extended throughFebruary 28, 2023 , with the first amortization payment onMarch 1, 2023 , (iv) prior toJanuary 1, 2022 , at our election, the amortization schedule can be adjusted to be based on a 30-month repayment period, and if so adjusted, upon final payment or prepayment of the loans, we must pay a final payment equal to 4.8% of the loans borrowed, and (v) at our election, we may prepay the loans, subject to a prepayment fee of 2% of the amount prepaid if such prepayment occurs no later than the 18-month anniversary of the Amended Credit Facility Effective Date, or if the prepayment occurs after the 18-month anniversary of the Amended Credit Facility Effective Date but prior to the maturity date 1% of the amount prepaid. All of the other terms and conditions of the 2019 Credit Facility remain unchanged and in full force and effect. We expect that our existing cash and cash equivalents as ofSeptember 30, 2021 will enable us to fund our planned operating expenses and capital expenditure requirements into the late third quarter of 2022. Funds for Phase 3 clinical trials are not included in our forecast. Until such time, if ever, as we can generate revenue from product sales, we expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaborations, license and development agreements. To the extent that we raise additional capital through future equity offerings or debt financings, ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of the common stockholders. Debt and equity financings, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. There can be no assurance that such financings will be obtained on terms acceptable to us, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us we may have to significantly delay, scale back or discontinue our research and development programs or future commercialization efforts. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties for one or more of our current or future drug candidates, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or to grant licenses on terms that may not be favorable to us. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy. 35 -------------------------------------------------------------------------------- Table of Contents Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):
Nine Months Ended
2021 2020 Cash used in operating activities$ (68,879) $ (54,110) Cash used in investing activities (1,956) (906) Cash provided by financing activities 97,666 58,763 Net increase in cash, cash equivalents and restricted cash $
26,831
Operating Activities Net cash used in operating activities for the nine months endedSeptember 30, 2021 was$68.9 million driven primarily by our net loss of$93.5 million . This was partially offset by non-cash charges including an extinguishment loss of$3.2 million , stock-based compensation expense of$11.5 million , non-cash lease expense of$1.4 million , depreciation expense of$1.7 million , non-cash interest expense of$0.2 million and changes in operating assets and liabilities. Net cash used in operating activities for the nine months endedSeptember 30, 2020 was$54.1 million driven primarily by our net loss of$64.6 million . This was partially offset by non-cash charges including stock-based compensation expense of$6.1 million , non-cash lease expense of$1.5 million , depreciation expense of$1.5 million and changes in operating assets and liabilities. Investing Activities Net cash used in investing activities for the nine months endedSeptember 30, 2021 was$2.0 million , driven by the purchase of capital equipment totaling$2.0 million during the period. Net cash used in investing activities for the nine months endedSeptember 30, 2020 was$0.9 million , driven by the net purchase of capital equipment totaling$0.9 million during the period. Financing Activities Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was$97.7 million , consisting of proceeds from the issuance of common stock, net of issuance costs totaling$82.0 million , net proceeds from the issuance of long-term debt totaling$14.8 million , and proceeds from the issuance of common stock under the ESPP and the exercise of stock options totaling$0.9 million . Net cash provided by financing activities for the nine months endedSeptember 30, 2020 was$58.8 million , consisting of$48.4 million proceeds from the issuance of common stock; net of issuance cost, proceeds from the issuance of long-term debt under the Amended Credit Facility of$10.0 million and proceeds from the issuance of common stock under the ESPP and the exercise of stock options totaling$0.3 million . Contractual Obligations and Commitments We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide this information. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC . Recent Accounting Pronouncements 36 -------------------------------------------------------------------------------- Table of Contents For a discussion of recently adopted or issued accounting pronouncements please refer to Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Critical Accounting Policies and Use of Estimates Our management's discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities in our unaudited condensed consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. These items, including estimates related to the application of ASC 606 to our collaboration agreement with ALJ, application of ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging to our K2HV debt and warrants, accrued research and development expenses and stock-based compensation, are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience, known trends and events, and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions. In making estimates and judgments, management employs critical accounting policies. There have been no material changes to our critical accounting policies during the three and nine months endedSeptember 30, 2021 from those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Annual Report on Form 10-K that was filed with theSEC onMarch 9, 2021 . 37
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