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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________

FORM 10-Q
_______________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-38473
____________________________
https://cdn.kscope.io/2a8330e91f2ef6d5fc040b5ff9dd30aa-evlo-20220331_g1.jpg
 Evelo Biosciences, Inc.
(Exact name of registrant as specified in its charter)
____________________________
Delaware 46-5594527
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
620 Memorial Drive
Cambridge, Massachusetts
 02139
(Address of principal executive offices) (Zip Code)
(617) 577-0300
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock,
$0.001 par value per share
EVLONasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  
As of May 9, 2022, the registrant had 53,659,859 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, including within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. These statements involve known and unknown risks, uncertainties, assumptions and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” "target," “predict,” “project,” "contemplate," “should,” “will,” “would,” "continue" or the negative or plural of those terms or other similar expressions.
Forward-looking statements may include, but are not limited to, statements about:
our status as a development-stage company and our expectation to incur losses in the future;
our ability to continue as a going concern, our future capital needs and our need to raise additional funds;
our estimates regarding our expenses including research and development costs, future revenues and anticipated future capital requirements;
our future results of operations, financial position, business strategy and prospective products;
our ability to build a pipeline of product candidates and develop and commercialize drugs;
our ability to develop therapeutic interventions;
plans and objectives of management for future operations and the future results of anticipated products;
our ability to enroll patients and volunteers in clinical trials, timely and successfully complete those trials and receive necessary regulatory approvals;
timing and plans for clinical trials and product candidate approvals;
the timing, progress, receipt and release of data from our ongoing and planned clinical trials and the potential use of those candidates to treat various indications;
our ability to establish our own manufacturing facilities and to receive or manufacture sufficient quantities of our product candidates;
our expectations regarding the potential safety, efficacy or clinical utility of our product candidates;
the impact of the COVID-19 pandemic on our operations, including our preclinical studies and clinical trials, and the continuity of our business;
our ability to protect and enforce our intellectual property rights;
federal, state and foreign regulatory requirements, including regulation of our product candidates by the U.S. Food and Drug Administration (the "FDA");
the likelihood of regulatory filings and approvals;
our ability to obtain and retain key executives and attract and retain qualified personnel;
activities related to strategic collaborations and anticipated revenue therefrom;
our ability to successfully manage our growth; and
developments relating to our competitors and our industry.
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We 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. Forward-looking statements are inherently subject to risks, uncertainties and assumptions, some of which cannot be predicted or quantified and some of which are beyond our control. Risks, uncertainties and assumptions that may cause actual results to differ materially from current expectations include, among other things, those set forth below in “Summary Risk Factors,” in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 1A. “Risk Factors” and for the reasons described elsewhere in this Quarterly Report on Form 10-Q. Any forward-looking statement in this Quarterly Report on Form 10-Q reflects our current view with respect to future events, speaks only as of the date of this Quarterly Report on Form 10-Q, and is subject to these and other risks, uncertainties and assumptions. Given these uncertainties, you should not rely on these forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the


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


SUMMARY RISK FACTORS
Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. Principal risks and uncertainties affecting our business include the following:
•    We are a development-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability. Moreover, our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.
We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. We will need additional funding in order to complete development of our product candidates and commercialize our products, if approved. If we are unable to raise capital when needed, we will be forced to delay, reduce or discontinue our product development programs or commercialization efforts.
Our product candidates are based on targeting SINTAX™, the small intestinal axis, which is an unproven approach to therapeutic intervention.
We are dependent on the success of our product candidates. If the product candidates do not successfully complete clinical development or receive regulatory approval, our business may be harmed.
The regulatory approval process is lengthy, expensive and uncertain with respect to outcome. We may be unable to obtain regulatory approval for our product candidates under applicable regulatory requirements of the United States and/or internationally. The denial or delay of any such approval would delay commercialization of our product candidates and adversely impact our ability to generate revenue, our business and our results of operations.
We rely, and will continue to rely, on third parties to conduct the clinical trials for our product candidates, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.
We do not have our own manufacturing capabilities and rely, and will continue to rely, on third parties to produce clinical supplies and, if approved, commercial supplies of our product candidates. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
If we are unable to establish our own sales, marketing and distribution capabilities, or to enter into agreements with third parties to sell and market our product candidates, we may not be successful in commercializing our product candidates if and when they are approved, and we may not be able to generate any revenue.
The successful commercialization of our product candidates will depend in part on the extent to which governmental authorities and health insurers establish coverage, adequate reimbursement levels and pricing policies. Failure to obtain or maintain coverage and adequate reimbursement for our product candidates, if approved, could limit our ability to market those products and decrease our ability to generate revenue.
We face substantial competition, which may result in others discovering, developing or commercializing drugs before or more successfully than we do.
Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, cause us to suspend or discontinue clinical trials, limit the commercial profile of an approved label or result in significant negative consequences following marketing approval, if any.
If we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents which are sufficient to protect our product candidates, other companies could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.
The 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 March 31, 2022
Table of Contents



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Evelo Biosciences, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share and share amounts)
(Unaudited)
March 31, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$39,631 $68,441 
Prepaid expenses and other current assets3,494 2,585 
Total current assets43,125 71,026 
Property and equipment, net6,126 6,622 
Right of use asset - operating lease8,419 8,910 
Other assets1,155 1,313 
Total assets$58,825 $87,871 
Liabilities and stockholders’ (deficit) equity
Current liabilities:
Debt, current portion$1,844 $ 
Accounts payable1,760 1,601 
Accrued expenses9,876 13,068 
Operating lease liability, current portion2,027 1,951 
Other current liabilities665 742 
Total current liabilities16,172 17,362 
Noncurrent liabilities:
Debt, net of current portion44,772 46,557 
Operating lease liability, net of current portion7,183 7,785 
Deferred revenue 7,500 7,500 
Total liabilities75,627 79,204 
Commitments and contingencies (Note 10)
Stockholder’s (deficit) equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding as of March 31, 2022 and December 31, 2021, respectively
  
Common stock, $0.001 par value; 200,000,000 shares authorized; 53,648,189 and 53,576,454 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively
54 54 
Additional paid-in capital427,700 423,308 
Accumulated deficit(444,556)(414,695)
Total stockholders’ (deficit) equity(16,802)8,667 
Total liabilities and stockholders’ (deficit) equity$58,825 $87,871 
See accompanying notes to unaudited condensed consolidated financial statements.
1

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
 Three Months Ended March 31,
 20222021
Operating expenses:
Research and development$19,321 $21,508 
General and administrative9,417 5,963 
Total operating expenses28,738 27,471 
Loss from operations(28,738)(27,471)
Other (expense) income:
Interest expense, net(1,027)(765)
Other miscellaneous income, net20 162 
Total other expense, net(1,007)(603)
Loss before income taxes(29,745)(28,074)
Income tax expense(116)(122)
Net loss$(29,861)$(28,196)
Net loss per share attributable to common stockholders, basic and diluted$(0.56)$(0.55)
Weighted-average number of common shares outstanding, basic and diluted53,619,635 51,343,923 
See accompanying notes to unaudited condensed consolidated financial statements.
2

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
(In thousands, except share amounts)
(Unaudited)
Three Months Ended March 31, 2022
Common StockAdditional Paid-In CapitalAccumulated DeficitTotal
SharesAmount
Balance - December 31, 202153,576,454 $54 $423,308 $(414,695)$8,667 
Issuance of common stock under Employee Stock Purchase Plan36,329 — 129 — 129 
Vesting of restricted common stock35,406 — — —  
Stock-based compensation expense— — 4,275 — 4,275 
Fees associated with public offering of common stock— — (12)— (12)
Net loss— — — (29,861)(29,861)
Balance - March 31, 202253,648,189 $54 $427,700 $(444,556)$(16,802)


(Unaudited)
Three Months Ended March 31, 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 options45,299  235 — 235 
Stock-based compensation expense— — 3,264 — 3,264 
Net loss— — — (28,196)(28,196)
Balance - March 31, 202153,357,739 $53 $408,501 $(320,715)$87,839 
See accompanying notes to unaudited condensed consolidated financial statements.
3

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 Three Months Ended March 31,
 20222021
Operating activities
Net loss$(29,861)$(28,196)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense4,275 3,264 
Depreciation expense517 536 
Non-cash interest expense59 124 
Non-cash lease expense491 445 
Loss on disposal of property and equipment232  
Changes in operating assets and liabilities:
Prepaid expenses and other current assets(1,011)46 
Accounts receivable (7,500)
Accounts payable159 (1,062)
Accrued expenses and other current liabilities(3,267)(981)
Operating lease liabilities(526)(458)
Deferred revenue 7,500 
Other liabilities 2 
Net cash used in operating activities(28,932)(26,280)
Investing activities
Purchases of property and equipment(153)(314)
Net cash used in investing activities(153)(314)
Financing activities
Proceeds from issuance of common stock, net of issuance cost 82,003 
Proceeds from the issuance of common stock under employee stock purchase plan and exercise of stock options129 325 
Fees associated with public offering of common stock (12) 
Net cash provided by financing activities117 82,328 
Net (decrease) increase in cash, cash equivalents and restricted cash(28,968)55,734 
Cash, cash equivalents and restricted cash – beginning of period69,754 70,420 
Cash, cash equivalents and restricted cash – end of period$40,786 $126,154 
Supplemental disclosure of cash flow information
Cash paid for interest$973 $649 
Cash paid for taxes$393 $ 
Noncash investing and financing activities
Public offering costs in accrued expenses$ $42 
Property and equipment additions included in accrued expenses$27 $171 
See accompanying notes to the unaudited condensed consolidated financial statements.

4

EVELO BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Basis of Presentation
Evelo Biosciences, Inc. ("Evelo," "we," "our," "us" or the "Company”) is a biotechnology company incorporated in Delaware on May 6, 2014. We are discovering and developing a new class of orally delivered investigational medicines that are intended to act on cells in the small intestine to produce therapeutic effects throughout the body. We are advancing these investigational medicines with the aim of treating a broad range of immune mediated diseases, with an initial focus on inflammatory diseases and oncology. Our headquarters is located in Cambridge, Massachusetts.
Since inception, we have devoted substantially all of our efforts to research and development and raising capital. We have not generated any product or license revenue related to our primary business purpose to date. We are subject to a number of risks similar to those of other development stage companies, including a dependence on key individuals, the need to develop commercially viable products, the competition from other companies, many of whom are larger and better capitalized, and the need to obtain adequate additional financing to fund the development of our products.
We have incurred operating losses since inception and we expect such losses and negative operating cash flows to continue for the foreseeable future. As of March 31, 2022, we held cash, cash equivalents and restricted cash of $40.8 million and have an accumulated deficit of $444.6 million. Since inception, we have 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 from debt financing.
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that these unaudited condensed consolidated financial statements are issued. The transition to profitability is dependent upon the successful development, approval and commercialization of our products and product candidates, and the achievement of a level of revenues adequate to support our cost structure. Based on our current operating plan, we believe that our cash and cash equivalents balance as of March 31, 2022 will not be sufficient to fund operations and capital expenditures for at least the twelve months following the filing of this Quarterly Report on Form 10-Q, and we will need to obtain additional funding. We intend to pursue strategic partnerships and collaborations, or obtain additional funding through available financing sources which include additional public offerings of common stock and the private financing of debt or equity. Management’s belief with respect to our ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, we may need to seek additional funding sooner than would otherwise be expected. There can be no assurance that we will be able to obtain additional funding on acceptable terms, if at all. If we are unable to obtain sufficient funding, we may be required to delay our development efforts, limit activities and reduce research and development costs, which could adversely affect our business prospects. Because of the uncertainty in securing additional funding and the insufficient amount of cash and cash equivalent resources as of March 31, 2022, management concluded that substantial doubt exists with respect to our ability to continue as a going concern within one year after the date that these unaudited condensed consolidated financial statements are issued.
The accompanying unaudited condensed consolidated financial statements were 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 ASUs of the FASB. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP were condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 and the related notes thereto. These unaudited condensed consolidated financial statements are prepared on the same basis as the audited financial statements. In the opinion of our management, the accompanying unaudited condensed consolidated financial statements contain all adjustments which are necessary to present fairly our financial position as of March 31, 2022, the results of our operations and stockholders' equity for the three months ended March 31, 2022 and 2021. Such adjustments are of a normal and recurring nature. The results for the three months ended March 31, 2022 are not necessarily indicative of the results for the year ending December 31, 2022, or for any future period.
5

2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include, but are not limited to, estimates related to the application of Revenue from Contracts with Customers (Topic 606) ("ASC 606") to our collaboration agreement with Meddist Company Limited (" ALJ"), the accrual of research and development expenses, the expected future lives of property and equipment and the valuation of stock-based awards. We base our estimates on historical experience and market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of our business and our wholly owned and controlled subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Subsequent Event Considerations
We consider events or transactions that occur after the balance sheet date but prior to the issuance of the unaudited condensed consolidated financial statements to identify matters that require additional disclosure or that may significantly affect currently reported financial condition such as our judgments related to estimates. Subsequent events were evaluated as required. Those events determined to be sufficiently material are described in Note 17 - Subsequent Events.
Emerging Growth Company Status
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and we may take advantage of reduced reporting requirements that are otherwise applicable to public companies until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We elected to use the extended transition period for complying with new or revised accounting standards and, as a result of this election, our unaudited condensed consolidated financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our IPO or such earlier time that we no longer are an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, have more than $700.0 million in market value of our stock held by non-affiliates (and have been a public company for at least 12 months and have filed one annual report on Form 10-K), or have issued more than $1.0 billion of non-convertible debt securities over a three-year period.
Concentrations of Credit Risk and Off-Balance Sheet Risk
Financial instruments that potentially expose us to concentrations of credit risk primarily consist of cash and cash equivalents. We place our cash and cash equivalents primarily in two custodian accounts at accredited financial institutions. Such deposits have and will continue to exceed federally insured limits.
As of March 31, 2022 and December 31, 2021, we have no off-balance sheet risk such as foreign exchange contracts, option contracts, derivatives or other foreign hedging arrangements.
Comprehensive Loss
Comprehensive loss consists of net loss and changes in equity during a period arising from transactions and other equity and circumstances, of which we have none. Our comprehensive loss equals our net loss for all periods presented.
6

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, comprised of cash held in banks and amounts held in money market funds. Cash equivalents are stated at cost, which approximates market value. Our restricted cash consists of restricted cash in connection with building leases for our office and laboratory premises and deposits held in relation to our credit card facility. As of March 31, 2022 and December 31, 2021 we had $1.2 million and $1.3 million, respectively, in noncurrent restricted cash included within other assets in the unaudited condensed consolidated balance sheets.
The following reconciles cash, cash equivalents and restricted cash as of March 31, 2022 and December 31, 2021, as presented on our statements of cash flows to the related balance sheet accounts (in thousands):
March 31, 2022December 31, 2021
Cash and cash equivalents:
Cash$5,224 $1,452 
Money market funds34,407 66,989 
Total cash and cash equivalents39,631 68,441 
Restricted cash1,155 1,313 
Cash, cash equivalents and restricted cash$40,786 $69,754 
Fair Value of Financial Instruments
FASB 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 our own assumptions (unobservable inputs). 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 our 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 we exercised in determining fair value is greatest for instruments categorized in Level 3.
Property and Equipment
Property and equipment consists of computer hardware and software, furniture and fixtures, office equipment, research and lab equipment and leasehold improvement recorded at cost. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets.
A summary of the estimated useful lives of our property and equipment is as follows:
Computer hardware3to5 years
Computer software3 years
Furniture and fixtures7 years
Research and laboratory equipment (used/new)3to5 years
Leasehold improvementsLesser of asset life or remaining life of lease
Assets acquired and not placed in service are recorded to construction-in-process and are not depreciated. Assets are recorded according to classification and depreciated upon placement in service. Repairs and maintenance costs are expensed as incurred.
We periodically evaluate property and equipment for impairment whenever events or changes in circumstances indicate that a potential impairment may have occurred. We neither identified nor recorded any material impairment charges during the periods presented.
7

Income Taxes
We record deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities and for loss and credit carryforwards using enacted tax rates expected to be in effect in the years in which the differences reverse. We account for interest and penalties related to uncertain tax positions as part of our provision for income taxes. A valuation allowance is provided to reduce the net deferred tax assets to the amount that will more likely than not be realized. We have incurred net losses since inception and, in recognition of the uncertainty in the realization of favorable tax attributes in future tax returns, we recorded a full valuation allowance against our otherwise recognizable net deferred tax assets.
Revenue Recognition
We recognize revenue under the Financial Accounting Standards Board guidance of ASC 606. Since inception, we have entered into one contract subject to ASC 606, however, as discussed in Note 3 - ALJ Commercialization and License Agreement, all revenue pursuant to this arrangement has been deferred.
Collaboration Agreements
We analyze our collaboration arrangements under the Financial Accounting Standards Board guidance of Collaborative Arrangements (Topic 808) ("ASC 808"). To the extent an arrangement falls within the scope of ASC 808, we assess whether aspects of the arrangement between us and our collaboration partner are within the scope of other accounting guidance, including ASC 606.
Deferred Revenue
We record a contract liability as deferred revenue on our unaudited condensed consolidated balance sheets when we receive payment but have not yet satisfied our related performance obligations specified in the sales or other contract. Revenue is recognized from deferred revenue in the period in which our obligations under the agreement are fulfilled or are proportionately recognized in the proportional amount of fulfillment. See Note 3 - ALJ Commercialization and License Agreement.
Research and Development Costs
Research and development costs are expensed in the period incurred. Research and development expenses consist of both internal and external costs associated with the development of our product candidates, such as payroll, consulting and manufacturing costs associated with the development of our product candidates. Costs for certain development activities, such as clinical trials and manufacturing development activities, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, and information provided to us by our vendors on their actual costs incurred or level of effort expended. Payments for these activities are based on the terms of the individual arrangements, which may differ 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.
We have and may continue to acquire the rights to develop and commercialize new product candidates from third parties. The upfront payments to acquire any license, product or rights, as well as any future milestone payments, are immediately recognized as research and development expense provided that there is no alternative future use of the rights in other research and development projects. Any milestone payments made for Intellectual Property after regulatory approval, or that have alternative future use, are capitalized and amortized.
Stock-Based Compensation
We record 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. We account for stock-based compensation arrangements with non-employees based upon the fair value of the consideration received or the equity instruments issued, whichever amount is more reliably measurable. We use the Black-Scholes option-pricing model to determine the fair value of option grants. We record forfeitures as they occur.
8

Segments
We have one operating segment. Our chief operating decision maker, our Chief Executive Officer, manages our operations on a consolidated basis for the purposes of allocating resources.
Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. For purposes of the dilutive net loss per share applicable to common stockholders calculation, stock options, common stock from Employee Stock Purchase Plan, convertible debt, warrants to purchase common shares and unvested restricted stock are considered to be common stock equivalents but are excluded from the calculation of diluted net loss per share applicable to common stockholders, as their effect would be anti-dilutive; therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented.
Recently Adopted Accounting Pronouncements
Debt with Conversion and Other Options
On August 5, 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU-2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The guidance simplifies the evaluation of whether a contract in the issuer’s own equity can be classified in equity or an embedded feature qualifies for the derivative scope exception. We adopted the guidance for the year beginning January 1, 2022, The adoption has no impact on our consolidated financial statements and related disclosures.
Codification Improvements
In October 2020, the FASB issued ASU No. 2020-10 - Codification Improvements. The amendments improve the codification by having all disclosure-related guidance available in the disclosure sections of the codification and also includes various other minor amendments. We adopted the guidance for the year beginning January 1, 2022, with no impact on our consolidated financial statements and related disclosures.
Accounting Pronouncements Issued and Not Adopted
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)Measurement of Credit Losses on Financial Instruments, which was subsequently updated (together “ASU 2016-13”). The provisions of ASU 2016-13 modify the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, and require a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for us on January 1, 2023, with early adoption permitted. We are currently evaluating the potential impact that this standard may have on our financial position and results of operations, as well as the timing of our adoption of this standard.
3. ALJ Commercialization and License Agreement
In March 2021, we entered into a commercialization and license agreement (“ALJ Agreement”) with ALJ. Pursuant to the ALJ Agreement, we granted to ALJ an exclusive, non-transferable, sublicensable license to our product candidate EDP1815. In consideration for the rights granted under the ALJ Agreement, ALJ was obligated to pay a one-time, non-refundable upfront fee of $7.5 million. The parties will also share the future operating profits and losses for certain products in certain territories equally (50:50) as well as certain development, regulatory and commercialization costs. We have concluded that the delivery of the license to ALJ shall be accounted for under ASC 606. The development, regulatory and commercialization activities within the territories shall be accounted for under ASC 808.
We have recognized no revenue under the ALJ Agreement to date as we have yet to undertake any of our performance obligations within the agreement. The $7.5 million upfront fee was recorded as deferred revenue 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.
9

We anticipate payments under the cost-sharing or profit and loss sharing arrangements will be classified in the statement of operations consistent with the guidance of ASC 808. To date, we have neither received nor incurred any such payments.
4. Leases
In January 2018, we entered into an operating sublease arrangement for approximately 40,765 square feet of office and research and development space at 620 Memorial Drive, Cambridge, MA 02139, extending through September 2025. The lease requires a security deposit which we fulfilled with a standing letter of credit secured by restricted cash on deposit.
For the three months ended March 31, 2022 and 2021, we recorded rent expense of $0.8 million and $0.7 million, respectively.
The minimum aggregate lease commitments as of March 31, 2022 are as follows (in thousands):
Remainder of 2022$2,049
20233,154
20243,249
20252,492
Total minimum lease payments10,944
Less: imputed interest(1,734)
Total operating lease liability$9,210
Operating cash flows used for operating leases$760
Weighted-average remaining lease term3.5 years
Weighted-average discount rate9.5 %
5. Fair Value Measurements
The following presents the fair value hierarchy for financial assets measured at fair value on a recurring basis as of March 31, 2022 (in thousands):
TotalLevel 1
Assets:
Money market funds included in cash and cash equivalents$34,407 $34,407 
Total$34,407 $34,407 
The following presents the fair value hierarchy for financial assets measured at fair value on a recurring basis as of December 31, 2021 (in thousands):
TotalLevel 1
Assets:
Money market funds included in cash and cash equivalents$66,989 $66,989 
Total$66,989 $66,989 
As of March 31, 2022 and December 31, 2021, our financial assets measured at fair value consist entirely of assets measured at Level 1. There were no financial liabilities measured at fair value.
10

6. Property and Equipment, Net
Property and equipment consists of the following (in thousands):
March 31, 2022December 31, 2021
Lab equipment$9,609 $9,689 
Leasehold improvements2,157 2,157 
Furniture and fixtures818 809 
Computers and software261 259 
Office equipment38 21 
Construction-in-process1,394 1,321 
14,277 14,256 
Less: accumulated depreciation(8,151)(7,634)
Property and equipment, net$6,126 $6,622 
We recognized $0.5 million and $0.5 million of depreciation expense for the three months ended March 31, 2022 and 2021, respectively.
7. Accrued Expenses
Accrued expenses consist of the following (in thousands):
March 31, 2022December 31, 2021
Accrued external research and development expenses$4,291 $4,895 
Accrued payroll and related expenses3,528 6,412 
Accrued professional fees1,282 1,013 
Accrued other expenses775 748 
Total accrued expenses$9,876 $13,068 
8. Loan and Security Agreements
In July 2019, we entered into a loan and security agreement with K2 HealthVentures LLC and others (collectively, "K2HV"), under which K2HV agreed to extend term loans of up to $45.0 million in three tranches. The initial tranche of $20.0 million was funded in July 2019. The second tranche of $10.0 million was funded in July 2020. The availability of the third tranche of $15.0 million expired in January 2021. The facility was amended in June 2021 (the "Amended Credit Facility"), to supersede the expired $15.0 million third tranche commitment with a new $15.0 million fourth tranche commitment, which we drew down in June 2021. The Amended Credit Facility resulted in a debt extinguishment for accounting purposes and we recorded a loss on the extinguishment of debt of $3.2 million in the quarterly period ended June 30, 2021, equaling the difference between the fair value for reacquisition of the new debt and the carrying amount of the existing debt.
In connection with the Amended Credit Facility, we issued to K2 HealthVentures Equity Trust LLC, an affiliate of K2HV, a warrant to purchase up to 139,770 shares of our common stock. In addition, K2HV has the option, exercisable at any time, to convert up to $5.0 million of principal outstanding into up to 375,940 shares of our common stock. See Note 11 - Stockholders' Equity.
Interest on the outstanding loan balance accrues at a variable annual rate equal to the greater of (i) 8.65% and (ii) the prime rate plus 3.15%. Terms are for interest-only payments on a monthly basis through February 2023. Thereafter, terms provide for equal monthly payments of principal plus interest until the loans mature in August 2024 whereupon the remaining balance is due and payable. Pursuant to the Amended Credit Facility, we elected to adjust the repayment schedule such that commencing on March 1, 2023, we will make consecutive equal monthly payments of principal and accrued and unpaid interest based on a notional thirty month repayment period. The loan maturity date remains August 1, 2024 and any outstanding principal and unpaid interest is due at maturity. Upon final payment or prepayment of the loans, we will pay a final payment equal to 4.8% of the aggregate original principal amount of the loans borrowed.
11

Borrowings under the Amended Credit Facility are collateralized by substantially all our tangible personal property along with our equity interests in our subsidiaries. The Amended Credit Facility contains customary representations, warranties and covenants. As of March 31, 2022, we were in compliance with all such covenants.
The minimum future loan payments under the Amended Credit Facility as of March 31, 2022 are as follows (in thousands):
Remainder of 2022$2,974 
202317,404 
202434,770 
Total minimum payments55,148 
Less: amounts representing interest and discount(8,532)
Total debt$46,616 
Interest expense was approximately $1.0 million and $0.8 million for the three months ended March 31, 2022 and 2021, respectively.
9. In-License Agreements
Mayo Foundation for Medical Education and Research
In August 2017, we and the Mayo Clinic entered into a license agreement which was subsequently amended. Under the agreement, the Mayo Clinic granted us (i) an exclusive, worldwide, sublicensable license under the Mayo Clinic’s rights to certain intellectual property and microbial strains and (ii) a non-exclusive, worldwide, sublicensable license to certain related know-how to develop and commercialize certain microbial strains and licensed products incorporating such strains. As consideration, we paid a nonrefundable upfront fee of $0.3 million and are obligated to pay annual license maintenance fees. The nonrefundable upfront fees were expensed to research and development expense in 2017. Annual maintenance fees are expensed as incurred over the term of the agreement. We may owe the Mayo Clinic milestone payments upon the achievement of certain milestones up to a maximum of $59.1 million in the aggregate, as well as royalties on net sales of licensed products in low single-digit percentages. As of March 31, 2022, we incurred milestone payments since inception of approximately $0.3 million and no amounts are currently due.
University of Chicago
In March 2016, we and the University of Chicago entered into a patent license agreement (“2016 University of Chicago Agreement”). Under the agreement, the University of Chicago granted us (i) an exclusive, royalty-bearing and sublicensable license to certain patent rights related to the administration of microbes to treat cancer and (ii) a non-exclusive, royalty-bearing, sublicensable license to access technical information for the development and commercialization of microbial products to treat cancer in combination with checkpoint inhibitors. As consideration, we paid a nonrefundable upfront fee of less than $0.5 million and are obligated to pay annual license maintenance fees. Nonrefundable upfront fees were expensed to research and development expense in 2016. Annual maintenance fees are expensed as incurred over the term of the agreement. We may owe the University of Chicago milestone payments totaling an aggregate of approximately $60.9 million upon the achievement of certain milestones, as well as royalties on net sales of licensed products ranging from low to high single-digit percentages. As of March 31, 2022, we incurred milestone payments since inception of approximately $0.4 million and no amounts are currently due.
10. Commitments and Contingencies
Collaboration Agreement with Sacco S.r.l.
In July 2019, we entered into an agreement with Sacco S.r.l. ("Sacco") pursuant to which Sacco will manufacture and supply single strain, non-genetically modified microbes intended for oral delivery or oral use in pharmaceutical products exclusively for us for a period of five years. Sacco may terminate the agreement if the provision of manufacturing services has been, or is scheduled to be, inactive for a period of six consecutive months. We agreed to pay Sacco an aggregate of €3.0 million, consisting of payments of €0.6 million annually during the exclusivity period. We incurred annual exclusivity fees since inception of approximately €1.8 million, and no amounts are currently due. We currently have an additional contractual arrangement for manufacturing in place with an affiliate of Sacco that will require us to spend an aggregate minimum amount of €1.5 million annually during each of 2022, 2023 and 2024 and €0.9 million on or before March 1, 2025.
12

Litigation and Other Proceedings
We may periodically become subject to legal proceedings and claims arising in connection with on-going business activities, including claims or disputes related to patents issued to us or that are pending. We are not a party to any material litigation and have established no contingency reserves for any litigation liability.
On February 12, 2021, the European Patent Office issued a Communication of a Notice of Opposition for European patent EP 3223834 held by us. In July 2021, we filed our reply to the Notice of Opposition. In January 2022, the European Patent Office issued a preliminary opinion and a summons to oral proceedings. The deadline for final written submissions is in July 2022 and the date for the oral proceedings is in September 2022. We are currently evaluating our available options and deciding next steps with respect to this matter. The patent at issue does not relate to any of our current product candidates, and receipt of this communication and/or any subsequent proceeding is not expected to affect any of our current development plans.
11. Stockholders’ (Deficit) Equity
2019 Shelf Registration
In June 2019, we filed a Registration Statement on Form S-3 ("2019 Shelf Registration") with the Securities and Exchange Commission ("SEC") for the registration and offering of common stock, preferred stock, debt securities, warrants and/or units or any combination thereof in the aggregate amount of up to $200.0 million for a period of up to three years from the date of effectiveness. We simultaneously entered into an “at-the-market” sales agreement ("ATM") providing for the offering, issuance and sale for up to $50.0 million of common stock under the 2019 Shelf Registration. During the three months ended March 31, 2022, we issued no shares of common stock under the ATM. During the year ended December 31, 2021, we issued 139,734 common shares 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.
February 2, 2021 Offering
In February 2021, we sold 5,175,000 shares of common stock in an underwritten public offering under our 2019 Shelf Registration at a price of $15.00 per share, which included the underwriters' exercise of its option to purchase 675,000 shares, for gross proceeds of $77.6 million and net proceeds of $72.7 million.
ALJ Health Care Private Placement
In January 2021, we entered into a stock purchase agreement with ALJ Health Care & Life Science Company Limited ("ALJ Health") pursuant to which, on February 2, 2021, ALJ Health purchased 500,000 shares of common stock in a private placement for $15.00 per share, equal to the public offering price per share at which common stock was sold to the public as referred above. The placement generated proceeds of $7.5 million. The shares were not registered under the Securities Act of 1933, as amended.
2021 Shelf Registration
In August 2021, we filed a Registration Statement on Form S-3 (“2021 Shelf Registration”) with the SEC for the registration and offering of common stock, preferred stock, debt securities, warrants and/or units or any combination thereof in the aggregate amount of up to $200.0 million for a period of up to three years from the date of effectiveness. During the three months ended March 31, 2022, we issued no shares of common stock under the 2021 Shelf Registration. No shares of common stock registered under the 2021 Shelf Registration were sold in the year ended December 31, 2021.
Warrants
In connection with our Amended Credit Facility (see Note 8 - Loan and Security Agreements), we issued K2 HealthVentures Equity Trust LLC a warrant to purchase up to 139,770 shares of our common stock with an exercise price of $13.30 per share, expiring in June 2031. The warrant holder has the option to exercise the purchase on a cashless basis. In addition, the warrant holder has the option, exercisable at any time, to convert up to $5.0 million of outstanding loan principal into up to 375,940 shares of common stock at a price of $13.30 per share.
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12. Stock-Based Compensation
2021 Inducement Plan
In May, 2021, our board of directors adopted the Evelo Biosciences, Inc. 2021 Employment Inducement Award Plan (the “Inducement Award Plan”) without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Stock Market LLC listing rules (“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 was not previously a member of our board of directors, or to an employee who is rehired following a bona fide period of non-employment by us, as a material inducement to the employee’s entering into employment with us. An aggregate of 1,250,000 shares of our common stock were reserved for issuance under the Inducement Award Plan.
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 our common stock on the grant date. Other terms of awards, including vesting requirements, are determined by our 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 later than 10 years from the date of grant. As of March 31, 2022, stock option awards covering up to 800,000 shares of our common stock were issued under the Inducement Award Plan, none of which were exercised or canceled. As of March 31, 2022, restricted stock unit (“RSU”) awards covering up to 4,545 shares of our common stock were granted under the Inducement Award Plan, none of which have vested or forfeited. As of March 31, 2022, 445,455 shares of common stock are available for future grant under the Inducement Award Plan.
2018 Incentive Award Plan
In April 2018, our board of directors adopted, and our stockholders approved, the 2018 Incentive Award Plan (the "2018 Plan"), effective in May 2018, under which we may grant cash and equity-based incentive awards to our employees, officers, directors, consultants and advisors. The 2018 Plan initially allowed us 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 (as defined below) that expire, lapse, terminate or are exchanged for cash, surrendered, repurchased, canceled prior to exercise 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 our board of directors. Accordingly, on January 1, 2022, 2021, 2020 and 2019, the number of shares authorized for issuance under the 2018 Plan was increased by 2,143,058, 1,898,805, 1,286,824 and 1,273,031 shares, respectively.
The exercise price of stock options granted under the 2018 Plan shall be no less than the fair market value of a share of our 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 later than 10 years from the date of grant. As of March 31, 2022, stock options awards covering up to 8,824,136 shares of our common stock were issued under the 2018 Plan, of which 43,247 shares were exercised and 1,328,684 shares were canceled. As of March 31, 2022, 824,123 shares of common stock are available for future grant under the 2018 Plan.
2015 Stock Incentive Plan
We previously granted equity awards under the 2015 Stock Incentive Plan (the "2015 Plan"), which originally provided for grant of incentive stock options, non-qualified stock options, RSAs and other stock-based awards to our employees, officers, directors, consultants and advisors. Following the effectiveness of the 2018 Plan, we ceased making grants under the 2015 Plan. The 2015 Plan continues to govern the terms and conditions of the outstanding awards granted under it.
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The terms of equity award agreements made under the 2015 Plan, 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, we record expense in the period in which such determination is made through any remaining estimated 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 later than 10 years from the date of grant.
Under the 2015 Plan, we were authorized to grant equity awards up to an aggregate of 5,417,044 shares of common stock. As of March 31, 2022, an aggregate of 5,758,518 options and other equity awards were granted under the 2015 Plan, of which 1,471,337 were exercised, 1,299,392 were canceled and 18,468 were repurchased as of March 31, 2022. 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 as of May 8, 2018.
Stock-Based Compensation Expense
Stock-based compensation expense recorded in our unaudited condensed consolidated statements of operations consists of the following (in thousands):
Three Months Ended March 31,
 20222021
Research and development2,036 1,823 
General and administrative$2,239 $1,441 
Total stock-based compensation expense4,275 $3,264 
Stock Options
A summary of our stock option activity is as follows: 
SharesWeighted-
Average
Exercise Price
Options outstanding as of December 31, 20219,713,182 $9.32 
Granted1,746,005 $5.03 
Exercised $ 
Canceled(219,185)$10.10 
Options outstanding as of March 31, 202211,240,002 $8.65 
Exercisable as of March 31, 20225,577,736 $7.13 
The weighted-average fair value of options granted during the three months ended March 31, 2022 and 2021 was $3.77 and $12.07, respectively.
As of March 31, 2022, total unrecognized stock-based compensation expense relating to unvested stock options was $35.9 million, expected to be recognized over a weighted average period of 2.82 years.
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Restricted Stock Units
We issue restricted stock units ("RSU") under the 2018 Plan and the 2021 Inducement Award Plan. Typically, each award of RSUs vests as to 25% on the first anniversary of the grant date, and either monthly thereafter or annually over three additional years. A summary of RSU activity is as follows: 
SharesWeighted-
Average
Grant Date Fair Value
Unvested as of December 31, 2021320,209 $9.04 
Granted108,375 $5.05 
Vested(35,406)$15.44 
Forfeited(26,867)$8.75 
Unvested as of March 31, 2022366,311 $7.26 
Stock-based compensation expense related to RSUs was $0.4 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively.
2018 Employee Stock Purchase Plan
In April 2018, our board of directors adopted and our stockholders approved the 2018 Employee Stock Purchase Plan (“ESPP”), which became effective in May 2018. Under the terms of the ESPP, the number of shares of common stock that may be issued under the ESPP automatically increases 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 our common stock outstanding on the last day of the applicable preceding calendar year and (ii) an amount determined by our board of directors. Accordingly, on January 1, 2022 and 2021, the number of shares authorized by our board of directors for issuance under the ESPP was increased by 535,765 and 474,701 shares, respectively. There were no additional share increases for the years 2020 and 2019.
A total of 36,329 shares and 27,587 shares were purchased under the ESPP during the three months ended March 31, 2022 and 2021, respectively. Compensation expense related to our ESPP for the three months ended March 31, 2022 and 2021 was not material.
As of March 31, 2022 and December 31, 2021, a total of 1,235,532 shares and 736,096 shares of common stock were reserved for issuance under the ESPP.
13. Income Taxes
For the three months ended March 31, 2022 and 2021 we recorded a tax provision of $0.1 million and $0.1 million respectively, primarily related to our wholly owned UK subsidiary.
As of March 31, 2022 and December 31, 2021, the balance in accrued expenses in the unaudited condensed consolidated balance sheets for deferred employer payroll taxes pursuant to the CARES Act was $0.2 million each.
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14. Net Loss Per Share
Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding during the period, as follows (net loss in thousands):
 Three Months Ended March 31,
 20222021
Numerator
Net loss$(29,861)(28,196)
Denominator
Weighted average shares outstanding used in computing net loss per share53,619,635 51,343,923 
Net loss per share, basic and diluted$(0.56)$(0.55)
We compute diluted net loss per common share by giving consideration to all potentially dilutive common shares, except where the effect of including such securities would be antidilutive. We have reported net losses since inception and, as such, have determined that all potentially dilutive common shares are anti-dilutive. Basic and diluted net loss per share of common stock were the same for all periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive.
The following table presents securities excluded from the computation of diluted weighted-average shares outstanding for the periods presented, as they are anti-dilutive:
 Three Months Ended March 31,
 20222021
Unvested common stock from early exercise of options 18,386 
Stock options to purchase common stock11,240,002 8,290,500 
Warrant 139,770  
RSUs366,311 385,250 
Convertible debt (as-converted to common stock)375,940  
Common stock offering from ESPP26,588 7,786 
Total securities excluded12,148,611 8,701,922 
15. Related Party Transactions
We receive clinical advisory services from Weatherden Ltd. (“Weatherden”) under agreements that were entered into during 2017 and 2018. Duncan McHale, our Chief Medical Officer, is a part owner of Weatherden. During the three months ended March 31, 2022 and 2021, we paid Weatherden $0.1 million or less, respectively. As of March 31, 2022 and December 31, 2021, the amounts owed to Weatherden under the supply of service agreement were approximately $0.1 million or less, respectively.
In September 2019, we entered into a consulting agreement with David Epstein (the "Consulting Agreement"), our Chairman of the Board, for strategic advisory and other consulting services. The Consulting Agreement was amended in October 2020 and again in April 2021, and now has a term that is scheduled to end on June 30, 2022 unless earlier terminated pursuant to its terms. In accordance with the initial terms of the Consulting Agreement, Mr. Epstein was granted an option to purchase 75,000 shares of common stock, vesting in 36 equal monthly installments and subject to his continued provision of consulting services on the applicable vesting dates. Under the Consulting Agreement as amended in October 2020, Mr. Epstein was also entitled to receive (i) an annual equity award on each anniversary of the effective date of the Consulting Agreement in the form of an option to purchase shares of common stock having a grant date fair market value of approximately $0.2 million as determined by the Board in its discretion based on customary option pricing methodologies, vesting in 12 equal monthly installments and subject to his continued provision of consulting services on the applicable vesting date, and (ii) an aggregate annual cash consulting fee of $0.3 million. In the event the Consulting Agreement is renewed for a term of less than one year, the equity award and the number of shares of common stock shall be adjusted proportionately to the length of the renewal term. In October 2020, in connection with the commencement of his second year of service as a consultant, Mr. Epstein was granted an option to purchase 44,743 shares of common stock, vesting in nine equal monthly installments and subject to his continued provision of consulting services on the vesting dates. Under the Consulting Agreement as amended in April 2021 and effective on June 30, 2021, Mr. Epstein is entitled to receive
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RSUs having an aggregate grant date fair value of approximately $0.5 million, as determined by our board of directors in its discretion based on a 10-day trailing average of the closing price of our common stock, as his sole compensation for his consulting services. The RSUs vest in 12 substantially equal monthly installments such that the RSUs shall be fully vested on June 30, 2022, subject to Mr. Epstein's continued provision of consulting services on the applicable vesting date. All of the foregoing options and restricted stock units were or are subject to accelerated vesting under change in control provisions.
16. Defined Contribution Plan
We provide benefits under certain retirement benefit plans. Our most significant defined contribution plan is in the United States, which is administered through a third-party administrator. Under the U.S. defined contribution plan, employees may elect to defer up to 85.0% of their compensation per year (subject to a maximum limit prescribed by federal tax law) and we match a portion of such employee contributions. For each of the three months ended March 31, 2022 and 2021, our matching contribution expense was $0.2 million.
17. Subsequent Events
On May 11, 2022, we notified the University of Chicago of our intent to terminate the 2016 University of Chicago Agreement, which we initially entered into in March 2016. None of our current or anticipated product candidates will be affected by the termination of licenses contained therein. The termination will be effective on July 11, 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Annual Report"), including the audited consolidated financial statements and notes thereto contained in our 2021 Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described, in or implied, by these forward-looking statements. In this Quarterly Report on Form 10-Q, unless otherwise stated or as the context otherwise requires, references to “Evelo,” “Evelo Biosciences,” the “Company,” “we,” “us,” “our” and similar references refer to Evelo Biosciences, Inc. and its consolidated subsidiaries.
Overview
We are discovering and developing a new class of orally delivered investigational medicines 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 neurologic systems. We refer to this biology as the small intestinal axis, or SINTAX™. We have built a platform to discover and develop novel oral medicines which target 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 or microbial extracellular vesicles. 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 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. Additional product candidates include EDP2939 which is in development for the treatment of inflammatory diseases.
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Clinical Programs
EDP1815
EDP1815 is an investigational oral biologic being developed for the treatment of inflammatory diseases. It is a single strain of Prevotella histicola isolated from a human donor and selected for its specific pharmacology.
Psoriasis and atopic dermatitis
Phase 2 clinical trial in psoriasis
In September 2021, we announced positive data from our Phase 2 trial of EDP1815 in psoriasis. This multicenter, randomized, double-blind, placebo-controlled, dose-ranging Phase 2 trial was evaluated three doses of an enteric coated capsule formulation of EDP1815 in adult patients with mild and moderate psoriasis. The trial included a treatment phase (Part A) and an off treatment, follow-up phase (Part B). In Part A of the trial, 249 patients were randomized in a 1:1:1 ratio to one of three parallel cohorts: 1 capsule, 4 capsules or 10 capsules. They were then randomized in a 2:1 ratio to active or placebo prior to the start of dosing. Trial medication was taken once daily for 16 weeks, and all patients were followed for 4 weeks after treatment completion to week 20. Psoriasis Area and Severity Index (“PASI”) scores were assessed by both mean changes from baseline and responder rates. The primary endpoint was the mean percentage change in PASI scores between treatment and placebo at 16 weeks. Secondary endpoints included the proportion of study patients who achieved at least a 50% improvement in PASI from baseline at the week 16 timepoint (a "PASI-50" response), and other clinical measures of disease such as Physicians Global Assessment ("PGA"), Body Surface Area ("BSA"), PGA x BSA, Psoriasis Symptom Inventory ("PSI"), and Dermatology Life Quality Index ("DLQI").
The primary endpoint, the difference in mean percentage change in PASI scores from baseline at week 16 between treatment and placebo, was prespecified as a Bayesian analysis. The Bayesian approach provides an estimate of the probability that EDP1815 was superior to placebo. The 16-week primary endpoint gave probabilities that EDP1815 is superior to placebo ranging from 80% to 90% across the prespecified analyses and cohorts.
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The responder endpoint analysis evaluated the proportion of patients who achieved a PASI-50 (a meaningful clinical response) or greater reduction in PASI score at week 16. As shown in the figure below, 25% to 32% of patients across the three EDP1815 treated cohorts achieved a PASI-50 or greater reduction at week 16 compared to 12% on placebo. In cohorts 1 and 2, this difference in response rate was statistically significant (p <0.05). Cohort 3 was not statistically significant, but directionally similar (25% vs. 12%). The pooled PASI-50 response across all three EDP1815 cohorts, an exploratory analysis, was 29% vs. 12% for placebo and was also statistically significant with a p-value of 0.027. An increase in the number of capsules of EDP1815 did not lead to a dose response.
https://cdn.kscope.io/2a8330e91f2ef6d5fc040b5ff9dd30aa-evlo-20220331_g2.jpg
* p<0.05.
PASI-50 responses at week 16. Statistically significant p-value (<0.05) for 2 of the 3 dose cohorts, and for all 3 cohorts when pooled.
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Additionally, several patients on EDP1815 achieved a PASI-75 response or better at week 16. For individuals who had a PASI-50 response or better, consistent improvements in patient reported outcomes such as DLQI and PSI were observed as seen in the figure below.

https://cdn.kscope.io/2a8330e91f2ef6d5fc040b5ff9dd30aa-evlo-20220331_g3.jpg
Responders in active cohort demonstrated improvements across multiple secondary endpoints. A "responder" was defined as an active patient who achieved PASI-50 or greater.
EDP1815 was observed to be well tolerated in Part A (treatment phase) of the Phase 2 trial. The safety data were comparable to placebo. Adverse events ("AEs") classified as “gastrointestinal” were comparable between active and placebo groups, with no meaningful differences in rates of diarrhea, abdominal pain, nausea, or vomiting. There were no drug related serious adverse events.
All patients in Part A of the Phase 2 trial had the option to enter Part B (extended follow-up phase, off-treatment) of the trial. The objective of Part B was to assess durability of treatment response and incidence of rebound (for example, increase in PASI score to 125% of baseline value or above, or onset of new pustular erythrodermic psoriasis within 3 months) following cessation of dosing. All patients who elected to enroll in in Part B were assessed during follow-up visits at weeks 24 and 28. Only patients who had achieved a PASI-50 or greater at week 16 were also evaluated at week 40. Patients were not permitted to start other psoriasis treatments or trials during Part B.
In February 2022, we announced data from Part B of the Phase 2 trial in psoriasis, which included durable and deeper clinical responses. Eighty-three patients who had received EDP1815 in Part A entered Part B. Thirty of these 83 patients had achieved a PASI-50 or greater reduction at week 16 in Part A. Eighteen of the 30 patients remained at PASI-50 or greater at the end of Part B. Ten of the 30 patients had achieved a PASI-75 or greater at the end of Part A and 5 remained at PASI-75 or greater at the end of Part B. These durable results were achieved without any new psoriasis medication being used during this time. Nineteen of the 83 patients had achieved clear skin (PGA 0) or nearly clear skin (PGA 1) at the end of Part A and of these, 9 remained at PGA 0/1 at the end of Part B.
Of the 30 patients who had reached a PASI-50 at the end of Part A and entered Part B, 10 had already achieved a PASI-75 response at week 16 in Part A. Of the remaining 20 patients, 9 achieved a PASI-75 or greater response during the post-treatment period. These data, combined with the durability data, suggest that longer dosing could lead to further deepening of the responses in some patients.
There were no drug related adverse events in Part B of the Phase 2 trial, with the additional finding of no flare or rebound following cessation of dosing (which are seen with some other therapies for psoriasis).
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In February 2022, we also announced the results of immunological biomarker analyses from Part A of the Phase 2 trial in psoriasis. We had previously reported reductions in inflammatory cytokines in a Phase 1b trial of EDP1815 in mild and moderate psoriasis, and these data were replicated in the Phase 2 psoriasis trial, with high statistical significance.
Blood samples were taken from patients at baseline and after 16 weeks of dosing with EDP1815 or placebo. Samples from 96 of the trial patients, including all patients with a PASI-50 or greater response and all patients who worsened by 50% or more, were analyzed. The figures below show the changes in pro-inflammatory cytokines interleukin 6 (IL-6), interleukin 8 (IL-8) and tumor necrosis factor (TNF). Each vertical bar represents the fold change up or down from 0 in ex vivo stimulated cytokine production between the baseline and week 16 samples from a patient. Three different stimuli were used on each sample and the results from all three stimuli are presented together in the figures, giving the aggregate N (sample) numbers shown in the figures.
Treatment with EDP1815 led to a statistically significant reduction in the release of cytokines compared to placebo: IL-6 (p=0.0003), IL-8 (p=0.0007), and TNF (p=0.0037). The effect observed for EDP1815 may be clearly seen by the deep tail of reduced cytokine production on the left of the distribution for each cytokine, which was absent in the placebo groups. There was no worsening compared to placebo on the right of the distributions, resulting in the overall significant difference between EDP1815 and placebo.

https://cdn.kscope.io/2a8330e91f2ef6d5fc040b5ff9dd30aa-evlo-20220331_g4.jpg
In addition, skin biopsies of active lesions were taken from a subset of patients in the trial. Six of the patients who received EDP1815 and achieved at least a PASI-50 response from baseline at week 16 had paired biopsies. RNA-seq analysis of these biopsies showed reductions in transcript levels for psoriasis-relevant cytokines interleukin 23 (IL-23), interleukin 12b (IL-12b), and interleukin 17 (IL-17) in these lesions between baseline and week 16. The box plot below shows the median and interquartile ranges, as well as individual values of the cytokine expression levels in the skin, at baseline and week 16. These data suggest that EDP1815 reduced inflammation in the skin by modulating multiple proinflammatory cytokines.
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https://cdn.kscope.io/2a8330e91f2ef6d5fc040b5ff9dd30aa-evlo-20220331_g5.jpg
We believe these data support the biology of the SINTAX and the development of a new potential class of medicine that is designed to act locally in the small intestine to affect inflammation throughout the body. In the Phase 2 trial, there was no observed exposure of EDP1815 outside the gut.
Based on these data, we currently intend to advance EDP1815 towards registration trials in psoriasis, following the completion of meetings with health authorities.
Pediatric Investigation Plan for EDP1815 in Psoriasis
In February 2022, the European Medicines Agency ("EMA") agreed to our Pediatric Investigation Plan ("PIP") for EDP1815 in psoriasis, in accordance with Regulation (EC) No 1901/2006 of the European Parliament and of the Council. The EMA agreement allows Evelo to include patients aged 12–17 years old in Phase 3 trials, and requires us to conduct a single clinical trial in patients 2–5 years old and 6–11 years old after the adult Marketing Authorization Application ("MAA") has been submitted, and to develop a pediatric formulation suitable for administration to patients 2–11 years old. Furthermore, the EMA confirmed that juvenile toxicity studies are not required for EDP1815 and granted us a waiver from studying EDP1815 in patients less than 2 years old.
Phase 1b and Phase 2 clinical trials in atopic dermatitis
In 2021, we reported preliminary clinical data from two cohorts of patients with mild and moderate atopic dermatitis in a Phase 1b randomized, placebo-controlled, dose-escalating safety and tolerability trial of EDP1815. The primary endpoint was safety and tolerability. In the first readout, we reported positive clinical data in a cohort of patients with mild and moderate atopic dermatitis (n=24), randomized 2:1 to receive EDP1815 in capsules (8.0 x 1011 total cells) or placebo for 56 days. This was the same concentration of EDP1815 that was used as one of the doses in our Phase 2 trial in psoriasis. In the first Phase 1b trial cohort of patients with atopic dermatitis, 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 as Eczema Area and Severity Index (“EASI”), the Investigator’s Global Assessment times body surface area (“IGA* BSA”), and the SCORing Atopic Dermatitis (“SCORAD”) scores.
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Clinical Measure
Treatment Difference between EDP1815 and Placebo Percentage Change at Day 56 *
EASI52% (p=0.062)
IGA*BSA65% (p=0.022)
SCORAD35% (p=0.068)
* Least Squares Mean Percentage Change From Baseline. Note that the Phase 1b trial was not powered to detect statistically significant outcomes on efficacy endpoints: p-values presented are nominal values presented for illustrative purposes only.
The preliminary data showed consistent improvements in percentage change from baseline compared to placebo for all three clinical scores: EASI, IGA*BSA, and SCORAD. In January 2022, in connection with locking the database for the Phase 1b trial, we further analyzed these preliminary data and the methodology used to report the SCORAD results from the first cohort of atopic dermatitis patients in the Phase 1b trial described above. In the course of such review, we determined that the initial calculation of the SCORAD values was incorrect and we recalculated the SCORAD values. The correct SCORAD values are shown in the above table. The p-value change in SCORAD does not alter our prior determination that the SCORAD secondary endpoint showed consistent improvement in percentage change from baseline compared to placebo. In addition, 7 out of 16 (44%) patients treated with EDP1815 achieved an outcome of a 50% improvement from baseline in EASI score (an "EASI-50” response) 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, patient-reported outcomes were also assessed. Treatment with EDP1815 resulted in clinically meaningful improvement in DLQI and 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. We believe these results provide further evidence that modulating SINTAX has the potential to drive significant clinical benefit without the need for systemic exposure.
We reported data from a second cohort in the Phase 1b trial of 24 patients with moderate atopic dermatitis who were randomized in a 2:1 ratio, with 16 receiving a higher per capsule concentration formulation of EDP1815 (6.4 x 1011 total cells) and 8 receiving a matching placebo once daily for eight weeks. The higher concentration capsules given to the second cohort of atopic dermatitis patients were produced using a different manufacturing process from that used to produce the capsules given to the first cohort of atopic dermatitis patients. The primary objective was to assess the safety and tolerability of the higher per capsule concentration formulation of EDP1815 after eight weeks of dosing. The secondary objective was to assess the clinical improvement in patients with moderate atopic dermatitis. All the patients used an emollient twice daily for at least seven consecutive days immediately prior to day 1 and continued to use the background emollient treatment twice daily throughout the trial. In this second cohort, EDP1815 was shown to be well-tolerated with no treatment-related adverse events of moderate or severe intensity and no serious adverse events through eight weeks of dosing. An initial improvement in mean percent change in EASI was observed at day 15 compared to placebo; however, the population mean change decreased over the remainder of the dosing period, and there was no overall difference from placebo at the end of the dosing period. Given the difference in clinical effects observed between the two cohorts in the Phase 1b trial, which were dosed with EDP1815 produced using different manufacturing processes, we are evaluating drug substance produced using both manufacturing processes in our Phase 2 atopic dermatitis trial described below.
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In February 2022, we began dosing patients in a Phase 2 trial of EDP1815 in atopic dermatitis. The primary objective of this multicenter, randomized, double-blind, placebo-controlled Phase 2 trial is to evaluate the efficacy and safety of EDP1815 in the treatment of atopic dermatitis when dosed for 16 weeks, compared to placebo. The trial is enrolling patients with mild, moderate, and severe atopic dermatitis and will evaluate EDP1815 drug substance produced using two different manufacturing processes. The primary endpoint is the proportion of patients who achieve an EASI-50 response at week 16. Secondary endpoints include several physician-reported outcomes, such as IGA and BSA, along with patient-reported outcomes such as DLQI, itch using the daily Pruritus-NRS, and POEM. Patients will be randomized into one of up to four cohorts. Each cohort will include approximately 100 patients randomized in a 3:1 ratio (75 to EDP1815 and 25 to placebo) for a total of up to 400 patients. Cohort 1 will explore a daily dose of 1.6 x 1011 total cells of EDP1815 or matching placebo administered as two capsules once daily. Cohorts 2 and 3 will explore a daily dose of 6.4 x 1011 total cells of EDP1815 or matching placebo administered as two capsules once daily or one capsule twice daily, respectively. The different dosages of drug (1.6 x 1011 total cells and 6.4 x 1011 total cells) are prepared from two different manufacturing processes. Cohorts 1, 2 and 3 were previously included as part of the initial trial protocol. In April 2022, we announced that, subject to allowance by regulatory authorities to proceed under the revised protocol, we intend to add a fourth cohort to this Phase 2 trial. Patients in this fourth cohort, if enrolled, would receive one capsule of EDP1815 (8.0 x 1010 total cells) designed to provide a faster release profile once daily or placebo. All patients will have the opportunity to join an open label extension trial once they complete 16 weeks of dosing. Patients in the open label extension trial will receive EDP1815 for a further 36 weeks. We anticipate that data from the first 3 cohorts of the Phase 2 atopic dermatitis trial will be available in the first quarter of 2023 and that data from the additional fourth cohort, if enrolled, will be available in the second quarter of 2023.
COVID-19
In March 2022, the Independent Data Monitoring Committee for the TACTIC-E clinical trial of EDP1815 for the treatment of hospitalized COVID-19 patients met for a scheduled review of data. No adverse signal was noted in the EDP1815 arm. However, we have concluded that the progressive mildness of the COVID-19 pandemic makes yielding a meaningful outcome for EDP1815 in TACTIC-E unlikely. Therefore, no further patients will be recruited. The trial will report results once all the data have been collected. The TACTIC-E clinical trial was a Phase 2/3 randomized trial, sponsored by Cambridge University Hospitals NHS Foundation Trust. The trial was 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.
Scintigraphy Studies
We continue to evaluate different formulations of EDP1815 with the goal of providing optimum delivery of the drug substance in the small intestine. An on-going Phase 1 single center clinical trial in healthy human volunteers is assessing the release characteristics of capsules of EDP1815 by gamma scintigraphy imaging. In March 2022, results from the Phase 1 trial showed that a capsule with an improved release profile was able to deliver EDP1815 higher up in the small intestine. In 17 of the human volunteers studied, 15 (or 88%) showed that EDP1815 released in the jejunum, the upper part of the small intestine. Preclinical data have shown that the higher that EDP1815 is released in the small intestine, the greater the observed effect. We intend to evaluate this faster release capsule in patients in one or more suitable clinical trials including, subject to allowance by regulatory authorities, in our Phase 2 trial of EDP1815 in atopic dermatitis.
We currently intend to evaluate EDP1815 in additional inflammatory disease indications. Potential indications include psoriatic arthritis, asthma, axial spondylarthritis and rheumatoid arthritis.
EDP1867
EDP1867 is a non-live pharmaceutical preparation of a single strain of Veillonella parvula, isolated from the ileum of a human donor. It is made non-live by gamma-irradiation in the manufacturing process, making it unable to colonize or persist in the gut, a central feature of SINTAX medicines.
In April 2022, we announced that data from our Phase 1b clinical trial of EDP1867 in patients with atopic dermatitis (n=52, with 40 participants who had at least one dose of EDP1867) suggested EDP1867 was well-tolerated in both healthy volunteers and patients with moderate atopic dermatitis across all doses tested. No clear evidence of clinical benefit was observed in the small set of patients (n=15) with atopic dermatitis who received the lower dose of EDP1867 and provided analyzable data at week 8. Additionally, we announced our intention to place the EDP1867 program on hold to focus our efforts on our lead inflammation programs EDP1815 and EDP2939.
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EDP2939
EDP2939 is an oral biologic consisting of extracellular vesicles ("EV") that we are investigating and developing for the potential treatment of inflammatory diseases. In May 2021, we presented preclinical data for EDP2939 at the American Association of Immunologists Meeting. In the preclinical mechanism of action study, mice undergoing a delayed-type hypersensitivity (DTH) reaction against keyhole limpet hemagglutinin (KLH) were treated with EDP2939, EDP2939 in combination with different blocking antibodies, or with placebo. These data suggest that the pharmacological activity of EDP2939 may require the stimulation of the TLR2 receptor and IL-10 receptor signaling, in addition to lymphocyte homing from the systemic circulation to the intestinal lymphoid tissue. In-vitro, EDP2939 induced TLR2-dependent release of IL-10. Biodistribution studies with fluorescently labelled EDP2939 showed that it was not detected outside the gastrointestinal tract. We also did not observe any adverse safety or tolerability issues in these preclinical studies. We believe these data suggest that treatment with EDP2939 could result in broad-based resolution of inflammation and the establishment of immune homeostasis. EDP2939 is the first EV product candidate we have nominated in our inflammation program. We anticipate initiation of clinical development in the third quarter of 2022, and expect data from a cohort of patients with psoriasis in the second half of 2023.
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.
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 the notes, including Note 3 - Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding the commercialization and license agreement with ALJ.
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. To date, we have financed our operations primarily with proceeds from sales of common and convertible preferred stock to our equity investors and borrowings under loan and security agreements with financial institutions.
We are a development stage company and have not generated any revenue. All of our product candidates are in clinical or preclinical development. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. Since our inception, we have incurred significant operating losses and we continue to incur significant research and development and other expenses related to our operations. For the three months ended March 31, 2022, our net loss was $29.9 million. As of March 31, 2022, we had an accumulated deficit of $444.6 million. We do not expect to generate revenue from sales of any products for the foreseeable future, if at all.
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We expect that our expenses will increase substantially in connection with our ongoing activities, particularly as we:
continue the ongoing clinical trials for EDP1815;
initiate additional clinical trials for EDP1815;
initiate clinical trials for EDP2939;
initiate or advance the clinical development of any additional product candidates;
conduct research and continue preclinical development of potential product candidates;
make strategic investments in manufacturing capabilities, including potentially planning and building our own manufacturing facility;
maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property;
increase employees and employee-related expenses including salaries, benefits, travel and stock-based compensation expense; and
seek to obtain regulatory approvals for our product candidates.
In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution.
As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Additionally, our ability to raise capital may be impacted by global macroeconomic conditions including as a result of international political conflict, supply chain issues and rising inflation. 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.
Debt Financing
In June 2021, we amended our loan and security agreement with K2 HealthVentures LLC and others. The aggregate principal borrowings available under the amended agreement are $45.0 million, all of which we have drawn down to date. See “—Liquidity and Capital Resources" and Note 8 - Loan and Security Agreements to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding our debt facility.
Equity Financing
In June 2019, we filed a Registration Statement on Form S-3 (the "2019 Shelf Registration") with the Securities and Exchange Commission (the "SEC") for the registration of common stock, preferred stock, debt securities, warrants and/or units or any combination thereof in the aggregate amount of up to $200.0 million for a period of up to three years from the date of effectiveness. We simultaneously entered into an “at-the-market” offering sales agreement with Cowen and Company, LLC (the "ATM") providing for the offering, issuance and sale of up to $50.0 million of common stock under the 2019 Shelf Registration. During the three months ended March 31, 2022, we issued no shares of common stock under the ATM and no other securities under the 2019 Shelf Registration.
In August 2021, we filed a Registration Statement on Form S-3 (the “2021 Shelf Registration”) with the SEC for the registration of common stock, preferred stock, debt securities, warrants and/or units or any combination thereof in the aggregate amount of up to $200.0 million for a period of up to three years from the date of effectiveness. During the three months ended March 31, 2022, we issued no securities under the 2021 Shelf Registration.
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See “—Liquidity and Capital Resources" and Note 11 - Stockholders' Equity to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding our equity financing.
Impact of COVID-19
On March 11, 2020, the World Health Organization (WHO) declared the COVID-19 outbreak a pandemic. The outbreak has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business closures and curtailments, and school closures.
The prolonged 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 continue working with our 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 continue to 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 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.
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.
Financial Operations Overview
Revenue
We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. As discussed in Note 3 - ALJ Commercialization and License Agreement to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we have entered into a collaboration agreement that will result in the recognition of $7.5 million of revenue upon regulatory approval of EDP1815 in certain designated markets. If our development efforts for our current product candidates or additional product candidates that we may develop in the future are successful and result in marketing approval or if we enter into 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.
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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 and depreciation expense. We do not allocate personnel costs, which primarily include salaries, discretionary bonus and stock-based compensation costs, as such costs are separately classified as research and development personnel costs.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we continue to implement our business strategy and our ongoing clinical trials for our product candidates including EDP1815, initiate additional clinical trials including for EDP1815 and EDP2939, discover and develop additional product candidates, seek regulatory approvals for any products that successfully complete clinical trials, continue to source or potentially build manufacturing capabilities, hire additional research and development personnel and expand into additional therapeutic areas.
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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 product candidates following approval.
A change in any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We expect our research and development expenses to increase at least over the next several years as we continue to implement our business strategy, advance our current programs, expand our research and development efforts, seek regulatory approvals for any product candidates that successfully complete clinical trials, identify and develop additional product candidates and incur expenses associated with hiring additional personnel to support our research and development efforts.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate, 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, 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.
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Interest Expense, Net
Interest expense, net primarily consists of interest expense incurred on our debt offset by interest earned on our cash and cash equivalents. During the three months ended March 31, 2022 and 2021, interest expense, net consisted primarily of interest at the stated rate on borrowings under our loan and security agreements, amortization of deferred financing costs and interest expense related to the accretion of debt discount offset by interest earned on institutional money market instruments.
Other Miscellaneous Income, Net
Other miscellaneous income, net for the three months ended March 31, 2022 and 2021 primarily consists of government grants related to our operations in the United Kingdom and foreign currency exchange losses.
Income Taxes
Income tax expense for the three months ended March 31, 2022 and 2021 reflects the provision for income taxes at our wholly owned UK subsidiary.
Since our inception in 2014, we recorded no U.S. federal or state income tax benefits for the net losses we incurred or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items.
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Results of Operations
Comparison of the Three Months Ended March 31, 2022 and 2021
Our statement of operations for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 is as follows (in thousands):
 Three Months Ended March 31, 
 20222021Change
Operating expenses:
Research and development$19,321 $21,508 $(2,187)
General and administrative9,417 5,963 3,454 
Total operating expenses28,738 27,471 1,267 
Loss from operations(28,738)(27,471)(1,267)
Other (expense) income:
Interest expense, net(1,027)(765)(262)
Other miscellaneous income, net20 162 (142)
Total other expense, net(1,007)(603)(404)
Loss before income taxes(29,745)(28,074)(1,671)
Income tax expense(116)(122)
Net loss$(29,861)$(28,196)$(1,665)
Net Loss
Net loss for the three months ended March 31, 2022 was $29.9 million, compared to $28.2 million for the three months ended March 31, 2021. The additional current year net loss of $1.7 million was the result of increases in our general and administrative expenses and total other expense, net, of $3.5 million and $0.4 million, respectively, partially offset by a $2.2 million decrease of research and development expenses.
Research and Development Expenses
Our research and development expenses for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 are as follows (in thousands):
 Three Months Ended March 31, 
 20222021Change
Inflammation programs$7,000 $10,690 $(3,690)
Oncology programs84 916 (832)
Personnel costs6,543 5,165 1,378 
Stock-based compensation2,036 1,823 213 
Platform expenses3,658 2,914 744 
Total research and development expenses$19,321 $21,508 $(2,187)
Research and development expenses were $19.3 million for the three months ended March 31, 2022, compared to $21.5 million for the three months ended March 31, 2021. The overall decrease of $2.2 million was driven by the completion of the first EDP1815 Phase 2 clinical trial in psoriasis and the closeout of the EDP1503 program. The $4.5 million decrease in expenditures for those programs were partially offset by the ramp up of the EDP1815 Phase 2 clinical trial in atopic dermatitis and the EDP2939 program. In addition, there were higher personnel costs of $1.4 million and stock-based compensation costs of $0.2 million due to increases in the clinical development and technical operations headcount to support clinical program activities. Lastly, there was a $0.7 million increase in investment for our platform expenses to support our early stage and preclinical candidates. Overall, we expect that our research and development expenses will increase in the foreseeable future as we continue our clinical trials for our product candidates including EDP1815, initiate new clinical trials for our product candidates including EDP1815 and EDP2939, expand into additional therapeutic areas, continue discovery and development efforts for additional product candidates, hire additional research and development personnel and seek to increase manufacturing capabilities.
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General and Administrative Expenses
Our general and administrative expenses for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 are as follows (in thousands):
 Three Months Ended March 31, 
 20222021Change
Personnel costs$3,730 $2,112 $1,618 
Stock-based compensation2,239 1,441 798 
Professional fees2,257 1,524 733 
Facility costs, office expense and other1,191 886 305 
Total general and administrative expenses$9,417 $5,963 $3,454 
General and administrative expenses were $9.4 million for the three months ended March 31, 2022, compared to $6.0 million for the three months ended March 31, 2021. The increase of $3.5 million was primarily driven by $1.6 million related to increases in pre-commercial and other general and administrative function headcount and related higher stock-based compensation expense of $0.8 million. Additionally, professional fees increased by $0.7 million and cost increases of $0.3 million related to a return of our employees to the office and increased travel.
Total Other Expense, Net
Total other expense, net for the three months ended March 31, 2022 was $1.0 million compared to $0.6 million for the three months ended March 31, 2021. The $0.4 million increase in other expense was primarily driven by a $0.3 million increase in interest expense resulting from higher outstanding principal balances on our debt facility and a $0.1 million decrease in other miscellaneous income.
Liquidity and Capital Resources
We have incurred losses and have generated negative operating cash flows since our inception, and anticipate that we will continue to incur losses for at least the next several years. As of December 31, 2021, we had an accumulated deficit of $414.7 million and have incurred an additional net loss of approximately $29.9 million for the three months ended March 31, 2022. To date, we have financed our operations primarily with proceeds from public and private offerings of our common stock, sales of our convertible preferred stock to our equity investors and borrowings under our debt facilities. From inception through March 31, 2022, we have received gross proceeds of $434.9 million from equity and debt transactions, including a net $45.0 million borrowed under our debt facilities. As of March 31, 2022, we had cash and cash equivalents of $39.6 million and an accumulated deficit of $444.6 million.
During the three months ended March 31, 2022, we sold no securities under the 2019 Shelf Registration including no sales of shares of our common stock pursuant to the ATM. During the three months ended March 31, 2022, we sold no securities under the 2021 Shelf Registration. In July 2019, we entered into a loan and security agreement (as amended prior to June 16, 2021, the "2019 Credit Facility") with K2 HealthVentures LLC and others (collectively, "K2HV"), providing for up to $45.0 million of current and future potential debt financing. In July 2019, we borrowed $20.0 million, representing the first tranche under the 2019 Credit Facility. In July 2020, we drew down the second tranche of $10.0 million under the 2019 Credit Facility. The availability of the third tranche of $15.0 million under the 2019 Credit Facility expired in January 2021.
On June 16, 2021 (the "Amended Credit Facility Effective Date"), we further amended the 2019 Credit Facility (as so amended, the “Amended Credit Facility”), pursuant to which (i) the existing $15.0 million third tranche commitment was replaced and superseded with a new $15.0 million fourth tranche commitment, which we drew down on June 16, 2021, (ii) K2HV may convert up to $5.0 million of outstanding principal of the Loans (as defined in the Amended Credit Facility) into shares of our common stock, (iii) the interest-only period is extended through February 28, 2023, with the first amortization payment on March 1, 2023, (iv) an election was included allowing us to adjust the amortization schedule to be based on a 30-month repayment period, and upon final payment or prepayment of the loans we must pay a final payment equal to 4.8% of the aggregate original principal amount of the loans borrowed which we elected on December 22, 2021, and (v) at our election, we may prepay the loans, subject to a prepayment fee of 2% of the amount prepaid if such prepayment occurs no later than the 18-month anniversary of the Amended Credit Facility Effective Date, 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. All of the other terms and conditions of the 2019 Credit Facility remain unchanged and in full force and effect under the Amended Credit Facility.
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As of March 31, 2022, our principal source of liquidity is cash and cash equivalents, which totaled approximately $39.6 million. Based on our current operating plan, our existing cash and cash equivalents as of March 31, 2022 will be sufficient to enable us to fund operating expenses and capital expenditure requirements into the third quarter of 2022. We base these estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect.
Based on our current operating plan, we believe we do not have sufficient cash and cash equivalents on hand to support current operations for at least one year from the date of issuance of the financial statements appearing within this Quarterly Report on Form 10-Q. To finance our operations beyond that point, we will need to raise additional capital. There can be no assurance that we will be able to obtain additional funding on acceptable terms, if at all. We have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern for at least one year from the date of the issuance of our unaudited condensed consolidated financial statements for the period ended March 31, 2022. As such, we plan to seek to raise capital from time to time through future equity financings, debt financings or partnerships to fund our future operations and remain as a going concern. To the extent that we raise additional capital through future equity offerings, the ownership interest of common stockholders will be diluted, which dilution may be significant. See Note 1 - Organization of the notes to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information on our assessment.
Until such time as we can generate revenue from product sales, if ever, we expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaborations, license and development agreements.
Cash Flows
Our total cash, cash equivalents and restricted cash decreased by $29.0 million during the three months ended March 31, 2022 to $40.8 million. Our statements of cash flows for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 are summarized as follows (in thousands):
 Three Months Ended March 31,
 20222021
Cash used in operating activities$(28,932)$(26,280)
Cash used in investing activities(153)(314)
Cash provided by financing activities117 82,328 
Net (decrease) increase in cash, cash equivalents and restricted cash$(28,968)$55,734 
Operating Activities
Net cash used in operating activities for the three months ended March 31, 2022 was $28.9 million, driven primarily by our net loss of $29.9 million. This was partially offset by non-cash charges consisting of stock-based compensation expense of $4.3 million, depreciation expense of $0.5 million, non-cash lease expense of $0.5 million, and non-cash interest expense of $0.1 million. The change in operating assets and liabilities account for $4.6 million of cash used in operations.
Net cash used in operating activities for the three months ended March 31, 2021 was $26.3 million driven primarily by our net loss of $28.2 million. This was partially offset by non-cash charges consisting of stock-based compensation expense of $3.3 million, depreciation expense of $0.5 million, non-cash lease expense of $0.4 million, and non-cash interest expense of $0.1 million. The change in operating assets and liabilities account for $2.5 million of cash used in operations.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2022 was $0.2 million, consisting of the purchase of capital equipment.
Net cash used in investing activities for the three months ended March 31, 2021 was $0.3 million, consisting of the purchase of capital equipment.
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Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2022 was $0.1 million, consisting of net proceeds from the exercise of stock options.
Net cash provided by financing activities for the three months ended March 31, 2021 was $82.3 million, consisting of $82.3 million in proceeds from the issuance of common stock, net of issuance cost.
Recent Accounting Pronouncements
For a discussion of recently adopted or issued accounting pronouncements please refer to Note 2 - Summary of Significant Accounting Policies of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.
Except as described in Part I, Item 4 - Controls and Procedures and Note 2 - Summary of Significant Accounting Policies, there were no material changes to our critical accounting policies in the three months ended March 31, 2022 from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2021 Annual Report.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and are not required to provide this information.
Item 4. Controls and Procedures.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures, as defined under 13a-15(e) and 15d-15(e) under the Exchange Act. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Following such evaluation, due solely to the material weakness previously disclosed in our Annual Report on Form 10-K for the period ended December 31, 2021 and further described below, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2022.
Previously Reported Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, we identified a material weakness in our internal control over financial reporting in connection with the preparation of our financial statements as of and for the year ended December 31, 2021. Specifically, the review of certain financial transactions and preparation and review of account reconciliations was not performed using a sufficient level of precision and accuracy. This material weakness resulted from an insufficient complement of resources with an appropriate level of accounting knowledge, experience, or training. No material financial statement misstatements were identified in relation to this material weakness in our internal control over financial reporting. Based on additional procedures and post-closing review, management concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented, in conformity with accounting principles generally accepted in the United States.
Remediation Plan
Our management, under the supervision of our principal executive officer and principal financial officer, previously adopted and has been implementing a plan to remediate the material weakness and continues to take steps that we believe will address the underlying causes of the material weakness. Those actions primarily include hiring additional accounting and finance personnel with technical accounting and financial reporting experience and enhancing our internal review procedures during the financial statement close process. During the preparation of this Quarterly Report on Form 10-Q, our management implemented certain additional substantive and analytical review procedures intended to ensure that information required to be disclosed by us in our periodic reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
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Changes in Internal Control over Financial Reporting
Except for the remediation efforts described above taken to address the previously disclosed material weakness, there was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be involved in claims and proceedings arising in the course of our business. The outcome of any such claim or proceeding, regardless of the merits, is inherently uncertain. We are not subject to any material legal proceedings.
On February 12, 2021, the European Patent Office issued a Communication of a Notice of Opposition for European patent EP 3223834, which is held by us. In July 2021, we filed our reply to the Notice of Opposition. In January 2022, the European Patent Office issued a preliminary opinion and a summons to oral proceedings. The deadline for final written submissions is in July 2022 and the date for the oral proceedings is in September 2022. We are currently evaluating the options available to us with respect to this matter. The patent at issue does not relate to any of our current product candidates, and receipt of this communication and/or any subsequent proceeding is not expected to affect any of our current development plans.
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and the related notes and Part I, Item 2. “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and in our Annual Report on Form 10-K filed with the SEC on March 24, 2022, including our consolidated financial statements and the related notes thereto, before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Financial Position and Need for Additional Capital
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.
Since inception, we have incurred significant operating losses. Our net loss was $29.9 million and $28.2 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, we had an accumulated deficit of $444.6 million. As noted below, we have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. Through March 31, 2022, we have financed our operations through proceeds from equity offerings of our common stock, private placements of our preferred stock and borrowings under loan and security agreements. We have devoted substantially all of our financial resources and efforts to developing our platform, identifying potential product candidates and conducting preclinical and clinical trials. We are in the early stages of developing our product candidates, and we have not completed the development of any product candidate. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase substantially as we:
•    seek to initiate additional and larger clinical trials of our product candidates;
•    seek to enhance our platform and discover and develop additional product candidates;
•    seek regulatory approvals for any product candidates that successfully complete clinical trials;
•    seek to establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products for which we may obtain regulatory approval;
•    maintain, expand and protect our intellectual property portfolio; and
•    add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts and to support our operations as a public company.
In addition, we anticipate that our expenses will increase substantially if we experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, safety issues or other regulatory challenges.
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To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing preclinical testing and clinical trials of our product candidates, discovering additional product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory approval. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, may never generate revenue that is significant enough to achieve profitability.
Because of the numerous risks and uncertainties associated with pharmaceutical product and biological product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. If we are required by the FDA or other regulatory authorities to perform preclinical studies or clinical trials in addition to those currently expected, or if there are any delays in completing our preclinical studies or clinical trials or the development of any of our product candidates, our expenses could increase and revenue could be further delayed.
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress our value and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations.
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.
We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct clinical trials, build manufacturing capacity and expand into additional therapeutic areas.
We expect that our existing cash and cash equivalents as of March 31, 2022 will enable us to fund our planned operating expenses and capital expenditure requirements into the third quarter of 2022. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:
•    the progress and results of any ongoing and future clinical trials;
•    the cost of manufacturing clinical supplies of our product candidates, including EDP1815 and EDP2939;
•    the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for any other future product candidates;
•    the costs, timing and outcome of regulatory review of our product candidates;
•    the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution for any of our product candidates for which we receive marketing approval;
•    the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
•    the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
•    the effect of competing technological and market developments; and
•    the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration arrangements for product candidates.
Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Additionally, market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact our ability to access capital as and when needed. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities by us, whether equity or debt, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity, including any shares subject to warrants that we have previously issued or may in the future issue, or of convertible securities, would dilute all of our stockholders. The occurrence of additional indebtedness could result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants such as limitations on our ability to
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incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborators or others at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.
If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or product development programs or the commercialization of any product candidates or cease our operations. In addition, we may be unable to make milestone and royalty payments due under our intellectual property license agreements or other payments under our agreements with contract research organizations ("CROs") and academic research collaborators, or expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.
Our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.
Since our inception in 2014, we have devoted substantially all of our resources to identifying and developing our product candidates, building our intellectual property portfolio, process development and manufacturing function, planning our business, raising capital and providing general and administrative support for these operations. All of our product candidates are in clinical or preclinical development. We have not yet demonstrated our ability to successfully complete a Phase 3 or other pivotal clinical trial, obtain regulatory approvals to commercialize a product, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Additionally, we expect our financial condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history.
We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.
We will be forced to delay or reduce the scope of our development programs, reduce our research and development costs and/or limit or cease our operations if we are unable to obtain additional funding to support our current operating plan. We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. As of March 31, 2022, we had $39.6 million in cash and cash equivalents. Based on our available cash resources, we believe we do not have sufficient cash and cash equivalents on hand to support current operations for at least one year from the date of issuance of the financial statements appearing within this Quarterly Report on Form 10-Q. This condition raises substantial doubt about our ability to continue as a going concern for at least one year from the date that our financial statements for the quarter ended March 31, 2022 were issued. Nevertheless, our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We will need to raise additional capital to fund our future operations and remain as a going concern. There can be no assurance that we will be able to obtain additional funding on acceptable terms, if at all. To the extent that we raise additional capital through future equity offerings, the ownership interest of common stockholders will be diluted, which dilution may be significant. However, we cannot guarantee that we will be able to obtain any or sufficient additional funding or that such funding, if available, will be obtainable on terms satisfactory to us. In the event that we are unable to obtain any or sufficient additional funding, there can be no assurance that we will be able to continue as a going concern, and we will be forced to delay, reduce or discontinue our product development programs or commercialization efforts.
The terms of our loan and security agreements place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.
Our loan and security agreement dated July 19, 2019 (as amended prior to June 16, 2021, the "2019 Credit Facility") with K2 Health Ventures ("K2HV") for $45.0 million was secured by a lien covering substantially all of our personal property, excluding intellectual property. Contemporaneous with the closing of the first tranche of funding under the facility, we repaid the entire $15.0 million loan balance outstanding under our prior loan and security agreement with Pacific Western Bank.
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On June 16, 2021 (the "Amended Credit Facility Effective Date"), we further amended the 2019 Credit Facility (as so amended, the “Amended Credit Facility”), pursuant to which (i) the existing $15.0 million third tranche commitment was replaced and superseded with a new $15.0 million fourth tranche commitment, which we drew down on June 16, 2021, (ii) K2HV may convert up to $5.0 million of outstanding principal of the Loans (as defined in the Amended Credit Facility) into shares of our common stock, (iii) the interest-only period is extended through February 28, 2023, with the first amortization payment on March 1, 2023, (iv) includes an election to adjust the amortization schedule to be based on a 30-month repayment period, and upon final payment or prepayment of the loans and we must pay a final payment equal to 4.8% of the aggregate original principal amount of the loans borrowed which we elected on December 22, 2021, and (v) at our election, we may prepay the loans, subject to a prepayment fee of 2% of the amount prepaid if such prepayment occurs no later than the 18-month anniversary of the Amended Credit Facility Effective Date, 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. All of the other terms and conditions of the Amended Credit Facility remain unchanged and in full force and effect.
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