10-Q 1 evlo-20220930.htm 10-Q evlo-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________

FORM 10-Q
_______________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-38473
____________________________
evlo-20220930_g1.jpg
 Evelo Biosciences, Inc.
(Exact name of registrant as specified in its charter)
____________________________
Delaware 46-5594527
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
620 Memorial Drive
Cambridge, Massachusetts
 02139
(Address of principal executive offices) (Zip Code)
(617) 577-0300
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock,
$0.001 par value per share
EVLONasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐   No  
As of November 8, 2022, the registrant had 109,614,598 shares of common stock, $0.001 par value per share, outstanding.


Evelo Biosciences, Inc.
Form 10-Q for the Quarterly Period Ended September 30, 2022
Table of Contents



FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements, including within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. These statements involve known and unknown risks, uncertainties, assumptions and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” "target," “predict,” “project,” "contemplate," “should,” “will,” “would,” "continue" or the negative or plural of those terms or other similar expressions.
Forward-looking statements may include, but are not limited to, statements about:
our status as a development-stage company and our expectation to incur losses in the future;
our ability to continue as a going concern, our future capital needs, our ability to satisfy our debt obligations (including any restrictive covenants) and/or refinance our current debt, and our need to raise additional funds;
our estimates regarding our expenses including research and development costs, future revenues and anticipated future capital requirements;
our future results of operations, financial position, business strategy and prospective products;
our ability to build a pipeline of product candidates and develop and commercialize drugs;
our ability to develop therapeutic interventions;
plans and objectives of management for future operations and the future results of anticipated products;
our ability to enroll patients and volunteers in clinical trials, to timely and successfully complete those trials and to receive necessary regulatory approvals;
timing and plans for clinical trials, including registration trials, and product candidate approvals;
the timing, progress, receipt and release of data from our ongoing and planned clinical trials and the potential use of our product candidates to treat various indications;
our ability to establish our own manufacturing facilities and to receive or manufacture sufficient quantities of our product candidates;
our expectations regarding the potential safety, efficacy or clinical utility of our product candidates;
the impact of the COVID-19 pandemic on our operations, including our preclinical studies and clinical trials, and the continuity of our business;
our ability to protect and enforce our intellectual property rights;
federal, state, local and foreign regulatory requirements, including regulation of our product candidates by the U.S. Food and Drug Administration ("FDA"), European Medicines Agency ("EMA") and UK Medicines and Healthcare products Regulatory Agency ("MHRA") and our interactions with such agencies;
our ability to successfully address regulatory questions and requirements and the likelihood of regulatory filings and approvals;
our ability to obtain and retain key executives and attract and retain qualified personnel;
activities related to strategic collaborations and anticipated revenue therefrom;
our ability to successfully manage our growth; and
developments relating to our competitors and our industry.
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions, some of which cannot be predicted or quantified and some of which are beyond our control. Risks, uncertainties and assumptions that may cause actual results to differ materially from current expectations include, among other things, those set forth below in “Summary Risk Factors,” in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 1A. “Risk Factors” and for the reasons described elsewhere in this Quarterly Report on Form 10-Q. Any forward-looking statement in this Quarterly Report on Form 10-Q reflects our current view with respect to future events, speaks only as of the date of this Quarterly Report on Form 10-Q, and is subject to these
i

and other risks, uncertainties and assumptions. Given these uncertainties, you should not rely on these forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our information may be incomplete or limited and we cannot guarantee future results. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by law, we do not plan, and assume no obligation, to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. We qualify all of our forward-looking statements by these cautionary statements.
This Quarterly Report on Form 10-Q may also contain estimates, projections and other information concerning our industry, our business and the markets for certain drugs and consumer products, including data regarding the estimated size of those markets, their projected growth rates and the incidence of certain medical conditions. Information that is based on estimates, forecasts, projections or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained these industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry, medical and general publications, government data and similar sources, and we have not independently verified the data from third party sources. In some cases, we do not expressly refer to the sources from which these data are derived.
In this Quarterly Report on Form 10-Q, unless otherwise stated or as the context otherwise requires, references to the "Company," “Evelo,” “we,” “us,” “our” and similar references refer to Evelo Biosciences, Inc. and our wholly owned subsidiaries. This Quarterly Report on Form 10-Q may also contain references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to, including logos, artwork and other visual displays, may appear without the "®" or "TM" symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend any use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
ii

SUMMARY RISK FACTORS
Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. Principal risks and uncertainties affecting our business include the following:
•    We are a development-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability. Moreover, our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.
We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. We will need additional funding in order to complete development of our product candidates, commercialize our products, if approved, and meet our debt obligations (including any restrictive covenants). If we are unable to raise capital when needed, we will be forced to delay, reduce or discontinue our product development programs or commercialization efforts.
Our product candidates are based on targeting SINTAX, the small intestinal axis, which is an unproven approach to therapeutic intervention.
We are dependent on the success of our product candidates. If the product candidates do not successfully complete clinical development or receive regulatory approval, our business may be harmed.
The regulatory approval process is lengthy, expensive and uncertain with respect to outcome. We may be unable to obtain regulatory approval for our product candidates under applicable regulatory requirements of the United States and/or internationally. The denial or delay of any such approval would delay commercialization of our product candidates and adversely impact our ability to generate revenue, our business and our results of operations.
We rely, and will continue to rely, on third parties to conduct the clinical trials for our product candidates, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.
We do not have our own manufacturing capabilities and rely, and will continue to rely, on third parties to produce clinical supplies and, if approved, commercial supplies of our product candidates. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
If we are unable to establish our own sales, marketing and distribution capabilities, or to enter into agreements with third parties to sell and market our product candidates, we may not be successful in commercializing our product candidates if and when they are approved, and we may not be able to generate any revenue.
The successful commercialization of our product candidates will depend in part on the extent to which governmental authorities and health insurers establish coverage, adequate reimbursement levels and pricing policies. Failure to obtain or maintain coverage and adequate reimbursement for our product candidates, if approved, could limit our ability to market those products and decrease our ability to generate revenue.
We face substantial competition, which may result in others discovering, developing or commercializing drugs before or more successfully than we do.
Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, cause us to suspend or discontinue clinical trials, limit the commercial profile of an approved label or result in significant negative consequences following marketing approval, if any.
If we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents which are sufficient to protect our product candidates, other companies could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.
The terms of our loan and security agreements place restrictions on our operating and financial flexibility. In order to meet our obligations under our existing loan and security agreements, we will need to raise additional capital and / or restructure our existing debt, which may be on unfavorable terms. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.
The COVID-19 pandemic has adversely impacted, and may continue to adversely impact, our business, including our preclinical studies and clinical trials, results of operations and financial condition.
iii

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Evelo Biosciences, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share and share amounts)
(Unaudited)
September 30, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$69,053 $68,441 
Prepaid expenses and other current assets3,274 2,585 
Total current assets72,327 71,026 
Property and equipment, net5,455 6,622 
Right of use asset - operating lease7,398 8,910 
Other assets1,156 1,313 
Total assets$86,336 $87,871 
Liabilities and stockholders’ equity
Current liabilities:
Debt, current portion$10,095 $ 
Accounts payable1,550 1,601 
Accrued expenses12,478 13,068 
Operating lease liability, current portion2,177 1,951 
Other current liabilities617 742 
Total current liabilities26,917 17,362 
Noncurrent liabilities:
Debt, net of current portion36,650 46,557 
Operating lease liability, net of current portion5,935 7,785 
Deferred revenue 7,500 7,500 
Total liabilities77,002 79,204 
Commitments and contingencies (Note 9)
Stockholder’s equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding as of September 30, 2022 and December 31, 2021, respectively
  
Common stock, $0.001 par value; 200,000,000 shares authorized; 108,473,091 and 53,576,454 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
108 54 
Additional paid-in capital514,907 423,308 
Accumulated deficit(505,681)(414,695)
Total stockholders’ equity9,334 8,667 
Total liabilities and stockholders’ equity$86,336 $87,871 
See accompanying notes to unaudited condensed consolidated financial statements.
1

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Operating expenses:
Research and development$21,928 $22,599 $62,470 $64,762 
General and administrative7,126 10,111 24,909 23,075 
Total operating expenses29,054 32,710 87,379 87,837 
Loss from operations(29,054)(32,710)(87,379)(87,837)
Other income (expense):
Interest expense, net(788)(1,023)(2,835)(2,602)
Loss on extinguishment of debt   (3,226)
Other miscellaneous income (expense), net(615)159 (386)472 
Total other expense, net(1,403)(864)(3,221)(5,356)
Loss before income taxes(30,457)(33,574)(90,600)(93,193)
Income tax expense(107)(156)(386)(331)
Net loss$(30,564)$(33,730)$(90,986)$(93,524)
Net loss per share attributable to common stockholders, basic and diluted$(0.28)$(0.63)$(1.14)$(1.77)
Weighted-average number of common shares outstanding, basic and diluted108,051,851 53,430,333 79,528,761 52,704,470 
    See accompanying notes to unaudited condensed consolidated financial statements.
2

Evelo Biosciences, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
(Unaudited)
Nine Months Ended September 30, 2022
Common StockAdditional
Paid-In
Capital
Accumulated DeficitTotal
SharesAmount
Balance - December 31, 202153,576,454 $54 $423,308 $(414,695)$8,667 
Issuance of common stock under Employee Stock Purchase Plan36,329 — 129 — 129 
Vesting of restricted common stock35,406 — — —  
Stock-based compensation expense— — 4,275 — 4,275 
Fees associated with public offering of common stock— — (12)— (12)
Net loss— — — (29,861)(29,861)
Balance - March 31, 202253,648,189 $54 $427,700 $(444,556)$(16,802)
Issuance of common stock, net54,246,358 54 78,928 — 78,982 
Vesting of restricted common stock16,278 — — —  
Exercise of stock options42,494 — 30 — 30 
Stock-based compensation expense— — 3,999 — 3,999 
Net loss— — — (30,561)(30,561)
Balance - June 30, 2022107,953,319 $108 $510,657 $(475,117)$35,648 
Issuance of common stock, net475,000  712 — 712 
Issuance of common stock under Employee Stock Purchase Plan40,385 — 72 — 72 
Exercise of stock options4,387 — 3 — 3 
Stock-based compensation expense— — 3,463 — 3,463 
Net loss— — — (30,564)(30,564)
Balance - September 30, 2022108,473,091 $108 $514,907 $(505,681)$9,334 
See accompanying notes to unaudited condensed consolidated financial statements.
3

Evelo Biosciences, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
(Unaudited)
Nine Months Ended September 30, 2021
Common StockAdditional
Paid-In
Capital
Accumulated DeficitTotal
SharesAmount
Balance - December 31, 202047,470,119 $47 $322,957 $(292,519)$30,485 
Issuance of common stock, net5,814,734 6 81,955 — 81,961 
Issuance of common stock under Employee Stock Purchase Plan27,587 — 90 — 90 
Exercise of stock options45,299 — 235 — 235 
Stock-based compensation expense— — 3,264 — 3,264 
Net loss— — — (28,196)(28,196)
Balance - March 31, 202153,357,739 $53 $408,501 $(320,715)$87,839 
Exercise of stock options40,532 — 330 — 330 
Stock-based compensation expense— — 3,772 — 3,772 
Issuance of common stock warrants— — 1,750 — 1,750 
Net loss— — — (31,598)(31,598)
Balance - June 30, 202153,398,271 $53 $414,353 $(352,313)$62,093 
Issuance of common stock under Employee Stock Purchase Plan18,771 — 147 — 147 
Vesting of restricted common stock9,850 — — —  
Exercise of stock options27,067 — 125 — 125 
Stock-based compensation expense— — 4,441 — 4,441 
Net loss— — — (33,730)(33,730)
Balance - September 30, 202153,453,959 $53 $419,066 $(386,043)$33,076 
See accompanying notes to unaudited condensed consolidated financial statements.
4

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 Nine Months Ended September 30,
 20222021
Operating activities
Net loss$(90,986)$(93,524)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense11,737 11,477 
Depreciation expense1,537 1,678 
Non-cash interest expense188 218 
Non-cash lease expense2,175 1,368 
Loss on extinguishment of debt 3,226 
Loss on disposal of property and equipment232 5 
Net foreign currency losses1,012  
Changes in operating assets and liabilities:
Prepaid expenses and other current assets(799)(63)
Accounts payable(40)1,075 
Accrued expenses and other current liabilities(814)(404)
Operating lease liabilities(2,287)(1,414)
Deferred revenue 7,500 
Other liabilities (21)
Net cash used in operating activities(78,045)(68,879)
Investing activities
Purchases of property and equipment(394)(1,962)
Proceeds from sale of fixed assets 6 
Net cash used in investing activities(394)(1,956)
Financing activities
Proceeds from issuance of common stock, net of issuance cost79,682 81,961 
Proceeds from the issuance of common stock under employee stock purchase plan and exercise of stock options234 927 
Proceeds from the issuance of long-term debt, net of issuance costs 14,778 
Net cash provided by financing activities79,916 97,666 
Effect of exchange rate changes on cash and cash equivalents(1,022) 
Net increase in cash, cash equivalents and restricted cash455 26,831 
Cash, cash equivalents and restricted cash – beginning of period69,754 70,420 
Cash, cash equivalents and restricted cash – end of period$70,209 $97,251 
Supplemental disclosure of cash flow information
Cash paid for interest$2,963 $2,383 
Cash paid for taxes$592 $9 
Noncash investing and financing activities
Property and equipment additions included in accrued expenses$128 $198 
Issuance of common stock warrants$ $1,750 
See accompanying notes to the unaudited condensed consolidated financial statements.
5

EVELO BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Organization
Evelo Biosciences, Inc. ("Evelo," "we," "our," "us" or the "Company”) is a biotechnology company incorporated in Delaware on May 6, 2014. We are 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 are advancing these investigational medicines with the aim of treating a broad range of inflammatory diseases, with an initial focus on psoriasis and atopic dermatitis. Our headquarters is located in Cambridge, Massachusetts.
Since inception, we have devoted substantially all of our efforts to research and development and raising capital. We have not generated any product or license revenue related to our primary business purpose to date. We are subject to a number of risks similar to those of other development stage companies, including a dependence on key individuals, the need to develop commercially viable products, the competition from other companies, many of which are larger and better capitalized, and the need to obtain adequate additional financing to fund the development of our product candidates.
We have incurred operating losses since inception and we expect such losses and negative operating cash flows to continue for the foreseeable future. As of September 30, 2022, we held cash and cash equivalents of $69.1 million and have an accumulated deficit of $505.7 million. Since inception, we have financed operations primarily with the proceeds from the issuance of common stock and since-redeemed preferred stock to equity investors, and from debt financing.
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), 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 these unaudited condensed consolidated financial statements are issued. The transition to profitability is dependent upon the successful development, approval and commercialization of our product candidates, and the achievement of a level of revenues adequate to support our cost structure. Based on our current operating plan, we believe that our cash and cash equivalents balance as of September 30, 2022 will not be sufficient to fund operations and capital expenditures for at least the twelve months following the filing of this Quarterly Report on Form 10-Q, and we will need to obtain additional funding. We intend to obtain additional funding through available financing sources which may include additional public offerings of common stock, private financing of debt or equity, and / or the pursuit of strategic partnerships, licensing arrangements or collaborations. Management’s belief with respect to our ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, we may need to seek additional funding sooner than would otherwise be expected. There can be no assurance that we will be able to obtain additional funding on acceptable terms, if at all. If we are unable to obtain sufficient funding, we may be required to delay development efforts, limit activities and reduce research and development costs, which could adversely affect our business prospects. Because of the uncertainty in securing additional funding and the insufficient amount of cash and cash equivalent resources as of September 30, 2022, management concluded that substantial doubt exists with respect to our ability to continue as a going concern within one year after the date that these unaudited condensed consolidated financial statements are issued.
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2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification and ASU of the FASB.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include, but are not limited to, estimates related to the application of Revenue from Contracts with Customers (Topic 606) ("ASC 606") to our collaboration agreement with Meddist Company Limited ("ALJ"), the accrual of research and development expenses, the expected future lives of property and equipment and the valuation of stock-based awards. We base our estimates on historical experience and market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.
Unaudited Interim Financial Information
Our unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The unaudited condensed consolidated financial statements include the accounts of our business and our wholly owned and controlled subsidiaries.
All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.
The accompanying condensed consolidated balance sheet as of December 31, 2021 has been derived from our audited consolidated financial statements for the year ended December 31, 2021. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2021.
These unaudited condensed consolidated financial statements are prepared on the same basis as the audited financial statements. In the opinion of our management, the accompanying unaudited condensed consolidated financial statements contain all adjustments which are necessary to present fairly our financial position as of September 30, 2022, and the results of operations and stockholders' equity for the three and nine months ended September 30, 2022 and 2021. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be realized for the year ending December 31, 2022, or for any future period.
Subsequent Event Considerations
We consider events or transactions that occur after the balance sheet date but prior to the issuance of the unaudited condensed consolidated financial statements to identify matters that require additional disclosure or that may significantly affect currently reported financial condition such as our judgments related to estimates. Subsequent events were evaluated as required.



7

Emerging Growth Company Status
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and we may take advantage of reduced reporting requirements that are otherwise applicable to public companies until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We elected to use the extended transition period for complying with new or revised accounting standards and, as a result of this election, our unaudited condensed consolidated financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our IPO or such earlier time that we no longer are an emerging growth company. We would cease to be an emerging growth company if we have more than $1.235 billion in annual revenue, have more than $700.0 million in market value of our stock held by non-affiliates (and have been a public company for at least 12 months and have filed one annual report on Form 10-K), or have issued more than $1.0 billion of non-convertible debt securities over a three-year period.
Concentrations of Credit Risk and Off-Balance Sheet Risk
Financial instruments that potentially expose us to concentrations of credit risk primarily consist of cash and cash equivalents. We place our operating cash in demand deposit accounts at a single financial institution which have exceeded and are expected to continue to exceed federally insured limits. Our money market funds are held in an investment account at an affiliate institution.
As of September 30, 2022 and December 31, 2021, we had no off-balance sheet risk such as foreign exchange contracts, option contracts, derivatives or foreign currency hedging arrangements.
Comprehensive Loss
Comprehensive loss consists of net loss and changes in equity during a period arising from transactions and other equity and circumstances, of which we have none. Our comprehensive loss equals our net loss for all periods presented.
Cash, Cash Equivalents and Restricted Cash
Cash equivalents are highly liquid investments that are readily convertible into cash with original maturities of three months or less, which consist of cash held in banks and funds held in money market accounts. Cash equivalents are stated at cost, which approximates market value. Our restricted cash consists of the deposits held for the building lease for our office and laboratory premises and for our credit card facility. As of September 30, 2022 and December 31, 2021 we had $1.2 million and $1.3 million, respectively, in noncurrent restricted cash included within other assets recorded on the unaudited condensed consolidated balance sheets.
The following reconciles cash, cash equivalents and restricted cash as of September 30, 2022 and 2021, as presented on our statements of cash flows to the related balance sheet accounts (in thousands):
September 30,
20222021
Cash and cash equivalents:
Cash$10,363 $3,359 
Money market funds58,690 92,579 
Total cash and cash equivalents69,053 95,938 
Restricted cash1,156 1,313 
Cash, cash equivalents and restricted cash$70,209 $97,251 
Research and Development Costs
Research and development costs are expensed in the period incurred. Research and development expenses consist of both internal and external costs associated with the development of our product candidates, such as payroll, consulting and manufacturing costs associated with the development of our product candidates. Costs for certain development activities, such as clinical trials and manufacturing development activities, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, and information provided to us by our vendors on their actual costs incurred or level of effort expended. Payments for these activities are based on the terms of the individual arrangements, which may differ
8

from the pattern of costs incurred, and are reflected on the unaudited condensed consolidated balance sheets as prepaid or accrued research and development expenses.
Segments
We have one operating segment. Our chief operating decision maker, our Chief Executive Officer, manages our operations on a consolidated basis for the purposes of allocating resources.
Recently Adopted Accounting Pronouncements
Debt with Conversion and Other Options
On August 5, 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU-2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The guidance simplifies the evaluation of whether a contract in the issuer’s own equity can be classified in equity or an embedded feature qualifies for the derivative scope exception. We adopted the guidance for the year beginning January 1, 2022. The adoption has no impact on our unaudited condensed consolidated financial statements and related disclosures.
Codification Improvements
In October 2020, the FASB issued ASU No. 2020-10 - Codification Improvements. The amendments improve the codification by having all disclosure-related guidance available in the disclosure sections of the codification and also include various other minor amendments. We adopted the guidance for the year beginning January 1, 2022, with no impact on our unaudited condensed consolidated financial statements and related disclosures.
Accounting Pronouncements Issued and Not Adopted
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)Measurement of Credit Losses on Financial Instruments, which was subsequently updated (together “ASU 2016-13”). The provisions of ASU 2016-13 modify the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, and require a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 will be effective for us on January 1, 2023, with early adoption permitted. We are currently evaluating the potential impact that this standard may have on our financial position and results of operations, as well as the timing of our adoption of this standard.
3. ALJ Collaborative Agreement
In March 2021, we entered into a collaborative commercialization and license agreement (“ALJ Agreement”) with ALJ. Pursuant to the ALJ Agreement, we granted to ALJ an exclusive, non-transferable, sublicensable license to our product candidate EDP1815. In consideration for the rights granted under the ALJ Agreement, ALJ was obligated to pay a one-time, non-refundable upfront fee of $7.5 million. The parties will also share the future operating profits and losses for certain products in certain territories equally (50:50) as well as certain development, regulatory and commercialization costs. We have concluded that the delivery of the license to ALJ shall be accounted for under ASC 606. The development, regulatory and commercialization activities within the territories shall be accounted for under the FASB guidance of Collaborative Arrangements (Topic 808) ("ASC 808").
We have recognized no revenue under the ALJ Agreement to date as we have yet to undertake any of our performance obligations within the agreement. The $7.5 million upfront fee is recorded as deferred revenue as a non-current liability in the accompanying unaudited condensed consolidated balance sheets because the performance obligation is not expected to be completed within the next twelve months.
We anticipate payments under the cost-sharing or profit and loss sharing arrangements will be classified in the statement of operations consistent with the guidance of ASC 808. To date, we have neither received nor incurred any such payments.
9

4. Leases
In January 2018, we entered into an operating sublease arrangement for approximately 40,765 square feet of office and research and development space at 620 Memorial Drive, Cambridge, MA 02139, extending through September 2025. The lease requires a security deposit which we fulfill with a standing letter of credit secured by restricted cash on deposit.
For each of the three months ended September 30, 2022 and 2021, we recorded rent expense of $0.7 million. For each of the nine months ended September 30, 2022 and 2021, we recorded rent expense of $2.2 million.
Lease amounts reported in the condensed consolidated balance sheets and the weighted-average lease term and discount rate information were as follows (in thousands):
September 30, 2022December 31, 2021
Assets:
Operating lease right-of-use assets$7,398 $8,910 
Liabilities:
Operating lease liabilities, current2,177 1,951 
Operating lease liabilities, noncurrent5,935 7,785 
Total lease liabilities$8,112 $9,736 
Weighted-average remaining lease term3 years3.75 years
Weighted-average discount rate9.5 %9.5 %
5. Fair Value Measurements
The following presents the fair value hierarchy for financial assets measured at fair value on a recurring basis as of September 30, 2022 (in thousands):
TotalLevel 1
Assets:
Money market funds included in cash and cash equivalents$58,690 $58,690 
Total$58,690 $58,690 
The following presents the fair value hierarchy for financial assets measured at fair value on a recurring basis as of December 31, 2021 (in thousands):
TotalLevel 1
Assets:
Money market funds included in cash and cash equivalents$66,989 $66,989 
Total$66,989 $66,989 
Cash held in money market funds are invested in a fund comprised of U.S. government securities and instruments. As of September 30, 2022 and December 31, 2021, our financial assets measurable at fair value consisted entirely of money market funds measured at Level 1. We held no financial liabilities measurable at fair value.
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6. Accrued Expenses
Accrued expenses recorded on the unaudited condensed consolidated balance sheets consist of the following (in thousands):
September 30, 2022December 31, 2021
External research and development expenses$5,637 $4,895 
Payroll and related expenses5,615 6,412 
Professional fees732 1,013 
Other494 748 
Total accrued expenses$12,478 $13,068 
7. Loan and Security Agreements
In July 2019, we entered into a loan and security agreement with K2 HealthVentures LLC and others (collectively, "K2HV"), under which K2HV agreed to extend term loans of up to $45.0 million in three tranches. The initial tranche of $20.0 million was funded in July 2019. The second tranche of $10.0 million was funded in July 2020. The availability of the third tranche of $15.0 million expired in January 2021. The facility was amended in June 2021 (the "Amended Credit Facility"), to supersede the expired $15.0 million third tranche commitment with a new $15.0 million fourth tranche commitment, which we drew down in June 2021. The Amended Credit Facility resulted in a debt extinguishment for accounting purposes, and we recorded a loss on the extinguishment of debt of $3.2 million in the quarterly period ended June 30, 2021, equaling the difference between the fair value for reacquisition of the new debt and the carrying amount of the existing debt.
In connection with the Amended Credit Facility, we issued to K2 HealthVentures Equity Trust LLC, an affiliate of K2HV, a warrant to purchase up to 139,770 shares of our common stock (the "Warrant") at a Warrant Price (as defined in the Warrant) of $13.30 per share. In addition, we provided K2HV the option (the "Conversion Option"), exercisable at any time, to convert at a Conversion Price (as defined in the Amended Credit Facility) of $13.30 per share up to $5.0 million of loan principal outstanding into up to 375,940 shares of our common stock. See Note 10 - Stockholders' Equity.
Interest on the outstanding loan balance accrues at a variable annual rate equal to the greater of (i) 8.65% and (ii) the prime rate plus 3.15%. Terms are for interest-only payments on a monthly basis through February 2023. Thereafter, terms provide for equal monthly payments of principal plus interest until the loans mature in August 2024 whereupon the remaining balance is due and payable. Pursuant to the Amended Credit Facility, we elected to adjust the repayment schedule such that commencing on March 1, 2023, we will make consecutive equal monthly payments of principal and accrued and unpaid interest based on a notional thirty month repayment period. The loan maturity date remains August 1, 2024 and any outstanding principal and unpaid interest is due at maturity. Upon final payment or prepayment of the loans, the terms of the Amended Credit Facility required us to pay a final payment ("Final Payment") equal to 4.8% of the aggregate original principal amount of the loans borrowed.
Borrowings under the Amended Credit Facility are collateralized by substantially all our tangible personal property along with our equity interests in our subsidiaries. The Amended Credit Facility contains customary representations, warranties and covenants.
During our debt covenant compliance review 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 entitle the lenders to default interest, the ability to terminate the facility and the ability to accelerate repayment of any outstanding loans in full. Subsequent to September 30, 2022, K2HV agreed to waive all identified Events of Default, thereby waiving its right to default interest and its ability to terminate the facility and accelerate repayment of all outstanding loans in full. As a result of this waiver, the debt remains classified according to its contractual payment terms as of September 30, 2022 and we are compliant with all covenants. In connection with such waiver, on November 14, 2022, we and K2HV entered into a modification letter to the Amended Credit Facility whereby we agreed, among other things, to: (i) accelerate the Final Payment of $2.16 million such that it will become payable on December 12, 2022 (it would have otherwise been due at maturity, at the time of a refinancing, or at the time of payment of final principal); (ii) amend and restate the Warrant to change the Warrant Price to $2.00 per share and increase the Number of Shares subject to the Warrant to 663,750; and (iii) with respect to the Conversion Option, restate the
11

Conversion Price to $2.00 per share, such that K2HV may now convert up to $5.0 million of loan principal outstanding into up to 2,500,000 shares of our common stock. There is no impact of these agreed amended terms on the financial statements for any periods presented in this Quarterly Report on Form 10-Q as the amendments are effective subsequent to September 30, 2022.
The minimum future loan payments under the Amended Credit Facility as of September 30, 2022, prior to the latest amendment described above, are as follows (in thousands):
Remainder of 2022$1,050 
202317,618 
202435,001 
Total minimum payments53,669 
Less: amounts representing interest and discount(6,924)
Total debt$46,745 
Interest expense was approximately $1.1 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively. Interest expense was approximately $3.2 million and $2.6 million for the nine months ended September 30, 2022 and 2021, respectively.
8. In-License Agreements
Mayo Foundation for Medical Education and Research
In August 2017, we and the Mayo Clinic entered into a license agreement which was subsequently amended. Under the agreement, the Mayo Clinic granted us (i) an exclusive, worldwide, sublicensable license under the Mayo Clinic’s rights to certain intellectual property and microbial strains and (ii) a non-exclusive, worldwide, sublicensable license to certain related know-how to develop and commercialize certain microbial strains and licensed products incorporating such strains. As consideration, we paid a nonrefundable upfront fee of $0.3 million and are obligated to pay annual license maintenance fees. The nonrefundable upfront fees were expensed to research and development expense in 2017. Annual maintenance fees are expensed as incurred over the term of the agreement. We may owe the Mayo Clinic milestone payments upon the achievement of certain milestones up to a maximum of $59.1 million in the aggregate, as well as royalties on net sales of licensed products in low single-digit percentages. As of September 30, 2022, we incurred milestone payments since inception of approximately $0.3 million and no amounts are currently due.
University of Chicago
In March 2016, we and the University of Chicago entered into a patent license agreement (“2016 University of Chicago Agreement”). Under the agreement, the University of Chicago granted us (i) an exclusive, royalty-bearing and sublicensable license to certain patent rights related to the administration of microbes to treat cancer and (ii) a non-exclusive, royalty-bearing, sublicensable license to access technical information for the development and commercialization of microbial products to treat cancer in combination with checkpoint inhibitors. As consideration, we paid a nonrefundable upfront fee of less than $0.5 million and were obligated to pay annual license maintenance fees. The nonrefundable upfront fees were expensed to research and development expense in 2016. Annual maintenance fees were expensed as incurred over the term of the agreement. As of September 30, 2022, we incurred milestone payments since inception of approximately $0.4 million and no amounts are currently due.
In May 2022, we served notice of termination to the University of Chicago of the 2016 University of Chicago Agreement effective July 11, 2022. None of our current or anticipated product candidates depends on any license subject to the 2016 University of Chicago Agreement.
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9. Commitments and Contingencies
Manufacture and Supply Agreement with Sacco S.r.l.
In July 2019, we entered into an agreement with Sacco S.r.l. ("Sacco") pursuant to which Sacco will manufacture and supply single strain, non-genetically modified microbes intended for oral delivery or oral use in pharmaceutical products exclusively for us for a period of five years. Sacco may terminate the agreement if the provision of manufacturing services has been, or is scheduled to be, inactive for a consecutive period of six months. We agreed to pay Sacco an aggregate of €3.0 million, consisting of payments of €0.6 million annually during the exclusivity period. We have incurred annual exclusivity fees since inception of approximately €2.4 million, and no amounts are currently due.
We have an additional contractual arrangement with an affiliate of Sacco for manufacturing that will require us to spend an aggregate minimum amount of €5.4 million, consisting of €1.5 million annually during each of 2022, 2023 and 2024 and €0.9 million on or before March 1, 2025.
In addition to our manufacture and supply agreement with Sacco, we have other agreements including a collaborative agreement, sublease and license agreement which do or may obligate us to future funding commitments. See for example Note 3 - ALJ Collaborative Agreement, Note 4 - Leases and Note 8 - License Agreements.
Litigation and Other Proceedings
We may periodically become subject to legal proceedings and claims arising in connection with on-going business activities, including claims or disputes related to patents issued to us or that are pending. We currently are not a party to any material litigation and have established no contingency reserves for any litigation liability.
On February 12, 2021, the European Patent Office issued a Communication of a Notice of Opposition for European patent EP 3223834, which is held by us. In July 2021, we filed our reply to the Notice of Opposition. In January 2022, the European Patent Office issued a preliminary opinion and a summons to oral proceedings. We filed our final written submission in July 2022, and the oral proceedings were held on September 14, 2022. The Opposition Board maintained claims that we presented in an auxiliary request in the oral proceedings. The deadline to appeal the Opposition Board’s decision is December 14, 2022. The patent at issue does not relate to any of our current product candidates, and any subsequent appeal is not expected to affect any of our current development plans.
10. Stockholders’ Equity
2019 Shelf Registration and 2019 ATM Program
In June 2019, we filed a Registration Statement on Form S-3 ("2019 Shelf Registration Statement") with the SEC for the registration and offering of common stock, preferred stock, debt securities, warrants and/or units or any combination thereof in the aggregate amount of up to $200.0 million for a period of up to three years from the date of effectiveness. We simultaneously entered into an "at-the-market" offering sales agreement ("2019 ATM") providing for the offering, issuance and sale for up to $50.0 million of common stock under the 2019 Shelf Registration Statement. During the year ended December 31, 2021, we issued 139,734 common shares under the 2019 ATM with offering prices ranging between $12.54 and $13.17 per share for gross proceeds of $1.8 million and net proceeds of $1.7 million. During the three and nine months ended September 30, 2022, we sold no shares of common stock under the 2019 ATM. The 2019 Shelf Registration Statement expired in June 2022, and we terminated the 2019 ATM in July 2022.
2021 Shelf Registration
In August 2021, we filed a Registration Statement on Form S-3 (“2021 Shelf Registration Statement”) with the SEC for the registration and offering of common stock, preferred stock, debt securities, warrants and/or units or any combination thereof in the aggregate amount of up to $200.0 million for a period of up to three years from the date of effectiveness. No stock or securities registered thereunder were issued in the year ended December 31, 2021 or prior to our May 2022 Registered Direct Offering.
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May 2022 Registered Direct Offering
In May 2022, we entered into a securities purchase agreement (the "Purchase Agreement") with certain purchasers named therein. Pursuant to the Purchase Agreement, we agreed to issue and sell to such purchasers in a registered direct offering an aggregate of 54,246,358 shares of common stock, including 393,834 shares acquired by our officers and directors and 28,253,422 shares acquired by related parties, at a purchase price of $1.46 per share, pursuant to the 2021 Shelf Registration Statement and a related prospectus supplement filed with the SEC. The closing of the registered direct offering occurred on May 27, 2022. The placement generated gross proceeds of $79.2 million. There were no underwriting or placement fees associated with the transaction. Legal, professional services and stock transfer fees totaled $0.2 million and were capitalized to additional paid-in capital upon the sale of common stock.
2022 ATM Program
In July 2022, we entered into an "at-the-market" offering sales agreement ("2022 ATM") providing for the offering, issuance and sale of up to $75.0 million of our common stock under the 2021 Shelf Registration Statement. During the three and nine months ended September 30, 2022, we issued 475,000 shares of common stock under the 2022 ATM at a weighted average price per share of $2.06 for aggregate net proceeds of $0.7 million after deducting commissions and other offering expenses paid by us.
11. Stock-Based Compensation
2021 Inducement Plan
In May 2021, our board of directors adopted the Evelo Biosciences, Inc. 2021 Employment Inducement Award Plan (the “Inducement Award Plan”) without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Stock Market LLC listing rules. As of September 30, 2022, 310,000 shares of common stock are available for future grant under the Inducement Award Plan.
2018 Incentive Award Plan
In April 2018, our board of directors adopted, and our stockholders approved, the 2018 Incentive Award Plan (the "2018 Plan"), effective May 2018, under which we may grant cash and equity-based incentive awards to our employees, officers, directors, consultants and advisors. As of September 30, 2022, awards representing 769,311 shares were available for future grant under the 2018 Plan.

Stock Options
Stock options and awards granted to employees generally vest over a four-year period but may be granted with different vesting terms and have a term of 10 years. During the nine months ended September 30, 2022 and 2021, we granted stock options to purchase 3,083,755 and 3,472,149 shares of common stock, respectively, with a weighted-average grant-date fair value of $2.89 and $10.81 per share, respectively. As of September 30, 2022, total unrecognized compensation expense related to stock options was $26.6 million, which is expected to be recognized over a weighted-average period of 2.6 years.
Restricted Stock Units
We issue RSUs under the 2018 Plan and the 2021 Inducement Award Plan. Typically, each award of RSUs vests as to 25% on the first anniversary of the grant date, and either monthly thereafter or annually over three additional years. During the nine months ended September 30, 2022 and 2021, we granted 108,375 and 172,450 RSUs with a weighted average grant date fair value of $5.05 and $15.50 per share, respectively. As of September 30, 2022, total unrecognized compensation expense related to restricted stock units was $1.5 million, which is expected to recognize over a weighted average period of 1.9 years.

Stock-based compensation expense related to RSUs was $0.2 million and $0.4 million for the three months ended September 30, 2022 and 2021, respectively. Stock-based compensation expense related to RSUs was $0.9 million and $0.7 million for the nine months ended September 30, 2022 and 2021, respectively. There was a total of 51,684 and 14,777 RSUs that vested during the nine months ended September 30, 2022 and 2021, respectively.
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2018 Employee Stock Purchase Plan
In April 2018, our board of directors adopted, and our stockholders approved, the 2018 Employee Stock Purchase Plan (“ESPP”), which became effective in May 2018. As of September 30, 2022, a total of 1,195,147 shares of common stock were reserved for issuance under the ESPP.

The compensation expense recognized related to the ESPP for the three and nine months ended September 30, 2022 and 2021 was not material. There was a total of 76,714 and 46,358 shares, respectively, purchased under the ESPP during the nine months ended September 30, 2022 and 2021, respectively.
Stock-Based Compensation Expense
Stock-based compensation expense recorded in our unaudited condensed consolidated statements of operations consists of the following (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Research and development$1,694 $2,053 $5,431 $5,925 
General and administrative1,769 2,388 6,306 5,552 
Total stock-based compensation expense3,463 $4,441 11,737 $11,477 
12. Net Loss Per Share
Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding during the period, as follows (net loss in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Numerator
Net loss$(30,564)$(33,730)$(90,986)$(93,524)
Denominator
Weighted average shares outstanding used in computing net loss per share108,051,851 53,430,333 79,528,761 52,704,470 
Net loss per share, basic and diluted$(0.28)$(0.63)$(1.14)$(1.77)
We compute diluted net loss per common share by giving consideration to all potentially dilutive common shares, except where the effect of including such securities would be anti-dilutive. We have reported net losses since inception and, as such, have determined that all potentially dilutive common shares are anti-dilutive. Consequently, basic and diluted net loss per share of common stock were the same for all periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive.
The following table presents securities excluded from the computation of diluted weighted-average shares outstanding for the periods presented, as they are anti-dilutive:
 September 30,
 20222021
Unvested common stock from early exercise of options 18,386 
Stock options to purchase common stock11,432,121 9,716,285 
Warrants139,770 139,770 
RSUs301,300  
Convertible debt (as-converted to common stock)375,940 375,940 
Common stock offering from ESPP40,197 13,152 
Total securities excluded12,289,328 10,263,533 
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13. Related Party Transactions
Weatherden Advisory Services Agreement
We receive clinical advisory services from Weatherden Ltd. (“Weatherden”) under agreements that were entered into during 2017 and 2018. Duncan McHale, our Chief Medical Officer, is a part owner of Weatherden. During each of the nine-month periods ended September 30, 2022 and 2021, we paid Weatherden $0.2 million. As of September 30, 2022 and December 31, 2021, the amounts owed to Weatherden under the supply of service agreement were approximately $0.1 million or less, respectively.
Epstein Consulting Services Agreement
In September 2019, we entered into a consulting agreement with David Epstein ("Consulting Agreement"), our former Chairman of the Board, for strategic advisory and other consulting services. The Consulting Agreement was amended in October 2020 and again in April 2021, and terminated pursuant to its terms on June 30, 2022. In accordance with the initial terms of the Consulting Agreement, Mr. Epstein was granted an option to purchase 75,000 shares of common stock, vesting in 36 equal monthly installments and subject to his continued provision of consulting services on the applicable vesting dates. Under the Consulting Agreement as amended in October 2020, Mr. Epstein was also entitled to receive (i) an annual equity award on each anniversary of the effective date of the Consulting Agreement in the form of an option to purchase shares of common stock having a grant date fair market value of approximately $0.2 million as determined by our board of directors in its discretion based on customary option pricing methodologies, vesting in 12 equal monthly installments and subject to his continued provision of consulting services on the applicable vesting date, and (ii) an aggregate annual cash consulting fee of $0.3 million. In the event the Consulting Agreement was renewed for a term of less than one year, the equity award and the number of shares of common stock would be adjusted proportionately to the length of the renewal term. In October 2020, in connection with the commencement of his second year of service as a consultant, Mr. Epstein was granted an option to purchase 44,743 shares of common stock, vesting in nine equal monthly installments and subject to his continued provision of consulting services on the vesting dates. Under the Consulting Agreement as amended in April 2021 and effective on June 30, 2021, Mr. Epstein was entitled to receive RSUs having an aggregate grant date fair value of approximately $0.5 million, as determined by our board of directors in its discretion based on a 10-day trailing average of the closing price of our common stock, as his sole compensation for his consulting services. The RSUs vested in 12 substantially equal monthly installments such that the RSUs became fully vested on June 30, 2022, in each case subject to Mr. Epstein's continued provision of consulting services on the applicable vesting date. In June 2022, terms of Mr. Epstein's unvested option grants were modified to allow immediate vesting upon his resignation as Chairman of the Board of Directors on June 30, 2022. All of the foregoing options and restricted stock units were or are subject to accelerated vesting under change in control provisions.
Securities Purchase Agreement with Related Parties
In May 2022, in connection with our registered direct offering, we entered into the Purchase Agreement with a group of purchasers including certain of our executive officers, members of our board of directors and other related parties. Of the 54,246,358 total shares offered, officers and directors purchased an aggregate of 393,834 shares and other related parties purchased an aggregate of 28,253,422 shares of our common stock for $1.46 per share, a price equal to the offering price per share of, and on equal terms as, common stock sold to the public. See Note 10 - Stockholders' Equity.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 ended December 31, 2021 ("2021 Annual Report"), including the audited consolidated financial statements and notes thereto contained in our 2021 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 to Evelo Biosciences, Inc. and its consolidated subsidiaries.

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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.

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, can 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 leads 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 do not 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, these same investigational medicines could be effective 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 atopic dermatitis and psoriasis.
Atopic dermatitis

Phase 2 clinical trial

In February 2022, we began dosing patients in a Phase 2 trial of EDP1815 in atopic dermatitis. The primary objective of this multicenter, randomized, double-blind, placebo-controlled multiple cohort trial is to evaluate the efficacy and safety of EDP1815 in the treatment of atopic dermatitis when dosed for 16 weeks, compared to placebo. The trial is enrolling patients with mild, moderate, and severe atopic dermatitis and each of the four cohorts is investigating a different aspect of the potential of EDP1815 in the treatment of atopic dermatitis.

The primary endpoint for the trial is the proportion of patients who achieve an outcome of a 50% improvement from baseline in Eczema Area and Severity Index (“EASI”) score (an "EASI-50” response) at week 16. Secondary endpoints include several physician-reported outcomes, such as Investigator’s Global Assessment (“IGA”) and body surface area (“BSA”), along with patient-reported outcomes such as Dermatology Life Quality Index (“DLQI”), daily itch using the Pruritus-Numerical Rating Scale (“Pruritus-NRS”), and Patient-Oriented Eczema Measure (“POEM”). Patients will be randomized into one of four cohorts. Cohorts 1-3 include approximately 100 patients per cohort randomized in a 3:1 ratio (75 to EDP1815 and 25 to placebo) for a total of approximately 300 patients. Patients in Cohort 4 will be randomized in a 2:1 ratio (70 to EDP1815 and 35 to placebo) for a total of approximately 105 patients.

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 explores 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 will receive 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 is 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 will test 6.4 x 1011 total cells of EDP1815 or matching placebo administered as two capsules once daily. This higher concentration of EDP1815 drug product has been produced using a different manufacturing process, in order 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 uses the same drug product and daily dose as Cohort 2 (or matching
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placebo), but is administered as one capsule taken twice daily. This cohort will test if there is any additional benefit obtained from a twice a day regimen versus once a day. Patients in Cohort 4 will 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 produced 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 the trial 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. We anticipate that data from Cohorts 1-3 of the Phase 2 atopic dermatitis trial will be available early in the first quarter of 2023, and we anticipate that data from Cohort 4 will be available in the second quarter of 2023.
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, including manufacturing preparations, protocol development and regulatory agency consultation.

We completed scientific advice meetings with the EMA and MHRA to seek their respective guidance on the appropriateness of our proposed registration clinical trial design, including the primary and secondary endpoints. Both health authorities have acknowledged the reasonableness of our proposed trial design, including the primary and secondary endpoints. Based on their feedback, we have the ability to evaluate either of our capsule forms, including the faster release capsule, in the registration trials. We received initial written feedback from the FDA on the same topics and have submitted a request for a meeting with the FDA to discuss our registration trial plans. As part of our interactions with the EMA and MHRA, we also sought feedback and discussed critical components of the chemistry, manufacturing and control ("CMC") for EDP1815, in particular our proposals regarding product release and product stability testing for the registration trials. We separately received written feedback from the FDA on the same CMC topics.

Phase 2 clinical trial

In September 2021, we announced positive data from a Phase 2 trial of EDP1815 in psoriasis. This multicenter, randomized, double-blind, placebo-controlled, dose-ranging Phase 2 trial evaluated three doses of EDP1815 in adult patients with mild and moderate psoriasis. The trial included a treatment phase (Part A) and an off-treatment, follow-up phase (Part B). In Part A of the trial, 249 patients were randomized in a 1:1:1 ratio to one of three parallel cohorts: 1 capsule, 4 capsules or 10 capsules. They were then randomized in a 2:1 ratio to active or placebo prior to the start of dosing. Trial medication was taken once daily for 16 weeks, and all patients were followed for 4 weeks after treatment completion to week 20. Psoriasis Area and Severity Index (“PASI”) scores were assessed by both mean changes from baseline and responder rates. The primary endpoint was the mean percentage change in PASI scores between treatment and placebo at 16 weeks. Secondary endpoints included the proportion of study patients who achieved at least a 50% improvement in PASI from baseline at the week 16 timepoint (a "PASI-50" response), and other clinical measures of disease such as Physicians Global Assessment ("PGA"), BSA, PGA x BSA, Psoriasis Symptom Inventory ("PSI"), and DLQI.

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.
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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.

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 February 2022 we announced data from Part B, which included durable and deeper clinical responses. Eighty-three patients who had received EDP1815 in Part A entered Part B. Thirty of these 83 patients had achieved a PASI-50 or greater reduction at week 16 in Part A. Eighteen of the 30 patients remained at PASI-50 or greater at the end of Part B. Ten of the 30 patients had achieved a PASI-75 or greater at the end of Part A and 5 remained at PASI-75 or greater at the end of Part B. These durable results were achieved without any new psoriasis medication being used during this time. Nineteen of the 83 patients had achieved clear skin (PGA 0) or nearly clear skin (PGA 1) at the end of Part A and of these, 9 remained at PGA 0/1 at the end of Part B.

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).
EDP2939

EDP2939 is an investigational oral biologic consisting of extracellular vesicles ("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.

Dosing in a Phase 1/2, randomized, placebo-controlled trial will be conducted in two parts. Part A will evaluate the safety and tolerability of EDP2939 in healthy volunteers, and Part B will evaluate the safety, tolerability and preliminary efficacy in adults with moderate psoriasis. The primary endpoint of Part B is the superiority of EDP2939 as compared to placebo on the proportion of participants with moderate psoriasis achieving a PASI-50 response.

Part A of the trial will include up to three sequential, escalating multiple dose cohorts. Each cohort will be comprised of 12 healthy volunteers receiving EDP2939 or matching placebo in capsules once a day for up to 10 days, according to a 2:1 randomization (8 to EDP2939 and 4 to placebo).

Part B of the trial will commence dosing after the Safety Review Committee has reviewed the initial dose level in Part A and the dose has been deemed safe and well tolerated. All participants in Part B will be randomly assigned in a 1:1 ratio to EDP2939 or matching placebo, administered orally as a single capsule once a day for 16 weeks.

On November 10, 2022, we received a request from the MHRA for additional information with respect to our Clinical Trial Application submission for the EDP2939 Phase 1/2 trial. We are currently in the process of providing written responses to the MHRA questions, and anticipate dosing healthy volunteers in Part A of the trial in the first quarter of 2023. We still expect to report data from the cohort of patients with psoriasis (Part B) in the second half of 2023.
ALJ Collaboration

In March 2021, we announced a strategic collaboration to develop and commercialize our lead inflammation product candidate, EDP1815, in the Middle East, Turkey, and Africa with Meddist Company Limited, or ALJ. Under the terms of the agreement, we received an upfront payment from ALJ and we are 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 2 - Summary of Significant Accounting Policies and Note 3 - ALJ Collaborative
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Agreement to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding the commercialization and license agreement with ALJ.
Chief Executive Officer Succession Plan
In August 2022, we announced the succession plan for Balkrishan “Simba” Gill, Ph.D. to transition from his roles as our Chief Executive Officer and President to the role of Chair of our Board of Directors. Our Board of Directors has retained the executive search firm Spencer Stuart to conduct a comprehensive search led by the current Chair of our Board of Directors, Lord Ara Darzi, to identify Dr. Gill's successor. Dr. Gill will continue to serve as our Chief Executive Officer and President and, in these capacities, as our principal executive officer, until his successor joins Evelo, at which time he will become Chair of the Board of Directors and Lord Darzi will become our Lead Independent Director.
Financing

Since our incorporation in 2014, we have devoted substantially all of our resources to developing our 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 operations primarily with the proceeds from the issuance of common stock and since-redeemed preferred stock to equity investors and borrowings under loan and security agreements with financial institutions.
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 ended September 30, 2022, our net loss was $91.0 million. As of September 30, 2022, we had an accumulated deficit of $505.7 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 clinical trials for EDP1815;
initiate additional clinical trials for EDP1815;
initiate clinical trials for EDP2939;
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. 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.
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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.
Equity Financing
In August 2021, we filed a Registration Statement on Form S-3 (the “2021 Shelf Registration Statement”) with the SEC for the registration of common stock, preferred stock, debt securities, warrants and/or units or any combination thereof in the aggregate amount of up to $200.0 million for a period of up to three years from the date of effectiveness.
In May 2022, we entered into a securities purchase agreement (the "Purchase Agreement") with the purchasers named therein (collectively, the "Purchasers"). Pursuant to the Purchase Agreement, we agreed to issue and sell to the Purchasers in a registered direct offering an aggregate of 54,246,358 shares of common stock, at a purchase price of $1.46 per share, pursuant to the 2021 Shelf Registration Statement and a related prospectus supplement filed with the SEC. The closing of the offering occurred on May 27, 2022. The placement generated gross proceeds of $79.2 million. There were no underwriting or placement fees associated with the transaction. See “Liquidity and Capital Resources" and Note 10 - Stockholders' Equity to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding our equity financing.

In July 2022, we entered into an “at-the-market” offering sales agreement with Cowen and Company, LLC ("Cowen") (the "2022 ATM") providing for the offering, issuance and sale of up to $75.0 million of common stock under the 2021 Shelf Registration Statement. We sold 475,000 shares of our common stock under the 2022 ATM during the three and nine months ended September 30, 2022. These shares were sold at a weighted average price per share of $2.06 for aggregate net proceeds of $0.7 million, after deducting commissions and offering costs. As of September 30, 2022, $74.0 million remained available to be sold under the 2022 ATM.
Debt Financing
In June 2021, we amended our loan and security agreement with K2 HealthVentures LLC and others (collectively, "K2HV"). The aggregate principal borrowings available under the amended agreement are $45.0 million, all of which we have drawn down to date. During our debt covenant compliance review applicable to periods in the third quarter of 2022, we identified non-compliance with certain provisions of the loan agreement which constituted Events of Default (as defined in the Amended Credit Facility). K2HV agreed to waive all identified Events of Default including their right to default interest, ability to terminate the loan facility and ability to accelerate repayment of all outstanding loans in full. In connection with such waiver, we amended certain terms of the loan agreement and related warrant to purchase up to 139,770 shares of our common stock (the "Warrant"), including accelerating payment of the $2.16 million final payment owed under the loan facility to December 2022, increasing the number of warrants and decreasing the warrant price, and decreasing the conversion price on the $5.0 million of loan principal which the lender may elect to convert into shares of our common stock. See “—Liquidity and Capital Resources" and Note 7 - Loan and Security Agreements to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding our debt facility.
Impact of COVID-19

The ongoing COVID-19 pandemic has had, and for an extended period of time is expected to have, substantial impacts around the world and is affecting our employees, communities, clinical trial sites and business operations, as well as the U.S. economy and international financial markets. 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. Since the start of the pandemic, 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 continue working with our contract manufacturing organizations ("CMOs") to minimize delays and disruptions to scheduled manufacturing runs for our product candidates and to ensure conformity to product specifications.
The COVID-19 pandemic has in the past impacted and may in the future impact our enrollment of new patients into, and the retention of existing patients in, our ongoing and any new clinical trials, due primarily to lower patient participation. We have taken steps to follow local and national guidelines for clinical research sites, are in close contact with our contract research organizations ("CROs") to ensure patient safety, and have prioritized our drug
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supply operations. We are continuing to monitor the impact of the COVID-19 pandemic on our operations and ongoing clinical development activity.
The extent to which the COVID-19 pandemic, and related global events and market impacts, affect 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, the emergence of new variants, whether travel restrictions and social distancing efforts are lifted or reinstated in the United States, the United Kingdom and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States, the United 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.
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 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 additional 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.
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.

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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 and our ongoing clinical trials for our product candidates including EDP1815, initiate additional clinical trials including 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 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 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 and completion of clinical trials;
any delays in clinical trials, including as a result of the COVID-19 pandemic or other health crisis;
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 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 similar 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 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 personnel to support our research and development efforts.
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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, 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; facility-related expenses, which include depreciation costs and allocated expenses for rent, 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.
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 increasing costs for accounting, audit, legal, regulatory and tax-related services associated with, among other things, maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs and investor and public relations costs.
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 the three and nine months ended September 30, 2022 and 2021, interest expense, net consisted primarily of interest at the stated rate on borrowings under our loan and security agreements, amortization of deferred financing costs and interest expense related to the accretion of debt discount offset by interest earned on institutional money market instruments.
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 U.S. Federal Reserve. Similarly, we expect that interest income earned on our money market accounts would increase in response to the same actions. Although our invested funds currently exceed our outstanding loan balance, the effect reflected in our unaudited condensed consolidated statement of operations to interest expense, net is uncertain.
Other Miscellaneous Expense, Net
Other miscellaneous expense, net for the three and nine months ended September 30, 2022 and 2021 primarily consists of government grants related to our operations in the United Kingdom and foreign currency exchange losses.
Income Taxes
Income tax expense for the three and nine months ended September 30, 2022 and 2021 reflects the provision for income taxes at our wholly owned UK subsidiary.
Since our inception in 2014, we recorded no U.S. federal or state income tax benefits for the net losses we incurred or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items.
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Results of Operations
Comparison of the Three Months Ended September 30, 2022 and 2021
Our statement of operations for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 is as follows (in thousands):
 Three Months Ended September 30, 
 20222021Change
Operating expenses:
Research and development$21,928 $22,599 $(671)
General and administrative7,126 10,111 (2,985)
Total operating expenses29,054 32,710 (3,656)
Loss from operations(29,054)(32,710)3,656 
Other income (expense):
Interest expense, net(788)(1,023)235 
Other miscellaneous income (expense), net(615)159 (774)
Total other expense, net(1,403)(864)(539)
Loss before income taxes(30,457)(33,574)3,117 
Income tax expense(107)(156)49 
Net loss$(30,564)$(33,730)$3,166 
Net Loss
Net loss for the three months ended September 30, 2022 was $30.6 million, compared to $33.7 million for the three months ended September 30, 2021. The lower current-quarter net loss of $3.2 million was primarily the result of lower operating expenses. The $3.7 million decrease in total operating expenses was the result of a $0.7 million decrease in research and development and a $3.0 million decrease in general and administrative expenses.
Research and Development Expenses
Our research and development expenses for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 are as follows (in thousands):
 Three Months Ended September 30, 
 20222021Change
Inflammation programs$12,624 $10,014 $2,610 
Oncology programs(222)501 (723)
Personnel costs5,130 6,371 (1,241)
Stock-based compensation1,694 2,053 (359)
Platform expenses2,702 3,660 (958)
Total research and development expenses$21,928 $22,599 $(671)

Research and development expenses were $21.9 million for the three months ended September 30, 2022, compared to $22.6 million for the three months ended September 30, 2021. The overall decrease of $0.7 million was driven by a reduction in our personnel costs and stock-based compensation, platform expenses, as well as completion of the EDP1503 and other oncology-related spending. The increased expense of $2.6 million in inflammatory programs was driven by the ramp up of the EDP1815 Phase 2 Atopic Dermatitis and EDP2939 trials, as well as an immunopharmacology study of EDP1815, partially offset by completion of the EDP1815 Phase 2 Psoriasis and EDP1815 Phase 1b trials, and closeouts of the EDP1867 and EDP1815 COVID-19 programs. Overall, we expect that our research and development expenses will increase in the foreseeable future as we continue our clinical trials for our product candidates, including EDP1815 and EDP2939, initiate new clinical trials, potentially 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.
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General and Administrative Expenses
Our general and administrative expenses for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 are as follows (in thousands):
 Three Months Ended September 30, 
 20222021Change
Personnel costs$3,185 $3,759 $(574)
Stock-based compensation1,769 2,388 (619)
Professional fees1,133 2,316 (1,183)
Facility costs, office expense and other1,039 1,648 (609)
Total general and administrative expenses$7,126 $10,111 $(2,985)

General and administrative expenses were $7.1 million for the three months ended September 30, 2022, compared to $10.1 million for the three months ended September 30, 2021. The decrease of $3.0 million was primarily driven by a $0.6 million decrease in personnel costs and lower stock-based compensation costs of $0.6 million. Additionally, professional fees decreased by $1.2 million, resulting from higher consulting fees for strategy and accounting services in the prior year.
Total Other Expense, Net
Total other expense, net for the three months ended September 30, 2022 was $1.4 million compared to $0.9 million for the three months ended September 30, 2021. The $0.5 million increase in other expense was primarily the result of unfavorable market value changes to cash held in foreign currencies.
Comparison of the Nine Months Ended September 30, 2022 and 2021
Our statement of operations for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 is as follows (in thousands):
 Nine Months Ended September 30, 
 20222021Change
Operating expenses:
Research and development$62,470 $64,762 $(2,292)
General and administrative24,909 23,075 1,834 
Total operating expenses87,379 87,837 (458)
Loss from operations(87,379)(87,837)458