EVELO BIOSCIENCES, INC. The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form
10-K. This discussion and analysis and other parts of this Annual Report on Form
10-K contain forward-looking statements based upon current beliefs, plans and
expectations that involve risks, uncertainties and assumptions, such as
statements regarding our plans, objectives, expectations, intentions and
projections. Our actual results and the timing of selected events could differ
materially from those anticipated in these forward-looking statements as a
result of several important factors, including without limitation those set
forth under "Summary Risk Factors," Part I, Item 1A "Risk Factors" and elsewhere
in this Annual Report on Form 10-
Overview
Evelo is a clinical-stage biotechnology company focused on discovering and developing a new class of oral medicines that act on immune cells in the small intestine with systemic effects.
We believe the small intestine has a profound influence on systemic immunity and can resolve inflammation throughout the body. We have discovered that specific single strains of microbes resident in the mucosal lining of the small intestine, and the extracellular vesicles they shed, have the potential to resolve inflammation throughout the body when given orally at pharmacological doses, by physically interacting with immune cells in the small intestine. Engagement in the small intestine can lead to the generation of circulating T cells with regulatory activity that down-regulate multiple inflammatory pathways, including Th1, Th2 and Th17, without suppressing immunity. Our investigational medicines have not been observed to colonize the gut nor modify the microbiome.
This discovery may create the potential for a new type of effective, safe, well tolerated, and convenient medicine for people with many types and stages of inflammatory diseases. Evelo initially is developing EDP1815 as a treatment in psoriasis and atopic dermatitis and EDP2939 in psoriasis. If shown to be effective in inflammatory disease mediated by the Th1, Th2 or Th17 inflammatory pathways, we believe these same investigational medicines have potential utility in additional inflammatory diseases, such as psoriatic and other forms of arthritis, asthma, allergy, and inflammatory bowel disease.
Clinical Programs
EDP1815
EDP1815 is an investigational oral biologic being developed for the treatment of inflammatory diseases. It is a single strain of Prevotella histicola isolated from a human donor and selected for its specific pharmacology. EDP1815 is currently in clinical development for both psoriasis, driven largely by Th17 inflammation, and atopic dermatitis, driven by TH2 inflammation.
Psoriasis
Preparation for registration trials
Following completion of the Phase 2 trial of EDP1815 in psoriasis described below, we are undertaking various activities to prepare for potential registration trials of EDP1815 in psoriasis, advancement into which is funding dependent, including CMC preparations, protocol development and regulatory agency consultation.
We have received feedback from the FDA, EMA and MHRA regarding our proposed
registration trial design of EDP1815 in psoriasis, including the primary and
secondary endpoints. We also sought feedback and discussed critical components
of the CMC for EDP1815 with EMA and MHRA, particularly our proposals regarding
product release and stability testing. We reached alignment regarding: use of a
primary endpoint of PGA 0/1 with a 2-point improvement; no need for an active
comparator in
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path toward registration trials in psoriasis and we are incorporating the agencies' comments into our Phase 3 trial designs and related preparatory work.
Phase 2 clinical trial
In
The primary endpoint, the difference in mean percentage change in PASI scores from baseline at week 16 between treatment and placebo, was prespecified as a Bayesian analysis. The Bayesian approach provides an estimate of the probability that EDP1815 was superior to placebo. The 16-week primary endpoint gave probabilities that EDP1815 is superior to placebo ranging from 80% to 90% across the prespecified analyses and cohorts.
The responder endpoint analysis evaluated the proportion of patients who achieved a PASI-50 (a meaningful clinical response) or greater reduction in PASI score at week 16. 25% to 32% of patients across the three EDP1815 treated cohorts achieved a PASI-50 or greater reduction at week 16 compared to 12% on placebo. 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 placebo 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.
[[Image Removed: evlo-20221231_g4.jpg]]
*p<0.05.
PASI-50 responses at week 16. Statistically significant p-value (<0.05) for 2 of the 3 individual dose cohorts, and for all 3 cohorts when pooled
Additionally, several patients on EDP1815 achieved a PASI-75 response or better at week 16. 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 Part A (treatment phase) of the trial. The safety data were comparable to placebo. Adverse events classified as "gastrointestinal" were comparable between active and placebo groups, with no meaningful differences in rates of diarrhea, abdominal pain, nausea, or vomiting. There were no drug related serious adverse events.
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All patients in Part A had the option to enter Part B (extended follow-up phase, off-treatment) of the trial. The objective of Part B was to assess durability of treatment response and incidence of rebound (for example, increase in PASI score to 125% of baseline value or above, or onset of new pustular erythrodermic psoriasis within 3 months) following cessation of dosing. All patients who elected to enroll in Part B were assessed during follow-up visits at weeks 24 and 28. Patients who had achieved a PASI-50 or greater at week 16 were also evaluated at week 40. Patients were not permitted to start other psoriasis treatments or trials during Part B.
In
Of the 30 patients who had reached a PASI-50 at the end of Part A and entered Part B, 10 had already achieved a PASI-75 response at week 16 in Part A. Of the remaining 20 patients, 9 achieved a PASI-75 or greater response during the post-treatment period. These data, combined with the durability data, suggest that longer dosing could lead to further deepening of the responses in some patients.
There were no drug related adverse events in Part B, with the additional finding of no flare or rebound following cessation of dosing (which are seen with some other therapies for psoriasis).
In
Blood samples were taken from 96 patients at baseline and after 16 weeks of dosing with EDP1815 or placebo. The figures below show the changes in pro-inflammatory cytokines interleukin 6 (IL-6), interleukin 8 (IL-8) and tumor necrosis factor (TNF). Each vertical bar represents the fold change up or down from 0 in ex vivo stimulated cytokine production between the baseline and week 16 samples from a patient. Three different stimuli were used on each sample and the results from all three stimuli are presented together in the figures, giving the aggregate N (sample) numbers shown in the figures.
Treatment with EDP1815 led to a statistically significant reduction in the release of cytokines compared to placebo: IL-6 (p=0.0003), IL-8 (p=0.0007), and TNF (p=0.0037). The effect observed for EDP1815 may be clearly seen by the deep tail of reduced cytokine production on the left of the distribution for each cytokine, which was absent in the placebo groups. There was no worsening compared to placebo on the right of the distributions, resulting in the overall significant difference between EDP1815 and placebo.
[[Image Removed: evlo-20221231_g5.jpg]]
In addition, skin biopsies of active lesions were taken from a subset of patients in the trial. Six of the patients who received EDP1815 and achieved at least a PASI-50 response from baseline at week 16 had paired biopsies.
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RNAseq analysis of the biopsies showed reductions in transcript levels for psoriasis-relevant cytokines interleukin 23 (IL-23), interleukin 12b (IL-12b), and interleukin 17 (IL-17) in these lesions between baseline and week 16. The box plot below shows the median and interquartile ranges, as well as individual values of the cytokine expression levels in the skin, at baseline and week 16. These data suggest that EDP1815 reduced inflammation in the skin by modulating multiple proinflammatory cytokines.
[[Image Removed: evlo-20221231_g6.jpg]]
We believe these data support the biology of the SINTAX and the development of a new potential class of medicine that is designed to act locally in the small intestine to affect inflammation throughout the body. In the Phase 2 trial, there was no observed distribution of EDP1815 outside the gut.
Pediatric Investigation Plan for EDP1815 in Psoriasis
In
Atopic dermatitis
Phase 2 clinical trial
In
The primary endpoint for the trial is the proportion of patients who achieve an
outcome of a 50% improvement from baseline in
Each cohort in the trial is independently tested for the potential of EDP1815 in the treatment of atopic dermatitis, as well as specific hypotheses with regards to cell concentration, manufacturing process, dosing regimen and site of release. Cohort 1 explored a daily dose of 1.6 x 1011 total cells of EDP1815 or matching placebo administered as two capsules once daily. Patients dosed in this cohort received the same EDP1815 drug product as used in the previously completed Phase 2 psoriasis study which demonstrated an improvement in PASI-50 responses (as defined below). This was intended to allow a relative comparison of the benefit observed in psoriasis patients during the Phase 2 trial with any observed benefit in atopic dermatitis patients. Cohort 2 of the atopic dermatitis trial tested 6.4 x 1011 total cells of EDP1815 or matching placebo administered as two capsules once daily. This higher concentration of EDP1815 drug product was produced using a different manufacturing process, which was intended
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to allow an assessment of the clinical activity of a higher concentration of EDP1815 in a single capsule and of the alternate manufacturing process. Cohort 3 used the same drug product and daily dose as Cohort 2 (or matching placebo), but was administered as one capsule taken twice daily. This cohort was intended to test if there was any additional benefit obtained from a twice a day regimen versus once a day. Patients in Cohort 4 receive EDP1815 (8.0 x 1010 total cells) in a faster release capsule that releases the drug product higher up in the small intestine than the capsule used in the other three cohorts, or matching placebo. The Cohort 4 drug product has been manufactured using the same drug substance manufacturing process as in Cohort 1. Cohort 4 is evaluating if release of EDP1815 higher up in the small intestine provides greater clinical activity, as separate preclinical study data has previously demonstrated that higher release resulted in improved pharmacodynamic effects against inflammation in mice. All patients in Cohort 4 will have the opportunity to join an open-label extension trial once they complete 16 weeks of dosing. Patients in the open-label extension trial will receive EDP1815 for a further 36 weeks.
In
Cohort 4 of the Phase 2 trial of EDP1815 in atopic dermatitis is fully recruited and is testing a faster release capsule, intended to deliver EDP1815 higher up in the small intestine, that may potentially enable greater clinical activity. Data from this cohort of patients is expected in the second quarter of 2023 and will inform our path forward for EDP1815 in patients with atopic dermatitis.
Scintigraphy Studies
We continue to evaluate different formulations of EDP1815 with the goal of
providing optimum delivery of the drug substance in the small intestine. We
completed a Phase 1 single center clinical trial in healthy human volunteers
that assessed the release characteristics of different formulations (capsules
and tablets) of EDP1815 by gamma scintigraphy imaging. In
Other Indications
We intend to evaluate EDP1815 in additional inflammatory disease indications. Potential indications may include psoriatic arthritis, asthma, axial spondylarthritis and rheumatoid arthritis.
EDP2939
EDP2939 is an investigational oral biologic consisting of EVs that we are developing for the potential treatment of inflammatory diseases. In vitro studies of EDP2939 in human and mouse cellular assays and in vivo models support its further development in the treatment of inflammatory diseases.
Preclinical Studies
In
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data suggest that treatment with EDP2939 could result in broad-based resolution of inflammation and the establishment of immune homeostasis. EDP2939 is the first EV product candidate we have nominated in our inflammation program.
Phase 1/2 Clinical Trial
Dosing in our Phase 1/2, randomized, placebo-controlled trial has commenced and is being conducted in two parts. Part A will evaluate the safety and tolerability of EDP2939 in healthy volunteers. The primary endpoints of Part A (Phase 1) are safety endpoints, including adverse events, vital signs and safety laboratory tests. Part B (Phase 2) will evaluate the safety, tolerability and preliminary efficacy in adults with moderate psoriasis. The primary endpoint of Part B is the proportion of participants with moderate psoriasis achieving a PASI-50 response compared to placebo.
Part A (Phase 1) of the study is being conducted according to a randomized,
placebo-controlled, participant-and investigator-blind, sponsor-open design. It
includes up to three sequential, escalating multiple dose cohorts. Each cohort
will comprise of 12 healthy volunteers receiving EDP2939 or placebo orally once
a day for up to 10 days according to a 2:1 randomization. Prior to dose
escalation, safety will be reviewed by a SRC, comprising members of the
sponsor's clinical team and study investigators. Dose escalation to the next
cohort may proceed once safety data from at least 10 participants who have
completed the treatment period in the current cohort has been reviewed. An SRC
meeting will also occur once safety data from at least 10 participants is
available from Cohort 3. Cohort 1 of Part A of the study started dosing of
healthy volunteers in
Part B (Phase 2) commenced dosing in psoriasis patients in
Financing
In
In
Debt Refinancing
In
In connection with the entry into this new loan agreement, we repaid in full all
outstanding indebtedness under our loan and security agreement with K2HV dated
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Agreements to our consolidated financial statements in this Annual Report on Form 10-K for additional information regarding our debt facility.
Chief Executive Officer Succession Plan
In
In
Workforce Reduction
On
The foregoing estimates of the charges and expenditures that we expect to incur in connection with the Workforce Reduction, and the timing thereof, are subject to several assumptions and the actual amounts incurred may differ materially from these estimates. In addition, we may incur other charges or cash expenditures not currently contemplated due to unanticipated events that may occur, including in connection with the implementation of the Workforce Reduction.
ALJ Collaborations
In
Global Events and Macroeconomic Conditions
Our operations have been and may in the future be impacted by several global
events including, for example, changes to existing geopolitical dynamics, social
and economic instability, and the impact of the COVID-19 pandemic, which have
resulted in increased market volatility, changes to the labor market, sustained
inflationary environment, increasing interest rates, financial institution
failures and supply chain constraints. We have also seen adverse impacts from
foreign currency exchange rates as a result of our
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Table of Contents 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 - ALJ Collaborative Agreement to our consolidated financial
statements, we have entered into a collaboration agreement that will result in
the recognition of
Operating Expenses
Our operating expenses since inception have consisted primarily of research and development ("R&D") activities and general and administrative ("G&A") costs.
Research and Development Expenses
R&D 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 and clinical trial materials;
•costs related to compliance with regulatory requirements; and
•facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We expense R&D 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 consolidated financial statements as prepaid or accrued R&D expenses. Nonrefundable advance payments for goods or services to be received in the future for use in R&D activities are deferred and capitalized, even 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 R&D since inception has been building a platform to enable us to develop medicines based on an understanding of the gut-body network and to show potential clinical utility and develop the first set of clinical assets. Our platform and program expenses consist principally of costs, such as preclinical research, process development research, clinical and preclinical manufacturing activity costs, clinical development costs, licensing expense as well as an allocation of certain indirect costs, facility and office related expenses. We do not allocate personnel costs, which include salaries, discretionary bonus and stock-based compensation costs, as such costs are separately classified as R&D personnel costs.
R&D 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. Subject to obtaining appropriate funding, we expect that our R&D expenses will continue to increase in the foreseeable future as we continue to implement our business
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strategy and our ongoing clinical trials for our product candidates including EDP1815 and EDP2939, initiate additional clinical trials including potentially for EDP1815 and EDP2939, discover and develop additional product candidates, seek regulatory approvals for any products that successfully complete clinical trials, continue to source or potentially build manufacturing capabilities, hire additional R&D 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 without limitation the uncertainty of:
•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 ability to obtain regulatory approval to conduct registration trials;
•our successful enrollment in and completion of clinical trials;
•any delays in clinical trials, as a result of public health crises, such as the COVID-19 pandemic;
•global economic slowdown and market instability, including the impact from supply chain delays and increasing inflation and interest rates;
•the costs associated with the development of our current product candidates and/or any additional product candidates that 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 or other variables with respect to the development of any of our current or future 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 or retaining existing personnel to support our research and development efforts.
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General and Administrative Expenses
G&A expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, pre-commercial, corporate and business development, and administrative functions. G&A expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs; and other costs associated with operating a public company including investor relations and board related fees and expenses.
Interest Expense, Net
During the years ended
We anticipate that the interest expense on our outstanding loan will increase in
the near term, if and as interest rates rise in response to actions taken by the
Loss on Extinguishment of Debt
Loss on extinguishment of debt for the year ended
Other Miscellaneous Income, Net
For the year ended
Income Taxes
Income tax expense primarily relates to tax expense at our
Since our inception in 2014, we have not recorded any
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Comparison of Years Ended
Our statement of operations for the years endedDecember 31, 2022 and 2021 (in thousands): Year Ended December 31, 2022 2021 Change Operating expenses: Research and development$ 78,554 $ 83,643 $ (5,089) General and administrative 29,912 31,753 (1,841) Total operating expenses 108,466 115,396 (6,930) Loss from operations (108,466) (115,396) 6,930 Other income (expense): Interest expense, net (4,672) (3,612) (1,060) Loss on extinguishment of debt (520) (3,226) 2,706 Other miscellaneous income, net 61 486 (425) Total other expenses, net (5,131) (6,352) 1,221 Loss before income taxes (113,597) (121,748) 8,151 Income tax expense (930) (428) (502) Net loss$ (114,527) $ (122,176) $ 7,649 Net Loss
The net loss was
Research and Development Expenses (in thousands):
Year Ended December 31,
2022 2021 Change
Inflammation programs $ 39,030 $ 37,394 $ 1,636
Personnel costs 18,845 22,030 (3,185)
Platform expenses 13,350 13,412 (62)
Stock-based compensation 7,140 8,004 (864)
Oncology programs 189 2,803 (2,614)
Total research and development expenses $ 78,554 $ 83,643 $ (5,089) R&D expenses were
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General and Administrative Expenses (in thousands):
Year Ended December 31,
2022 2021 Change
Personnel costs $ 11,342 $ 11,769 $ (427)
Stock-based compensation 8,018 7,842 176
Professional fees 5,833 6,714 (881)
Facility costs, office expense and other 4,719 5,428 (709)
Total general and administrative expenses $ 29,912 $ 31,753 $ (1,841) G&A expenses were
Total Other Expense, Net
Total other expense, net for the year ended
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Liquidity and Capital Resources
We were incorporated and commenced operations in 2014. Since our incorporation,
we have devoted substantially all of our resources to developing preclinical and
clinical product 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.
To date, we have financed our operations primarily with the proceeds from
issuance of our common stock combined with proceeds from previous sales of our
convertible preferred stock to our equity investors and borrowings under loan
and security agreements. From our inception through
In
We evaluated whether there are conditions and events, considered in the
aggregate, that raise substantial doubt about our ability to continue as a going
concern within one year after the date that the consolidated financial
statements are issued. We incurred net losses of approximately
We anticipate capital expenditures for 2023 to be minimal.
Funding Requirements
We have incurred losses and cumulative negative cash flows from operations since our inception. We anticipate that we will continue to incur significant losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase. As a result, we will need additional capital to fund our operations, which we may raise through a combination of the sale of equity, debt financings, or other sources, including potential collaborations.
We expect our expenses to increase substantially in connection with our ongoing development activities related to the initiation of clinical studies and preclinical work on additional monoclonal microbial and extracellular vesicle product candidates, which are still in development, and our follow-on therapeutics and other programs. In addition, we expect to incur additional costs associated with operating as a public company. We anticipate that our expenses will increase substantially if and as we:
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•continue our clinical trials, including for EDP1815 and EDP2939;
•advance the clinical development of additional product candidates;
•conduct research and continue preclinical development of potential product candidates;
•make strategic investments in manufacturing capabilities, including potentially planning and building a commercial manufacturing facility;
•maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property;
•seek to obtain regulatory approvals for our product candidates;
•potentially establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products for which we may obtain regulatory approval;
•add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts and to support our operations as a public company; and
•experience any delays or encounter any issues with any of the above, including but not limited to failed studies or trials, complex results, safety issues or other regulatory or personnel challenges.
As of
Because of the numerous risks and uncertainties associated with the development of our product candidates, including EDP1815 and EDP2939, any additional product candidates or any follow-on programs, and because the extent to which we may enter into further partnerships, collaborations or licensing arrangements with third parties for the development of these product candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements for our technology platform or our other programs will depend on many factors, including:
•the costs, progress and results of our clinical trials, including of EDP1815 and EDP2939;
•the cost of manufacturing clinical supplies of our product candidates;
•the scope, progress, results and costs of preclinical development, including laboratory testing and studies, for any other potential product candidates;
•the costs, timing and outcome of regulatory review of our product candidates;
•the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;
•the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
•the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
•the effect of competing technological and market developments; and
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•the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration arrangements for product candidates, although we currently have no additional commitments or agreements to complete any such acquisitions or investments in businesses.
Identifying potential product candidates and conducting preclinical testing and clinical trials is a time consuming, expensive and uncertain process that takes years to complete. We may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.
Adequate additional funds may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Additional debt financing and preferred equity financing, 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 and may require or involve the issuance of warrants, which could potentially dilute the ownership interest of existing stockholders. The terms of our loan and security agreement with Horizon preclude us from paying dividends on our equity securities without their consent. If we lack sufficient capital to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations would be materially adversely affected.
If we raise additional funds through collaborations, partnerships, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.
Financing
We are a development stage company and have not generated any revenue. All of our product candidates are in early 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 ongoing operations. 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. Additionally, our ability to raise capital may be impacted by global macroeconomic conditions including as a result of international political conflict, supply chain issues and rising inflation and interest rates. 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.
We also anticipate continuing increases in
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, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
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Table of Contents Equity Financing
In
For the year ended
In
In
In
In
In
See "Liquidity and Capital Resources" and Note 11 - Stockholders' (Deficit) Equity to our consolidated financial statements in this Annual Report on Form 10-K for additional information regarding our equity financing.
Debt Financing K2 HealthVentures LLC Loan Termination
In
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In connection with the Amended Credit Facility, we issued to
During our debt covenant compliance reviews applicable to periods in the third quarter of 2022, we identified certain Events of Default (as defined in the Amended Credit Facility) resulting from non-compliance with certain provisions of the Amended Credit Facility. Under the Amended Credit Facility, Events of Default may have entitled the lenders to default interest, the ability to terminate the facility and the ability to accelerate repayment of any outstanding loans in full.
On
In connection with the entry into the new loan agreement with Horizon, discussed
below, we repaid in full all outstanding indebtedness under the Amended Credit
Facility, and K2HV terminated all of its interests thereunder, except for the
663,750 shares of our common stock subject to the Warrant. The aggregate
principal amount of the loan outstanding at the time of repayment was
Horizon Technology Finance Corporation Loan and Security Agreement
In
Interest on the outstanding loan balance will accrue at a variable annual rate
equal to the greater of (i) 11% and (ii) rate of interest noted in
Upon the entry into the loan agreement, we were required to pay Horizon a
commitment fee of
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remedies as set forth in the loan agreement and under applicable law. Our
subsidiary,
In connection with the entry into the loan agreement, we also issued to Horizon
warrants to purchase up to an aggregate 463,915 shares of our common stock, with
an exercise price of
See Note 8 - Loan and Security Agreements to our consolidated financial statements in this Annual Report on Form 10-K for additional information regarding our debt facility.
License and Manufacturing Agreements
See Part I, Item 1. "License and Manufacturing Agreements" for additional information about our license and manufacturing agreements.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):
Year Ended December 31,
2022 2021
Cash used in operating activities $ (101,235) $ (96,725)
Cash used in investing activities (622) (1,481)
Cash provided by financing activities 81,655 97,540
Effect of exchange rate changes on cash and cash
equivalents (454) -
Net decrease in cash, cash equivalents and restricted
cash $ (20,656) $ (666)
Operating Activities
Net cash used in operating activities for the year ended
We anticipate continuing increases in
Net cash used in operating activities for the year ended
Investing Activities
Net cash used in investing activities for the year ended
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Table of Contents Financing Activities
Net cash provided by financing activities for the year ended
Net cash provided by financing activities for the year ended
Contractual Obligations
We have entered into arrangements that contractually obligate us to make
payments that will affect our liquidity and cash flows in future periods. Our
contractual obligations primarily consist of our obligations under operating
leases and spending obligations related to one of our manufacturing agreements.
The aggregate amount of future operating lease obligations over the term of our
leases is
Critical Accounting Policies and Use of Estimates
Our management's discussion and analysis of financial condition and results of
operations are based on our consolidated financial statements which are prepared
in accordance with generally accepted accounting principles, or GAAP, in
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 personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:
•CROs in connection with performing research services on our behalf including, but not limited to, clinical trials and preclinical studies;
•investigative sites and other providers in connection with clinical trials and preclinical studies;
•other research and development service providers such as academic institutions and laboratory services providers in connection with discovery, preclinical and clinical development activities; and
•vendors related to product manufacturing, development and distribution of clinical supplies.
We base our expenses related to clinical trials and preclinical studies on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs, investigative sites, laboratories and other providers that conduct and manage those studies on our behalf. The financial terms of these agreements are
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subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.
Stock-Based Compensation
We measure stock options and other stock-based awards granted to employees and directors based on the fair value on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. Generally, we issue stock options and restricted stock awards with only service-based vesting conditions and record the expense for these awards using the straight-line method, adjusting for pre-vesting forfeitures in the period in which the forfeitures occur. We measure stock-based awards granted to consultants and non-employees based on the fair value of the award on the date of the grant. Compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed.
We estimate the fair value of each stock option grant using the Black-Scholes
option-pricing model. Use of this model requires that we make assumptions as to
the volatility of our common stock, the expected term of our stock options, the
risk-free interest rate for a period that approximates the expected term of our
stock options, and our expected dividend yield. Prior to
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