SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☒||QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934|
For the quarterly period ended June 30, 2022
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934|
For the transition period from to
Commission File Number: 001-38473
Evelo Biosciences, Inc.
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of|
incorporation or organization)
| ||(I.R.S. Employer|
620 Memorial Drive
|(Address of principal executive offices)|| ||(Zip Code)|
(Registrant's telephone number, including area code)
|Securities registered pursuant to Section 12(b) of the Act:|
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
$0.001 par value per share
|EVLO||Nasdaq Global Select Market|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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|
|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 August 8, 2022, the registrant had 107,993,704 shares of common stock, $0.001 par value per share, outstanding.
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, to timely and successfully complete those trials and to 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 ("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 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 may also contain references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend any use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
SUMMARY RISK FACTORS
Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. Principal risks and uncertainties affecting our business include the following:
• We are a development-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability. Moreover, our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.
•We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. We will need additional funding in order to complete development of our product candidates, commercialize our products, if approved, and meet our debt obligations. 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 June 30, 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)
|June 30, 2022||December 31, 2021|
|Cash and cash equivalents||$||92,007 ||$||68,441 |
|Prepaid expenses and other current assets||5,003 ||2,585 |
|Total current assets||97,010 ||71,026 |
|Property and equipment, net||5,821 ||6,622 |
|Right of use asset - operating lease||7,915 ||8,910 |
|Other assets||1,155 ||1,313 |
|Total assets||$||111,901 ||$||87,871 |
|Liabilities and stockholders’ equity|
|Debt, current portion||$||5,928 ||$||— |
|Accounts payable||2,248 ||1,601 |
|Accrued expenses||10,423 ||13,068 |
|Operating lease liability, current portion||2,105 ||1,951 |
|Other current liabilities||737 ||742 |
|Total current liabilities||21,441 ||17,362 |
|Debt, net of current portion||40,746 ||46,557 |
|Operating lease liability, net of current portion||6,566 ||7,785 |
|Deferred revenue ||7,500 ||7,500 |
|Total liabilities||76,253 ||79,204 |
|Commitments and contingencies (Note 10)|
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding as of June 30, 2022 and December 31, 2021, respectively
|— ||— |
Common stock, $0.001 par value; 200,000,000 shares authorized; 107,953,319 and 53,576,454 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
|108 ||54 |
|Additional paid-in capital||510,657 ||423,308 |
|Total stockholders’ equity||35,648 ||8,667 |
|Total liabilities and stockholders’ equity||$||111,901 ||$||87,871 |
See accompanying notes to unaudited condensed consolidated financial statements.
Evelo Biosciences, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
| ||Three Months Ended June 30,||Six Months Ended June 30,|
|Research and development||$||21,221 ||$||20,655 ||$||40,542 ||$||42,163 |
|General and administrative||8,366 ||7,001 ||17,783 ||12,964 |
|Total operating expenses||29,587 ||27,656 ||58,325 ||55,127 |
|Loss from operations||(29,587)||(27,656)||(58,325)||(55,127)|
|Other income (expense):|
|Interest expense, net||(1,020)||(814)||(2,047)||(1,579)|
|Loss on extinguishment of debt||— ||(3,226)||— ||(3,226)|
|Other miscellaneous income, net||209 ||151 ||229 ||313 |
|Total other expense, net||(811)||(3,889)||(1,818)||(4,492)|
|Loss before income taxes||(30,398)||(31,545)||(60,143)||(59,619)|
|Income tax expense||(163)||(53)||(279)||(175)|
|Net loss per share attributable to common stockholders, basic and diluted||$||(0.40)||$||(0.59)||$||(0.93)||$||(1.14)|
|Weighted-average number of common shares outstanding, basic and diluted||75,719,092 ||53,379,415 ||64,730,412 ||52,340,608 |
See accompanying notes to unaudited condensed consolidated financial statements.
Evelo Biosciences, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
|Six Months Ended June 30, 2022|
|Common Stock||Additional |
|Balance - December 31, 2021||53,576,454 ||$||54 ||$||423,308 ||$||(414,695)||$||8,667 |
|Issuance of common stock under Employee Stock Purchase Plan||36,329 ||— ||129 ||— ||129 |
|Vesting of restricted common stock||35,406 ||— ||— ||— ||— |
|Stock-based compensation expense||— ||— ||4,275 ||— ||4,275 |
|Fees associated with public offering of common stock||— ||— ||(12)||— ||(12)|
|Net loss||— ||— ||— ||(29,861)||(29,861)|
|Balance - March 31, 2022||53,648,189 ||$||54 ||$||427,700 ||$||(444,556)||$||(16,802)|
|Issuance of common stock, net||54,246,358 ||54 ||78,928 ||— ||78,982 |
|Vesting of restricted common stock||16,278 ||— ||— ||— ||— |
|Exercise of stock options||42,494 ||— ||30 ||— ||30 |
|Stock-based compensation expense||— ||— ||3,999 ||— ||3,999 |
|Net loss||— ||— ||— ||(30,561)||(30,561)|
|Balance - June 30, 2022||107,953,319 ||$||108 ||$||510,657 ||$||(475,117)||$||35,648 |
See accompanying notes to unaudited condensed consolidated financial statements.
Evelo Biosciences, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
|Six Months Ended June 30, 2021|
|Common Stock||Additional |
|Balance - December 31, 2020||47,470,119 ||$||47 ||$||322,957 ||$||(292,519)||$||30,485 |
|Issuance of common stock, net||5,814,734 ||6 ||81,955 ||— ||81,961 |
|Issuance of common stock under Employee Stock Purchase Plan||27,587 ||— ||90 ||— ||90 |
|Exercise of stock options||45,299 ||— ||235 ||— ||235 |
|Stock-based compensation expense||— ||— ||3,264 ||— ||3,264 |
|Net loss||— ||— ||— ||(28,196)||(28,196)|
|Balance - March 31, 2021||53,357,739 ||$||53 ||$||408,501 ||$||(320,715)||$||87,839 |
|Exercise of stock options||40,532 ||— ||330 ||— ||330 |
|Stock-based compensation expense||— ||— ||3,772 ||— ||3,772 |
|Issuance of common stock warrants||— ||— ||1,750 ||— ||1,750 |
|Net loss||— ||— ||— ||(31,598)||(31,598)|
|Balance - June 30, 2021||53,398,271 ||$||53 ||$||414,353 ||$||(352,313)||$||62,093 |
See accompanying notes to unaudited condensed consolidated financial statements.
Evelo Biosciences, Inc.
Condensed Consolidated Statements of Cash Flows
| ||Six Months Ended June 30,|
|Adjustments to reconcile net loss to net cash used in operating activities:|
|Stock-based compensation expense||8,274 ||7,036 |
|Depreciation expense||1,050 ||1,090 |
|Non-cash interest expense||116 ||180 |
|Non-cash lease expense||995 ||901 |
|Loss on extinguishment of debt||— ||3,226 |
|Loss (gain) on disposal of property and equipment||232 ||(4)|
|Changes in operating assets and liabilities:|
|Prepaid expenses and other current assets||(2,520)||(789)|
|Accounts payable||636 ||877 |
|Accrued expenses and other current liabilities||(2,754)||(987)|
|Operating lease liabilities||(1,065)||(927)|
|Deferred revenue||— ||7,500 |
|Other liabilities||— ||(21)|
|Net cash used in operating activities||(55,458)||(41,712)|
|Purchases of property and equipment||(385)||(1,151)|
|Proceeds from sale of fixed assets||— ||4 |
|Net cash used in investing activities||(385)||(1,147)|
|Proceeds from issuance of common stock, net of issuance cost||79,092 ||81,902 |
|Proceeds from the issuance of common stock under employee stock purchase plan and exercise of stock options||159 ||655 |
|Proceeds from the issuance of long-term debt, net of issuance costs||— ||14,778 |
|Net cash provided by financing activities||79,251 ||97,335 |
|Net increase in cash, cash equivalents and restricted cash||23,408 ||54,476 |
|Cash, cash equivalents and restricted cash – beginning of period||69,754 ||70,420 |
|Cash, cash equivalents and restricted cash – end of period||$||93,162 ||$||124,896 |
|Supplemental disclosure of cash flow information|
|Cash paid for interest||$||1,957 ||$||1,388 |
|Cash paid for taxes||$||394 ||$||— |
|Noncash investing and financing activities|
|Offering costs in accrued expenses||$||122 ||$||59 |
|Property and equipment additions included in accrued expenses||$||11 ||$||172 |
|Issuance of common stock warrants||$||— ||$||1,750 |
See accompanying notes to the unaudited condensed consolidated financial statements.
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 which 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 June 30, 2022, we held cash, cash equivalents and restricted cash of $93.2 million and have an accumulated deficit of $475.1 million. Since inception, we have financed operations primarily with the proceeds from the issuance of common stock and since-redeemed preferred stock to equity investors, and from debt financing.
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that these unaudited condensed consolidated financial statements are issued. The transition to profitability is dependent upon the successful development, approval and commercialization of our product candidates, and the achievement of a level of revenues adequate to support our cost structure. Based on our current operating plan, we believe that our cash and cash equivalents balance as of June 30, 2022 will not be sufficient to fund operations and capital expenditures for at least the twelve months following the filing of this Quarterly Report on Form 10-Q, and we will need to obtain additional funding. We intend to obtain additional funding through available financing sources which may include additional public offerings of common stock, private financing of debt or equity, and / or the pursuit of strategic partnerships, licensing arrangements or collaborations. Management’s belief with respect to our ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, we may need to seek additional funding sooner than would otherwise be expected. There can be no assurance that we will be able to obtain additional funding on acceptable terms, if at all. If we are unable to obtain sufficient funding, we may be required to delay development efforts, limit activities and reduce research and development costs, which could adversely affect our business prospects. Because of the uncertainty in securing additional funding and the insufficient amount of cash and cash equivalent resources as of June 30, 2022, management concluded that substantial doubt exists with respect to our ability to continue as a going concern within one year after the date that these unaudited condensed consolidated financial statements are issued. 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 June 30, 2022, and the results of operations and stockholders' equity for the six months ended June 30, 2022 and 2021. Such adjustments are of a normal and recurring nature. The results for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be realized for the year ending December 31, 2022, or for any future period.
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 operating cash in demand deposit accounts at a single financial institution which have exceeded and are expected to continue to exceed federally insured limits. Our money market funds are held in an investment account at an affiliate institution.
As of June 30, 2022 and December 31, 2021, we had no off-balance sheet risk such as foreign exchange contracts, option contracts, derivatives or foreign currency hedging arrangements.
Comprehensive loss consists of net loss and changes in equity during a period arising from transactions and other equity and circumstances, of which we have none. Our comprehensive loss equals our net loss for all periods presented.
Cash, Cash Equivalents and Restricted Cash
Cash equivalents are highly liquid investments that are readily convertible into cash with original maturities of three months or less, which consist of cash held in banks and funds held in money market accounts. Cash equivalents are stated at cost, which approximates market value. Our restricted cash consists of 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 June 30, 2022 and December 31, 2021 we had $1.2 million and $1.3 million, respectively, in noncurrent restricted cash included within other assets recorded on the unaudited condensed consolidated balance sheets.
The following reconciles cash, cash equivalents and restricted cash as of June 30, 2022 and December 31, 2021, as presented on our statements of cash flows to the related balance sheet accounts (in thousands):
|June 30, 2022||December 31, 2021|
|Cash and cash equivalents:|
|Cash||$||4,572 ||$||1,452 |
|Money market funds||87,435 ||66,989 |
|Total cash and cash equivalents||92,007 ||68,441 |
|Restricted cash||1,155 ||1,313 |
|Cash, cash equivalents and restricted cash||$||93,162 ||$||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 each asset. Assets are depreciated over their estimated useful lives upon placement in service.
A summary of the estimated useful lives of our property and equipment is as follows:
|Computer hardware||3||to||5 years|
|Computer software||3 years|
|Furniture and fixtures||7 years|
|Research and laboratory equipment (used/new)||3||to||5 years|
|Leasehold improvements||Lesser of asset life or remaining life of lease|
Assets acquired but not placed in service are included in property and equipment as construction-in-process, and are not depreciated. 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.
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.
We recognize revenue under the FASB guidance of ASC 606. Since inception, we have entered into one contract subject to ASC 606, however, as discussed in Note 3 - ALJ Collaborative Agreement, all revenue pursuant to this arrangement has been deferred.
We analyze our collaborative arrangements under the FASB 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.
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 Collaborative 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.
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.
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 our 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 our 2018 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. Consequently, 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 unaudited condensed consolidated financial statements and related disclosures.
In October 2020, the FASB issued ASU No. 2020-10 - Codification Improvements. The amendments improve the codification by having all disclosure-related guidance available in the disclosure sections of the codification and also include various other minor amendments. We adopted the guidance for the year beginning January 1, 2022, with no impact on our unaudited condensed consolidated financial statements and related disclosures.
Accounting Pronouncements Issued and Not Adopted
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments, which was subsequently updated (together “ASU 2016-13”). The provisions of ASU 2016-13 modify the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, and require a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 will be effective for us on January 1, 2023, with early adoption permitted. We are currently evaluating the potential impact that this standard may have on our financial position and results of operations, as well as the timing of our adoption of this standard.
3. ALJ Collaborative Agreement
In March 2021, we entered into a collaborative commercialization and license agreement (“ALJ Agreement”) with ALJ. Pursuant to the ALJ Agreement, we granted to ALJ an exclusive, non-transferable, sublicensable license to our product candidate EDP1815. In consideration for the rights granted under the ALJ Agreement, ALJ was obligated to pay a one-time, non-refundable upfront fee of $7.5 million. The parties will also share the future operating profits and losses for certain products in certain territories equally (50:50) as well as certain development, regulatory and commercialization costs. We have concluded that the delivery of the license to ALJ shall be accounted for under ASC 606. The development, regulatory and commercialization activities within the territories shall be accounted for under ASC 808.
We have recognized no revenue under the ALJ Agreement to date as we have yet to undertake any of our performance obligations within the agreement. The $7.5 million upfront fee is recorded as deferred revenue as a non-current liability in the accompanying unaudited condensed consolidated balance sheets because the performance obligation is not expected to be completed within the next twelve months.
We anticipate payments under the cost-sharing or profit and loss sharing arrangements will be classified in the statement of operations consistent with the guidance of ASC 808. To date, we have neither received nor incurred any such payments.
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 June 30, 2022 and 2021, we recorded rent expense of $0.8 million and $0.7 million, respectively. For the six months ended June 30, 2022 and 2021, we recorded rent expense of $1.5 million and $1.5 million, respectively.
The minimum aggregate lease commitments as of June 30, 2022 are as follows (in thousands):
|Remainder of 2022||$||1,289|
|Total minimum lease payments||10,184|
|Less: imputed interest||(1,513)|
|Total operating lease liability||$||8,671|
|Operating cash flows used for operating leases||$||1,520|
|Weighted-average remaining lease term||3.25 years|
|Weighted-average discount rate||9.5 ||%|
5. Fair Value Measurements
The following presents the fair value hierarchy for financial assets measured at fair value on a recurring basis as of June 30, 2022 (in thousands):
|Money market funds included in cash and cash equivalents||$||87,435 ||$||87,435 |
|Total||$||87,435 ||$||87,435 |
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):
|Money market funds included in cash and cash equivalents||$||66,989 ||$||66,989 |
|Total||$||66,989 ||$||66,989 |
Cash held in money market funds are invested in a fund comprised of U.S. government securities and instruments. As of June 30, 2022 and December 31, 2021, our financial assets measurable at fair value consisted entirely of money market funds measured at Level 1. We held no financial liabilities measurable at fair value.
6. Property and Equipment, Net
Property and equipment consists of the following (in thousands):
|June 30, 2022||December 31, 2021|
|Lab equipment||$||9,933 ||$||9,689 |
|Leasehold improvements||2,157 ||2,157 |
|Furniture and fixtures||818 ||809 |
|Computers and software||277 ||259 |
|Office equipment||38 ||21 |
|Construction-in-process||1,282 ||1,321 |
|14,505 ||14,256 |
|Less: accumulated depreciation||(8,684)||(7,634)|
|Property and equipment, net||$||5,821 ||$||6,622 |
For the three months ended June 30, 2022 and 2021, we recorded depreciation expense of $0.5 million and $0.5 million, respectively. For the six months ended June 30, 2022 and 2021, we recorded depreciation expense of $1.1 million and $1.1 million, respectively.
7. Accrued Expenses
Accrued expenses recorded on the unaudited condensed consolidated balance sheets consist of the following (in thousands):
|June 30, 2022||December 31, 2021|
|Accrued external research and development expenses||$||4,288 ||$||4,895 |
|Accrued payroll and related expenses||4,483 ||6,412 |
|Accrued professional fees||133 ||1,013 |
|Accrued other expenses||1,519 ||748 |
|Total accrued expenses||$||10,423 ||$||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 $5.0 million of principal outstanding into up to 375,940 shares of our common stock. See Note 11 - Stockholders' Equity.
Interest on the outstanding loan balance accrues at a variable annual rate equal to the greater of (i) 8.65% and (ii) the prime rate plus 3.15%. Terms are for interest-only payments on a monthly basis through February 2023. Thereafter, terms provide for equal monthly payments of principal plus interest until the loans mature in August 2024 whereupon the remaining balance is due and payable. Pursuant to the Amended Credit Facility, we elected to adjust the repayment schedule such that commencing on March 1, 2023, we will make consecutive equal monthly payments of principal and accrued and unpaid interest based on a notional thirty month repayment period. The loan maturity date remains August 1, 2024 and any outstanding principal and unpaid interest is due at maturity. Upon final payment or prepayment of the loans, we will pay a final payment equal to 4.8% of the aggregate original principal amount of the loans borrowed.
Borrowings under the Amended Credit Facility are collateralized by substantially all our tangible personal property along with our equity interests in our subsidiaries. The Amended Credit Facility contains customary representations, warranties and covenants. As of June 30, 2022, we were in compliance with all such covenants.
The minimum future loan payments under the Amended Credit Facility as of June 30, 2022 are as follows (in thousands):
|Remainder of 2022||$||1,979 |
|Total minimum payments||54,153 |
|Less: amounts representing interest and discount||(7,479)|
|Total debt||$||46,674 |
Interest expense was approximately $1.0 million and $0.8 million for the three months ended June 30, 2022 and 2021, respectively. Interest expense was approximately $2.1 million and $1.6 million for the six months ended June 30, 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 June 30, 2022, we incurred milestone payments since inception of approximately $0.3 million and no amounts are currently due.
University of Chicago
In March 2016, we and the University of Chicago entered into a patent license agreement (“2016 University of Chicago Agreement”). Under the agreement, the University of Chicago granted us (i) an exclusive, royalty-bearing and sublicensable license to certain patent rights related to the administration of microbes to treat cancer and (ii) a non-exclusive, royalty-bearing, sublicensable license to access technical information for the development and commercialization of microbial products to treat cancer in combination with checkpoint inhibitors. As consideration, we paid a nonrefundable upfront fee of less than $0.5 million and are obligated to pay annual license maintenance fees. The 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. As of June 30, 2022, we incurred milestone payments since inception of approximately $0.4 million and no amounts are currently due.
In May 2022, we served notice of termination to the University of Chicago of the 2016 University of Chicago Agreement effective July 11, 2022. None of our current or anticipated product candidates depends on any license subject to the 2016 University of Chicago Agreement.
10. Commitments and Contingencies
Manufacture and Supply Agreement with Sacco S.r.l.
In July 2019, we entered into an agreement with Sacco S.r.l. ("Sacco") pursuant to which Sacco will manufacture and supply single strain, non-genetically modified microbes intended for oral delivery or oral use in pharmaceutical products exclusively for us for a period of five years. Sacco may terminate the agreement if the provision of manufacturing services has been, or is scheduled to be, inactive for a consecutive period of six months. We agreed to pay Sacco an aggregate of €3.0 million, consisting of payments of €0.6 million annually during the exclusivity period. We have incurred annual exclusivity fees since inception of approximately €2.4 million, and no amounts are currently due.
We have an additional contractual arrangement with an affiliate of Sacco for manufacturing that will require us to spend an aggregate minimum amount of €5.4 million, consisting of €1.5 million annually during each of 2022, 2023 and 2024 and €0.9 million on or before March 1, 2025.
In addition to our manufacture and supply agreement with Sacco, we have other agreements including a collaborative agreement, sublease and license agreement which do or may obligate us to future funding commitments. See for example Note 3 - ALJ Collaborative Agreement, Note 4 - Leases and Note 9 - License Agreements.
Litigation and Other Proceedings
We may periodically become subject to legal proceedings and claims arising in connection with on-going business activities, including claims or disputes related to patents issued to us or that are pending. We are not a party to any material litigation and have established no contingency reserves for any litigation liability.
On February 12, 2021, the European Patent Office issued a Communication of a Notice of Opposition for European patent EP 3223834, which is held by us. In July 2021, we filed our reply to the Notice of Opposition. In January 2022, the European Patent Office issued a preliminary opinion and a summons to oral proceedings. We filed our final written submission in July 2022, and oral proceedings are scheduled in September 2022. We are currently evaluating all 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.
11. Stockholders’ Equity
2019 Shelf Registration and 2019 ATM Program
In June 2019, we filed a Registration Statement on Form S-3 ("2019 Shelf Registration Statement") with the 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" offering sales agreement ("2019 ATM") providing for the offering, issuance and sale for up to $50.0 million of common stock under the 2019 Shelf Registration Statement. During the year ended December 31, 2021, we issued 139,734 common shares under the 2019 ATM with offering prices ranging between $12.54 and $13.17 per share for gross proceeds of $1.8 million and net proceeds of $1.7 million. During the three and six months ended June 30, 2022, we sold no shares of common stock under the 2019 ATM. The 2019 Shelf Registration Statement expired in June 2022, and we terminated the 2019 ATM in July 2022.
February 2021 Public Offering
In February 2021, we sold and issued 5,175,000 shares of common stock in an underwritten public offering under our 2019 Shelf Registration Statement 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.
February 2021 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"), an affiliate of ALJ, 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 Statement”) with the SEC for the registration and offering of common stock, preferred stock, debt securities, warrants and/or units or any combination thereof in the aggregate amount of up to $200.0 million for a period of up to three years from the date of effectiveness. No stock or securities registered thereunder were issued in the year ended December 31, 2021 or prior to our May 2022 Registered Direct Offering.
May 2022 Registered Direct Offering
In May 2022, we entered into a securities purchase agreement (the "Purchase Agreement") with certain purchasers named therein. Pursuant to the Purchase Agreement, we agreed to issue and sell to such purchasers in a registered direct offering an aggregate of 54,246,358 shares of common stock, including 393,834 shares acquired by our officers and directors and 28,253,422 shares acquired by related parties, at a purchase price of $1.46 per share, pursuant to the 2021 Shelf Registration Statement and a related prospectus supplement filed with the SEC. The closing of the registered direct offering occurred on May 27, 2022. The placement generated gross proceeds of $79.2 million. There were no underwriting or placement fees associated with the transaction. Legal, professional services and stock transfer fees totaled $0.2 million and were capitalized to additional paid-in capital upon the sale of common stock.
2022 ATM Program
In July 2022, we entered into an “at-the-market” offering sales agreement ("2022 ATM") providing for the offering, issuance and sale of up to $75.0 million of our common stock under the 2021 Shelf Registration Statement. During the three and six months ended June 30, 2022, we issued no shares of common stock under the 2022 ATM.
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, 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, which may be exercised on a cashless basis.
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 shall 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 June 30, 2022, stock option awards covering up to 800,000 shares of our common stock were issued under the Inducement Award Plan, 225,000 shares of which were canceled. Restricted stock unit (“RSU”) awards of 4,545 shares of our common stock were granted under the Inducement Award Plan, all 4,545 shares of which were forfeited. As of June 30, 2022, 675,000 shares of common stock are available for future grant under the Inducement Award Plan.
2018 Incentive Award Plan
In April 2018, our board of directors adopted, and our stockholders approved, the 2018 Incentive Award Plan (the "2018 Plan"), effective May 2018, under which we may grant cash and equity-based incentive awards to our employees, officers, directors, consultants and advisors. The 2018 Plan initially allowed us to grant awards representing 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 of awards 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 awards 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. Awards granted to employees generally vest over a four-year period, but may be granted with different vesting terms. Certain awards 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 to four years. Awards granted under the 2018 Plan expire no later than 10 years from the date of grant. As of June 30, 2022, awards covering up to 9,670,916 shares of our common stock were issued under the 2018 Plan, of which awards representing 187,985 shares were options exercised or RSUs that vested. Awards representing 1,918,701 shares were canceled or forfeited. As of June 30, 2022, awards representing 1,080,495 shares were 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, RSUs 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.
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 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 June 30, 2022, an aggregate of 5,758,518 options and other equity awards were granted under the 2015 Plan, of which 1,513,831 were exercised, 1,322,301 were canceled and 18,468 were repurchased.
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 June 30,||Six Months Ended June 30,|
|Research and development||$||1,701 ||$||2,049 ||$||3,737 ||$||3,872 |
|General and administrative||2,298 ||1,723 ||4,537 ||3,164 |
|Total stock-based compensation expense||3,999 ||$||3,772 ||8,274 ||$||7,036 |
A summary of our stock option activity is as follows:
|Options outstanding as of December 31, 2021||9,713,182 ||$||9.32 |
|Granted||2,032,505 ||$||4.64 |
|Options outstanding as of June 30, 2022||10,751,076 ||$||8.43 |
|Exercisable as of June 30, 2022||6,071,431 ||$||7.13 |
The weighted-average fair value of options granted during the six months ended June 30, 2022 and 2021 was $3.48 and $11.52, respectively.
As of June 30, 2022, total unrecognized stock-based compensation expense relating to unvested stock options was $28.5 million, expected to be recognized over a weighted average period of 2.6 years.
Restricted Stock Units
We issue RSUs under the 2018 Plan and the 2021 Inducement Award Plan. Typically, each award of RSUs vests as to 25% on the first anniversary of the grant date, and either monthly thereafter or annually over additional years. A summary of RSU activity is as follows:
Grant Date Fair Value
|Unvested as of December 31, 2021||320,209 ||$||9.04 |
|Granted||108,375 ||$||5.05 |
|Unvested as of June 30, 2022||310,548 ||$||6.75 |
Stock-based compensation expense related to RSUs was $0.3 million and $0.2 million for the three months ended June 30, 2022 and 2021, respectively. Stock-based compensation expense related to RSUs was $0.7 million and $0.3 million for the six months ended June 30, 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, respectively. There were no share increases for the years 2020 and 2019.
No shares were purchased under the ESPP during the three months ended June 30, 2022 and 2021. 36,329 and 27,587 shares were purchased under the ESPP during the six months ended June 30, 2022 and 2021, respectively. Compensation expense related to our ESPP for the three and six months ended June 30, 2022 and 2021 was not material.
As of June 30, 2022 and December 31, 2021, a total of 1,235,532 and 736,096 shares of common stock were reserved for issuance under the ESPP, respectively.
13. Income Taxes
For the three months ended June 30, 2022 and 2021 we recorded a tax provision of $0.2 million and $0.1 million, respectively. For the six months ended June 30, 2022 and 2021 we recorded a tax provision of $0.3 million and $0.2 million, respectively, primarily related to our wholly owned UK subsidiary.
As of June 30, 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 $0.2 million for each.
14. Net Loss Per Share
Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding during the period, as follows (net loss in thousands):
| ||Three Months Ended June 30,||Six Months Ended June 30,|
|Weighted average shares outstanding used in computing net loss per share||75,719,092 ||53,379,415 ||64,730,412 ||52,340,608 |
|Net loss per share, basic and diluted||$||(0.40)||$||(0.59)||$||(0.93)||$||(1.14)|
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. Consequently, basic and diluted net loss per share of common stock were the same for all periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive.
The following table presents securities excluded from the computation of diluted weighted-average shares outstanding for the periods presented, as they are anti-dilutive:
| ||June 30,|
|Unvested common stock from early exercise of options||— ||18,386 |
|Stock options to purchase common stock||10,751,076 ||9,145,838 |
|Warrants||139,770 ||139,770 |
|RSUs||310,548 ||— |
|Convertible debt (as-converted to common stock)||375,940 ||375,940 |
|Common stock offering from ESPP||40,385 ||10,743 |
|Total securities excluded||11,617,719 ||9,690,677 |
15. Related Party Transactions
Weatherden Advisory Services Agreement
We receive clinical advisory services from Weatherden Ltd. (“Weatherden”) under agreements that were entered into during 2017 and 2018. Duncan McHale, our Chief Medical Officer, is a part owner of Weatherden. During each of the six-month periods ended June 30, 2022 and 2021, we paid Weatherden $0.1 million. As of June 30, 2022 and December 31, 2021, the amounts owed to Weatherden under the supply of service agreement were approximately $0.1 million or less, respectively.
Epstein Consulting Services Agreement
In September 2019, we entered into a consulting agreement with David Epstein ("Consulting Agreement"), our former Chairman of the Board, for strategic advisory and other consulting services. The Consulting Agreement was amended in October 2020 and again in April 2021, and terminated pursuant to its terms on June 30, 2022. In accordance with the initial terms of the Consulting Agreement, Mr. Epstein was granted an option to purchase 75,000 shares of common stock, vesting in 36 equal monthly installments and subject to his continued provision of consulting services on the applicable vesting dates. Under the Consulting Agreement as amended in October 2020, Mr. Epstein was also entitled to receive (i) an annual equity award on each anniversary of the effective date of the Consulting Agreement in the form of an option to purchase shares of common stock having a grant date fair market value of approximately $0.2 million as determined by our board of directors in its discretion based on customary option pricing methodologies, vesting in 12 equal monthly installments and subject to his continued provision of consulting services on the applicable vesting date, and (ii) an aggregate annual cash consulting fee of $0.3 million. In the event the Consulting Agreement was renewed for a term of less than one year, the equity award and the number of shares of common stock would be adjusted proportionately to the length of the renewal term. In October
2020, in connection with the commencement of his second year of service as a consultant, Mr. Epstein was granted an option to purchase 44,743 shares of common stock, vesting in nine equal monthly installments and subject to his continued provision of consulting services on the vesting dates. Under the Consulting Agreement as amended in April 2021 and effective on June 30, 2021, Mr. Epstein was entitled to receive RSUs having an aggregate grant date fair value of approximately $0.5 million, as determined by our board of directors in its discretion based on a 10-day trailing average of the closing price of our common stock, as his sole compensation for his consulting services. The RSUs vested in 12 substantially equal monthly installments such that the RSUs became fully vested on June 30, 2022, in each case subject to Mr. Epstein's continued provision of consulting services on the applicable vesting date. In June 2022, terms of Mr. Epstein's unvested option grants were modified to allow immediate vesting upon his resignation as Chairman of the Board of Directors on June 30, 2022. All of the foregoing options and restricted stock units were or are subject to accelerated vesting under change in control provisions.
Securities Purchase Agreement with Related Parties
In May 2022, in connection with our registered direct offering, we entered into the Purchase Agreement with a group of purchasers including certain of our executive officers, members of our board of directors and other related parties. Of the 54,246,358 total shares offered, officers and directors purchased an aggregate of 393,834 shares and other related parties purchased an aggregate of 28,253,422 shares of our common stock for $1.46 per share, a price equal to the offering price per share of, and on equal terms as, common stock sold to the public. See Note 11 - Stockholders' Equity.
16. Defined Contribution Plan
We provide benefits under certain retirement benefit plans. Our defined contribution plan in the United States 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. Additionally, we provide a defined contribution retirement benefit to our UK employees also matching a portion of their contributions. For the three months ended June 30, 2022 and 2021, our matching contribution expense was $0.2 million and $0.1 million, respectively. For the six months ended June 30, 2022 and 2021, our matching contribution expense was $0.4 million and $0.2 million, respectively
17. Subsequent Events
Effective July 11, 2022, the 2016 University of Chicago Agreement was terminated pursuant to notice given to the University of Chicago in May 2022. None of our current or anticipated product candidates depends on any license subject to the 2016 University of Chicago Agreement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2021 ("2021 Annual Report"), including the audited consolidated financial statements and notes thereto contained in our 2021 Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, these forward-looking statements. In this Quarterly Report on Form 10-Q, unless otherwise stated or as the context otherwise requires, references to “Evelo,” “Evelo Biosciences,” the “Company,” “we,” “us,” “our” and similar references refer to Evelo Biosciences, Inc. and its consolidated subsidiaries.
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.
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 evaluated three doses of a 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.
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.
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.
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.
|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).
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.
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.
We believe these data support the biology of 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.
We are currently engaging with health authorities in the United States and Europe to solicit feedback on our proposed plans for advancing EDP1815 into registrational psoriasis trials. We currently anticipate that we will have feedback by the end of 2022.
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 dose level 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.
Treatment Difference between EDP1815 and Placebo Percentage Change at Day 56 *
* 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 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. 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.
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 four cohorts. Cohorts 1-3 will include approximately 100 patients per cohort randomized in a 3:1 ratio (75 to EDP1815 and 25 to placebo) for a total of approximately 300 patients. 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. Patients in Cohort 4 will receive one capsule of EDP1815 (8.0 x 1010 total cells) designed to provide a faster release profile once daily or placebo. Patients in Cohort 4 will be randomized in a 2:1 ratio (70 to EDP1815 and 35 to placebo) for a total of approximately 105 patients. 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 three cohorts of the Phase 2 atopic dermatitis trial will be available in the first quarter of 2023, and data from the fourth cohort is expected to be available in the second quarter of 2023.
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 different formulations (capsules and tablets) 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 are evaluating this faster release capsule in our Phase 2 trial of EDP1815 in atopic dermatitis and intend to evaluate it in other clinical trials.
We currently intend to evaluate EDP1815 in additional inflammatory disease indications. Potential indications include psoriatic arthritis, asthma, axial spondylarthritis and rheumatoid arthritis.
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.
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.
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.
In March 2021, we announced a strategic collaboration to develop and commercialize our lead inflammation product candidate, EDP1815, in the Middle East, Turkey, and Africa with Meddist Company Limited, or ALJ, a company focused on accelerating access to affordable modern medical care while addressing unmet medical needs in developing markets around the world.
Together, we and ALJ will work to address the significant disparity in access to medical care in the fastest-growing populations and growth economies of the developing world. Africa’s population is projected to reach 1.7 billion by 2030 and 2.5 billion by 2050.
Under the terms of the agreement, we received an upfront payment from ALJ. We will be primarily responsible for the development and manufacturing of EDP1815 worldwide, whilst ALJ will be primarily responsible for development, regulatory submissions and commercialization activities in the agreed-upon regions. ALJ and we will participate in a 50:50 profit share arrangement. See Note 2 - Summary of Significant Accounting Policies and Note 3 - ALJ Collaborative Agreement to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding the commercialization and license agreement with ALJ.
University of Chicago
In May 2022, we provided notice to terminate the patent license agreement between us and the University of Chicago, which we initially entered into in March 2016 (the “2016 University of Chicago Agreement”). Pursuant to the terms of the 2016 University of Chicago Agreement, such termination became effective on July 11, 2022. None of our current or anticipated product candidates depends on any license subject to the 2016 University of Chicago Agreement.
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 operations primarily with the proceeds from the issuance of common stock and since-redeemed preferred stock to equity investors and borrowings under loan and security agreements with financial institutions.
We are a development stage company and have not generated any revenue. All of our product candidates are in clinical or preclinical development. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. Since our inception, we have incurred significant operating losses and we continue to incur significant research and development and other expenses related to our operations. For the six months ended June 30, 2022, our net loss was $60.4 million. As of June 30, 2022, we had an accumulated deficit of $475.1 million. We do not expect to generate revenue from sales of any products for the foreseeable future, if at all.
We expect that our expenses will increase substantially in connection with our ongoing activities, particularly as we:
•continue the ongoing clinical trials for EDP1815;
•initiate additional clinical trials for EDP1815;
•initiate clinical trials for EDP2939;
•initiate or advance the clinical development of any additional product candidates;
•conduct research and continue preclinical development of potential product candidates;
•make strategic investments in manufacturing capabilities, including potentially planning and building our own manufacturing facility;
•maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property;
•increase employees and employee-related expenses including salaries, benefits, travel and stock-based compensation expense; and
•seek to obtain regulatory approvals for our product candidates.
In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution.
As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Additionally, our ability to raise capital may be impacted by global macroeconomic conditions including as a result of international political conflict, supply chain issues and rising inflation and interest rates. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.
Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
In June 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.
In June 2019, we filed a Registration Statement on Form S-3 (the "2019 Shelf Registration Statement") 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 ("Cowen") (the "2019 ATM") providing for the offering, issuance and sale of up to $50.0 million of common stock under the 2019 Shelf Registration Statement. During the three and six months ended June 30, 2022, we issued no shares of common stock under the 2019 ATM and no other securities under the 2019 Shelf Registration Statement. The 2019 Shelf Registration Statement expired on June 6, 2022 and we terminated the 2019 ATM on July 1, 2022.
In August 2021, we filed a Registration Statement on Form S-3 (the “2021 Shelf Registration Statement”) with the SEC for the registration of common stock, preferred stock, debt securities, warrants and