SEC Filing | Evelo Biosciences

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evlo-20200331

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020


☐			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

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)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock,

$0.001 par value per share

EVLO

Nasdaq 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 x No o

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 x No o

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 May 5, 2020, the registrant had 32,333,036 shares of common stock, $0.001 par value per share, outstanding.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in 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 facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, the anticipated impact of the novel coronavirus (“COVID-19”) pandemic on our business, business strategy, prospective products, product approvals, research and development costs, timing and plans for clinical trials, expected timing of the release of clinical trial data, new formulations and product candidates, the scalability of manufacturing for EDP1815, plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties 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 terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have 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. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described under Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. These forward-looking statements are subject to numerous risks, including, without limitation, the following:

•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 and our need to raise additional funds;

•our ability to build a pipeline of product candidates and develop and commercialize drugs;

•our unproven approach to therapeutic intervention;

•our ability to enroll patients and volunteers in clinical trials, timely and successfully complete those trials and receive necessary regulatory approvals;

•our ability to establish our own manufacturing facilities and to receive or manufacture sufficient quantities 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, and foreign regulatory requirements, including FDA regulation of our product candidates;

•the timing of clinical trials and the likelihood of regulatory filings and approvals;

•our ability to obtain and retain key executives and attract and retain qualified personnel; and

•our ability to successfully manage our growth.

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.

As forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not occur or be achieved, and actual results could differ materially from those projected in the forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

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Evelo Biosciences, Inc.

Form 10-Q for the Quarterly Period Ended March 31, 2020

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019			1
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020 and 2019			2
Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2020 and 2019			3
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019			5
Notes to the Condensed Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosure About Market Risk			34
Item 4. Controls and Procedures			34

PART II: OTHER INFORMATION
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			78
Item 3. Defaults Upon Senior Securities			78
Item 4. Mine Safety Disclosures			78
Item 5. Other Information			78
Item 6. Exhibits			79

Signatures			80

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Evelo Biosciences, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except per share and share amounts)


	March 31, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	58,115	$	77,833
Prepaid expenses and other current assets	2,878		3,176
Total current assets	60,993		81,009
Property and equipment, net	8,478		8,341
Right of use asset - operating lease	12,106		—
Other assets	1,570		1,570
Total assets	$	83,147	$	90,920
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,210	$	620
Accrued expenses	9,039		8,758
Operating lease liability, current portion	1,806		—
Other current liabilities	408		365
Total current liabilities	12,463		9,743
Noncurrent liabilities:
Long-term debt	19,720		19,634
Operating lease liability, net of current portion	11,451		—
Deferred rent, net of current portion	—		1,148
Other noncurrent liabilities	169		198
Total liabilities	43,803		30,723
Commitments and contingencies
Stockholder’s equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31, 2020 and December 31, 2019, respectively	—		—
Common stock, $0.001 par value; 200,000,000 shares authorized; 32,369,471 and 32,232,258 shares issued and 32,321,208 and 32,170,605 shares outstanding at March 31, 2020 and December 31, 2019, respectively	32		32
Additional paid-in capital	261,206		259,018
Accumulated deficit	(221,894)		(198,853)
Total stockholders’ equity	39,344		60,197
Total liabilities and stockholders’ equity	$	83,147	$	90,920

See accompanying notes to condensed consolidated financial statements.

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Evelo Biosciences, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited, in thousands, except share and per share data)


	Three Months Ended March 31,
	2020		2019
Operating expenses:
Research and development	$	17,419	$	15,680
General and administrative	5,842		5,124
Total operating expenses	23,261		20,804
Loss from operations	(23,261)		(20,804)
Other (expense) income:
Interest (expense) income, net	(181)		505
Other income	466		—
Other income, net	285		505
Loss before income taxes	(22,976)		(20,299)
Income tax expense	(65)		—
Net loss	$	(23,041)	$	(20,299)

Net loss per share attributable to common stockholders, basic and diluted	$	(0.71)	$	(0.64)
Weighted-average number of common shares outstanding, basic and diluted	32,250,050		31,925,072

Comprehensive loss:
Net loss	$	(23,041)	$	(20,299)
Other comprehensive loss:
Unrealized gain (loss) on investments, net of tax of $0	—		16
Comprehensive loss	$	(23,041)	$	(20,283)

See accompanying notes to condensed consolidated financial statements.

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Evelo Biosciences, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited, in thousands, except share amounts)


	Three Months Ended March 31, 2020
	Preferred Stock				Common Stock						Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit	Total
	Shares	Amount		Shares	Amount
Balance-December 31, 2019	—	$	—	32,170,605	$	32	$	259,018	$	—	$	(198,853)	$	60,197
Vesting of restricted common stock	—	—		13,390	—		7		—		—		7
Exercise of stock options	—	—		137,213	—		226		—		—		226
Stock-based compensation expense	—	—		—	—		1,955		—		—		1,955
Unrealized gain on investments	—	—		—	—				—		—		—
Net loss	—	—		—	—				—		(23,041)		(23,041)
Balance-March 31, 2020	—	$	—	32,321,208	$	32	$	261,206	$	—	$	(221,894)	$	39,344

See accompanying notes to condensed consolidated financial statements.

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Evelo Biosciences, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited, in thousands, except share amounts)


	Three Months Ended March 30, 2019
	Preferred Stock				Common Stock						Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit	Total
	Shares	Amount		Shares	Amount
Balance-December 31, 2018	—	$	—	31,825,769	$	32	$	250,316	$	(18)	$	(113,381)	$	136,949
Vesting of restricted common stock	—	—		23,345	—		7		—		—		7
Exercise of stock options	—	—		181,521	—		257		—		—		257
Stock-based compensation expense	—	—		—	—		1,953		—		—		1,953
Unrealized gain on investments	—	—		—	—		—		16		—		16
Net loss	—	—		—	—		—		—		(20,299)		(20,299)
Balance-March 31, 2019	—	$	—	32,030,635	$	32	$	252,533	$	(2)	$	(133,680)	$	118,883

See accompanying notes to condensed consolidated financial statements.

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Evelo Biosciences, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	Three Months Ended March 31,
	2020		2019
Operating activities
Net loss	$	(23,041)	$	(20,299)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	1,955		1,953
Depreciation expense	491		375
Net (accretion of discount)/amortization of premium on marketable securities	—		(115)
Non-cash interest expense	50		28
Non-cash lease expense	627		—
Gain on sale of fixed assets, net	(3)		—
Changes in assets and liabilities:
Prepaid expenses and other current assets	298		(221)
Accounts payable	565		97
Accrued expenses and other current liabilities	146		185
Operating lease liabilities	(624)		—
Other liabilities	21		4
Net cash used in operating activities	(19,515)		(17,993)
Investing activities
Proceeds from sales and maturities of investments	—		31,000
Purchases of property and equipment	(435)		(876)
Proceeds from sale of fixed assets	6		—
Net cash (used in)/provided by investing activities	(429)		30,124
Financing activities
Proceeds from the exercise of stock options	226		258
Net cash provided by financing activities	226		258
Net (decrease) increase in cash, cash equivalents and restricted cash	(19,718)		12,389
Cash, cash equivalents and restricted cash – beginning of period	79,333		94,351
Cash, cash equivalents and restricted cash – end of period	$	59,615	$	106,740
Supplemental disclosure of cash flow information
Cash paid for interest	$	437	$	215
Noncash investing and financing activities
Property and equipment additions in accounts payable and accrued expenses	$	406	$	172

See accompanying notes to the condensed consolidated financial statements.

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EVELO BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Organization

Evelo Biosciences, Inc. ("Evelo" or the "Company”) is a biotechnology company which was incorporated in Delaware on May 6, 2014. The Company is discovering and developing oral biologics designed to act on cells in the small intestine with systemic therapeutic effects. The Company is advancing these oral biologics with the aim of treating a broad range of immune mediated diseases with an initial focus on inflammatory diseases and oncology. The Company is headquartered in Cambridge, Massachusetts.

Since inception, the Company has devoted substantially all of its efforts to research and development and raising capital. The Company has not generated any revenue related to its primary business purpose to date. The Company is subject to a number of risks similar to those of other development stage companies, including dependence on key individuals, the need to develop commercially viable products, competition from other companies, many of whom are larger and better capitalized, and the need to obtain adequate additional financing to fund the development of its products.

The Company has incurred operating losses since inception and expects such losses and negative operating cash flows to continue for the foreseeable future. The Company historically has funded its operations from the issuance of convertible notes, convertible preferred stock and common stock, and through debt financings. At March 31, 2020, the Company had cash and cash equivalents of $58.1 million and an accumulated deficit of $221.9 million.

Going Concern

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), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are issued. The transition to profitability is dependent upon the successful development, approval, and commercialization of its products and product candidates and the achievement of a level of revenues adequate to support its cost structure. Based on the Company’s current operating plan, the Company believes that its cash and cash equivalents at March 31, 2020 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 the Company will need to obtain additional funding. The Company intends to pursue strategic partnerships and collaborations, or obtain additional funding through its available financing sources which include, additional public offerings of common stock and private financing of debt or equity. Management’s belief with respect to its ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, the Company may need to seek additional funding sooner than would otherwise be expected. There can be no assurance that the Company will be able to obtain additional funding on acceptable terms, if at all. If the Company is unable to obtain sufficient funding, it could be required to delay its development efforts, limit activities and reduce research and development costs, which could adversely affect its business prospects. Because of the uncertainty in securing additional funding and the insufficient amount of cash and cash equivalent resources at March 31, 2020, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are issued.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standard Codification (“ASC”) and ASU of the FASB. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended

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December 31, 2019 and notes thereto. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments which are necessary to present fairly the Company’s financial position as of March 31, 2020, the results of its operations and stockholders' equity for the three months ended March 31, 2020 and 2019 and cash flows for the three months ended March 31, 2020 and 2019. Such adjustments are of a normal and recurring nature. The results for the three months ended March 31, 2020 are not necessarily indicative of the results for the year ending December 31, 2020, or for any future period.

Use of Estimates

The preparation of 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, the accrual of research and development expenses and the valuation of stock-based awards. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned, controlled subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Subsequent Event Considerations

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the unaudited condensed consolidated financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and determined that there are no material recognized or unrecognized subsequent events requiring disclosure in this Quarterly Report on Form 10-Q.

Emerging Growth Company Status

Evelo is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and it may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Evelo may take advantage of these exemptions until it is 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. Evelo has elected to use the extended transition period for complying with new or revised accounting standards, and, as a result of this election, its consolidated financial statements may not be comparable to companies that comply with public company effective dates. Evelo may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of its IPO or such earlier time that it is no longer an emerging growth company. Evelo would cease to be an emerging growth company if it has more than $1.07 billion in annual revenue, it has more than $700.0 million in market value of its stock held by non-affiliates (and has been a public company for at least 12 months and has filed one annual report on Form 10-K), or it has issued more than $1.0 billion of non-convertible debt securities over a three-year period.

Comprehensive Loss

Comprehensive loss includes net loss and certain changes in stockholders’ equity that are excluded from net loss. The Company's only element of other comprehensive income (loss) is unrealized gains and losses on available-for-sale investments. Comprehensive loss totaled $20.3 million for the three months ended March 31, 2019. For the three months ended March 31, 2020 comprehensive loss was $23.0 million and equaled net loss.

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Cash, Cash Equivalents, and Restricted Cash

Cash equivalents are comprised of highly liquid investments that are readily convertible into cash with original maturities of three months or less. Cash and cash equivalents include cash held in banks and amounts held in money market funds. Cash equivalents are stated at cost, which approximates market value. The Company’s restricted cash consists of restricted cash in connection with building leases for the Company’s office and laboratory premises and deposits held in relation to the company's credit card facility. Restricted cash totaled approximately $1.5 million at March 31, 2020 and December 31, 2019, and is classified within other assets on the accompanying condensed consolidated balance sheet. The following reconciles cash, cash equivalents and restricted cash as of March 31, 2020 and December 31, 2019, as presented on the Company's statements of cash flows, to its related balance sheet accounts (in thousands):


	March 31, 2020		December 31, 2019
Cash and cash equivalents:
Cash	$	7,618	$	1,634
Money market funds	50,497		76,199
Total cash and cash equivalents	58,115		77,833
Restricted cash	1,500		1,500
Cash, cash equivalents and restricted cash	$	59,615	$	79,333

Fair Value of Financial Instruments

ASC 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.

ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following:

•Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

•Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

•Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

An entity may choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company did not elect to measure any additional financial instruments or other items at fair value.

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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 such as payroll, consulting, and manufacturing costs associated with the development of the Company’s 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 the Company by its 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 from the pattern of costs incurred, and are reflected on the consolidated balance sheets 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. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

The Company has and may continue to acquire the rights to develop and commercialize new product candidates from third parties. The upfront payments to acquire license, product or rights, as well as any future milestone payments, are immediately recognized as research and development expense provided that there is no alternative future use of the rights in other research and development projects. Any milestone payments made for Intellectual Property after regulatory approval, or that have alternative future use, are capitalized and amortized.

Stock-Based Compensation

The Company records stock-based compensation for options granted to employees and directors based on the grant date fair value of awards issued. The expense is recorded over the requisite service period, which is the vesting period, on a straight-line basis. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by the Company’s common stock price, as well as a number of other assumptions. The Company records forfeitures as they occur.

The Company accounts for stock-based compensation arrangements with non-employees based upon the fair value of the consideration received or the equity instruments issued, whichever is more reliably measurable. The measurement date for non-employee awards is generally the date performance of services required from the non-employee is complete. Stock-based compensation costs for non-employee awards are recognized as services are provided, which is generally the vesting period, on a straight-line basis.

Segments

The Company has one operating segment. The Company's chief operating decision maker, its Chief Executive Officer, manages the Company's operations on a consolidated basis for the purposes of allocating resources.

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Recently Adopted Accounting Pronouncements

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes the guidance in former ASC 840, Leases. The new accounting guidance requires recognition of all long-term lease assets and lease liabilities by lessees and sets forth new disclosure requirements for those lease assets and liabilities. It requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements for all leases with a term of greater than 12 months regardless of classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The FASB subsequently issued several ASUs amending the new standard. This guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018 for most public entities. The Company adopted this new standard on January 1, 2020 using the required modified retrospective approach and utilizing the effective date as its date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840.

ASU 2016-02 provides a number of optional practical expedients in transition. The Company elected to adopt the 'package of practical expedients', which permits the Company (i) not to reassess whether expired existing contracts are or contain leases, (ii) not to reassess the classification of expired or existing leases, and (iii) not to reassess initial direct costs for any existing leases. The Company will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases using classification criteria that are substantially similar to the previous guidance. Adoption of this standard resulted in the recognition of a right-of-use asset and a lease liability on the Company’s January 1, 2020 condensed consolidated balance sheet of $12.7 million and $13.9 million, respectively. There was no material impact resulting from the adoption on the Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2020. For leases with terms greater than 12 months, the Company records the related right-of-use asset and lease liability at the present value of lease payments over the term. As the Company’s leases do not provide readily determinable implicit interest rates, the Company utilized its incremental borrowing rate, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. In transition to ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rates. The application of the new standard required netting of unamortized balance of lease incentives and deferred lease obligation to the right-of-use asset at the adoption date. The Company’s operating leases include rental escalation clauses that are factored into the determination of lease payments when appropriate. The Company does not separate lease and non-lease components of contracts. Refer to Note 3, Leases within these unaudited condensed consolidated financial statements for additional information.

Share-Based Compensation

In June 2018, the FASB issued ASU No. 2018-07, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting (Topic 718) ("ASU 2018-07"), which amends the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. Entities will apply the ASU by recognizing a cumulative-effect adjustment, if any, to retained earnings as of the beginning of the annual period of adoption. The Company adopted ASU 2018-07 on January 1, 2020. The adoption of this standard did not have a material impact on its condensed consolidated financial statements.

Accounting Pronouncements Issued and Not Adopted as of March 31, 2020

Income Taxes

In December 2019, the FASB issued ASU No. 2019 -12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new standard includes several provisions which simplify accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and increasing consistency and clarity for the users of financial statements. This standard will be effective for the Company on January 1, 2021. Early adoption is permitted. The Company is currently evaluating the potential impact ASU 2019-12 may have on its financial position and results of operations upon adoption.

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3. Leases

In January 2018, the Company entered into an operating sublease arrangement to lease approximately 40,765 square feet for its office and research development space at 620 Memorial Drive, Cambridge, MA 02139 from February 2018 to September 2025. The Company maintains an additional separate operating lease for office and laboratory space that is scheduled to expire in 2020. The leases require security deposits, which the Company has primarily met with letters of credit from a financial institution that are secured with cash on deposit.

In June 2018, the Company entered into a sublease arrangement with a third party to lease space subject to an operating lease that expired in April 2020. The minimum rental payments received under this agreement totaled $0.1 million and were equivalent to the minimum payments due from the Company to the landlord.

The Company recorded rent expense of $0.7 million for both the three months ended March 31, 2020 and 2019. Rent expense for each of the three months ended March 31, 2020 and 2019 is net of sublease rental income of $0.2 million.

The minimum aggregate future lease commitments, exclusive of any offsetting sublease rental payments, at March 31, 2020, are as follows (in thousands):


	Amount
2020 (excluding three month ended March 31. 2020)	$	2,251
2021	2,973
2022	3,062
2023	3,154
2024	3,249
Thereafter	2,491
Total lease payments	17,180
Less imputed interest	(3,923)
	$	13,257

Other information:
Operating cash flows used for operating leases	$	837
Weighted-average remaining lease term (in years)	5.5
Weighted-average discount rate	9.5		%

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4. Fair Value Measurements

The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value as of March 31, 2020 and December 31, 2019 (in thousands):


Description	March 31, 2020		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds included within cash and cash equivalents	$	50,497	$	50,497	$	—	$	—
Total	$	50,497	$	50,497	$	—	$	—


Description	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds included within cash and cash equivalents	$	76,199	$	76,199	$	—	$	—
Total	$	76,199	$	76,199	$	—	$	—

As of March 31, 2020 and December 31, 2019, the Company's cash equivalents have been initially valued at the transaction price and subsequently valued utilizing a third party pricing service. The Company validates the prices provided by its third-party pricing service by understanding the models used and obtaining market values from other pricing sources.

5. Property and Equipment, Net

Property and equipment consists of the following (in thousands):


	March 31, 2020		December 31, 2019
Property and equipment:
Lab equipment	$	8,082	$	7,479
Leasehold improvements	2,014		2,014
Furniture and fixtures	822		750
Computers and software	204		204
Office equipment	3		9
Construction-in-process	1,467		1,594
Property and equipment	12,592		12,050
Less: accumulated depreciation	(4,114)		(3,709)
Property and equipment, net	$	8,478	$	8,341

The Company recognized $0.5 million and $0.4 million of depreciation expense for the three months ended March 31, 2020 and 2019, respectively.

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6. Loan and Security Agreements

2016 Credit Facility

In 2016, the Company entered into a credit facility (the “2016 Credit Facility”) with a bank that allowed the Company to borrow up to $15.0 million. Borrowings under the 2016 Credit Facility were secured by a lien on all Company assets, excluding intellectual property.

Prior to 2018, a total of $10.0 million was drawn under the 2016 Credit Facility, and in February 2018, the Company drew the remaining $5.0 million available. This resulted in an increase to the interest rate to the higher of (i) prime plus 0.25% or (ii) 4.50% per annum and extended the interest only payment period through to August 15, 2019. Upon the expiration of the interest only period, amounts borrowed would have been repayable over 24 equal monthly payments of principal plus interest accrued through August 15, 2021. The Company had the ability to prepay the outstanding balance of the 2016 Credit Facility at its option with a prepayment fee of 2% of principal amount if prepayment was made before August 15, 2018 or 0.5% if the prepayment was made between August 15, 2018 and August 15, 2019.

In conjunction with the February 2018 drawdown, the Company issued a warrant to purchase up to 34,722 shares of the Company’s Series B preferred stock at an exercise price of $1.80 per share. As part of the February 2018 drawdown, the loan and security agreement was amended to include the payment of a $0.3 million success fee to the financial institution in the event of a liquidation event, including an initial public offering. The success fee represented an embedded derivative which the Company bifurcated from the debt arrangement and carried at fair value. In May 2018, the Company completed its initial public offering (the "IPO") and paid the success fee of $0.3 million. In addition, the warrant issued in February 2018 was exercised in May 2018.

The 2016 Credit Facility contained negative covenants restricting the Company’s activities, including limitations on cash deposits, dispositions, mergers or acquisitions, incurring indebtedness or liens, paying dividends or making investments and certain other business transactions. There were no financial covenants associated with the agreement.

2019 Credit Facility

On July 19, 2019, the Company entered into a loan and security agreement (as amended, the "2019 Credit Facility") with K2 HealthVentures LLC and others (collectively, "K2HV") pursuant to which the K2HV agreed to make term loans in an aggregate principal amount of up to $45.0 million available to the Company in three tranches. The initial tranche of $20.0 million was funded upon closing on July 19, 2019. The second tranche of $10.0 million is available to be funded at the Company's election between December 1, 2019 and June 1, 2020, subject to certain customary conditions. The third tranche of $15.0 million is available to be funded at the Company's election on or before January 15, 2021, subject to certain customary conditions and the achievement of certain clinical development milestones. Borrowings under the 2019 Credit Facility are collateralized by substantially all of the Company's personal property, excluding intellectual property, and the Company pledged its equity interests in its subsidiaries, subject to certain limitations with respect to its foreign subsidiaries.

Interest on the outstanding loan balance will accrue at a variable annual rate equal to the greater of (i) 8.65% and (ii) the prime rate plus 3.15%. The Company is required to make interest-only payments on the loans on a monthly basis through February 28, 2022. If the Company elects to draw the third tranche, the interest-only period will be extended through August 31, 2022. Subsequent to the interest only periods, the Company is required to make equal monthly payments of principal plus interest until the loans mature on August 1, 2024. Upon final payment or prepayment of the loans, the Company must pay a final payment equal to 4.3% of the loans borrowed, which is being accrued to interest expense over the term of the loan using the effective-interest method. The Company incurred fees associated with establishing the 2019 Credit Facility of $0.4 million. The Company has an option to prepay the loans in whole, subject to a prepayment fee of 2% of the amount prepaid or, if the prepayment occurs after the 18-month anniversary of the funding date of the loans, 1% of the amount prepaid.

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The 2019 Credit Facility contains customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches of covenants, change of control and occurrence of a material adverse effect. The Company has determined that the risk of subjective acceleration under the material adverse events clause was remote and therefore has classified the long-term portion of the outstanding principal in non-current liabilities. Upon the occurrence and continuation of an event of default, a default interest rate of an additional 5% per annum may be applied to the outstanding loan balances, and the administrative agent, collateral agent, and lenders may declare all outstanding obligations immediately due and payable and exercise all of their rights and remedies as set forth in the 2019 Credit Facility and under applicable law. As of March 31, 2020, the Company was in compliance with all covenants under the 2019 Credit Facility.

The Company used the proceeds from the initial $20.0 million tranche to prepay the full $15.0 million loan balance outstanding under the 2016 Credit Facility on July 19, 2019.

The Company has the following minimum aggregate future loan payments at March 31, 2020 (in thousands):


Twelve month period ending March 31,	Amount
2021	$	1,754
2022	2,421
2023	9,376
2024	8,675
Thereafter	4,267
Total minimum payments	26,493
Less amounts representing interest and discount	(6,773)
Long-term debt	$	19,720

Interest expense related to the Company's 2016 Credit Facility was approximately $0.2 million for the three months ended March 31, 2019.

Interest expense related to the Company's 2019 Credit Facility was approximately $0.4 million for the three months ended March 31, 2020.

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7. In-License Agreements

Mayo Foundation for Medical Education and Research

On June 10, 2016, the Company entered into a Research and License Agreement, (the “2016 Mayo License Agreement”) with the Mayo Foundation for Medical Education and Research, an affiliate of Mayo Clinic (the “Mayo Clinic”). Under the 2016 Mayo License Agreement, the Mayo Clinic was entitled to certain participation rights in connection with the issuance and sale of Series B Preferred Stock. The 2016 Mayo License Agreement allowed the Mayo Clinic to purchase shares at the same price paid as other investors and is considered to be a fair value contract. In 2018, the Mayo Clinic purchased 1,666,667 shares of Series B Preferred Stock at $1.80 per share. Also pursuant to the 2016 Mayo License Agreement, the Mayo Clinic received 490 shares of common stock upon the completion of certain project milestones as well as warrants to purchase common stock (the “Mayo Warrants”) exercisable for 18 shares and 116 shares of common stock upon the completion of certain additional project milestones. The Mayo Warrants were fully vested and expensed in 2016. On April 9, 2018, the Mayo Clinic exercised its warrant and was issued 134 shares of common stock.

On August 6, 2017, the Company and the Mayo Clinic entered into a license agreement (“2017 Mayo License Agreement”). Under the 2017 Mayo License Agreement, the Mayo Clinic granted the Company (i) an exclusive, worldwide, sublicensable license under the Mayo Clinic’s rights to certain intellectual property and microbial strains (ii) a non-exclusive, worldwide, sublicensable license to certain related know-how, in each case, to develop and commercialize certain microbial strains and licensed products incorporating any such strains. As consideration, the Company paid a nonrefundable upfront fee of $0.2 million and annual license maintenance fees. Nonrefundable upfront fees were expensed in full to research and development expense in 2017. Annual maintenance fees will be expensed as incurred over the term of the agreement. The Company may owe the Mayo Clinic milestone payments upon the achievement of certain development, regulatory, and commercial milestones, up to a maximum of $56.0 million in the aggregate, as well as royalties on net sales of licensed products in low single-digit percentages. As of March 31, 2020, the Company has incurred milestone payments to date totaling approximately $0.2 million under the agreement of which no amounts are currently due.

University of Chicago

On March 10, 2016, the Company and the University of Chicago entered into a patent license agreement (“2016 University of Chicago Agreement”). Under the 2016 University of Chicago Agreement, the University of Chicago granted the Company (i) an exclusive, royalty-bearing and sublicensable license under the Licensed Patents and (ii) a non-exclusive, royalty-bearing, sublicensable license to access the technical information to diligently develop and commercialize Licensed Products. As consideration, the Company paid a nonrefundable upfront fee of less than $0.5 million and will pay annual license maintenance fees. Nonrefundable upfront fees were expensed in full to research and development expense in 2016. Annual maintenance fees will be expensed as incurred over the term of the agreement. The Company may owe the University of Chicago milestone payments, totaling an aggregate of approximately $60.9 million upon the achievement of certain development, regulatory, and commercial milestones, as well as royalties on net sales of licensed products ranging from low to high single-digit percentages. As of March 31, 2020, the Company has incurred milestone payments to date totaling approximately $0.4 million.

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8. Commitments and Contingencies

Collaboration Agreement with Sacco S.r.l.

In July 2019, the Company entered into an agreement with Sacco S.r.l. ("Sacco"), an affiliate of one of the Company’s existing contract manufacturing organizations, pursuant to which and subject to certain exceptions for pre-existing products for pre-existing customers, Sacco will manufacture and supply single strain, non-genetically modified microbes intended for oral delivery or oral use in pharmaceutical products exclusively for the Company 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 period of six consecutive months. The Company has agreed to pay Sacco an aggregate of €3.0 million, €0.6 million annually, during the exclusivity period. The Company has incurred milestone payments to date totaling approximately €0.6 million of which no amounts are currently due as of March 31, 2020.

Equipment Funding Arrangement

In July 2019, the Company entered into an arrangement with one of its external manufacturing partners providing the Company with priority access to future manufacturing services which will be rendered using certain dedicated equipment. In return for such access, the Company committed to provide funding for the purchase of the dedicated equipment in an aggregate amount of £0.8 million. An upfront payment of £0.4 million was paid in 2019 and any remaining amounts will be paid subject to the manufacturer's installation and qualification of the equipment, estimated to occur in 2020.

Agreement with Biose Industrie

On February 15, 2018, the Company entered into an agreement with Biose Industrie (“Biose”), a French corporation, in which Biose has agreed to exclusively manufacture certain microbial biotherapeutic products for the Company and reserve agreed upon manufacturing resources to conduct manufacturing runs for such products. Under the terms of this agreement, the Company agreed to annual fees in the mid-six digits in consideration of both exclusivity for the manufacture of monoclonal microbials and for a set minimum number of manufacturing runs per year. Exclusivity fees paid and any minimum commitments are expensed as incurred. At March 31, 2020, aggregate minimum payments over the remaining contract life total approximately $1.2 million.

Litigation and Other Proceedings

The Company may periodically become subject to legal proceedings and claims arising in connection with on-going business activities, including claims or disputes related to patents that have been issued or that are pending in the field of research on which the Company is focused. The Company is not a party to any material litigation and does not have contingency reserves established for any litigation liabilities.

In April 2019, the United States Patent and Trademark Office ("USPTO"), granted a third party petition to initiate a post-grant review of a patent issued to the University of Chicago, to which the Company has an exclusive license from the University of Chicago. In April 2020, the USPTO issued its decision in post-grant review, finding unpatentable all of the current claims in the patent. We are reviewing the decision and considering our options with respect of the patent, which include seeking narrower claims through re-issue or appeal. Importantly, the USPTO decision does not hinder the Company's ability to continue developing its oncology or other product candidates. Under the terms of our license agreement, the Company has been responsible for reimbursing the University of Chicago for patent defense costs.

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9. Stockholders’ Equity

Common Stock

On June 3, 2019, the Company filed a Registration Statement on Form S-3 (File No. 333-231911) (the “Shelf”) with the SEC in relation to the registration of common stock, preferred stock, debt securities, warrants and/or units of 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 the filing. The Company also simultaneously entered into a sales agreement with Cowen and Company, LLC, as sales agent, providing for the offering, issuance and sale by the Company of up to an aggregate $50.0 million of its common stock from time to time in “at-the-market” offerings under the Shelf. As of March 31, 2020, no securities have been issued pursuant to the sales agreement.

10. Stock-Based Compensation

2018 Incentive Award Plan

The Company’s board of directors adopted on April 18, 2018, and the Company’s stockholders approved, the 2018 Incentive Award Plan (the “2018 Plan”), which became effective May 8, 2018 and under which the Company may grant cash and equity-based incentive awards to the Company’s employees, officers, directors, consultants and advisors. Following the effectiveness of the 2018 Plan, the Company ceased making grants under the 2015 Stock Incentive Plan (as amended, the "2015 Plan"). The 2018 Plan initially allowed the Company to grant awards for up to 1,344,692 shares of common stock plus that number of shares of common stock subject to awards outstanding under the 2015 Plan that expire, lapse or become terminated or are exchanged for cash, surrendered, repurchased, canceled without having been fully exercised or forfeited following the effective date of the 2018 Plan. Each year starting with 2019 and ending in and including 2028, the number of shares available for grants of awards under the 2018 Plan will be increased automatically on January 1 by a number of shares of common stock equal to the lesser of 4% of the shares of common stock outstanding on the final day of the preceding calendar year or the number of shares determined by the Company’s board of directors. Accordingly, on January 1, 2019, the number of shares authorized for issuance under the 2018 Plan was increased by 1,273,031 shares, and on January 1, 2020 this number was further increased by 1,286,824 shares. The 2015 Plan continues to govern the terms and conditions of the outstanding awards granted under it.

The exercise price of stock options granted under the 2018 Plan is not less than the fair market value of a share of the Company’s common stock on the grant date. Other terms of awards, including vesting requirements, are determined by the board of directors and are subject to the provisions of the 2018 Plan. Stock options granted to employees generally vest over a four-year period but may be granted with different vesting terms. Certain options provide for accelerated vesting in the event of a change in control. Awards granted to non-employee consultants generally vest monthly over a period of one to four years. Stock options granted under the 2018 Plan expire no more than 10 years from the date of grant. As of March 31, 2020, equity-based incentive awards covering up to 3,573,326 shares of the Company’s common stock have been issued under the 2018 Plan, of which 547,883 have been canceled and none have been exercised. As of March 31, 2020, 1,552,557 shares of common stock are available for future grant under the 2018 Plan, which includes 673,453 shares subject to awards that were originally granted, and have, since the effective date of the 2018 Plan, been canceled or repurchased under the 2015 Plan.

2015 Stock Incentive Plan

Prior to the approval of the 2018 Plan, the Company granted equity awards under the 2015 Plan, which originally provided for grant of incentive stock options, non-qualified stock options, restricted stock awards ("RSAs"), and other stock-based awards to the Company’s employees, officers, directors, consultants and advisors.

The terms of equity award agreements, including vesting requirements, were determined by the board of directors and are subject to the provisions of the 2015 Plan. Stock options granted to employees generally vest over a four-year period but may be granted with different vesting terms. A limited number of awards contain performance-based vesting criteria and for such awards that are deemed probable of vesting, the Company records expense in the period in which such determination is made through any estimated remaining vesting period. Certain options provide for accelerated vesting in the event of a change in control. Awards granted to non-employee consultants generally vest monthly over a period of one to four years. Stock options issued under the 2015 Plan expire no more than 10 years from the date of grant. As of the effectiveness of the 2018 Plan, the Company ceased making awards under the 2015 Plan.

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Under the 2015 Plan, the Company was authorized to grant equity awards up to an aggregate of 5,417,044 shares of common stock. As of March 31, 2020, an aggregate of 5,758,518 options and other equity awards had been granted under the 2015 Plan, of which 1,322,481 have been exercised, 1,109,462 have been canceled and 18,468 have been repurchased as of March 31, 2020. A total of 113,006 shares previously reserved under the 2015 Plan that had not been exercised or were otherwise subject to outstanding exercise awards were no longer authorized for issuance under the 2015 Plan as of May 8, 2018.

Stock-Based Compensation Expense

Stock-based compensation expense included in the Company’s condensed consolidated statements of operations and comprehensive loss is as follows (in thousands):


	Three Months Ended March 31,
	2020		2019
General and administrative	$	889	$	1,062
Research and development	1,066		891
Total stock-based compensation expense	$	1,955	$	1,953

Stock Options

A summary of the Company’s stock option activity and related information is as follows:


	Shares	Weighted- Average Exercise Price
Options outstanding at December 31, 2019	5,691,474	$	6.99
Granted	1,358,500	7.02
Exercised	(137,213)	1.65
Canceled	(560,730)	9.27
Options outstanding at March 31, 2020	6,352,031	$	6.91
Exercisable as of March 31, 2020	2,790,620	$	5.26

The weighted-average fair value of options granted during the three months ended March 31, 2020 and 2019 was $4.81 and $8.82, respectively.

As of March 31, 2020, total unrecognized stock-based compensation expense relating to unvested stock options was $19.1 million. This amount is expected to be recognized over a weighted average period of 2.87 years.

2018 Employee Stock Purchase Plan

The Company's board of directors adopted on April 18, 2018, and the Company’s stockholders approved, the 2018 Employee Stock Purchase Plan (the “ESPP”), which became effective on May 8, 2018. A total of 336,356 shares of common stock were initially reserved for issuance under the ESPP. In addition, the number of shares of common stock that may be issued under the ESPP will automatically increase on the first day of each calendar year, beginning in 2020 and ending in and including 2028, by an amount equal to the lesser of (i) 1% of the number of shares of the Company’s common stock outstanding on the last day of the applicable preceding calendar year and (ii) an amount determined by the Company’s board of directors. The Company's board of directors determined not to increase the number of shares that may be issued under the ESPP on January 1, 2020. The Company's board of directors has authorized an initial offering period under the ESPP commencing on February 1, 2020.

The compensation expense in connection with the ESPP was approximately $18.0 thousand for the three months ended March 31, 2020. There were no shares purchased under the ESPP during the three months ended March 31, 2020.

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11. Income Taxes

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using statutory rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. Due to losses incurred since inception and the uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has recorded a full valuation allowance against the Company’s otherwise recognizable net deferred tax assets.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. The CARES Act contains several key provisions including: (i) five year carryback of net operating losses (“NOLs”), (ii) increasing Section 163(j) from 30% limitation to 50% for 2019 and 2020, (iii) delay of payment of employer payroll taxes, (iv) temporary refundable employee retention credit, (v) suspension of certain aviation and alcohol excise taxes and (vi) technical correction for qualified improvement property. The CARES Act is not expected to have an impact on the Company's condensed consolidated financial statements.

For the three months ended March 31, 2020, the Company has recorded a tax provision of $0.1 million primarily related to the Company's wholly-owned UK subsidiary. There were no significant income tax provisions or benefits for the three months ended March 31, 2019.

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. The Company has computed diluted net loss per common share after giving consideration to all potentially dilutive common shares, including options to purchase common stock, issuance of common stock under the ESPP, restricted common stock, convertible preferred stock and warrants to purchase convertible preferred stock, outstanding during the period determined using the if-converted and treasury stock methods, except where the effect of including such securities would be antidilutive. Because the Company has reported net losses since inception, these potential common shares have been anti-dilutive and therefore basic and diluted net loss per share have been equivalent.

The following table presents securities that have been excluded from the computations of diluted weighted-average shares outstanding as they would be anti-dilutive:


	Three Months Ended March 31,
	2020	2019
Unvested common stock from early exercise of options	48,263	102,436
Stock options to purchase common stock	6,352,031	5,685,275
Common stock offering from ESPP	14,043	—
Total	6,414,337	5,787,711

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13. Related Party Transactions

The Company receives clinical advisory services from Weatherden Ltd. (“Weatherden”) under agreements that were entered into during 2017 and 2018. Duncan McHale, the Company’s Chief Medical Officer, is a part owner of Weatherden. During the three months ended March 31, 2020 and 2019, the Company paid Weatherden $0.2 million and $0.3 million, respectively. As of March 31, 2020 and 2019, the amounts due to Weatherden under the supply of service agreement were $0.1 million in both periods.

In June 2018, the Company entered into a subleasing arrangement with Ring Therapeutics (formerly VL46), an affiliate of one of its stockholders, Flagship Venture Funds. Under the terms of the sublease, the Company invoiced Ring Therapeutics for an aggregate $0.9 million in rent payments which were due during the period from July 1, 2018 through April 30, 2020 plus any related taxes and lease operating costs. For the three months ended March 31, 2020, $0.2 million related to this sublease agreement, inclusive of rent payments, taxes, and operating expenses, has been recorded as an offset to operating expense within the unaudited condensed consolidated statements of operations and comprehensive loss.

The Company entered into a consulting agreement with David Epstein (the "Consulting Agreement"), the Company's Chairman of the Board, effective September 16, 2019 pursuant to which Mr. Epstein will provide strategic advisory and other consulting services to the Company. The Consulting Agreement has a one year term and may be terminated earlier by either Mr. Epstein or the Company upon 30 days’ notice, or 24 hours’ notice by the non-breaching party in the event of a breach. In accordance with the terms of the Consulting Agreement, Mr. Epstein was granted an option to purchase 75,000 shares of the Company’s common stock, which award vests in 36 equal monthly installments subject to his continued provision of consulting services to the Company pursuant to the Consulting Agreement on the applicable vesting date. Under the Consulting Agreement, Mr. Epstein also is 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 the Company’s common stock having an aggregate grant date fair market value equal to approximately $0.2 million, as determined by the Board in its discretion based on customary option pricing methodologies, which award vests in full on the first anniversary of the grant date, subject to his continued provision of consulting services to the Company pursuant to the Consulting Agreement on the applicable vesting date, and (ii) an aggregate annual cash consulting fee of $0.3 million for his consulting services. All of the foregoing options, to the extent then outstanding, will be subject to accelerated vesting upon the occurrence of a change in control of the Company.

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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, 2019 (the "2019 Annual Report"), including the audited consolidated financial statements and notes thereto contained in our 2019 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.

Overview

Evelo Biosciences is discovering and developing a new class of orally delivered biologic medicines that are intended to act locally on cells in the small intestine to produce systemic therapeutic effects throughout the body The target cells in the small intestine play a central role in governing the immune, metabolic and neurological systems throughout the body. We refer to this relationship as the small intestinal axis, or SINTAX™. The importance of SINTAX as a therapeutic target has only recently become appreciated and we have built a platform to discover and develop novel oral biologics which target SINTAX. These therapeutics have the potential to be effective, safe and affordable medicines and to transform the treatment of major diseases, driving profound benefits to patients and society.

Our first product candidates are monoclonal microbials: orally delivered pharmaceutical compositions of naturally occurring, specific single strains of microbes. In preclinical models monoclonal microbials engage immune cells in the small intestine and drive changes in systemic biology without systemic exposure and without colonizing the gut. We have observed in preclinical studies that specific monoclonal microbials can downregulate or upregulate immune responses throughout the body by acting on SINTAX.

Impact of COVID-19

On March 11, 2020, the World Health Organization ("WHO") declared the COVID-19 outbreak a pandemic. The outbreak has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business closures and curtailments, and school closures.

Consistent with a Massachusetts state directive, as a biotechnology company, we currently continue to operate as an essential business. Notwithstanding our continued operations, the COVID-19 pandemic has had, and for an extended period of time could have, negative impacts on our operations and supply chain. Our ability to continue to operate without any significant negative impacts will in part depend on our ability to protect our employees and our supply chain. We have endeavored to follow recommended actions of government and health authorities to protect our employees with particular measures in place for those working in our laboratories, such as staggered work shifts, and flexible schedules and telecommuting for office workers. We are working with our contract manufacturing organizations to minimize delays and disruptions to scheduled manufacturing batch runs for our product candidates and to ensure conformity to product specifications.

The COVID-19 pandemic is impacting the enrollment of new patients into, and the retention of existing patients in, our on-going clinical trials, due primarily to certain clinical sites suspending recruitment and enrollment and lower patient participation. Two clinical sites in our ongoing Phase 1/2 clinical trial of EDP1503 have suspended patient recruitment because of the COVID-19 pandemic, and other clinical sites in this study may limit certain clinical study activities (e.g., biomarker testing) because of patient safety concerns. Our ongoing Phase 1b clinical trial of EDP1815 in individuals with mild to moderate psoriasis and atopic dermatitis has been minimally affected. We fully recruited two planned cohorts in March and April 2020, each with 24 individuals. Between these cohorts, only four individuals have dropped out due to COVID-19 related logistics. Due to impacts from the COVID-19 pandemic, we expect that initiation of upcoming trials in our inflammation program, including our Phase 2 dose-ranging study of EDP1815 in individuals with mild to moderate psoriasis and our first in human Phase 1b clinical trial of EDP1867,

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will each be delayed by at least one quarter relative to our previously provided timing guidance. In our ongoing Phase 1/2 clinical trial of EDP1503, we continue to recruit individuals in line with the local and national guidelines of the clinical research sites. We are keeping in close contact with our contract research organization ("CRO") and clinical sites to provide support and guidance to ensure the safety of the patients in our clinical trials. We have prioritized our drug supply operations to secure the re-supply of patients currently enrolled in our clinical trials.

Capital markets and worldwide economies have been significantly impacted by the COVID-19 pandemic and the measures governments have implemented to control the spread of the virus. Such disruption to capital markets and economies could have a material adverse effect on our ability to obtain additional funding, including public offerings of common stock and private debt or equity financings. In response, we have taken steps to reduce our spending to the extent consistent with our business priorities.

The extent to which the COVID-19 pandemic impacts our business and finances will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the pandemic, travel restrictions and social distancing 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 outbreak of the novel coronavirus disease, COVID-19, has 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.

Recent Clinical Developments

EDP1815

EDP1815 is a monoclonal microbial candidate for inflammatory diseases.

Psoriasis and atopic dermatitis

Phase 1b clinical trial in mild-moderate psoriasis and atopic dermatitis

In November 2018, we initiated our ongoing Phase 1b placebo-controlled dose-escalating safety and tolerability study of EDP1815 in healthy volunteers and individuals with mild to moderate psoriasis or atopic dermatitis. The primary endpoint of this trial is safety and tolerability. Prospectively defined secondary and exploratory endpoints include clinical measures of disease, cellular histological biomarkers and blood immune cell biomarkers taken from biopsies and blood samples, respectively, at the start and end of the 28-day dosing period. Safety and tolerability, and secondary clinical endpoints are also measured at day 42, two weeks after completion of dosing.

In August 2019, we reported positive interim data from this Phase 1b trial from an initial cohort of 12 individuals with mild to moderate psoriasis dosed once per day for 28 days with 550mg (low dose) of the enteric capsule formulation of EDP1815 or placebo. EDP1815 was well tolerated in this cohort with no overall difference reported from placebo.

At the end of the 28-day dosing period, individuals dosed with EDP1815 showed a reduction in mean LSS at 28 days of 2 points, on a 12-point scale (p<0.05), compared to a mean increase of 0.25 points in individuals who received placebo. Lesion Severity Score (“LSS") reductions over the dosing period of individuals dosed with EDP1815 ranged from 0-67 percent. LSS, a secondary endpoint, is a component of the Psoriasis Area and Severity Index ("PASI") and measures redness, thickness, and scaling of an individual psoriatic lesion and is a sensitive clinical measure for individuals with mild to moderate disease. Trends consistent with the LSS reductions were observed in the reduction of the PASI scores in individuals treated with EDP1815 compared to individuals treated with placebo.

In November 2019, we reported additional positive interim clinical data from this ongoing Phase 1b trial in a cohort of 18 individuals with mild to moderate psoriasis who were randomized 2:1 to receive a daily dose of 2.76g (high dose) of the enteric capsule formulation of EDP1815 or placebo for 28 days.

EDP1815 continued to be well tolerated in this cohort, with no overall difference reported from placebo. At the end of the 28-day dosing period, the high dose cohort showed a mean reduction in LSS consistent with previously reported data from the low dose cohort.

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Two weeks following the completion of the dosing period, at day 42, the high dose cohort showed continued reductions from baseline in both mean LSS and PASI, which may be indicative of sustained clinical activity and dose response.

A summary of the LSS and PASI results are shown in the tables below.

Mean (+/-SE) Percentage Change in LSS vs. Start of Dosing Period ⁽¹⁾


	n	At end of 28-day dosing period	At day 42
Placebo ⁽²⁾	10	0.6% (9.0%)	-7.2% (6.2%)
EDP1815 (high dose)	12	-15.1% (6.4%)	-24.1% (7.1%)
EDP1815 (low dose)	8	-22.8% (9.9%)	-9.0% (12.7%)

Mean (+/-SE) Percentage Change in PASI vs. Start of Dosing Period ⁽¹⁾


	n	At end of 28-day dosing period	At day 42
Placebo⁽²⁾	10	-1.0% (13.2%)	-3.3% (14.8%)
EDP1815 (high dose)	12	-16.0% (8.1%)	-20.7% (8.2%)

Note:

⁽¹⁾ This study was not sufficiently powered to detect statistically significant differences in clinical effect between treatment groups.

⁽²⁾ Represents the combination of placebo arms for the low dose (n=4) and high dose (n=6) cohorts

A range of histological and molecular biomarkers were measured in the low dose and high dose cohorts, with trends in line with the clinical activity of EDP1815 observed in the low dose cohort. In March 2020, we reported a detailed analysis of this biomarker data that highlights the individual inflammatory cytokines and chemokines that were modulated. EDP1815 caused a pronounced downward shift in production of interleukin 6 (“IL-6”) and interleukin 8 (“IL-8”) in the blood of individuals with psoriasis compared to placebo during the 28-day dosing period. Similar, slightly less pronounced reductions were seen for tissue necrosis factor alpha ("TNFα") and interleukin 1 beta ("IL-1β"). The results for IL-6 and IL-8 are shown in the waterfall plots below.

https://cdn.kscope.io/9778d3d32efdb737957419b2c76e1be4-evlo-20200331_g1.jpg

Blood samples were taken at baseline and after 28 days of daily oral administration of EDP1815 (n=20) or placebo (n=18) from patients in our ongoing clinical study in mild to moderate psoriasis. Whole blood was incubated with a broad inflammatory activator, lipopolysaccharide (LPS). 6 cytokines were reliably measured in this assay. The waterfall plots show the difference between the baseline value and after 28 days of treatment. All patients from both low and high dose EDP1815 cohorts are shown

In March 2020, we initiated dosing in two additional cohorts in our ongoing Phase 1b trial to test an alternative formulation of EDP1815. One cohort included 24 individuals with mild to moderate psoriasis who were randomized 2:1 to receive a daily dose of 2.76g of the alternative formulation of EDP1815 or placebo for 28 days. 22 individuals,

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15 receiving EDP1815 and seven receiving placebo, completed this study, while two individuals dropped out due to COVID-19 logistics. Interim data from this cohort did not show an impact on LSS or PASI score. Based on these data, we are discontinuing development of the alternative formulation in mild to moderate psoriasis.

The other cohort included 24 individuals with mild to moderate atopic dermatitis who were randomized 2:1 to receive a daily dose of 2.76g of the alternative formulation of EDP1815 or placebo for 28 days. To date, 21 individuals, 16 receiving EDP1815 and five receiving placebo have completed this study, while two individuals have dropped out due to COVID-19 logistics. Interim data from this cohort did not show an impact on the Eczema Area and Severity Index (“EASI”) score or the Scoring Atopic Dermatitis (“SCORAD”) score, in line with the alternative formulation in psoriasis data. Further evaluation of the potential of EDP1815 in atopic dermatitis will be conducted using the enteric capsule formulation, as positive clinical data was observed in psoriasis with this formulation.

KLH immunopharmacology

As a further direct translational test of the immunopharmacology of EDP1815, an antigen challenge model was investigated in healthy human volunteers. This is a human equivalent of the delayed-type hypersensitivity preclinical model. 20 volunteers were immunized with keyhole limpet hemocyanin (KLH) and dosed with either 2.7g of the enteric capsule formulation of EDP1815 (n=16) or placebo (n=4) daily for 28 days. An immune reaction was induced by challenge with an intradermal injection of KLH on the arm at day 27. Inflammation 24 hours after intradermal KLH challenge was determined by measuring basal blood flow using laser speckle contrast imaging. EDP1815 resulted in a greater than 15-fold reduction in the inflammatory reaction, compared to placebo (n=24, combination of placebo arms from multiple cohorts); a reduction in the inflammatory response of over 90%. EDP1815 reduced basal blood flow close to the pre-challenge baseline, consistent with effects seen preclinically and confirming the anti-inflammatory activity of EDP1815 in the enteric capsule formulation.

Planned Phase 2 clinical trial in mild-moderate psoriasis

We plan to advance EDP1815 into a Phase 2 dose ranging study, evaluating three doses of EDP1815 in the enteric capsule formulation versus placebo in approximately 225 individuals with mild to moderate psoriasis. The primary endpoint of the trial will be the mean reduction in PASI score at 16 weeks. Other clinical measures of psoriasis will also be evaluated. We expect to initiate the Phase 2 clinical trial in the third quarter of 2020, and to announce interim data in the middle of 2021. This updated guidance reflects a one quarter delay due to the current and anticipated impact of the COVID-19 pandemic on clinical site initiation and patient recruitment. Clinical data from this trial may enable us to advance directly into Phase 3 registrational trials in 2021, subject to end of Phase 2 discussions with regulatory agencies.

We intend to evaluate EDP1815 in additional inflammatory disease indications, depending on the results from the interim data analysis of the Phase 2 trial. Potential indications include psoriatic arthritis, axial spondylarthritis and rheumatoid arthritis.

COVID-19

Biomarker data from the Phase 1b clinical trial of EDP1815 in psoriasis suggest the potential of EDP1815 in the treatment of COVID-19. We believe that the effect of EDP1815 on systemic IL-6, IL-8, TNFα and IL-1β reduction previously observed is notable given the emerging evidence of the potential role of these immune factors in driving pathogenic effects and lung damage following infection with a range of viruses including influenza, coronaviruses (SARS, MERS and SARS-CoV-2) and respiratory syncytial virus.

Tissue damage following infection with COVID-19 appears to be due to an emergent excess host immune response. Approximately seven days after SARS-CoV-2 infection, the host immune system starts to become a driver of disease symptoms and, in some individuals, an exaggerated inflammatory response has been observed. This cytokine storm and hyperinflammation can lead to lung and sometimes multi-organ damage. The development of these severe complications e.g. acute respiratory distress syndrome (“ARDS”) can be independent of high-titer viral replication. The immune and inflammatory response in affected lungs includes production of high levels of IL-6, TNFα and IL-1β, and an influx of neutrophils and cytotoxic T cells.

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Based on data from our Phase 1b clinical study in psoriasis, EDP1815 may have the potential to modulate multiple immune pathways, including those associated with a cytokine storm, to resolve hyperinflammation without causing complete immunosuppression. Early intervention in the disease process could prevent and/or reduce COVID-Related Complications (“CRC”) leading to lower morbidity and mortality and reduced demands on healthcare systems. We believe the tolerability of EDP1815 observed in our Phase 1b clinical trial potentially makes it well-suited for early intervention in this host-mediated disease process.

In May 2020, in conjunction with the Robert Wood Johnson University Hospital and the Rutgers University, we announced the submission of an Investigational New Drug (IND) application for a Phase 2 double-blind, placebo-controlled clinical trial evaluating the safety and efficacy of EDP1815 for the treatment of individuals diagnosed with COVID-19 early in the course of their disease. The trial initially will evaluate 60 individuals to determine if early intervention with EDP1815 can prevent the progression of COVID-19 symptoms and the development of CRC. Individuals who have presented at the emergency room of the Robert Wood Johnson University Hospital within the last 36 hours and tested positive for SARS-CoV-2 will be randomized 1:1 to receive the enteric capsule formulation of EDP1815 or placebo for 14 days, along with the standard of care. The primary endpoint will be reduced requirements for oxygen therapy, as measured by the ratio of oxygen saturation (SpO2) / fraction of inspired oxygen (FiO2). Key secondary endpoints will include total symptom duration, progression along the WHO scale of disease severity, and mortality. Data from the trial are expected during the second half of 2020.

If EDP1815 is successfully developed and approved as a treatment for COVID-19, we believe that we could rapidly scale the manufacturing of EDP1815 to supply the drug at a reasonable cost. If approved and proven effective for early intervention, we expect that oral EDP1815 could also be used in the outpatient setting to control the community impact of the COVID-19 pandemic. If the Phase 2 trial is successful in COVID-19, we plan to investigate EDP1815 as a potential therapy for other diseases, such as influenza infection, in which hyperinflammation and cytokine storm can play a key role.

EDP1867

EDP1867 is a non-replicating monoclonal microbial candidate for inflammatory diseases. EDP1867 was selected from a broad screen of single strains of microbes in in vitro cellular assays and in vivo models of inflammation. In preclinical studies EDP1867 was shown to resolve TH2-dependent inflammation which underlies atopic diseases and a large spectrum of asthma. We plan to initiate clinical studies in individuals with atopic dermatitis or asthma. We expect to initiate our first Phase 1b clinical trial of EDP1867 in the first quarter of 2021, reflecting a one quarter delay to previous guidance due to the current and anticipated impact of the COVID-19 pandemic on clinical site initiation and patient recruitment.

EDP1503

In December 2018, we initiated our ongoing Phase 1/2 open-label clinical trial of EDP1503 in combination with KEYTRUDA (pembrolizumab), Merck's anti-PD-1 therapy, in three cohorts of individuals: microsatellite stable colorectal cancer; triple-negative breast cancer; and individuals with multiple tumor types who have relapsed on prior PD-1/L1 inhibitor treatment. This trial is designed to evaluate the safety and tolerability, immune response markers and overall response rates achieved with EDP1503 in combination with KEYTRUDA.

In November 2019, we announced that the microsatellite stable colorectal cancer ("CRC") cohort has been fully recruited. Several individuals in this cohort have shown extended stable disease although no formal clinical responses according to RECIST criteria (objective response rate) have been evident. Cellular infiltration biomarker changes were also observed in tumor biopsies taken from these individuals during the EDP1503 monotherapy period, which we believe are consistent with preclinical observations for EDP1503.

We have decided to prioritize the development of EDP1503 for the treatment of triple negative breast cancer (“TNBC”) with a high dose regimen, based on early clinical response data with this regimen. A total of 61 individuals have been enrolled into this study across the three cohorts. Individuals in this trial have received either four capsules twice daily (high dose) or two capsules twice daily of the enteric capsule formulation of EDP1503, in combination with pembrolizumab. Future recruitment in this trial will focus on individuals with TNBC and they will receive the high dose of EDP1503. We expect to announce data from the TNBC cohort in the second half of 2020. Initial safety analyses have been performed on all three cohorts, and the CRC and TNBC cohorts have passed prespecified futility criteria. Because of the range of tumor types included within the PD-1/L1 relapsed cohort, we did

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not include a futility analysis for this cohort in the study protocol. We continue to monitor individuals in the three cohorts who remain on study.

In January 2019, the University of Chicago initiated a Phase 2a investigator-sponsored clinical trial of EDP1503 in combination with KEYTRUDA in individuals with melanoma. The University of Chicago plans to enroll up to 70 individuals who are PD-1-naïve and PD-1-relapsed melanoma in this trial which is designed to evaluate the safety, tolerability and overall response rates achieved with EDP1503 in combination with KEYTRUDA. Additionally, the University of Chicago will evaluate immune response markers from biopsies taken during the study. We are not issuing guidance related to this investigator-sponsored trial.

Recent Financing Activities

Since our incorporation in 2014, we have devoted substantially all of our resources to developing our clinical and preclinical candidates, building our intellectual property portfolio and process development and manufacturing function, business planning, raising capital and providing general and administrative support for these operations.

We are a development stage company and have not generated any revenue. All of our product candidates are in early clinical or preclinical development. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. Since our inception, we have incurred significant operating losses and we continue to incur significant research and development and other expenses related to our operations. For the three months ended March 31, 2020, our net loss was $23.0 million. As of March 31, 2020, we had an accumulated deficit of $221.9 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 proof of concept trials for EDP1815 and EDP1503;

•initiate additional clinical trials for EDP1815 and EDP1867, including the Phase 2 clinical trial of EDP1815 in patients with COVID-19;

•initiate or advance the clinical development of any additional monoclonal microbial 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 research and development employees and employee-related expenses including salaries, benefits, travel and stock-based compensation expense; and

•seek to obtain regulatory approvals for our product candidates.

In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution.

As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.

Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or

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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.

As of March 31, 2020, our principal source of liquidity is cash and cash equivalents, which totaled approximately $58.1 million. We expect that our existing cash and cash equivalents, along with the capacity to borrow an additional $10.0 million under the 2019 Credit Facility, will enable us to fund our planned operating expenses and capital expenditure requirements into the first quarter of 2021. We have based these estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. See “Liquidity and Capital Resources."

Based on our current operating plan, we believe we do not have sufficient cash and cash equivalents on hand to support current operations for at least one year from the date of issuance of the financial statements appearing within this Quarterly Report on Form 10-Q. To finance our operations beyond that point, we will need to raise additional capital. There can be no assurance that we will be able to obtain additional funding on acceptable terms, if at all. We have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern for at least one year from the date that our unaudited condensed consolidated financial statements for the three months ended March 31, 2020 were issued. As such, we plan to seek to raise capital from time to time this year through future equity financings, debt financings or partnerships to fund our future operations and remain as a going concern. To the extent that we raise additional capital through future equity offerings, the ownership interest of common stockholders will be diluted, which dilution may be significant. See Note 1 of the notes to our unaudited condensed consolidated condensed financial statements in this Quarterly Report on Form 10-Q for additional information on our assessment.

Financial Operations Overview

Revenue

We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. If our development efforts for our current product candidates or additional product candidates that we may develop in the future are successful and result in marketing approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements.

Operating Expenses

Our operating expenses since inception have consisted primarily of research and development activities and general and administrative costs.

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 contract manufacturing organizations ("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;

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•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, even when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

Our primary focus of research and development since inception has been building a platform to enable us to develop medicines based on an understanding that cells in the small intestine play a central role in governing the immune, metabolic and neurological systems and to show potential clinical utility. Our platform and program expenses consist principally of costs, such as preclinical research, clinical and preclinical manufacturing activity costs, clinical development costs, licensing expenses as well as an allocation of certain indirect costs, facility costs and depreciation expense. We do not allocate personnel costs, which primarily include salaries, discretionary bonus and stock-based compensation costs, as such costs are separately classified as research and development personnel costs.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we continue to implement our business strategy, continue our ongoing clinical trials for our product candidates, including EDP1815 and EDP1503, initiate additional clinical trials, including EDP 1867, continue to discover and develop additional product candidates, seek regulatory approvals for any products that successfully complete clinical trials, build manufacturing capabilities, hire additional research and development personnel, and expand into additional therapeutic areas.

At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales or licensing of our product candidates. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of:

•our ability to add and retain key research and development personnel;

•our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates;

•our successful enrollment in and completion of clinical trials;

•any delays in clinical trials as a result of the COVID-19 pandemic;

•the costs associated with the development of our current product candidates and/or any additional product candidates we identify in-house or acquire through collaborations;

•our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the impact on disease progression of our product candidates;

•our ability to establish an appropriate safety profile with IND-enabling toxicology studies;

•our ability to establish and maintain agreements with third-party manufacturers and other entities for clinical trial supply and future commercial supply, if our product candidates are approved;

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•the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;

•our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved;

•our receipt of marketing approvals from applicable regulatory authorities;

•our ability to commercialize products, if and when approved, whether alone or in collaboration with others; and

•the continued acceptable safety profiles of the product candidates following approval.

A change in any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We expect our research and development expenses to increase at least over the next several years as we continue to implement our business strategy, advance our current programs, expand our research and development efforts, seek regulatory approvals for any product candidates that successfully complete clinical trials, identify and develop additional product candidates and incur expenses associated with hiring additional personnel to support our research and development efforts.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; and facility-related expenses, which include depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our product candidates. We also expect to incur increased expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs and investor and public relations costs.

Interest Income (Expense), Net

Interest income (expense), net primarily consists of interest earned on our cash, cash equivalents balances offset by interest expense incurred on our debt. During each of the three months ended March 31, 2020 and 2019, interest income (expense), net consisted primarily of interest earned on institutional money market instruments and U.S. treasury securities offset by interest at the stated rate on borrowings under our loan and security agreements and amortization of deferred financing costs and interest expense related to the accretion of debt discount.

Other Income (Expense), Net

Other income, net for the three months ended March 31, 2020 primarily consists of foreign currency gains and government grants related to our operations in the United Kingdom.

Income Taxes

Income tax expense for the three months ended March 31, 2020 reflects the provision for income taxes at our wholly owned UK subsidiary.

Since our inception in 2014, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items.

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Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

The following table summarizes our results of operations for the three months ended March 31, 2020 and 2019 (in thousands):


	Three Months Ended March 31,
	2020		2019		Change
Operating expenses:
Research and development	$	17,419	$	15,680	$	1,739
General and administrative	5,842		5,124		718
Total operating expenses	23,261		20,804		2,457
Loss from operations	(23,261)		(20,804)		(2,457)
Other (expense) income:
Interest (expense) income, net	(181)		505		(686)
Other income	466		—		466
Other income, net	285		505		(220)
Loss before income taxes	(22,976)		(20,299)		(2,677)
Income tax expense	(65)		—		(65)
Net loss	$	(23,041)	$	(20,299)	$	(2,742)

Research and Development Expenses (in thousands):


	Three Months Ended March 31,
	2020	2019	Change
Platform expenses