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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 September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-38473
 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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock,
$0.001 par value per share
EVLONasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  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 October 28, 2020, the registrant had 46,189,236 shares of common stock, $0.001 par value per share, outstanding.



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.



Evelo Biosciences, Inc.
Form 10-Q for the Quarterly Period Ended September 30, 2020
Table of Contents
 



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Evelo Biosciences, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except per share and share amounts)
September 30, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$81,580 $77,833 
Prepaid expenses and other current assets2,979 3,176 
Total current assets84,559 81,009 
Property and equipment, net7,586 8,341 
Right of use asset - operating lease11,192 — 
Other assets1,500 1,570 
Total assets$104,837 $90,920 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$2,729 $620 
Accrued expenses8,823 8,758 
Operating lease liability, current portion1,607 — 
Other current liabilities389 365 
Total current liabilities13,548 9,743 
Noncurrent liabilities:
Long-term debt29,924 19,634 
Operating lease liability, net of current portion10,503 — 
Deferred rent, net of current portion— 1,148 
Other noncurrent liabilities432 198 
Total liabilities54,407 30,723 
Commitments and contingencies
Stockholder’s equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding as of September 30, 2020 and December 31, 2019, respectively
  
Common stock, $0.001 par value; 200,000,000 shares authorized; 46,220,859 and 32,232,258 shares issued and 46,184,087 and 32,170,605 shares outstanding as of September 30, 2020 and December 31, 2019, respectively
46 32 
Additional paid-in capital313,853 259,018 
Accumulated deficit(263,469)(198,853)
Total stockholders’ equity50,430 60,197 
Total liabilities and stockholders’ equity$104,837 $90,920 
See accompanying notes to condensed consolidated financial statements.
1

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited, in thousands, except share and per share data)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Operating expenses:
Research and development$14,910 $15,610 $47,503 $46,751 
General and administrative5,272 5,886 16,185 16,936 
Total operating expenses20,182 21,496 63,688 63,687 
Loss from operations(20,182)(21,496)(63,688)(63,687)
Other (expense) income:
Interest (expense) income, net(713)81 (1,353)1,032 
Other income (expense), net39 (218)646 (218)
Other (expense) income, net(674)(137)(707)814 
Loss before income taxes(20,856)(21,633)(64,395)(62,873)
Income tax expense(67) (221) 
Net loss$(20,923)$(21,633)$(64,616)$(62,873)
Net loss per share attributable to common stockholders, basic and diluted$(0.45)$(0.67)$(1.74)$(1.96)
Weighted-average number of common shares outstanding, basic and diluted46,168,013 32,060,747 37,050,907 32,009,571 
Comprehensive loss:
Net loss$(20,923)$(21,633)$(64,616)$(62,873)
Other comprehensive loss:
Unrealized gain (loss) on investments, net of tax of $0
 (1) 18 
Comprehensive loss$(20,923)$(21,634)$(64,616)$(62,855)
See accompanying notes to condensed consolidated financial statements.
2

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited, in thousands, except share amounts)
Nine Months Ended September 30, 2020
Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal
SharesAmountSharesAmount
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 
Net loss— — — — — — (23,041)(23,041)
Balance-March 31, 2020 $ 32,321,208 $32 $261,206 $ $(221,894)$39,344 
Issuance of common stock in public offering, net of fees— — 13,800,000 14 48,393 — — 48,407 
Vesting of restricted common stock— — 11,491 — 5 — — 5 
Exercise of stock options— — 3,944 — 9 — — 9 
Stock-based compensation expense— — — — 2,093 — — 2,093 
Net loss— — — — — — (20,652)(20,652)
Balance-June 30, 2020 $ 46,136,643 $46 $311,706 $ $(242,546)$69,206 
Issuance of stock under the Employee Stock Purchase Plan— — 28,603 — 92 — — 92 
Exercise of stock options— — 18,841 — 11 — — 11 
Stock-based compensation expense— — — — 2,045 — — 2,045 
Fees associated with public offering of common stock— — — — (1)— — (1)
Net loss— — — — — — (20,923)(20,923)
Balance-September 30, 2020 $ 46,184,087 $46 $313,853 $ $(263,469)$50,430 


See accompanying notes to condensed consolidated financial statements.

3


Evelo Biosciences, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited, in thousands, except share amounts)
Nine Months Ended September 30, 2019
Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal
SharesAmountSharesAmount
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 
Vesting of restricted common stock— — 13,692 — 7 — — 7 
Exercise of stock options— — 1,379 — 1 — — 1 
Stock-based compensation expense— — — — 2,135 — — 2,135 
Unrealized gain on investments— — — — — 3 — 3 
Net loss— — — — — — (20,941)(20,941)
Balance-June 30, 2019 $ 32,045,706 $32 $254,676 $1 $(154,621)$100,088 
Vesting of restricted common stock— — 13,691 — 7 — — 7 
Exercise of stock options— — 12,633 — 23 — — 23 
Stock-based compensation expense— — — — 2,062 — — 2,062 
Unrealized gain on investments— — — — — (1)— (1)
Net loss— — — — — — (21,633)(21,633)
Balance-September 30, 2019 $ 32,072,030 $32 $256,768 $ $(176,254)$80,546 




See accompanying notes to condensed consolidated financial statements.
4

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
 Nine Months Ended
September 30,
 20202019
Operating activities
Net loss$(64,616)$(62,873)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense6,093 6,150 
Depreciation expense1,493 1,264 
Net accretion of discount marketable securities (164)
Non-cash interest expense250 263 
Non-cash lease expense1,541 — 
Gain on sale of fixed assets, net(5)(2)
Changes in assets and liabilities:
Prepaid expenses and other assets267 (633)
Accounts payable2,105 90 
Accrued expenses and other current liabilities263 2,907 
Operating lease liabilities(1,771) 
Other liabilities270 12 
Net cash used in operating activities(54,110)(52,986)
Investing activities
Proceeds from sales and maturities of investments 55,000 
Purchases of property and equipment(912)(2,569)
Proceeds from sale of fixed assets6 2 
Net cash (used in)/provided by investing activities(906)52,433 
Financing activities
Net proceeds from the issuance of long-term debt10,000 19,481 
Repayment of long-term debt (15,000)
Proceeds from issuance of common stock, net of issuance cost48,424  
Proceeds from issuance of common stock under employee stock purchase plan and exercise of stock options339 282 
Net cash provided by financing activities58,763 4,763 
Net increase in cash, cash equivalents and restricted cash3,747 4,210 
Cash, cash equivalents and restricted cash – beginning of period79,333 94,351 
Cash, cash equivalents and restricted cash – end of period$83,080 $98,561 
Supplemental disclosure of cash flow information
Cash paid for interest$1,509 $728 
Cash paid for taxes$20 $ 
Noncash investing and financing activities
Deferred financing and public offering costs in accounts payable and accrued expenses$19 $ 
Property and equipment additions in accounts payable and accrued expenses$33 $290 
See accompanying notes to the condensed consolidated financial statements.
5

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.

In June 2020, the Company sold 13,800,000 shares of its common stock in an underwritten public offering at a public offering price of $3.75 per share, including the underwriters' exercise of their option to purchase 1,800,000 shares to cover over-allotment, generating gross proceeds of $51.8 million and net proceeds of $48.4 million, after deducting underwriting discounts and commission and other offering expenses payable by the Company.

On July 14, 2020, the Company drew down the second tranche of $10.0 million available under the 2019 Credit Facility. Refer to Note 6 to these unaudited condensed consolidated financial statements for more information.

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. As of September 30, 2020, the Company had cash and cash equivalents of $81.6 million and an accumulated deficit of $263.5 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 and due to the uncertainty related to the impact of the COVID-19 pandemic and the nature of Evelo's business, the Company has substantial doubt that its cash and cash equivalents at September 30, 2020 will 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 September 30, 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.
6

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 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 September 30, 2020, the results of its operations and stockholders' equity for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 30, 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 the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include, but are not limited to, 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.
7

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 loss is unrealized gains on available-for-sale investments, which the Company held in 2019. Comprehensive loss totaled $20.9 million and $64.6 million, respectively, for the three and nine months ended September 30, 2020. For the three and nine months ended September 30, 2019 comprehensive loss was $21.6 million and $62.9 million, respectively.
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 September 30, 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 September 30, 2020 and December 31, 2019, as presented on the Company's statements of cash flows, to its related balance sheet accounts (in thousands):
September 30, 2020December 31, 2019
Cash and cash equivalents:
Cash$6,830 $1,634 
Money market funds74,750 76,199 
Total cash and cash equivalents81,580 77,833 
Restricted cash1,500 1,500 
Cash, cash equivalents and restricted cash$83,080 $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.
8

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.
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.
9

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 and nine months ended September 30, 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 September 30, 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.
10

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 maintained an additional separate operating lease for office and laboratory space that expired in May 2020. The leases require security deposits, which the Company has primarily met with letters of credit from a financial institution that is 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 $0.2 million for the nine months ended September 30, 2020 and were equivalent to the minimum payments due from the Company to the landlord.
For the three and nine months ended September 30, 2020, the Company recorded rent expense of $0.7 million and $2.1 million, respectively. Rent expense for the nine months ended September 30, 2020 is net of sublease rental income of $0.3 million. There was no sublease rental income for the three months ended September 30, 2020. For the three and nine months ended September 30, 2019, the Company recorded rent expense of $0.7 million and $2.0 million, respectively, which is net of sublease rental income of $0.1 million and $0.4 million, respectively. Sublease rental income is inclusive of rental payments, taxes and operating expenses.
The minimum aggregate future lease commitments, exclusive of any offsetting sublease rental payments, at September 30, 2020, are as follows (in thousands):
Amount
2020 (excluding payments made as of September 30, 2020)$493
20212,973
20223,062
20233,154
20243,249
Thereafter2,491
Total lease payments15,422
Less imputed interest(3,312)
Total$12,110
Other information:
Operating cash flows used for operating leases$2,596
Weighted-average remaining lease term (in years)5
Weighted-average discount rate9.5 %

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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 September 30, 2020 and December 31, 2019 (in thousands):
DescriptionSeptember 30, 2020
(Level 1)

(Level 2)

(Level 3)
Assets:
Money market funds included within cash and cash equivalents$74,750 $74,750 $ $ 
Total$74,750 $74,750 $ $ 

DescriptionDecember 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 September 30, 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):
September 30, 2020December 31, 2019
Property and equipment:
Lab equipment$8,606 $7,479 
Leasehold improvements2,157 2,014 
Furniture and fixtures822 750 
Computers and software230 204 
Office equipment3 9 
Construction-in-process877 1,594 
Property and equipment12,695 12,050 
Less: accumulated depreciation(5,109)(3,709)
Property and equipment, net$7,586 $8,341 
The Company recognized $0.5 million and $1.5 million of depreciation expense for the three and nine months ended September 30, 2020, respectively and $0.5 million and $1.3 million for the three and nine months ended September 30, 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. The Company borrowed the entire $15.0 million available under the 2016 Credit Facility prior to its extinguishment in July 2019 as discussed in further detail below.
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. As amended on May 15, 2020, the second tranche of $10.0 million was available to be funded between December 1, 2019 and July 15, 2020 and was drawn down on July 14, 2020. 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.

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 September 30, 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 on July 19, 2019 the full $15.0 million loan balance outstanding under the 2016 Credit Facility.
13


The Company has the following minimum aggregate future loan payments at September 30, 2020 (in thousands).
Twelve month period ending September 30,Amount
2021$2,631 
20228,912 
202313,387 
202413,605 
Thereafter 
Total minimum payments38,535 
Less amounts representing interest and discount(8,611)
Long-term debt$29,924 
Interest expense related to the Company's 2016 Credit Facility was approximately $0.5 million for the nine months ended September 30, 2019.
Interest expense related to the Company's 2019 Credit Facility was approximately $0.6 million and $1.5 million for the three and nine months ended September 30, 2020 and $0.4 million for both the three and nine months ended September 30, 2019.
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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 preferred stock that was issued prior to the Company’s public offering and warrants which were issued in 2016 and exercised in 2018.
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 and (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 will pay 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 September 30, 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 September 30, 2020, the Company has incurred milestone payments to date totaling approximately $0.4 million under the agreement of which no amounts are currently due.
15

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 annual exclusivity fees to date totaling approximately €1.2 million, and no amounts are currently due as of September 30, 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 those microbial biotheraputics and for a set minimum number of manufacturing runs per year. Exclusivity fees paid and any minimum commitments are expensed as incurred. As of September 30, 2020, aggregate minimum payments over the remaining contract life total approximately $0.8 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 the post-grant review, finding unpatentable all of the current claims in the patent. In June 2020, the University of Chicago filed a re-issue application to seek narrowed claims. 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 U.S. Securities and Exchange Commission (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 September 30, 2020, no securities have been issued pursuant to the sales agreement.
In June 2020, the Company sold 13,800,000 shares of its common stock pursuant to the Shelf in an underwritten public offering at a public offering price of $3.75 per share, for gross proceeds of $51.8 million and net proceeds of $48.4 million, after deducting underwriting discounts and commission and other offering expenses payable by the Company.
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 September 30, 2020, equity-based incentive awards covering up to 4,243,544 shares of the Company’s common stock have been issued under the 2018 Plan, of which none have been exercised and 818,084 have been canceled. As of September 30, 2020, 1,304,183 shares of common stock are available for future grant under the 2018 Plan, which includes 825,096 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.
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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.
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 September 30, 2020, an aggregate of 5,758,518 options and other equity awards had been granted under the 2015 Plan, of which 1,345,266 have been exercised, 1,261,105 have been canceled and 18,468 have been repurchased as of September 30, 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 September 30,Nine Months Ended September 30,
 2020201920202019
General and administrative$969 $1,082 $2,868 $3,306 
Research and development1,076 980 3,225 2,844 
Total stock-based compensation expense$2,045 $2,062 $6,093 $6,150 
Stock Options
A summary of the Company’s stock option activity and related information is as follows: 
SharesWeighted-
Average
Exercise
Price
Options outstanding at December 31, 20195,691,474 $6.99 
Granted2,028,718 6.09 
Exercised(159,998)1.54 
Canceled(982,574)8.83 
Options outstanding at September 30, 20206,577,620 $6.57 
Exercisable as of September 30, 20203,363,541 $5.32 
The weighted-average fair value of options granted during the nine months ended September 30, 2020 and 2019 was $4.17 and $7.66, respectively.
As of September 30, 2020, total unrecognized stock-based compensation expense relating to unvested stock options was $16.5 million. This amount is expected to be recognized over a weighted average period of 2.61 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
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(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 authorized an initial offering period under the ESPP commencing on February 1, 2020.

The compensation expense recognized related to the ESPP for the three and nine months ended September 30, 2020 was not material. There was a total of 28,603 shares purchased under the ESPP during the three and nine months ended September 30, 2020.
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) increase in amount of business interest expense deductible under Section 163(j) of the Internal Revenue Code from 30% to 50% for tax years 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. As of September 30, 2020, the Company had deferred $0.3 million in employer payroll taxes pursuant to the CARES Act, which is included in the other noncurrent liabilities in these unaudited condensed consolidated balance sheets.
For the three and nine months ended September 30, 2020, the Company has recorded a tax provision of $0.1 million and $0.2 million, respectively, primarily related to the Company's wholly-owned UK subsidiary. There were no significant income tax provisions or benefits for the three and nine months ended September 30, 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 and restricted common stock, outstanding during the period determined using the 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:
 Nine Months Ended September 30,
 20202019
Unvested common stock from early exercise of options36,772 75,043 
Stock options to purchase common stock6,577,620 5,892,781 
Common stock offering from ESPP12,482  
Total6,626,874 5,967,824 

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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 nine months ended September 30, 2020 and 2019, the Company paid Weatherden $0.5 million and $0.7 million, respectively. As of September 30, 2020 and 2019, the amounts due to Weatherden under the supply of service agreement were approximately $30.0 thousand and $0.1 million, respectively.
In June 2018, the Company entered into a subleasing arrangement with Ring Therapeutics, Inc. (formerly VL46, Inc.), 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, the sublease expiration date, plus related taxes and lease operating costs. For the nine-months ended September 30, 2020, $0.3 million related to this sublease, 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 (as amended, 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. As amended on October 15, 2020, the Consulting Agreement will continue until June 30, 2021 unless 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, on September 16, 2019, 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 dates. 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 12 equal monthly installment following 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. On October 11, 2020, in connection with the commencement of his second year of service as a consultant to the Company, Mr. Epstein was granted an annual equity award in the form of an option to purchase 44,743 shares of the Company’s common stock, which award vests in nine equal monthly installments, in each case subject to his continued provision of consulting services to the Company pursuant to the Consulting Agreement on the applicable vesting dates.
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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 investigational medicines that are intended to act 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 biology as the small intestinal axis, or SINTAX™. We have built a platform to discover and develop novel oral medicines which target SINTAX. By harnessing SINTAX, we believe we can transform healthcare via medicines that have the potential to be effective, safe, convenient and affordable and thus able to treat patients at all stages of disease and to treat patients globally.

Our first product candidates are orally delivered pharmaceutical preparations derived from naturally occurring, specific single strains of microbes. In preclinical models, our product candidates have engaged immune cells in the small intestine and driven changes in systemic biology without systemic exposure and without colonizing the gut. We have observed in early clinical trials and in preclinical studies that specific product candidates modulated immune responses throughout the body by acting on SINTAX. We currently have two product candidates in multiple clinical trials, EDP1815 for the treatment of inflammatory diseases and the treatment of individuals with COVID-19 and EDP1503 for the treatment of certain types of cancer. We have two additional product candidates for the treatment of inflammatory diseases: EDP1867 and EDP2939, and one additional product candidate for the treatment of cancer: EDP1908.

We believe that orally delivered SINTAX medicines have the potential to address patient needs at all stages of disease due to their potentially superior characteristics over current therapies:

Each of our product candidates has been observed to act through multiple clinically relevant and validated biological pathways in preclinical models. By acting on multiple pathways simultaneously, we believe our product candidates could impact disease in ways that are not possible with current single-target or dual-target therapies.

Our data suggests that our product candidates for inflammatory diseases have the potential to resolve disease causing inflammation whilst preserving immunity, a significant potential benefit compared to other anti-inflammatory therapies that often cause significant immunosuppression.

Our product candidates are likely to be well-tolerated given that they are derived from naturally occurring, specific single strains of human commensal microbes that engage immune cells in the small intestine and drive changes in systemic biology without systemic exposure and without colonizing the gut. Our initial clinical data supports this potential and, if we are able to validate this profile in future clinical trials, we believe our product candidates have the potential to be used at all stages of disease and in many more patients than current immunomodulatory drugs.

Our discovery and development of oral SINTAX medicine has the potential to be more efficient than other product classes such as cell therapy, monoclonal antibodies and small molecules. We believe our product candidates do not require the lengthy target validation and compound discovery requirements of conventional drug discovery.
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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.

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

The COVID-19 pandemic has impacted and continues to impact our enrollment of new patients into, and the retention of existing patients in, our ongoing clinical trials, due primarily to lower patient participation. The pandemic likely will impact enrollment and retention of patients in new clinical trials, such as our Phase 2 trial of EDP1815, for similar reasons. 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.

The extent to which the COVID-19 pandemic impacts our business and finances will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, travel restrictions and social distancing 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 an investigational oral biologic being developed for the treatment of inflammatory diseases. It is a strain of Prevotella histicola, selected for its specific pharmacology.

COVID-19

EDP1815 is being evaluated in two ongoing clinical studies for the treatment of hospitalized COVID-19 patients. The first is 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 COVID-Related Complications. 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 are 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 is reduced requirements for oxygen therapy, as measured by the ratio of oxygen saturation (SpO2) / fraction of inspired oxygen (FiO2). Key secondary endpoints include total symptom duration, progression along the WHO scale of disease severity, and mortality. The trial is led by Reynold A. Panettieri, Jr., M.D., Vice Chancellor for Translational Medicine and Science at Rutgers Biomedical and Health Sciences and Professor of Medicine at Rutgers Robert Wood Johnson Medical School.

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EDP1815 is also included as a treatment arm in the TACTIC-E clinical trial. TACTIC-E is a Phase 2/3 randomized trial, sponsored by Cambridge University Hospitals NHS Foundation Trust, that is expected to evaluate up to 469 patients per arm at Addenbrooke’s Hospital and other leading clinical centers in the United Kingdom. The trial is investigating the safety and efficacy of certain experimental therapies in the prevention and treatment of life-threatening complications associated with COVID-19 in hospitalized individuals at early stages of the disease. The trial is enrolling individuals with COVID-19 who have identified risk factors for developing severe complications and are at risk of progression to the intensive care unit or death. The primary outcome measure of the trial is time to incidence (up to day 14) of any one of the following: death, mechanical ventilation, extracorporeal membrane oxygenation (ECMO), cardiovascular organ support, renal failure, hemofiltration or dialysis. Secondary outcome measures include duration of stay in hospital, duration of oxygen therapy, changes in biomarkers associated with COVID-19 progression, and time to clinical improvement.

As a result of the varying infection rates that have occurred with the pandemic, we experienced slower than expected enrollment early on in both trials and now expect to report data from clinical trial conducted at the Robert Wood Johnson University Hospital and interim safety data and futility analysis from TACTIC-E in the second quarter of 2021. In order to expedite patient recruitment and expand access to potential therapies for COVID-19, new trial sites are being opened for TACTIC-E.

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

Phase 2 clinical trial in psoriasis

Based on previously reported positive clinical data in two cohorts of individuals with mild to moderate psoriasis in a Phase 1b clinical trial, we have advanced EDP1815 into a Phase 2 dose ranging trial, evaluating three doses of EDP1815 in enteric capsules versus placebo in approximately 225 individuals with mild to moderate psoriasis. The primary endpoint of the trial is the mean reduction in Psoriasis Area and Severity Index (PASI) score at 16 weeks. Other clinical measures of psoriasis are also being evaluated. We initiated the Phase 2 clinical trial in October 2020, and expect to announce interim data by the middle of 2021. Clinical data from this trial may enable us to advance directly into Phase 3 registrational trials in late 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.

Phase 1b clinical trial in atopic dermatitis

In November 2018, we initiated our ongoing Phase 1b double-blind placebo-controlled dose-escalating safety and tolerability study of EDP1815 in healthy volunteers and individuals with mild to moderate psoriasis or atopic dermatitis.

Based on previously reported positive clinical data in two cohorts of individuals with psoriasis, we are evaluating EDP1815 in a cohort of 24 patients with mild to moderate atopic dermatitis, randomized 2:1 to receive oral administration of 2.76g of the enteric capsule formulation of EDP1815 or placebo once daily, for 56 days. The primary endpoint is safety and tolerability. Secondary endpoints include key validated markers of atopic dermatitis, including the Eczema Area and Severity Index (EASI), SCORing Atopic Dermatitis (SCORAD), Dermatology Life Quality Index (DLQI), and Pruritis Numerical Rating Scale (Pruritis NRS). This cohort is fully recruited and we expect to announce initial data from this cohort in the first quarter of 2021.

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EDP1867

EDP1867 is a non-living investigational oral biologic being developed for the treatment of 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 multiple pathways of inflammation. This observed activity suggests a number of possible initial clinical indications for EDP1867, including TH2-dependent inflammation which underlies atopic diseases and a large spectrum of asthma. We expect to initiate our first Phase 1b clinical trial of EDP1867 in individuals with atopic dermatitis in the first quarter of 2021, and expect to announce initial data from this trial in mid-2021.

EDP1503

EDP1503 is an investigational oral biologic being developed for the treatment of cancer. 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 July 2020, we reported interim clinical data from the trial in a poster presented at the ESMO World Congress on Gastrointestinal Cancer Virtual Meeting. In addition to data in individuals with microsatellite stable colorectal cancer (“CRC”), the poster reported preliminary data on 11 individuals with triple-negative breast cancer (“TNBC”) (8 on high dose and 3 on low dose EDP1503). An overall response rate (ORR) of 25% (2/8) and a disease control rate of 37.5% (3/8) were observed across all individuals with TNBC receiving high dose EDP1503. Historic studies of anti-PD-1 monotherapy in heavily pretreated TNBC patients have yielded an ORR of 5-10%.

We have decided to prioritize the development of EDP1503 for the treatment of TNBC with a high dose regimen, based on early clinical response data with this regimen. We expect to announce further data from the TNBC cohort in the fourth quarter 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 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.
Financial Operations Overview
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 nine months ended September 30, 2020, our net loss was $64.6 million. As of September 30, 2020, we had an accumulated deficit of $263.5 million. We do not expect to generate revenue from sales of any products for the foreseeable future, if at all.
We expect that our expenses will increase substantially in connection with our ongoing activities, particularly as we:
continue the ongoing trials for EDP1815 and EDP1503;
initiate additional clinical trials for EDP1815, EDP1867, EDP2939 and EDP1908;
initiate or advance the clinical development of any additional product candidates;
conduct research and continue preclinical development of potential product candidates;
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make strategic investments in manufacturing capabilities, including potentially planning and building our own manufacturing facility;
maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property;
increase employees and employee-related expenses including salaries, benefits, travel and stock-based compensation expense; and
seek to obtain regulatory approvals for our product candidates.
In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution.
As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.
Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

In June 2020, we sold 13,800,000 shares of our common stock in an underwritten public offering at a public offering price of $3.75 per share, for gross proceeds of $51.8 million and net proceeds of $48.4 million, after deducting underwriting discounts and commission and other offering expenses payable by us.

On July 14, 2020, we drew down the second tranche of $10.0 million available under the 2019 Credit Facility with K2HV.
As of September 30, 2020, our principal source of liquidity is cash and cash equivalents, which totaled approximately $81.6 million. We expect that our existing cash and cash equivalents will enable us to fund our planned operating expenses and capital expenditure requirements into the beginning of the third 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 unaudited condensed consolidated financial statements appearing within this Quarterly Report on Form 10-Q without raising additional capital. 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 and nine months ended September 30, 2020 were issued. As such, we plan to seek to raise capital from time to time through future equity financings, debt financings or partnerships to fund our future operations and remain as a going concern. To the extent that we raise additional capital through future equity offerings, the ownership interest of common stockholders will be diluted, which dilution may be significant. See Note 1 of the notes to our unaudited condensed consolidated condensed financial statements in this Quarterly Report on Form 10-Q for additional information on our assessment.
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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;
costs related to compliance with regulatory requirements; and
facility-related expenses, which include depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized, when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
Our primary focus of research and development since inception has been building a platform to enable us to develop medicines based on an understanding that cells in the small intestine play a central role in governing the immune, metabolic and neurological systems and to show potential clinical utility. Our platform and program expenses consist principally of costs, such as preclinical research, clinical and preclinical manufacturing activity costs, clinical development costs, licensing expenses as well as an allocation of certain indirect costs, facility costs and depreciation expense. We do not allocate personnel costs, which primarily include salaries, discretionary bonus and stock-based compensation costs, as such costs are separately classified as research and development personnel costs.
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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 EDP1867, 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 and completion of clinical trials;
any delays in clinical trials as a result of the COVID-19 pandemic;
the costs associated with the development of our current product candidates and/or any additional product candidates we identify in-house or acquire through collaborations;
our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the impact on disease progression of our product candidates;
our ability to establish an appropriate safety profile with IND-enabling toxicology studies;
our ability to establish and maintain agreements with CMOs and other entities for clinical trial supply and future commercial supply, if our product candidates are approved;
the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;
our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved;
our receipt of marketing approvals from applicable regulatory authorities;
our ability to commercialize products, if and when approved, whether alone or in collaboration with others; and
the continued acceptable safety profiles of the product candidates following approval.
A change in any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We expect our research and development expenses to increase at least over the next several years as we continue to implement our business strategy, advance our current programs, expand our research and development efforts, seek regulatory approvals for any product candidates that successfully complete clinical trials, identify and develop additional product candidates and incur expenses associated with hiring additional personnel to support our research and development efforts.
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General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; other professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; and facility-related expenses, which include depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our product candidates. We also expect to 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 and nine months ended September 30, 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 and nine months ended September 30, 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 and nine months ended September 30, 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 September 30, 2020 and 2019
The following table summarizes our results of operations for the three months ended September 30, 2020 and 2019 (in thousands):
 Three Months Ended September 30, 
 20202019Change
Operating expenses:
Research and development$14,910 $15,610 $(700)
General and administrative5,272 5,886 (614)
Total operating expenses20,182 21,496 (1,314)
Loss from operations(20,182)(21,496)1,314 
Other (expense) income:
Interest (expense) income, net(713)81 (794)
Other income (expense), net39 (218)257 
Other (expense) income, net(674)(137)(537)
Loss before income taxes(20,856)(21,633)777 
Income tax expense(67)— (67)
Net loss$(20,923)$(21,633)$710 
Research and Development Expenses (in thousands):
 Three Months Ended September 30, 
 20202019Change
Platform expenses$2,591 $4,182 $(1,591)
Inflammation programs5,883 5,039 844 
Oncology programs983 1,697 (714)
Research and development personnel costs (including stock-based compensation)5,453 4,692 761 
Total research and development expenses$14,910 $15,610 $(700)

Research and development expenses were $14.9 million for the three months ended September 30, 2020, compared to $15.6 million for the three months ended September 30, 2019. The decrease of $0.7 million was due to a $1.6 million decrease in our platform expenses and a $0.7 million decrease in our oncology programs primarily related to clinical trial recruitment delays, lower lab costs and fewer research and development related activities due to the COVID-19 pandemic. These decreases were partially offset by a $0.8 million increase in our inflammation programs due to EDP1815 progression to a Phase 2 trial, additional COVID-19 trials and EDP1815 Phase 1b trials, and costs incurred in clinical manufacturing to enable the EDP1867 Phase 1 clinical trial, partially offset by the closeout of the EDP1066 program. The $0.8 million increase in personnel related costs is primarily due to headcount increases in clinical development, technical operations and platform organization, which is in line with our strategy to maximize the potential of our platform. Overall, we expect that our research and development expenses will increase in the foreseeable future as we continue clinical trials for our product candidates, including EDP1815, EDP1503 and EDP1867, initiate new clinical trials, continue discovery and development efforts for additional product candidates, hire additional research and development personnel, seek to increase manufacturing capabilities and possibly expand into additional therapeutic areas.
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General and Administrative Expenses (in thousands):
 Three Months Ended September 30, 
 20202019Change
General and administrative personnel costs (including stock-based compensation)$2,798 $3,154 $(356)
Professional fees1,254 1,682 (428)
Facility costs, office expense and other1,220 1,050 170 
Total general and administrative expenses$5,272 $5,886 $(614)

General and administrative expenses were $5.3 million for the three months ended September 30, 2020, compared to $5.9 million for the three months ended September 30, 2019. The decrease of $0.6 million is due to lower personnel costs of $0.4 million associated with temporarily lower general and administrative headcount and lower professional fees of $0.4 million. These decreases were partially offset by a $0.2 million increase in facility and office costs due to the impact of the COVID-19 pandemic. We expect general and administrative expenses to increase as we hire personnel to fill open positions and incur professional expenses in support of the continued growth of the Company.
Other Income (Expense), Net

Other expense, net for the three months ended September 30, 2020 was $0.7 million compared to $0.1 million for the three months ended September 30, 2019. The $0.6 million increase in other expenses was primarily driven by a decrease in interest income as a result of lower interest rates and lower cash and cash equivalent balance and an increase in interest expense as a result of a higher interest rate on a greater principal balance from the 2019 Credit Facility, partially offset by foreign currency gains and a grant related to our operations in the United Kingdom.
Net Loss
Net loss for the three months ended September 30, 2020 was $20.9 million, compared to $21.6 million for the three months ended September 30, 2019.
Comparison of the Nine months ended September 30, 2020 and 2019
The following table summarizes our results of operations for the nine months ended September 30, 2020 and 2019 (in thousands):
Nine Months Ended September 30,
20202019Change
Operating expenses:
Research and development$47,503 $46,751 $752 
General and administrative16,185 16,936 (751)
Total operating expenses63,688 63,687 
Loss from operations(63,688)(63,687)(1)
Other (expense) income:
Interest (expense) income, net(1,353)1,032 (2,385)
Other income646 (218)864 
Other income, net(707)814 (1,521)
Loss before income taxes(64,395)(62,873)(1,522)
Income tax expense(221)</