evlo-20210630
FALSE2021Q20001694665December 31P6MP1YP1Y00016946652021-01-012021-06-30xbrli:shares00016946652021-07-26iso4217:USD00016946652021-06-3000016946652020-12-31iso4217:USDxbrli:shares00016946652021-04-012021-06-3000016946652020-04-012020-06-3000016946652020-01-012020-06-300001694665us-gaap:CommonStockMember2020-12-310001694665us-gaap:AdditionalPaidInCapitalMember2020-12-310001694665us-gaap:RetainedEarningsMember2020-12-310001694665us-gaap:CommonStockMember2021-01-012021-03-310001694665us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-3100016946652021-01-012021-03-310001694665us-gaap:RetainedEarningsMember2021-01-012021-03-310001694665us-gaap:CommonStockMember2021-03-310001694665us-gaap:AdditionalPaidInCapitalMember2021-03-310001694665us-gaap:RetainedEarningsMember2021-03-3100016946652021-03-310001694665us-gaap:CommonStockMember2021-04-012021-06-300001694665us-gaap:AdditionalPaidInCapitalMember2021-04-012021-06-300001694665us-gaap:RetainedEarningsMember2021-04-012021-06-300001694665us-gaap:CommonStockMember2021-06-300001694665us-gaap:AdditionalPaidInCapitalMember2021-06-300001694665us-gaap:RetainedEarningsMember2021-06-300001694665us-gaap:CommonStockMember2019-12-310001694665us-gaap:AdditionalPaidInCapitalMember2019-12-310001694665us-gaap:RetainedEarningsMember2019-12-3100016946652019-12-310001694665us-gaap:CommonStockMember2020-01-012020-03-310001694665us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-3100016946652020-01-012020-03-310001694665us-gaap:RetainedEarningsMember2020-01-012020-03-310001694665us-gaap:CommonStockMember2020-03-310001694665us-gaap:AdditionalPaidInCapitalMember2020-03-310001694665us-gaap:RetainedEarningsMember2020-03-3100016946652020-03-310001694665us-gaap:CommonStockMember2020-04-012020-06-300001694665us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-300001694665us-gaap:RetainedEarningsMember2020-04-012020-06-300001694665us-gaap:CommonStockMember2020-06-300001694665us-gaap:AdditionalPaidInCapitalMember2020-06-300001694665us-gaap:RetainedEarningsMember2020-06-3000016946652020-06-300001694665us-gaap:AdditionalPaidInCapitalMember2021-01-012021-06-300001694665us-gaap:AdditionalPaidInCapitalMember2020-01-012020-06-300001694665evlo:RegistrationStatementMember2019-06-030001694665evlo:RegistrationStatementMember2019-06-032019-06-030001694665evlo:AtTheMarketMember2019-06-030001694665evlo:AtTheMarketMember2021-04-012021-06-300001694665evlo:AtTheMarketMember2021-01-012021-06-300001694665srt:MinimumMemberevlo:AtTheMarketMember2021-06-300001694665evlo:AtTheMarketMembersrt:MaximumMember2021-06-300001694665evlo:PublicStockOfferingMember2021-02-022021-02-020001694665evlo:PublicStockOfferingMember2021-02-020001694665us-gaap:OverAllotmentOptionMember2021-02-022021-02-020001694665us-gaap:PrivatePlacementMember2021-02-022021-02-020001694665us-gaap:PrivatePlacementMember2021-02-02evlo:segment0001694665evlo:MeddistCompanyLimitedMemberus-gaap:CollaborativeArrangementTransactionWithPartyToCollaborativeArrangementMember2021-03-172021-03-170001694665evlo:MeddistCompanyLimitedMemberus-gaap:CollaborativeArrangementTransactionWithPartyToCollaborativeArrangementMember2021-06-30xbrli:pureutr:sqft00016946652018-01-310001694665us-gaap:MoneyMarketFundsMember2021-06-300001694665us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2021-06-300001694665us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel2Member2021-06-300001694665us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel3Member2021-06-300001694665us-gaap:FairValueInputsLevel1Member2021-06-300001694665us-gaap:FairValueInputsLevel2Member2021-06-300001694665us-gaap:FairValueInputsLevel3Member2021-06-300001694665us-gaap:MoneyMarketFundsMember2020-12-310001694665us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2020-12-310001694665us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel2Member2020-12-310001694665us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel3Member2020-12-310001694665us-gaap:FairValueInputsLevel1Member2020-12-310001694665us-gaap:FairValueInputsLevel2Member2020-12-310001694665us-gaap:FairValueInputsLevel3Member2020-12-310001694665us-gaap:EquipmentMember2021-06-300001694665us-gaap:EquipmentMember2020-12-310001694665us-gaap:LeaseholdImprovementsMember2021-06-300001694665us-gaap:LeaseholdImprovementsMember2020-12-310001694665us-gaap:FurnitureAndFixturesMember2021-06-300001694665us-gaap:FurnitureAndFixturesMember2020-12-310001694665evlo:ComputersAndSoftwareMember2021-06-300001694665evlo:ComputersAndSoftwareMember2020-12-310001694665us-gaap:OfficeEquipmentMember2021-06-300001694665us-gaap:OfficeEquipmentMember2020-12-310001694665us-gaap:ConstructionInProgressMember2021-06-300001694665us-gaap:ConstructionInProgressMember2020-12-310001694665us-gaap:LineOfCreditMemberevlo:A2019CreditFacilityMember2019-07-19evlo:tranche0001694665us-gaap:LineOfCreditMemberevlo:A2019CreditFacilityMemberevlo:SecurityAndLoanAgreementTrancheOneMember2019-07-190001694665us-gaap:LineOfCreditMemberevlo:SecurityAndLoanAgreementTrancheTwoMemberevlo:A2019CreditFacilityMember2019-07-190001694665us-gaap:LineOfCreditMemberevlo:SecurityAndLoanAgreementTrancheThreeMemberevlo:A2019CreditFacilityMember2019-07-190001694665us-gaap:LineOfCreditMemberevlo:SecurityAndLoanAgreementTrancheThreeMemberevlo:A2019CreditFacilityMember2021-06-160001694665evlo:SecurityAndLoanAgreementTrancheFourMemberus-gaap:LineOfCreditMemberevlo:A2019CreditFacilityMember2021-06-160001694665us-gaap:LineOfCreditMemberevlo:AmendedCreditFacilityMember2021-06-160001694665us-gaap:LineOfCreditMemberus-gaap:PrimeRateMemberevlo:A2019CreditFacilityMember2019-07-192019-07-190001694665us-gaap:LineOfCreditMemberevlo:A2019CreditFacilityMember2019-07-192019-07-190001694665us-gaap:LineOfCreditMemberevlo:AmendedCreditFacilityMember2019-07-190001694665us-gaap:EstimateOfFairValueFairValueDisclosureMember2021-06-300001694665us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Memberus-gaap:MeasurementInputPriceVolatilityMember2021-06-300001694665us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Memberus-gaap:MeasurementInputDiscountRateMember2021-06-300001694665us-gaap:MeasurementInputSharePriceMemberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2021-06-300001694665us-gaap:MeasurementInputRiskFreeInterestRateMemberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2021-06-300001694665us-gaap:MeasurementInputExpectedTermMemberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2021-06-300001694665us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Memberus-gaap:MeasurementInputExpectedDividendRateMember2021-06-300001694665us-gaap:LineOfCreditMemberevlo:AmendedCreditFacilityMember2021-01-012021-06-300001694665us-gaap:LineOfCreditMember2021-06-300001694665evlo:A2019CreditFacilityMember2021-04-012021-06-300001694665evlo:A2019CreditFacilityMember2021-01-012021-06-300001694665evlo:A2019CreditFacilityMember2020-04-012020-06-300001694665evlo:A2019CreditFacilityMember2020-01-012020-06-300001694665evlo:MayoClinicMember2017-08-062017-08-060001694665evlo:MayoClinicMembersrt:MaximumMember2017-08-062017-08-060001694665evlo:MayoClinicMember2021-06-302021-06-300001694665evlo:MayoClinicMember2021-06-300001694665srt:MaximumMemberevlo:UniversityOfChicagoMember2016-03-102016-03-100001694665evlo:UniversityOfChicagoMember2016-03-102016-03-100001694665evlo:UniversityOfChicagoMember2021-06-302021-06-300001694665evlo:UniversityOfChicagoMember2021-06-300001694665us-gaap:CollaborativeArrangementMemberevlo:SaccoS.r.l.Member2019-07-012019-07-31iso4217:EUR0001694665us-gaap:CollaborativeArrangementMemberevlo:SaccoS.r.l.Member2019-07-310001694665us-gaap:CollaborativeArrangementMemberevlo:SaccoS.r.l.Member2019-07-012021-06-300001694665evlo:TwoThousandAndTwentyOneStockInducementPlanMember2021-05-270001694665us-gaap:EmployeeStockOptionMemberevlo:TwoThousandAndTwentyOneStockInducementPlanMember2021-05-272021-05-270001694665us-gaap:EmployeeStockOptionMemberevlo:TwoThousandAndTwentyOneStockInducementPlanMember2021-06-302021-06-300001694665us-gaap:RestrictedStockUnitsRSUMemberevlo:TwoThousandAndTwentyOneStockInducementPlanMember2021-06-302021-06-300001694665evlo:TwoThousandAndTwentyOneStockInducementPlanMember2021-06-300001694665evlo:TwoThousandAndEighteenStockIncentivePlanMember2018-05-080001694665evlo:TwoThousandAndEighteenStockIncentivePlanMember2018-05-082018-05-080001694665evlo:TwoThousandAndEighteenStockIncentivePlanMember2021-01-012021-01-010001694665evlo:TwoThousandAndEighteenStockIncentivePlanMember2020-01-012020-01-010001694665us-gaap:EmployeeStockOptionMemberus-gaap:ShareBasedPaymentArrangementEmployeeMemberevlo:TwoThousandAndEighteenStockIncentivePlanMember2018-05-082018-05-080001694665us-gaap:EmployeeStockOptionMemberus-gaap:ShareBasedPaymentArrangementNonemployeeMembersrt:MinimumMemberevlo:TwoThousandAndEighteenStockIncentivePlanMember2018-05-082018-05-080001694665us-gaap:EmployeeStockOptionMemberus-gaap:ShareBasedPaymentArrangementNonemployeeMemberevlo:TwoThousandAndEighteenStockIncentivePlanMembersrt:MaximumMember2018-05-082018-05-080001694665us-gaap:EmployeeStockOptionMemberevlo:TwoThousandAndEighteenStockIncentivePlanMembersrt:MaximumMember2018-05-082018-05-080001694665evlo:TwoThousandAndEighteenStockIncentivePlanMember2021-06-302021-06-300001694665evlo:TwoThousandAndEighteenStockIncentivePlanMember2021-06-300001694665us-gaap:EmployeeStockOptionMemberus-gaap:ShareBasedPaymentArrangementEmployeeMemberevlo:TwoThousandAndFifteenStockIncentivePlanMember2015-01-012015-12-310001694665us-gaap:EmployeeStockOptionMemberus-gaap:ShareBasedPaymentArrangementNonemployeeMembersrt:MinimumMemberevlo:TwoThousandAndFifteenStockIncentivePlanMember2015-01-012015-12-310001694665us-gaap:EmployeeStockOptionMemberus-gaap:ShareBasedPaymentArrangementNonemployeeMemberevlo:TwoThousandAndFifteenStockIncentivePlanMembersrt:MaximumMember2015-01-012015-12-310001694665us-gaap:EmployeeStockOptionMemberevlo:TwoThousandAndFifteenStockIncentivePlanMembersrt:MaximumMember2015-01-012015-12-310001694665evlo:TwoThousandAndFifteenStockIncentivePlanMember2015-12-310001694665evlo:TwoThousandAndFifteenStockIncentivePlanMember2015-01-012021-06-300001694665evlo:TwoThousandAndFifteenStockIncentivePlanMember2015-01-012015-12-310001694665us-gaap:GeneralAndAdministrativeExpenseMember2021-04-012021-06-300001694665us-gaap:GeneralAndAdministrativeExpenseMember2020-04-012020-06-300001694665us-gaap:GeneralAndAdministrativeExpenseMember2021-01-012021-06-300001694665us-gaap:GeneralAndAdministrativeExpenseMember2020-01-012020-06-300001694665us-gaap:ResearchAndDevelopmentExpenseMember2021-04-012021-06-300001694665us-gaap:ResearchAndDevelopmentExpenseMember2020-04-012020-06-300001694665us-gaap:ResearchAndDevelopmentExpenseMember2021-01-012021-06-300001694665us-gaap:ResearchAndDevelopmentExpenseMember2020-01-012020-06-300001694665us-gaap:EmployeeStockOptionMember2021-06-300001694665us-gaap:EmployeeStockOptionMember2021-01-012021-06-300001694665us-gaap:RestrictedStockUnitsRSUMember2020-12-310001694665us-gaap:RestrictedStockUnitsRSUMember2021-01-012021-06-300001694665us-gaap:RestrictedStockUnitsRSUMember2021-06-300001694665us-gaap:RestrictedStockUnitsRSUMember2021-04-012021-06-300001694665us-gaap:EmployeeStockMemberevlo:A2018EmployeeStockPurchasePlanMember2018-05-082018-05-080001694665us-gaap:EmployeeStockMemberevlo:A2018EmployeeStockPurchasePlanMember2021-01-012021-01-010001694665us-gaap:EmployeeStockMemberevlo:A2018EmployeeStockPurchasePlanMember2021-04-012021-06-300001694665us-gaap:EmployeeStockMemberevlo:A2018EmployeeStockPurchasePlanMember2021-01-012021-06-300001694665us-gaap:EmployeeStockMemberevlo:A2018EmployeeStockPurchasePlanMember2020-04-012020-06-300001694665us-gaap:EmployeeStockMemberevlo:A2018EmployeeStockPurchasePlanMember2020-01-012020-06-300001694665us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember2021-06-300001694665us-gaap:OtherNoncurrentLiabilitiesMember2021-06-300001694665evlo:UnvestedCommonStockMember2021-01-012021-06-300001694665evlo:UnvestedCommonStockMember2020-01-012020-06-300001694665us-gaap:EmployeeStockOptionMember2021-01-012021-06-300001694665us-gaap:EmployeeStockOptionMember2020-01-012020-06-300001694665us-gaap:WarrantMember2021-01-012021-06-300001694665us-gaap:WarrantMember2020-01-012020-06-300001694665us-gaap:ConvertibleDebtSecuritiesMember2021-01-012021-06-300001694665us-gaap:ConvertibleDebtSecuritiesMember2020-01-012020-06-300001694665us-gaap:EmployeeStockMember2021-01-012021-06-300001694665us-gaap:EmployeeStockMember2020-01-012020-06-300001694665evlo:WeatherdenLtdMember2021-01-012021-06-300001694665evlo:WeatherdenLtdMember2020-01-012020-06-300001694665evlo:WeatherdenLtdMember2021-06-300001694665evlo:WeatherdenLtdMember2020-06-300001694665evlo:VL46Member2020-04-300001694665evlo:ConsultingAgreementMembersrt:BoardOfDirectorsChairmanMember2021-04-092021-04-090001694665evlo:ConsultingAgreementMembersrt:BoardOfDirectorsChairmanMember2019-09-162019-09-16evlo:installment0001694665evlo:ConsultingAgreementMembersrt:BoardOfDirectorsChairmanMember2020-10-150001694665evlo:ConsultingAgreementMembersrt:BoardOfDirectorsChairmanMember2020-10-152020-10-150001694665evlo:ConsultingAgreementMembersrt:BoardOfDirectorsChairmanMember2020-10-112020-10-110001694665us-gaap:RestrictedStockUnitsRSUMembersrt:BoardOfDirectorsChairmanMember2021-06-300001694665evlo:ConsultingAgreementMemberus-gaap:RestrictedStockUnitsRSUMembersrt:BoardOfDirectorsChairmanMember2021-06-302021-06-30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________

FORM 10-Q
_______________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
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 July 26, 2021, the registrant had 53,398,292 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 including those 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 without limitation statements regarding our future results of operations and financial position, the anticipated impact of the 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, activities related to strategic collaborations and anticipated revenue therefrom, 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 estimates regarding our expenses, future revenues, anticipated future capital requirements 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 regulation of our product candidates by the U.S. Food and Drug Administration (the "FDA");
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 and expressly disclaim any obligation 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.
SUMMARY RISK FACTORS

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. Principal risks and uncertainties affecting our business include the following:

•    We are a development-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability. Moreover, our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.

•    We will need additional funding in order to complete development of our product candidates and commercialize our products, if approved. If we are unable to raise capital when needed, we could be forced to delay, reduce or discontinue our product development programs or commercialization efforts.

•    Our product candidates are based on targeting SINTAX™, the small intestinal axis, which is an unproven approach to therapeutic intervention

•    We are dependent on the success of our product candidates. If the product candidates do not successfully complete clinical development or receive regulatory approval, our business may be harmed.

•    The regulatory approval process is lengthy, expensive and uncertain, and we may be unable to obtain regulatory approval for our product candidates under applicable regulatory requirements of the United States and internationally. The denial or delay of any such approval would delay commercialization of our product candidates and adversely impact our ability to generate revenue, our business and our results of operations.

•    We rely, and will continue to rely, on third parties to conduct our clinical trials for our product candidates, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

•    We do not have our own manufacturing capabilities and will rely on third parties to produce additional clinical supplies, if needed, and commercial supplies of our product candidates. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

•    If we are unable to establish our own sales, marketing and distribution capabilities, or enter into agreements with third parties to sell and market our product candidates, we may not be successful in commercializing our product candidates if and when they are approved, and we may not be able to generate any revenue.

•    The successful commercialization of our product candidates will depend in part on the extent to which governmental authorities and health insurers establish coverage, adequate reimbursement levels and pricing policies. Failure to obtain or maintain coverage and adequate reimbursement for our product candidates, if approved, could limit our ability to market those products and decrease our ability to generate revenue.

•    We face substantial competition, which may result in others discovering, developing or commercializing drugs before or more successfully than we do.

•    Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, cause us to suspend or discontinue clinical trials, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

•    If we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents which are sufficient to protect our product candidates, other companies could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.



•    The COVID-19 pandemic has adversely impacted and may continue to adversely impact, our business, including our preclinical studies and clinical trials, results of operations and financial condition.



Evelo Biosciences, Inc.
Form 10-Q for the Quarterly Period Ended June 30, 2021
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)
June 30, 2021December 31, 2020
Assets
Current assets:
Cash and cash equivalents$123,333 $68,857 
Prepaid expenses and other current assets3,034 2,123 
Total current assets126,367 70,980 
Property and equipment, net7,520 7,478 
Right of use asset - operating lease9,856 10,757 
Other assets1,315 1,424 
Total assets$145,058 $90,639 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$2,319 $1,442 
Accrued expenses15,011 16,254 
Operating lease liability, current portion1,812 1,674 
Other current liabilities654 463 
Total current liabilities19,796 19,833 
Noncurrent liabilities:
Long-term debt46,482 30,048 
Operating lease liability, net of current portion8,924 9,989 
Deferred revenue 7,500  
Other noncurrent liabilities263 284 
Total liabilities82,965 60,154 
Commitments and contingencies
Stockholder’s equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding as of June 30, 2021 and December 31, 2020, respectively
  
Common stock, $0.001 par value; 200,000,000 shares authorized; 53,416,657 and 47,488,505 shares issued and 53,398,271 and 47,470,119 shares outstanding as of June 30, 2021 and December 31, 2020, respectively
53 47 
Additional paid-in capital414,353 322,957 
Accumulated deficit(352,313)(292,519)
Total stockholders’ equity62,093 30,485 
Total liabilities and stockholders’ equity$145,058 $90,639 
See accompanying notes to condensed consolidated financial statements.
1

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except share and per share data)
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2021202020212020
Operating expenses:
Research and development$20,655 $15,174 $42,163 $32,593 
General and administrative7,001 5,071 12,964 10,913 
Total operating expenses27,656 20,245 55,127 43,506 
Loss from operations(27,656)(20,245)(55,127)(43,506)
Other (expense) income:
Interest expense, net(814)(458)(1,579)(639)
Loss on extinguishment of debt(3,226) (3,226) 
Other income, net151 140 313 606 
Total other expense(3,889)(318)(4,492)(33)
Loss before income taxes(31,545)(20,563)(59,619)(43,539)
Income tax expense(53)(89)(175)(154)
Net loss$(31,598)$(20,652)$(59,794)$(43,693)
Net loss per share attributable to common stockholders, basic and diluted$(0.59)$(0.63)$(1.14)$(1.35)
Weighted-average number of common shares outstanding, basic and diluted53,379,415 32,634,468 52,340,608 32,442,259 
See accompanying notes to condensed consolidated financial statements.
2

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited, in thousands, except share amounts)

Six Month Periods Ended June 30, 2021
Common StockAdditional Paid-in CapitalAccumulated DeficitTotal
SharesAmount
Balance-December 31, 202047,470,119 $47 $322,957 $(292,519)$30,485 
Issuance of common stock, net5,814,734 6 81,955 — 81,961 
Issuance of common stock under Employee Stock Purchase Plan27,587 — 90 — 90 
Exercise of stock options 45,299 — 235 — 235 
Stock-based compensation expense— — 3,264 — 3,264 
Net loss— — — (28,196)(28,196)
Balance-March 31, 202153,357,739 $53 $408,501 $(320,715)$87,839 
Exercise of stock options40,532 — 330 — 330 
Stock-based compensation expense— — 3,772 — 3,772 
Issuance of common stock warrants— — 1,750 — 1,750 
Net loss— — — (31,598)(31,598)
Balance-June 30, 202153,398,271 $53 $414,353 $(352,313)$62,093 
See accompanying notes to condensed consolidated financial statements.

3


Evelo Biosciences, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited, in thousands, except share amounts)

Six Month Periods Ended June 2020
Common StockAdditional Paid-in CapitalAccumulated DeficitTotal
SharesAmount
Balance-December 31, 201932,170,605 $32 $259,018 $(198,853)$60,197 
Vesting of restricted common stock13,390 — 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, 202032,321,208 $32 $261,206 $(221,894)$39,344 
Issuance of common stock in public offering, net of fees13,800,000 14 48,393 — 48,407 
Stock-based compensation expense— — 2,093 — 2,093 
Vesting of restricted common stock11,491— 5 — 5 
Exercise of stock options3,944— 9 — 9 
Net loss— — — (20,652)(20,652)
Balance-June 30, 202046,136,643 $46 $311,706 $(242,546)$69,206 
See accompanying notes to condensed consolidated financial statements.

4

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
 Six Months Ended
June 30,
 20212020
Operating activities
Net loss$(59,794)$(43,693)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense7,036 4,048 
Depreciation expense1,090 1,031 
Non-cash interest expense180 132 
Non-cash lease expense901 1,117 
Loss on extinguishment of debt3,226  
Gain on sale of fixed assets, net(4)(5)
Changes in assets and liabilities:
Prepaid expenses and other current assets(789)632 
Accounts payable877 2,812 
Accrued expenses and other current liabilities(987)(1,001)
Operating lease liabilities(927)(1,111)
Deferred revenue7,500  
Other liabilities(21)147 
Net cash used in operating activities(41,712)(35,891)
Investing activities
Purchases of property and equipment(1,151)(651)
Proceeds from sale of fixed assets4 6 
Net cash used in investing activities(1,147)(645)
Financing activities
Proceeds from issuance of common stock, net of issuance cost81,902 48,641 
Proceeds from the issuance of long-term debt, net of issuance costs14,778  
Proceeds from issuance of common stock under employee stock purchase plan and exercise of stock options655 235 
Net cash provided by financing activities97,335 48,876 
Net increase in cash, cash equivalents and restricted cash54,476 12,340 
Cash, cash equivalents and restricted cash – beginning of period70,420 79,333 
Cash, cash equivalents and restricted cash – end of period$124,896 $91,673 
Supplemental disclosure of cash flow information
Cash paid for interest$1,388 $875 
Cash paid for Tax$ $20 
Noncash investing and financing activities
Deferred financing and public offering costs in accounts payable and accrued expenses$ $234 
Public offering cost in accrued expense$59 $ 
Property and equipment additions in accrued expenses$172 $248 
Issuance of common stock warrants$1,750 $ 
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 a new class of oral biologics that are intended to act on cells in the small intestine to produce therapeutic effects throughout the body. The 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.
To date, the Company has financed operations primarily with the proceeds from the issuance of common stock combined with proceeds from previous sales of convertible preferred stock to equity investors and debt financing.
On June 3, 2019, the Company filed a Registration Statement on Form S-3 (File No. 333-231911) (the “Shelf”) with the SEC in relation to the registration of common stock, preferred stock, debt securities, warrants and/or units of any combination thereof in the aggregate amount of up to $200.0 million for a period of up to three years from the date of its effectiveness on June 6, 2019. The Company also simultaneously entered into a sales agreement (the "ATM") 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. For the three and six months ended June 30, 2021, the Company sold no shares and 139,734 shares, respectively, under the ATM with offering prices ranging between $12.54 and $13.17 per share for gross proceeds of $1.8 million, and net proceeds of $1.7 million, after deducting commission and other offering expenses payable by the Company.
On February 2, 2021, the Company sold 5,175,000 shares of its common stock in an underwritten public offering at a public offering price of $15.00 per share, including the underwriters' exercise of their option to purchase 675,000 shares to cover over-allotment, generating gross proceeds of $77.6 million and net proceeds of underwriting discounts and commission of $72.7 million, after deducting underwriting discounts and commission and other offering expenses paid by the Company.

On January 28, 2021, the Company entered into a stock purchase agreement with ALJ Health Care & Life Science Company Limited ("ALJ Health Care"), pursuant to which on February 2, 2021, ALJ Health Care purchased $7.5 million of our common stock in a private placement at a purchase price of $15.00 per share, equal to the public offering price per share at which our common stock was sold to the public as referred above. The sale of such shares was not registered under the Securities Act.

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 June 30, 2021, the Company had cash and cash equivalents of $123.3 million and an accumulated deficit of $352.3 million.
The Company expects that its cash and cash equivalents as of June 30, 2021 will be sufficient to fund the operating expenditures and capital expenditure requirements necessary to advance its research efforts and clinical trials for at least one year from the date of issuance of these unaudited condensed consolidated financial statements. The future viability of the Company beyond one year from the date of issuance of these unaudited condensed consolidated financial statements is dependent on its ability to raise additional capital to finance its operations. The Company's inability to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies. There can be no assurance that the current operating plan will be achieved or that additional funding will be available on terms acceptable to the Company, or at all.
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, 2020 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 June 30, 2021, the results of its operations and stockholders' equity for the three and six months ended June 30, 2021 and 2020 and cash flows for the six months ended June 30, 2021 and 2020. Such adjustments are of a normal and recurring nature. The results for the three and six months ended June 30, 2021 are not necessarily indicative of the results for the year ending December 31, 2021, 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, estimates related to the application of ASC 606 to our collaboration agreement, 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.
Emerging Growth Company Status
Evelo is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and it may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Evelo may take advantage of these exemptions until it is no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. Evelo has elected to use the extended transition period for complying with new or revised accounting standards, and, as a result of this election, its consolidated financial statements may not be comparable to companies that comply with public company effective dates. Evelo may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of its IPO or such earlier time that it is no longer an emerging growth company. Evelo would cease to be an emerging growth company if it has more than $1.07 billion in annual revenue, it has more than $700.0 million in market value of its stock held by non-affiliates (and has been a public company for at least 12 months and has filed one annual report on Form 10-K), or it has issued more than $1.0 billion of non-convertible debt securities over a three-year period.
Comprehensive Income or Loss
Comprehensive income (loss) consists of net income (loss) and changes in equity during a period from transactions and other equity and circumstances generated from non-owner sources. The Company’s net loss equals comprehensive loss for all periods presented.
7

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. As of June 30, 2021 and December 31, 2020 the Company had $0.3 million in current restricted cash within prepaid expenses and other current assets and $1.3 million in noncurrent restricted cash which were included within other assets in the unaudited condensed consolidated balance sheets. The following reconciles cash, cash equivalents and restricted cash as of June 30, 2021 and December 31, 2020, as presented on the Company's statements of cash flows, to its related balance sheet accounts (in thousands):
June 30, 2021December 31, 2020
Cash and cash equivalents:
Cash$2,964 $4,487 
Money market funds120,369 64,370 
Total cash and cash equivalents123,333 68,857 
Restricted cash1,563 1,563 
Cash, cash equivalents and restricted cash$124,896 $70,420 
Fair Value of Financial Instruments
ASC 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.
ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
An entity may choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company did not elect to measure any additional financial instruments or other items at fair value.
8

Collaboration Agreements

The Company analyzes its collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements ("ASC 808") to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards that are dependent on the commercial success of such activities. To the extent the arrangement is within the scope of ASC 808, the Company assesses whether aspects of the arrangement between the Company and its collaboration partner are within the scope of other accounting literature, including ASC 606, Revenue from Contracts with Customers ("ASC 606"). If it is concluded that some or all aspects of the arrangement represent a transaction with a customer, the Company will account for those aspects of the arrangement within the scope of ASC 606.

ASC 808 provides guidance for the presentation and disclosure of transactions in collaborative arrangements, but it does not provide recognition or measurement guidance. Therefore, if the Company concludes a counterparty to a transaction is not a customer or otherwise not within the scope of ASC 606, the Company considers the guidance in other accounting literature, including the guidance in ASC 606, as applicable or by analogy to account for such transaction. The classification of transactions under the Company’s arrangements is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants.

Revenue Recognition

The Company analyzes its collaboration arrangements to assess whether they are within the scope of Accounting Standards Codification ASC 808, to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards that are dependent on the commercial success of such activities. If the Company concludes that some or all aspects of the arrangement represent a transaction with a customer, the Company accounts for those aspects of the arrangement within the scope of ASC 606.

To determine the appropriate amount of revenue to be recognized for arrangements that the Company determines are within the scope of ASC 606, it performs the following steps: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) each performance obligation is satisfied. ASC 606 requires significant judgment and estimates and results in changes to, but not limited to: (i) the determination of the transaction price, including estimates of variable consideration, (ii) the allocation of the transaction price, including the determination of estimated selling price, and (iii) the pattern of recognition, including the application of proportional performance as a measure of progress on service-related promises and application of point-in-time recognition for supply-related promises.

The promised good or services in the Company’s arrangement may consist of license rights to the Company’s intellectual property or research and development services. The Company also may have optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts with the customer if such option is elected by the customer, unless the option provides a material right which would not be provided without entering into the contract. Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer. Promised goods or services are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources or (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised goods or services are distinct, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on their own or whether the required expertise is readily available.

The transaction price may be comprised of fixed payments, often an upfront payment due at contract inception, or other types of variable consideration in the form of payments for the Company’s services and materials and milestone payments due upon the achievement of specified events. Other payments the Company could be entitled to include tiered royalties earned when customers recognize net sales of licensed products. The Company considers the existence of any significant financing component within its arrangements to the extent there is a significant difference between the timing of payment and the transfer of control of the performance obligations. In making that determination, the Company considers whether substantive business purposes exist to support the payment structure other than to provide a significant benefit of financing. The Company measures the transaction price based on the amount of consideration to which it expects to be entitled in exchange for transferring the
9

promised goods and/or services to the customer. The Company utilizes either the expected value method or the most likely amount method to estimate the amount of variable consideration, depending on which method is expected to better predict the amount of consideration to which the Company will be entitled. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. With respect to arrangements that include payments for a development or regulatory milestone payment, the Company evaluates whether the associated event is considered probable of achievement and estimates the amount to be included in the transaction price using the most likely amount method. Milestone payments that are not within the Company’s or the licensee’s control, such as those dependent upon receipt of regulatory approval, are not considered to be probable of achievement until the triggering event occurs. At the end of each reporting period, the Company re-evaluates the probability of achievement of each milestone and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and net loss in the period of adjustment. For arrangements that include sales-based royalties, including milestone payments based upon the achievement of a certain level of product sales, wherein the license is deemed to be the sole or predominant item to which the payments relate, the Company recognizes revenue upon the later of: (i) when the related sales occur or (ii) when the performance obligation to which some or all of the payment has been allocated has been satisfied (or partially satisfied). Consideration that would be received for optional goods and/or services is excluded from the transaction price at contract inception.

For arrangements with more than one performance obligation, the Company generally allocates the transaction price to each performance obligation based on a relative standalone selling price basis. The Company develops assumptions that require judgment to determine the standalone selling price for each performance obligation in consideration of applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated research and development costs. However, in certain instances, the Company may allocate variable consideration entirely to one or more performance obligation if the terms of the variable consideration relate to the satisfaction of the respective performance obligation and the amount allocated is consistent with the amount the Company would expect to receive for the satisfaction of the respective performance obligation.

The Company recognizes revenue based on the amount of the transaction price that is allocated to each respective performance obligation when or as the performance obligation is satisfied by transferring a promised good or service to the customer. For performance obligations that are satisfied at a point in time, the Company recognizes revenue when control of the goods and/or services is transferred to the customer. For performance obligations that are satisfied over time, the Company recognizes revenue by measuring the progress toward complete satisfaction of the performance obligation using a single method of measuring progress which depicts the performance in transferring control of the associated goods and/or services to the customer. With respect to arrangements containing a license to its intellectual property that is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from amounts allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations under an arrangement. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and net loss in the period of adjustment.

Contract Liabilities

The Company records a contract liability, classified as deferred revenue on its condensed consolidated balance sheet, when it has received payment but has not yet satisfied the related performance obligations. In the event of an early termination of a contract with a customer, any contract liabilities would be recognized in the period in which all Company obligations under the agreement have been fulfilled.




10

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 unaudited condensed 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 licenses, products 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 equity awards 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 options. The determination of the fair value of 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.
Recently Adopted Accounting Pronouncements
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 was effective for the Company on January 1, 2021 and it 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. The Company adopted ASU No. 2019-12 on January 1, 2021 and has concluded the adoption did not have a material impact on its unaudited condensed consolidated financial statements.
Accounting Pronouncements Issued and Not Adopted as of June 30, 2021
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments, which has been subsequently amended by ASU No. 2018-19, ASU No.
11

2019-04, ASU No. 2019-05, ASU No. 2019-10, ASU No. 2019-11 and ASU No. 2020-03 (“ASU 2016-13”). The provisions of ASU 2016-13 modify the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology and require a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for the Company on January 1, 2023, with early adoption permitted. The Company is currently evaluating the potential impact that this standard may have on its financial position and results of operations, as well as the timing of its adoption of this standard.
Debt with Conversion and Other Options
On August 5, 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU-2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models in ASC 470-20 that require separate accounting for embedded conversion features from convertible instruments. As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. Additionally, the guidance simplifies the evaluation of whether a contract in the issuer’s own equity can be classified in equity or an embedded feature qualifies for the derivative scope exception. Although the guidance is not effective until 2022, early adoption of ASU 2020-06 is permitted for all entities for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of this new guidance on the Company’s condensed consolidated financial statements and related disclosures.

3. ALJ Commercialization and License Agreement

On March 17, 2021, the Company entered into a commercialization and license agreement (the “ALJ Agreement”) with ALJ. Pursuant to the ALJ Agreement, the Company granted to ALJ an exclusive, non-transferable, sublicensable license to the Company’s product candidate, EDP1815 (together with any replacement or second products of the Company described below, the “Products”) solely (i) to conduct development activities relating to the Products allocated to ALJ in a development plan agreed with the Company, (ii) to conduct manufacturing activities relating to the Products in all therapeutic uses in humans (the “Field”) throughout the world, subject to certain conditions and requirements, and (iii) to commercialize the Products in the Field in all countries of Africa and the Middle East-Turkey, excluding certain restricted countries (the “Territory”). If the Company ceases development of EDP1815 prior to receipt of regulatory approval required for commercialization of EDP1815 in any one of the United States, the United Kingdom, France, Germany, Spain, Italy, China or Japan, then ALJ will have the right to designate another product candidate of the Company as a replacement to EDP1815 or terminate the ALJ Agreement, subject to certain conditions and requirements. Further, for the first two years of the term, ALJ has the option to negotiate with the Company to add a second product candidate of the Company subject to certain conditions and requirements, for an additional license fee not to exceed $7.5 million.

In consideration for the rights the Company granted under the ALJ Agreement, ALJ obligated to pay to the Company a one-time, non-refundable upfront payment of $7.5 million. The parties will also share the future operating profits and losses for all Products in the Territory equally (50:50) as well as certain development, regulatory and commercialization costs. The Company concluded that the delivery of the license to ALJ, should be accounted for under ASC 606. The development, regulatory and commercialization activities within the Territory will be accounted for under ASC 808.

The Company has not recognized any revenue under the ALJ Agreement to date as they have not completed any performance obligation within the agreement. As of June 30, 2021, the Company has recognized $7.5 million of deferred revenue, which is classified as a non-current liability in the accompanying unaudited condensed consolidated balance sheets as the performance obligation is not expected to be completed within the next twelve months.


The Company anticipates that payments under the costs share or profit and loss sharing arrangements, will be classified in the statement of operations consistent with the guidance in ASC 808. To date, the Company has not received or made any costs sharing or profit and loss payments.

12

4. 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 $0.1 million and $0.2 million, respectively, for the three months and six months ended June 30, 2020 and were equivalent to the minimum payments due from the Company to the landlord.
For the three months and six months ended June 30, 2021, the Company recorded rent expense of $0.7 million and $1.5 million, respectively. For the three months and six months ended June 30, 2020, the Company recorded rent expense of $0.7 million and $1.4 million, respectively.There was no sublease rental income for the three months and six months ended June 30, 2021. For the three months and six months ended June 30, 2020, the Company recorded rent expense net of sublease rental income of $0.1 million and $0.3 million, respectively. Sublease rental income is inclusive of rental payments, taxes and operating expenses.
The minimum aggregate future lease commitments at June 30, 2021, are as follows (in thousands):
Amount
2021 (excluding amounts paid or in Accounts Payable as of 6/30/2021)
$1,252
20223,062
20233,154
20243,249
20252,491
Total lease payments13,208
Less imputed interest(2,472)
Total$10,736
Other information:
Operating cash flows used for operating leases$1,230
Weighted-average remaining lease term (in years)4.25
Weighted-average discount rate9.5 %

5. 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 June 30, 2021 and December 31, 2020 (in thousands):
DescriptionJune 30, 2021
(Level 1)

(Level 2)

(Level 3)
Assets:
Money market funds included within cash and cash equivalents$120,369 $120,369 $ $ 
Total$120,369 $120,369 $ $ 
13

DescriptionDecember 31, 2020
(Level 1)

(Level 2)

(Level 3)
Assets:
Money market funds included within cash and cash equivalents$64,370 $64,370 $ $ 
Total$64,370 $64,370 $ $ 
As of June 30, 2021 and December 31, 2020, 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.
6. Property and Equipment, Net
Property and equipment consists of the following (in thousands):
June 30, 2021December 31, 2020
Property and equipment:
Lab equipment$9,744 $8,831 
Leasehold improvements2,157 2,157 
Furniture and fixtures822 822 
Computers and software230 230 
Office equipment14 3 
Construction-in-process1,272 1,078 
Property and equipment14,239 13,121 
Less: accumulated depreciation(6,719)(5,643)
Property and equipment, net$7,520 $7,478 
The Company recognized $0.5 million and $1.1 million of depreciation expense for the three and six months ended June 30, 2021, respectively, and $0.5 million and $1.0 million of depreciation expense for the three and six months ended June 30, 2020, respectively.
7. Loan and Security Agreements

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 availability of the third tranche of $15.0 million expired on January 15, 2021. On June 16, 2021 (the "Amended Credit Facility Effective Date"), the parties further amended the 2019 Credit Facility (as so amended, the “Amended Credit Facility”) to, among other things, replace and supersede the existing $15.0 million third tranche commitment with a new $15.0 million fourth tranche commitment, which the Company drew down on June 16, 2021. In connection with the Amended Credit Facility, the Company issued to K2 HealthVentures Equity Trust LLC, an affiliate of K2HV a warrant to purchase up to 139,770 shares of the Company’s common stock with an exercise price of $13.30 per share, subject to customary per share adjustments that are within the Company's control (“the Warrant”). In addition, under the Amended Credit Facility, K2HV has the option, exercisable at any time, to convert up to $5.0 million of principal outstanding into shares of the Company’s common stock at a conversion price of $13.30 per share, subject to customary per share adjustments within the Company's control (the "Conversion Option”).

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, 2023, which was extended from February 28, 2022 pursuant to the Amended Credit Facility. 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. The Company has an option to prepay the loans in
14

whole, subject to a prepayment fee of 2% of the amount prepaid or, if the prepayment occurs after the 18-month anniversary of the Amended Credit Facility Effective Date but prior to the maturity date, 1% of the amount prepaid. Pursuant to the Amended Credit Facility, the Company has the option at any point prior to January 1, 2022 to elect to adjust the repayment schedule (the “Modified Repayment Schedule”) such that commencing on March 1, 2023, the Company can make consecutive equal monthly payments of principal and accrued and unpaid interest based on a notional thirty month repayment period. Under the Modified Repayment Schedule, the loan maturity date remains August 1, 2024. Any outstanding principal and unpaid interest is due at maturity. Upon final payment or prepayment of the loans, the Company must pay a final payment equal to 4.3% (or 4.8% if the Company elects the Modified Repayment Schedule) of the aggregate original principal amount of the loans borrowed. The Company incurred fees associated with establishing the 2019 Credit Facility and fees related to the Amended Credit Facility of $0.4 million and $0.3 million, respectively.

Borrowings under the Amended 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. The Amended 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 Amended Credit Facility and under applicable law. As of June 30, 2021, the Company was in compliance with all covenants under the Amended Credit Facility.

The Company has concluded the Amended Credit Facility is a debt extinguishment for accounting purposes because the terms of the modified debt are considered substantially different than the terms of the debt prior to the amendment. As such, the Amended Credit Facility was recorded at its estimated fair value of $46.6 million which was determined using a combination of a discounted cash flow model and a binomial lattice model. The Company utilized the following significant unobservable inputs (Level 3 inputs) to determine the estimated fair value of its debt as of the amendment date:

Expected volatility70.00 %
Expected yield11.50 %

Significant increases (decreases) in either of these inputs could result in a significantly lower or higher fair value measurement.

The Warrant was deemed to be a freestanding financial instrument as it is legally detachable and separately exercisable from the debt obligations. The Company evaluated the terms and conditions of the warrant and concluded it met the criteria to be classified within equity. As such, the Company recorded the warrant as additional paid in capital at its issuance date fair value of $1.8 million. The Company utilized the Black-Scholes valuation method to determine the fair value of the warrant which utilized the following assumptions:

Fair value of underlying common stock$16.13 
Exercise price$13.30 
Risk-free interest rate1.56 %
Expected volatility70.0 %
Expected term (years)10.0
Expected dividend yield %

The Company recorded a loss on the extinguishment of the existing debt of $3.2 million which equaled the difference between the reacquisition cost of the new debt, inclusive of the fair value of the Warrant and lender fees, and the carrying amount of the existing debt. The difference between (i) the carrying amount of the debt and (ii) the par value of the debt and the amount of the final payment due at maturity will be amortized as interest expense using the effective interest rate method.
15


The Company has the following minimum aggregate future loan payments at June 30, 2021 (in thousands).

Twelve month period ending June 30,Amount
2022$3,893 
202313,348 
202432,096 
20257,316 
Total minimum payments56,653 
Less amounts representing interest and discount(10,171)
Total Debt$46,482 
Interest expense was approximately $0.8 million and $1.6 million for the three and six months ended June 30, 2021, respectively, and $0.4 million and $0.8 million for the three and six months ended June 30, 2020.
8. 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 June 30, 2021, the Company has incurred milestone payments to date totaling approximately $0.3 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 June 30, 2021, the Company has incurred milestone payments to date totaling approximately $0.4 million under the agreement of which no amounts are currently due.


16

9. 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 June 30, 2021.
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.

A Notice of Opposition was filed against European Patent No. 3223834, which is held by the Company. In July 2021, the Company filed its reply to the Opposition. The patent at issue does not relate to any of the Company’s current product candidates, and any subsequent proceeding is not expected to affect any of the Company’s current development plans.
10. Stockholders’ Equity
Common Stock
On June 3, 2019, the Company filed the Shelf with the SEC in relation to the registration of common stock, preferred stock, debt securities, warrants and/or units of any combination thereof in the aggregate amount of up to $200.0 million for a period of up to three years from the date of the filing. The Company also simultaneously entered into the ATM, 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. For the three and six months ended June 30, 2021, the Company sold no common shares and 139,734 common shares, respectively, under the ATM with offering prices ranging between $12.54 and $13.17 per share for gross proceeds of net proceeds of $1.7 million, after deducting commission and other offering expenses payable by the Company.
On February 2, 2021, the Company sold 5,175,000 shares of its common stock in an underwritten public offering at a public offering price of $15.00 per share, including the underwriters' exercise of their option to purchase 675,000 shares to cover over-allotment, generating gross proceeds of $77.6 million and net proceeds of underwriting discounts and commission of $72.7 million, after deducting underwriting discounts and commission and other offering expenses paid by the Company.

On January 28, 2021, the Company entered into a stock purchase agreement with ALJ Health Care & Life Science Company Limited ("ALJ Health Care"), pursuant to which on February 2, 2021, ALJ Health Care purchased $7.5 million of the Company's common stock in a private placement at a purchase price of $15.00 per share, equal to the public offering price per share at which the Company's common stock was sold to the public as referred above. The sale of such shares was not registered under the Securities Act.

In connection with the entry into the Amended Credit Facility, the Company issued to K2 HealthVentures Equity Trust LLC, an affiliate of K2HV, a warrant to purchase up to 139,770 shares of the Company’s common stock, with an exercise price of $13.30 per share, subject to customary per share adjustments. The Warrant is exercisable immediately and expires on June 16, 2031, provided that, under certain circumstances, the Warrant may terminate and expire earlier in connection with the closing of certain acquisition transactions involving the Company. The Warrant provides that the holder thereof may elect to exercise the Warrant on a net “cashless” basis at any time prior to the expiration thereof. The fair market value of one share of the Company’s common stock in connection with any cashless exercise shall be the closing price or last sale price per share of the Company’s common stock on
17

a nationally recognized securities exchange, inter-dealer quotation system or over-the-counter market on which the Company’s common stock is traded on the business day immediately prior to the date the holder elects to exercise the Warrant on a cashless basis. In addition, under the Amended Credit Facility, K2HV has the option, exercisable at any time, to convert up to $5.0 million of principal outstanding into shares of the Company’s common stock at a conversion price of $13.30 per share, subject to customary per share adjustments.
11. Stock-Based Compensation
2021 Inducement Plan
On May 27, 2021, the Company’s board of directors adopted the Evelo Biosciences, Inc. 2021 Employment Inducement Award Plan (the “Inducement Award Plan”) without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Stock Market LLC listing rules (“Rule 5635(c)(4)”). In accordance with Rule 5635(c)(4), cash and equity-based incentive awards under the Inducement Award Plan may only be made to a newly hired employee who has not previously been a member of the Company’s board of directors, or an employee who is being rehired following a bona fide period of non-employment by the Company or a subsidiary, as a material inducement to the employee’s entering into employment with the Company or its subsidiary. An aggregate of 1,250,000 shares of the Company’s common stock have been reserved for issuance under the Inducement Award Plan. The Company will continue to grant awards under the 2018 Incentive Award Plan (the “2018 Plan”) pursuant to the terms thereof.
The exercise price of stock options granted under the Inducement Award Plan will not be 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 Company’s board of directors and are subject to the provisions of the Inducement Award Plan. Stock options granted to employees generally vest over a four-year period but may be granted with different vesting terms. Certain options may provide for accelerated vesting in the event of a change in control. Stock options granted under the Inducement Award Plan expire no more than 10 years from the date of grant. As of June 30, 2021, stock option awards covering up to 550,000 shares of the Company’s common stock have been issued under the Inducement Award Plan, none of which have been exercised or canceled. As of June 30, 2021, restricted stock unit (“RSU”) awards covering up to 4,545 shares of the Company’s common stock have been granted under the Inducement Award Plan, none of which have vested or been forfeited. As of June 30, 2021, 695,455 shares of common stock are available for future grant under the Inducement Award Plan.
2018 Incentive Award Plan
The Company’s board of directors adopted on April 18, 2018, and the Company’s stockholders approved, 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, 2021 and 2020, the number of shares authorized for issuance under the 2018 Plan was increased by 1,898,805 shares and 1,286,824 shares, respectively. 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 will not be 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 June 30, 2021, stock options awards covering up to 6,557,456 shares of the Company’s common stock have been issued under the 2018 Plan, of which 34,748 have been
18

exercised and 977,561 have been canceled. As of June 30, 2021, 647,704 shares of common stock are available for future grant under the 2018 Plan.

2015 Stock Incentive Plan
Prior to the approval of the 2018 Plan, the Company granted equity awards under the 2015 Plan, which originally provided for grant of incentive stock options, non-qualified stock options, restricted stock awards ("RSAs"), and other stock-based awards to the Company’s employees, officers, directors, consultants and advisors.
The terms of equity award agreements, including vesting requirements, were determined by the board of directors and are subject to the provisions of the 2015 Plan. Stock options granted to employees generally vest over a four-year period but may be granted with different vesting terms. A limited number of awards contain performance-based vesting criteria and for such awards that are deemed probable of vesting, the Company records expense in the period in which such determination is made through any estimated remaining vesting period. Certain options provide for accelerated vesting in the event of a change in control. Awards granted to non-employee consultants generally vest monthly over a period of one to four years. Stock options issued under the 2015 Plan expire no more than 10 years from the date of grant. As of the effectiveness of the 2018 Plan, the Company ceased making awards under the 2015 Plan.
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 June 30, 2021, an aggregate of 5,758,536 options and other equity awards had been granted under the 2015 Plan, of which 1,431,864 have been exercised, 1,275,971 have been canceled and 18,468 have been repurchased as of June 30, 2021. 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 unaudited condensed consolidated statements of operations is as follows (in thousands):
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
General and administrative$1,723 $1,010 $3,164 $1,899 
Research and development2,049 1,083 3,872 2,149 
Total stock-based compensation expense$3,772 $2,093 $7,036 $4,048 
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, 20206,610,662 $6.55 
Granted2,731,274 15.59 
Exercised(85,831)6.59 
Canceled(110,267)10.46 
Options outstanding at June 30, 20219,145,838 $9.20 
Exercisable as of June 30, 20214,443,028 $6.12 
19

The weighted-average fair value of options granted during the six months ended June 30, 2021 and 2020 was $11.52 and $4.45, respectively.
As of June 30, 2021, total unrecognized stock-based compensation expense relating to unvested stock options was $38.7 million. This amount is expected to be recognized over a weighted average period of 2.76 years.
Restricted Stock Units
A summary of the RSU activity and related information is as follows: 
SharesWeighted-
Average
Grant Date Fair Value
Unvested balance at December 31, 2020284,000 $4.41 
Granted172,450 15.50 
Vested  
Forfeited(36,190)6.50 
Unvested balance at June 30, 2021420,260 $8.78 
Stock-based compensation expense related to RSUs was $0.2 million and $0.3 million, respectively, for the three months and six months ended June 30, 2021.
2018 Employee Stock Purchase Plan

The Company's board of directors adopted on April 18, 2018, and the Company’s stockholders approved, the 2018 Employee Stock Purchase Plan (the “ESPP”), which became effective on May 8, 2018. A total of 336,356 shares of common stock were initially reserved for issuance under the ESPP. In addition, the number of shares of common stock that may be issued under the ESPP will automatically increase on the first day of each calendar year, beginning in 2020 and ending in and including 2028, by an amount equal to the lesser of (i) 1% of the number of shares of the Company’s common stock outstanding on the last day of the applicable preceding calendar year and (ii) an amount determined by the Company’s board of directors. The Company's board of directors authorized an initial offering period under the ESPP commencing on February 1, 2020. Accordingly, on January 1, 2021, the number of shares authorized for issuance under the ESPP was increased by 474,701 shares.

The compensation expense recognized related to the ESPP for the three and six ended June 30, 2021 and 2020 was not material. There was a total of 0 shares and 27,587 shares, respectively, purchased under the ESPP during the three and six months ended June 30, 2021. There were no shares purchased under the ESPP during both the three months and six months ended June 30, 2020.
12. 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 contained 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 June 30, 2021, the Company had deferred $0.4 million in employer payroll taxes pursuant to the CARES Act, of which $0.2 million is included in the accrued expenses and $0.2 million is included in the other noncurrent liabilities in these unaudited condensed consolidated balance sheets.
20

For the six months ended June 30, 2021 and 2020 the Company recorded a tax provision of $0.2 million and $0.2 million, respectively, primarily related to the Company's wholly-owned UK subsidiary.
13. 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, and exercise of the Warrant and Conversion Option under the Amended Credit Facility, 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:
 Six Months Ended June 30,
 20212020
Unvested common stock from early exercise of options18,386 36,772 
Stock options to purchase common stock9,145,838 6,385,572 
Warrant139,770  
Conversion option375,939  
Common stock offering from ESPP10,743 23,492 
Total9,690,676 6,445,836 

14. 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 six months ended June 30, 2021 and 2020, the Company paid Weatherden $0.1 million and $0.4 million, respectively. As of June 30, 2021 and 2020, the amount due to Weatherden under the supply of service agreement was approximately 0.1 million 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 three and six months ended June 30, 2020, $0.1 million and $0.3 million, respectively, 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.

The Company entered into a consulting agreement with David Epstein (the "Consulting Agreement"), the Company's Chairman of the Board, effective September 16, 2019 pursuant to which Mr. Epstein provides strategic advisory and other consulting services to the Company. The Consulting Agreement was amended on October 15, 2020 and again on April 9, 2021, and now has a term that is scheduled to end on June 30, 2022 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 as amended on October 15, 2020, 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
21

Board in its discretion based on customary option pricing methodologies, which award vests in 12 equal monthly installments 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. In the event the Consulting Agreement is renewed for a term of less than one year, the aggregate grant date fair value of the corresponding annual equity award and the resulting number of shares of the Company’s common stock purchasable under such annual equity award and the vesting schedule shall be adjusted proportionately to the length of the renewal term. 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. Under the Consulting Agreement as amended on April 9, 2021, effective on June 30, 2021, Mr. Epstein is entitled to receive restricted stock units having an aggregate grant date fair value of approximately $0.5 million, as determined by our Board of Directors in its discretion based on a 10-day trailing average of the closing price of our common stock on the Nasdaq Global Select Market, as his sole compensation for the provision of consulting services to the Company. The restricted stock units will vest in 12 substantially equal monthly installments following June 30, 2021, such that the restricted stock units shall be fully vested on June 30, 2022, subject to his continued provision of consulting services to the Company pursuant to the Consulting Agreement on the applicable vesting date. All of the foregoing options and restricted stock units, to the extent then outstanding, will be subject to accelerated vesting upon the occurrence of a change in control of the Company.
22

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, 2020 (the "2020 Annual Report"), including the audited consolidated financial statements and notes thereto contained in our 2020 Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described, in or implied, by these forward-looking statements. In this Quarterly Report on Form 10-Q, unless otherwise stated or as the context otherwise requires, references to “Evelo,” “Evelo Biosciences,” the “Company,” “we,” “us,” “our” and similar references refer to Evelo Biosciences, Inc. and its consolidated subsidiaries.
Overview

We are discovering and developing a new class of oral biologics that are intended to act on cells in the small intestine to produce therapeutic effects throughout the body. The target cells in the small intestine play a central role in governing human immune, metabolic and neurological systems. We refer to this biology as the small intestinal axis, or SINTAXTM. We have built a platform to discover and develop novel oral medicines which target the small intestinal axis. By harnessing the small intestinal axis, we have the potential to transform healthcare via medicines that have the potential to be effective, safe, convenient and affordable and to thereby treat patients at all stages of diseases and to treat patients globally.
Our first product candidates are orally delivered pharmaceutical preparations of naturally occurring, specific single strains of microbes. In preclinical models, our product candidates engaged immune cells in the small intestine and drove changes in systemic biology without any observed systemic exposure. We have observed in early clinical trials and preclinical studies that our approach led to modulated immune responses throughout the body by acting on the small intestinal axis. Our most advanced product candidate, EDP1815 is being developed for the treatment of inflammatory diseases and the hyperinflammatory response associated with COVID-19. Additional product candidates include EDP1867 and EDP2939 for the treatment of inflammatory disease and EDP1908 for the treatment of cancer.
Impact of COVID-19

On March 11, 2020, the 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 ("CMOs") to minimize delays and disruptions to scheduled manufacturing batch runs for our product candidates and to ensure conformity to product specifications.

The COVID-19 pandemic has impacted and continues to impact our enrollment of new patients into, and the retention of existing patients in, our ongoing clinical trials, due primarily to lower patient participation. The pandemic likely will impact enrollment and retention of patients in new and existing clinical trials. We continue to recruit individuals in line with the local and national guidelines of the clinical research sites. We are keeping in close contact with our contract research organizations ("CROs") and clinical sites to provide support and guidance to ensure the safety of the patients in our clinical trials. We have prioritized our drug supply operations to secure the re-supply of patients currently enrolled in our clinical trials.

23

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 COVID-19 pandemic has adversely impacted and may continue to adversely impact our business, including our preclinical studies and clinical trials and finances.” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Clinical Programs
EDP1815

EDP1815 is an investigational oral biologic being developed for the treatment of inflammatory diseases. It is a strain of Prevotella histicola, selected for its specific pharmacology.
Psoriasis and atopic dermatitis

Phase 2 clinical trial in psoriasis

Based on previously reported positive clinical data in two cohorts of individuals with mild to moderate psoriasis in a Phase 1b clinical trial, we advanced EDP1815 into a Phase 2 dose ranging trial, evaluating three doses of EDP1815 in capsules versus placebo in approximately 225 individuals with mild and 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 have completed enrollment and plan to report topline data in the third quarter of 2021.

We intend to evaluate EDP1815 in additional inflammatory disease indications, depending on the results from 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 and moderate psoriasis or atopic dermatitis. The primary endpoint of the Phase 1b trial is safety and tolerability.

In December 2020 and January 2021, we reported positive clinical data from a cohort of patients with mild and moderate atopic dermatitis (n=24), randomized 2:1 to receive EDP1815 in capsules or placebo for 56 days. Atopic dermatitis is the most common type of eczema. EDP1815 was well-tolerated with no treatment-related adverse events of moderate or severe intensity, and no serious adverse events. Secondary endpoints included a range of established markers of clinical efficacy in atopic dermatitis, such the Eczema Area and Severity Index (“EASI”), the Investigator’s Global Assessment times body surface are (“IGA* BSA”), and the SCORing Atopic Dermatitis (“SCORAD”) scores.

The data showed consistent improvements in percentage change from baseline compared to placebo for all three clinical scores: EASI, IGA*BSA, and SCORAD. In addition, 7 out of 16 (44%) patients treated with EDP1815 achieved an outcome of a 50% improvement from baseline in EASI score by day 70, compared with 0% in the placebo group, showing sustained improvement in those patients responding to EDP1815.

In addition to physician-reported clinical outcomes, this trial also assessed patient-reported outcomes. Treatment with EDP1815 resulted in clinically meaningful improvement in the Dermatology Life Quality Index (“DLQI”) and the Patient-Oriented Eczema Measure (“POEM”). These patient-reported outcomes capture the important impact of the disease on patients, including the domains of itch and sleep, both of which saw improvements in patients receiving EDP1815 in the trial. All five measures of itch within the Pruritus-Numerical Rating Scale “(Pruritus-NRS”), SCORAD, POEM, and DLQI showed greater improvements in the treated group at day 56 compared with placebo. These results provide further evidence that modulating SINTAX can drive significant clinical benefit without the need for systemic exposure.

Subject to regulatory approval, we anticipate initiation of a Phase 2 trial of EDP1815 in atopic dermatitis in the third quarter of 2021 and plan to report topline data in the third quarter of 2022.
24


COVID-19

EDP1815 is being evaluated in two ongoing clinical studies for the treatment of hospitalized COVID-19 patients. EDP1815 is included as a treatment arm in the TACTIC-E clinical trial. TACTIC-E is a Phase 2/3 randomized trial, sponsored 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.

The second study 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.

As a result of the varying infection rates that have occurred with the pandemic, we have experienced slower than expected enrollment in both trials and, therefore, do not know when we will be able to report data from the clinical trial being conducted at the Robert Wood Johnson University Hospital or TACTIC-E. In order to expedite patient recruitment and expand access to potential therapies for COVID-19, new trial sites have been opened for TACTIC-E, including in the United Kingdom, Brazil and Mexico.

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.

EDP1867

EDP1867 is an inactivated 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 initiated our first Phase 1b clinical trial of EDP1867 in healthy volunteers and patients with moderate atopic dermatitis in February 2021 and expect to report interim data in the fourth quarter of 2021.

EDP2939

EDP2939 is an extracellular vesicle (EV) investigational oral biologic being developed for the treatment of inflammatory diseases. In May 2021, we presented preclinical data for EDP2939 at the American Association of Immunologists Meeting. EDP2939 is the first EV product candidate we have nominated in our inflammation program and we anticipate initiation of clinical development in 2022.


25

EDP1908

In December 2020, we announced EDP1908 as our lead candidate in oncology following presentation of preclinical data at the Society for Immunotherapy for Cancer meeting in November 2020. Preclinical data presented showed that orally administered EDP1908, an EV, resulted in superior tumor growth control versus the parent microbial strain or anti-PD-1 therapy, with an observed dose-dependent reduction in tumor growth. We anticipate initiation of clinical development in 2022.

Collaborations

In March 2021, we announced a strategic collaboration to develop and commercialize our lead inflammation product candidate, EDP1815, in the Middle East, Turkey, and Africa with Meddist Company Limited ("ALJ"), a company focused on accelerating access to affordable modern medical care while addressing unmet medical needs in developing markets around the world.

Together, we and ALJ will work to address the significant disparity in access to medical care in the fastest-growing populations and growth economies of the developing world. Africa’s population is projected to reach 1.7 billion by 2030 and 2.5 billion by 2050.

Under the terms of the agreement, we received an upfront payment from ALJ. We will be primarily responsible for the development and manufacturing of EDP1815 worldwide, whilst ALJ will be primarily responsible for development, regulatory submissions and commercialization activities in the agreed-upon regions. ALJ and we will participate in a 50:50 profit share arrangement. See Note 3 of the notes to our unaudited condensed consolidated condensed financial statements in this Quarterly Report on Form 10-Q for additional information regarding the commercialization and license agreement with ALJ.
Financing
Since our incorporation in 2014, we have devoted substantially all of our resources to developing our clinical and preclinical candidates, building our intellectual property portfolio and process development and manufacturing function, business planning, raising capital and providing general and administrative support for these operations.
We are a development stage company and have not generated any revenue. All of our product candidates are in 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 six months ended June 30, 2021, our net loss was $59.8 million. As of June 30, 2021, we had an accumulated deficit of $352.3 million. We do not expect to generate revenue from sales of any products for the foreseeable future, if at all.
We expect that our expenses will increase substantially in connection with our ongoing activities, particularly as we:
continue the ongoing trials for EDP1815 and EDP1867;
initiate additional clinical trials for EDP1815;
initiate or advance the clinical development of any additional product candidates;
conduct research and continue preclinical development of potential product candidates;
make strategic investments in manufacturing capabilities, including potentially planning and building our own manufacturing facility;
maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property;
increase employees and employee-related expenses including salaries, benefits, travel and stock-based compensation expense; and
26

seek to obtain regulatory approvals for our product candidates.
In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution.
As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.
Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

During the three months and six months ended June 30, 2021, pursuant to the June 2019 sales agreement with Cowen and Company, LLC, we sold no shares and 139,734 shares of our common stock, respectively, in “at-the-market” offerings under a registration statement on Form S-3 that we previously filed with the SEC with offering prices ranging between $12.54 to $13.17 per share for gross proceeds of $1.8 million and net proceeds of $1.7 million, after deducting commission and other offering expenses payable by us.
In February 2021, we sold 5,175,000 shares of our common stock, which includes the underwriters' exercise of their option to purchase 675,000 shares to cover the over-allotment, in an underwritten public offering at a public offering price of $15.00 per share, generating gross proceeds of $77.6 million and net proceeds of underwriting discounts and commission of $72.7 million, after deducting underwriting discounts and commission and other offering expenses paid by us.

Also in February 2021, ALJ Health Care purchased $7.5 million of our common stock in a private placement at a purchase price of $15.00 per share, equal to the public offering price per share at which our common stock was sold to the public as referred above. The sale of such shares was not registered under the Securities Act.

In June 2021, we amended our loan and security agreement with K2 HealthVentures LLC and others (collectively, "K2HV") to, among other things, replace and supersede the existing $15.0 million third tranche commitment with a new $15.0 million fourth tranche commitment, which we drew down on June 16, 2021 (as amended, the “Amended Credit Facility”). The aggregate principal borrowings available under the Amended Credit Facility is $45.0 million. Pursuant to the Amended Credit Facility, we issued to K2 HealthVentures Equity Trust LLC, an affiliate of K2HV, a warrant to purchase up to 139,770 shares of our common stock with an exercise price of $13.30 per share, subject to customary per share adjustments. In addition, under the Amended Credit Facility, K2HV has the option, exercisable at any time, to convert up to $5.0 million of principal outstanding into shares of our common stock at a conversion price of $13.30 per share, subject to customary per share adjustments. See “—Liquidity and Capital Resources—Debt financing."

As of June 30, 2021, our principal source of liquidity is cash and cash equivalents, which totaled approximately $123.3 million dollars. Based on our current operating plan, our existing cash and cash equivalents as of June 30, 2021 will be sufficient to enable us to fund operating expenses and capital expenditure requirements to late Q3’2022. Funds for Phase 3 clinical trials are not included in our forecast. We have based these estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. See “Liquidity and Capital Resources."

27

Financial Operations Overview
Revenue
We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. As discussed in Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we have entered into a collaboration agreement that will result in the recognition of $7.5 million of revenue upon regulatory approval of EDP1815 in certain designated markets. If our development efforts for our current product candidates or additional product candidates that we may develop in the future are successful and result in marketing approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements.
Operating Expenses
Our operating expenses since inception have consisted primarily of research and development activities and general and administrative costs.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the development of our product candidates, which include:
expenses incurred under agreements with third parties, including investigative sites, external laboratories and CROs that conduct research, preclinical activities and clinical trials on our behalf;
manufacturing process-development costs as well as technology transfer and other expenses incurred with CMOs that manufacture drug substance and drug product for use in our preclinical activities and any current or future clinical trials;
salaries, benefits and other related costs, including stock-based compensation expense, for personnel in our research and development functions;
expenses to acquire technologies to be used in research and development;
costs of outside consultants, including their fees, stock-based compensation and related travel expenses;
the cost of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials;
costs related to compliance with regulatory requirements; and
facility-related expenses, which include depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
Our primary focus of research and development since inception has been building a platform to enable us to develop medicines based on an understanding that cells in the small intestine play a central role in governing the immune, metabolic and neurological systems and to show potential clinical utility. Our platform and program expenses consist principally of costs, such as preclinical research, clinical and preclinical manufacturing activity costs, clinical development costs, licensing expenses as well as an allocation of certain indirect costs, facility costs
28

and depreciation expense. We do not allocate personnel costs, which primarily include salaries, discretionary bonus and stock-based compensation costs, as such costs are separately classified as research and development personnel costs.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we continue to implement our business strategy, continue our ongoing clinical trials for our product candidates, including EDP1815 and EDP1867, initiate additional clinical trials for EDP1815, continue to discover and develop additional product candidates, seek regulatory approvals for any products that successfully complete clinical trials, build manufacturing capabilities, hire additional research and development personnel, and expand into additional therapeutic areas.
At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales or licensing of our product candidates. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of:
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.
29

General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; other professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; and facility-related expenses, which include depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our product candidates. We also expect to continue to incur increased expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs and investor and public relations costs.
Interest Expense, Net
Interest expense, net primarily consists of interest expense incurred on our debt offset by interest earned on our cash, and cash equivalents. During each of the three and six months ended June 30, 2021 and 2020, interest expense, net consisted primarily of interest at the stated rate on borrowings under our loan and security agreements and amortization of deferred financing costs and interest expense related to the accretion of debt discount offset by interest earned on institutional money market instruments and U.S. treasury securities.
Loss on Extinguishment of Debt

Loss on extinguishment of debt for three and six months ended June 30, 2021 reflects the difference between the reacquisition cost of the new debt, inclusive of the fair value of the Warrant and lender fees, and the carrying amount of the existing debt. This is a non-cash item.

Other Income (Expense), Net
Other income, net for the three and six months ended June 30, 2021 and 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 six months ended June 30, 2021 and 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.








30

Results of Operations
Comparison of the Three Months Ended June 30, 2021 and 2020
The following table summarizes our results of operations for the three months ended June 30, 2021 and 2020 (in thousands):
 Three Months Ended June 30, 
 20212020Change
Operating expenses:
Research and development$20,655 $15,174 $5,481 
General and administrative7,001 5,071 1,930 
Total operating expenses27,656 20,245 7,411 
Loss from operations(27,656)(20,245)(7,411)
Other (expense) income:
Interest expense, net(814)(458)(356)
Loss on extinguishment of debt(3,226)— (3,226)
Total other income, net151 140 11 
Total other expense(3,889)(318)(3,571)
Loss before income taxes(31,545)(20,563)(10,982)
Income tax expense(53)(89)36 
Net loss$(31,598)$(20,652)$(10,946)
Research and Development Expenses (in thousands):
 Three Months Ended June 30, 
 20212020Change
Platform expenses$3,085 $2,513 $572 
Inflammation programs9,596 5,402 4,194 
Oncology programs764 1,779 (1,015)
Research and development personnel costs (including stock-based compensation)7,210 5,480 1,730 
Total research and development expenses$20,655 $15,174 $5,481 

Research and development expenses were $20.7 million for the three months ended Jun 30, 2021, compared to $15.2 million for the three months ended Jun 30, 2020. The increase of $5.5 million was primarily driven by $4.2 million for higher inflammation program costs from the progression of EDP1815 into two Phase 2 studies, and additional EDP1815 Psoriasis and Atopic Dermatitis and EDP1867 Phase 1b studies, partially offset by the closeout of the EDP1066 program. In addition, there were higher personnel costs of $1.7 million primarily due to headcount growth in clinical development and technical operations functions and higher platform expenses of $0.6 million primarily driven by timing of preclinical studies and general lab related spend, which were partially offset by $1.0 million decrease in our oncology programs primarily related to the wind down of the EDP1503 program. Overall, we expect that our research and development expenses will continue to increase in the foreseeable future as we continue our clinical trials for our product candidates, including EDP1815 and EDP1867, initiate new clinical trials, expand into additional therapeutic areas, continue discovery and development efforts for additional product candidates, hire additional research and development personnel, and seek to increase manufacturing capabilities.


31

General and Administrative Expenses (in thousands):
 Three Months Ended June 30, 
 20212020Change
General and administrative personnel costs (including stock-based compensation)$4,281 $2,761 $1,520 
Professional fees1,538 1,582 (44)
Facility costs, office expense and other1,182 728 454 
Total general and administrative expenses$7,001 $5,071 $1,930 

General and administrative expenses were $7.0 million for the three months ended June 30, 2021, compared to $5.1 million for the three months ended June 30, 2020. The increase of $1.9 million was primarily driven by $1.5 million increase in personnel expenses to support our expanded R&D business needs, as well as additional investment in facility, office and other employee related expenses. We expect general and administrative expenses to increase due to higher personnel and related costs, professional, legal, and patent fees and consulting expenses in support of our continued growth.
Total Other Expense, Net

Total other income, net for the three months ended June 30, 2021 was expense of $3.9 million compared to income of $0.3 million for the three months ended June 30, 2020. The $3.6 million increase in other expenses was primarily driven by a non-cash loss on extinguishment of debt of $3.2 million related to entry into the Amended Credit Facility in June 2021.

Net Loss

Net loss for the three months ended June 30, 2021 was $31.6 million, compared to $20.7 million for the three months ended June 30, 2020. The increase of $10.9 million was primarily the result of the increases in research and development expenses, general and administrative expenses and decrease in total other income, net discussed above.

Comparison of the Six Months Ended June 30, 2021 and 2020

The following table summarizes our results of operations for the six months ended June 30, 2021 and 2020 (in thousands):
 Six Months Ended June 30, 
 20212020Change
Operating expenses:
Research and development$42,163 $32,593 $9,570 
General and administrative12,964 10,913 2,051 
Total operating expenses55,127 43,506 11,621 
Loss from operations(55,127)(43,506)(11,621)
Other (expense) income:
Interest expense, net(1,579)(639)(940)
Loss on extinguishment of debt(3,226)— (3,226)
Other income, net313 606 (293)
Total other expense(4,492)(33)(4,459)
Loss before income taxes(59,619)(43,539)(16,080)
Income tax expense(175)(154)(21)
Net loss$(59,794)$(43,693)$(16,101)
32

Research and Development Expenses (in thousands):
 Six Months Ended June 30, 
 20212020Change
Platform expenses$5,974 $6,249 $(275)
Inflammation programs20,286 12,270 8,016 
Oncology programs1,707 3,083 (1,376)
Research and development personnel costs (including stock-based compensation)14,196 10,991 3,205 
Total research and development expenses$42,163 $32,593 $