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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-38473
https://cdn.kscope.io/ef484f45456bf15211e398ebf3d8fb8d-Evelo JPEG graphic for Workiva.jpg
Evelo Biosciences, Inc.
 (Exact name of registrant as specified in its charter)
Delaware46-5594527
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
One Kendall Square, 600/700, Suite 7-201
Cambridge, Massachusetts

02139
(Address of principal executive offices)(Zip Code)
(617) 577-0300
 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareEVLONasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐   No  
As of November 6, 2023, there were 18,930,960 shares of the registrant's common stock outstanding.


Evelo Biosciences, Inc.
Form 10-Q for the Quarterly Period Ended September 30, 2023
Table of Contents
Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022

i

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements, including within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. These statements involve known and unknown risks, uncertainties, assumptions and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” "target," “predict,” “project,” "contemplate," “should,” “will,” “would,” "continue" or the negative or plural of those terms or other similar expressions.
Forward-looking statements may include, but are not limited to, statements about:
our plans to explore strategic alternatives;
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 cash runway, our future capital needs, our ability to satisfy our debt obligations (including any restrictive covenants) and our need and ability to raise additional funds;
our estimates, including our future expenses, research and development and general and administrative 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, partner and/or 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 design preclinical studies and clinical trials, 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, including registration trials, and product candidate approvals;
the timing, progress, receipt and release of data from our clinical trials and the potential use of our product candidates to treat various indications;
our ability to establish our own manufacturing facilities, to effectively leverage our contract manufacturing organization partnerships 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, local and foreign regulatory requirements, including regulation of our product candidates by the U.S. Food and Drug Administration ("FDA"), European Medicines Agency ("EMA") and UK Medicines and Healthcare products Regulatory Agency ("MHRA") and our interactions with such agencies;
our ability to successfully address regulatory questions and requirements and 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 maintain our listing on Nasdaq; 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 1A “Risk Factors," in Part II, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations," 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.
ii

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.
With our current cash resources, we will be unable to meet our future debt repayment obligation to our current Lender unless we are able to raise additional capital and / or restructure our existing debt, which may be on unfavorable terms, if available at all, and we could be forced to pursue alternative options, including, but not limited to, a further workforce reduction, implementing further cost-reduction initiatives, seeking relief in the U.S. Bankruptcy Courts and/or winding down operations.
We will need additional funding in order to complete development of our product candidates and commercialize our products, if approved. If we are unable to raise capital when needed, we could be forced to delay, reduce or discontinue our product development programs or commercialization efforts, should we resume such efforts in the future.
Any financial or strategic option we pursue may not be successful. Moreover, our decision to discontinue program development efforts may not result in the anticipated savings for the Company and may adversely affect our business.
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.
The terms of our loan and security agreements place restrictions on our operating and financial flexibility, and if we are unable to comply with any of the covenants, we could be subject to adverse consequences including, without limitation, our having to immediately repay all amounts outstanding under the Loan Agreement and the Lender could seek to foreclose on the collateral.
We are early in our development efforts and, should we resume development of our product candidates, may not be successful in our efforts to use our platform to build a pipeline of product candidates and develop marketable drugs.
Should we resume development of our product candidates, we would be highly dependent on the success of our product candidates, and if we are unable to complete development of, obtain approval for and commercialize any of our product candidates for one or more indications in a timely manner, our business will be harmed.
Our product candidates are an unproven approach to therapeutic intervention.
Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. Should we resume development of our product candidates, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.
If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our product candidates or will not be able to do so as soon as anticipated, and our ability to generate revenue will be materially impaired.
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 rely on third parties for the manufacture of our product candidates for preclinical and clinical testing and expect to continue to do so for the foreseeable future. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or that such quantities may not be available at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
We have no experience manufacturing our product candidates at commercial scale, and if we decide to establish our own manufacturing facility, we cannot assure you that we can manufacture our product candidates
iii

in compliance with regulations at a cost or in quantities necessary to make them commercially viable.
Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing regulations or third-party coverage and reimbursement policies, any of which could harm our business.
We face substantial competition, which may result in others discovering, developing or commercializing competing products 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.
Our reductions in force undertaken to extend our cash runway and focus more of our capital resources on our prioritized research and development programs may not achieve our intended outcome.
Our common stock may be delisted from The Nasdaq Global Select Market if we cannot maintain compliance with Nasdaq’s continued listing requirements, which could harm our business, the trading price of our common stock, our ability to raise additional capital and the liquidity of the market for our common stock.
iv

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Evelo Biosciences, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
September 30, 2023
December 31, 2022
Assets
Current assets:
Cash and cash equivalents$17,262 $47,940 
Prepaid expenses and other current assets1,674 3,633 
Total current assets18,936 51,573 
Property and equipment, net894 4,842 
Right of use asset - operating lease 6,868 
Other assets797 1,158 
Total assets$20,627 $64,441 
Liabilities and stockholders’ deficit
Current liabilities:
Debt, current portion$33,948 $ 
Accounts payable526 1,764 
Accrued expenses4,550 7,945 
Operating lease liability, current portion 2,259 
Other current liabilities737 427 
Total current liabilities39,761 12,395 
Noncurrent liabilities:
Debt, net of current portion 43,614 
Operating lease liability, net of current portion 5,265 
Deferred revenue7,500 7,500 
Other noncurrent liabilities73 659 
Total liabilities47,334 69,433 
Commitments and contingencies (Note 9)
Stockholder’s deficit:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively
  
Common stock, $0.001 par value; 200,000,000 shares authorized; 18,853,587 and 5,542,637 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively
19 6 
Additional paid-in capital561,304 524,224 
Accumulated deficit(588,030)(529,222)
Total stockholders’ deficit(26,707)(4,992)
Total liabilities and stockholders’ deficit$20,627 $64,441 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share and share amounts)
(Unaudited)
Three Months Ended September 30,Nine months ended September 30,
2023202220232022
Operating expenses:
Research and development$6,499 $21,928 37,399 62,470 
General and administrative3,891 7,126 15,849 24,909 
Loss on disposal and impairment of property and equipment793  2,409  
Total operating expenses11,183 29,054 55,657 87,379 
Loss from operations(11,183)(29,054)(55,657)(87,379)
Other income (expense):
Interest expense, net(1,162)(788)(3,642)(2,835)
Change in fair value of warrants(9) 622  
Other miscellaneous income (expense), net(27)(615)230 (386)
Total other expenses, net(1,198)(1,403)(2,790)(3,221)
Loss before income taxes(12,381)(30,457)(58,447)(90,600)
Income tax benefit (expense)17 (107)(361)(386)
Net loss$(12,364)$(30,564)(58,808)(90,986)
Net loss per share attributable to common stockholders, basic and diluted$(0.71)$(5.66)$(6.16)$(22.88)
Weighted average number of common shares outstanding, basic and diluted17,384,243 5,402,592 9,546,129 3,976,438 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
(In thousands, except share amounts)
(Unaudited)
Nine Months Ended September 30, 2023
Common StockAdditional Paid-In CapitalAccumulated DeficitTotal
SharesAmount
Balance - December 31, 20225,542,637 $6 $524,224 $(529,222)$(4,992)
Issuance of common stock, net— — — — 
Issuance of common stock under Employee Stock Purchase Plan2,044 — 36 — 36 
Vesting of restricted common stock1,823 — — — — 
Stock-based compensation expense— 2,909 — 2,909 
Net loss— — (25,341)(25,341)
Balance - March 31, 20235,546,504 6 527,169 (554,563)(27,388)
Issuance of common stock, net— — — — 
Vesting of restricted common stock53,384 — — — — 
Stock-based compensation expense— 2,365 — 2,365 
Redemption of fractional shares due to reverse stock split(51)
Net loss— — (21,103)(21,103)
Balance - June 30, 20235,599,837 6 529,534 (575,666)(46,126)
Issuance of common stock, net13,189,836 13 29,293 — 29,306 
Issuance of common stock under Employee Stock Purchase Plan124 — 1 — 
Vesting of restricted common stock63,790 — — — — 
Stock-based compensation expense— — 2,476 — 2,476 
Net loss— — — (12,364)(12,364)
Balance - September 30, 202318,853,587 19 561,304 (588,030)(26,707)


3

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
(In thousands, except share amounts)
(Unaudited)
Nine Months Ended September 30, 2022
Common StockAdditional Paid-In CapitalAccumulated DeficitTotal
SharesAmount
Balance - December 31, 20212,678,823 $3 $423,359 $(414,695)$8,667 
Issuance of common stock under Employee Stock Purchase Plan1,816 — 129 — 129 
Vesting of restricted common stock1,770 — — — — 
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, 20222,682,409 $3 $427,751 $(444,556)$(16,802)
Issuance of common stock, net2,712,318 3 78,979 — 78,982 
Vesting of restricted common stock814 — — — — 
Exercise of stock options2,125 — 30 — 30 
Stock-based compensation expense— — 3,999 — 3,999 
Net loss— — — (30,561)(30,561)
Balance - June 30, 20225,397,666 $6 $510,759 $(475,117)$35,648 
Issuance of common stock, net23,750 — 712 — 712 
Issuance of common stock under Employee Stock Purchase Plan2,019 — 72 — 72 
Exercise of stock options219 — 3 — 3 
Stock-based compensation expense— — 3,463 — 3,463 
Net loss— — — (30,564)(30,564)
Balance - September 30, 20225,423,654 $6 $515,009 $(505,681)$9,334 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4

Evelo Biosciences, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine months ended September 30,
20232022
Operating activities
Net loss$(58,808)$(90,986)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense7,750 11,737 
Depreciation expense1,038 1,537 
Loss on disposal and impairment of property and equipment2,409 232 
Non-cash interest expense421 188 
Non-cash lease expense3,283 2,175 
Decrease in fair value of warrants(622) 
Net foreign currency losses78 1,012 
Changes in operating assets and liabilities:
Prepaid expenses and other current assets1,958 (799)
Accounts payable(1,256)(40)
Accrued expenses and other current liabilities(3,823)(814)
Operating lease liabilities(2,939)(2,287)
Net cash used in operating activities(50,511)(78,045)
Investing activities
Purchases of property and equipment(59)(394)
Proceeds from the sale of fixed assets560  
Net cash provided by (used in) investing activities501 (394)
Financing activities
Proceeds from issuance of common stock, net of issuance cost24,305 79,682 
Proceeds from the issuance of common stock under employee stock purchase plan and the exercise of stock options37 234 
Repayments of debt(5,049) 
Fees associated with debt issuance(272) 
Net cash provided by financing activities19,021 79,916 
Effect of exchange rate changes on cash and cash equivalents(50)(1,022)
Net (decrease)/increase in cash, cash equivalents and restricted cash(31,039)455 
Cash, cash equivalents and restricted cash – beginning of period49,098 69,754 
Cash, cash equivalents and restricted cash – end of period$18,059 $70,209 
Supplemental disclosure of cash flow information
Cash paid for interest$3,927 $2,963 
Cash paid for taxes$8 $592 
Noncash investing and financing activities
Conversion of long-term debt to shares of common stock$5,000 $ 
Financing and public offering costs in accounts payable and accrued expenses$200 $ 
Property and equipment additions in accounts payable and accrued expenses $128 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5

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 a clinical-stage biotechnology company focused on discovering and developing a new class of oral medicines that act on immune cells in the small intestine with systemic effects. We are advancing these investigational medicines with the aim of treating a broad range of inflammatory diseases, with an initial focus on psoriasis and atopic dermatitis. 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 the inherent uncertainties in drug development, the need to develop commercially viable products, the competition from other companies, many of which are larger and better capitalized, the need to obtain adequate additional financing to fund the development of our product candidates and a dependence on key individuals.
We have incurred operating losses since inception and expect such losses and negative operating cash flows to continue for the foreseeable future. As of September 30, 2023, we had cash and cash equivalents of $17.3 million and an accumulated deficit of $588.0 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 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 September 30, 2023 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 additional capital if we intend to pursue further development of our candidates. We are exploring strategic alternatives which will inform our future financial and clinical development plans. Management’s belief with respect to our ability to fund operations is based on estimates that are subject to risks and uncertainties, including the outcome of the strategic review process. Actual results may be different from management’s estimates. There can be no assurance that we will be able to obtain additional financial resources on acceptable terms, if at all. If we are unable to obtain sufficient financial resources, we may be required to permanently cease development efforts, which would adversely affect our business prospects. Because of the uncertainty as to the outcome of the strategic review and our ability to secure financial resources and the insufficient amount of cash and cash equivalent resources as of September 30, 2023, 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 statements are issued.

2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification and ASU of the FASB.
On June 29, 2023, we effected a 1-for-20 reverse stock split of our common stock. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split.
6

Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Use of Estimates
The preparation of unaudited condensed consolidated statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed 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 that equipment utilized in impairment analyses, the valuation of stock-based awards, and common stock warrants. 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.
Unaudited Interim Financial Information
Our unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). 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. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.
The accompanying unaudited condensed consolidated balance sheet as of September 30, 2023 has been derived from our audited consolidated financial statements for the year ended December 31, 2022. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
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 September 30, 2023, and the results of operations and stockholders' deficit for the three and nine months ended September 30, 2023 and 2022. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be realized for the year ending December 31, 2023, or for any future period.
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 provide additional evidence for certain estimates or to identify matters that require additional disclosure.
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 other public companies. We may take advantage of these exemptions until we no longer are 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 have 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 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.
7

Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of the initial public offering of our common stock, or December 31, 2023, (b) in which we have total annual gross revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our outstanding common stock that are held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three year period.
We are also a smaller reporting company, and we will remain a smaller reporting company until the fiscal year following the determination that our voting and non-voting common shares held by non-affiliates is more than $250 million measured on the last business day of our second fiscal quarter, and our annual revenues are more than $100 million during the most recently completed fiscal year and our voting and non-voting common shares held by non-affiliates is more than $700 million measured on the last business day of our second fiscal quarter. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.
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 placed our operating cash in demand deposit accounts at a single financial institution since February 2022, 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 September 30, 2023 and 2022, we have no off-balance sheet risk such as foreign exchange contracts, option contracts, or other foreign hedging arrangements.
Comprehensive Loss
Comprehensive loss consists of net loss and changes in equity during a period arising from transactions and other equity and circumstances, of which we have none. Our comprehensive loss equals our net loss for all periods presented.
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 the deposits held for the building lease for our office and laboratory premises, for our credit card facility, and for the proceeds from our recent disposition of long-lived assets. As of September 30, 2023 and 2022, we had $0.8 million and $1.2 million in restricted cash balance recorded within other assets.
The following reconciles cash, cash equivalents and restricted cash as of September 30, 2023 and 2022, as presented on the statements of cash flows, to the related balance sheet accounts (in thousands):
September 30, 2023September 30, 2022
Cash and cash equivalents:
Cash$1,969 $10,363 
Money market funds15,293 58,690 
Total cash and cash equivalents17,262 69,053 
Restricted cash797 1,156 
Cash, cash equivalents and restricted cash$18,059 $70,209 
8

Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, clinical trial costs 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.
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. Lab equipment used in research and development activities is only capitalized when it has an alternative future use. These amounts are depreciated using the straight-line method over the estimated useful lives of the assets. Purchased assets that are not yet in service are recorded to construction-in-process and no depreciation expense is recorded. Once they are placed in service they are reclassified to the appropriate asset class.

A summary of the estimated useful lives is as follows:
ClassificationEstimated Useful Life
Computer hardware
3 - 5 years
Computer software
3 years
Furniture and fixtures
7 years
Research and lab equipment (used/new)
3 - 5 years
Leasehold improvementsLesser of asset life or remaining life of lease
Repairs and maintenance costs are expensed as incurred.
Impairment of Long-Lived Assets
We periodically evaluate property and equipment for impairment whenever events or changes in circumstances indicate that a potential impairment may have occurred. If such events or changes in circumstances arise, we compare the carrying amount of the long-lived assets to the estimated future undiscounted cash flows expected to be generated by the long-lived assets. If the estimated aggregate undiscounted cash flows are less than the carrying amount of the long-lived assets, an impairment charge, calculated as the amount by which the carrying amount of the assets exceeds the fair value of the assets, is recorded. The fair value of the long-lived assets is determined based on the estimated discounted cash flows expected to be generated from the long-lived assets.
Segments
We have one operating segment. Our chief operating decision maker, the Chief Executive Officer, manages our operations on a consolidated basis for the purposes of allocating resources.
Accounting Pronouncements Issued and Not Yet Effective as of September 30, 2023
No new accounting pronouncements issued or effective in the period had or are expected to have a material impact on our accompanying unaudited condensed consolidated statements.
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
9

Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ASC 606. The development, regulatory and commercialization activities within the territories shall be accounted for under the FASB guidance of Collaborative Arrangements (Topic 808) ("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.
4. Leases
In January 2018, we entered into an operating sublease arrangement for approximately 40,765 square feet for our office and research and development space at 620 Memorial Drive, Cambridge, MA 02139 from February 2018 extending through September 2025. The lease required a security deposit, which we fulfilled with a standing letter of credit secured by restricted cash on deposit.
On July 14, 2023, we entered into a sublease termination and surrender agreement with our landlord Bio-Rad Laboratories, Inc. (“Bio-Rad”) pursuant to which both parties agreed to terminate the sublease agreement, dated as of December 27, 2017, effective as of September 15, 2023. The sublease agreement was previously scheduled to terminate, in accordance with its terms, on September 30, 2025. In exchange for the early termination of the sublease agreement, we agreed to make a one-time termination payment to Bio-Rad in the amount of $0.5 million and Bio-Rad is also entitled to draw on a letter of credit in an amount equal to $0.9 million and retain such proceeds. Further, Bio-Rad may be entitled to an additional payment of up to $2.5 million if the Company realizes specified monetization events. This contingent payment is measured at fair value and recorded within on our unaudited condensed consolidated balance sheets. The carrying value of the liability as of September 30, 2023 was $0.7 million.
For the three months ended September 30, 2023 and 2022, we recorded rent expense of $1.8 million and $0.7 million, respectively. For the nine months ended September 30, 2023 and 2022, we recorded rent expenses of $3.3 million and $2.2 million, respectively. Operating cash flows used for operating leases were $2.1 million and $2.3 million for the nine months ended September 30, 2023 and 2022, respectively.
The following table presents supplemental balance sheet information related to our operating leases (in thousands):
September 30, 2023December 31, 2022
Assets:
Operating lease right-of-use assets$ $6,868 
Liabilities:
Operating lease liabilities, current 2,259 
Operating lease liabilities, noncurrent 5,265 
Total lease liabilities$ $7,524 
Other information:
Weighted-average remaining lease term (in years)0.00 years2.75 years
Weighted-average discount rate %9.5 %
10

Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. Property and Equipment, Net
Property and equipment recorded in our consolidated balance sheet consists of the following (in thousands):
September 30, 2023December 31, 2022
Property and equipment:
Lab equipment$2,631 $9,761 
Leasehold improvements 2,157 
Furniture and fixtures 818 
Computers and software253 253 
Office equipment 66 
Construction-in-process93 1,122 
Property and equipment2,977 14,177 
Less: accumulated depreciation(2,083)(9,335)
Property and equipment, net$894 $4,842 
We recognized $0.2 million and $0.5 million of depreciation expense for the three months ended September 30, 2023 and 2022, and $1.0 million and $1.5 million for the nine months ended September 30, 2023 and 2022, respectively.
In April 2023, a decision was made to cease further development of EDP1815 in atopic dermatitis, which we considered as an impairment triggering event for related lab equipment. Accordingly, we evaluated the recoverability of the asset group associated with the EDP1815 atopic dermatitis program in accordance with ASC 360. Based on this evaluation, we determined that long-lived assets with a carrying amount of $2.1 million were no longer recoverable, and recorded an impairment charge of $1.6 million to write those assets down to their fair value of $0.5 million for the nine months ended September 30, 2023. During the three months ended September 30, 2023, we disposed of the impaired lab equipment for proceeds of $0.5 million.
On July 14, 2023, we entered into a sublease termination and surrender agreement with our landlord Bio-Rad pursuant to which we agreed to early terminate our office sublease at 620 Memorial Drive, Cambridge, MA 02139, effective as of September 15, 2023. As a result of this early termination, during the three and nine months ended September 30, 2023, we disposed Furniture and fixtures and Office equipment with a carrying value of $0.3 million for proceeds of $0.1 million, and as a result, recognized a loss on disposal of $0.2 million. We have also written down Leasehold improvements to zero and recognized a loss on disposal of $0.6 million for the three and nine months ended September 30, 2023.
6. Fair Value Measurements
The following tables present information about our financial assets and liabilities that have been measured at fair value as of September 30, 2023 and December 31, 2022 (in thousands):
DescriptionSeptember 30, 2023(Level 1)(Level 2)(Level 3)
Financial Assets
Cash and cash equivalents:
Money market funds$15,293 $15,293 $ $ 
Other assets:
Restricted cash held in money market funds263 263   
Total$15,556 $15,556 $ $ 
Financial Liabilities
Other noncurrent liabilities:
Warrant liabilities$37   $37 
Contingent rent liability711   711 
Total$748 $ $ $748 
11

Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DescriptionDecember 31, 2022(Level 1)(Level 2)(Level 3)
Financial Assets
Cash and cash equivalents:
Money market funds$46,660 $46,660 $ $ 
Other assets:
Restricted cash held in money market funds1,158 1,158   
Total$47,818 $47,818 $ $ 
Financial Liabilities
Other noncurrent liabilities:
Warrant liabilities$659   $659 
Total$659 $ $ $659 
Our financial assets are reported as cash equivalents and other assets, which are held in money market funds, are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices in active markets as of September 30, 2023 and 2022. The money market funds are invested in a fund comprised of U.S. government securities and instruments.
Our financial liability reported as other noncurrent liabilities are common stock warrants issued in connection with the loan arrangement with Horizon Technology Finance Corporation ("Horizon”) (See Note 8), and the contingent rent liability that Bio-Rad, our landlord, may be entitled if we realize specified monetization events (See Note 4). The fair value of the common stock warrants was determined based on the Black-Scholes option-pricing model and classified within Level 3 of the fair value hierarchy. As of September 30, 2023, the expected volatility input of 70% used in the model was deemed unobservable and was determined based on historical share price data of comparable companies for a term equal to the remaining contractual term of the warrants. Other required inputs used in the model were considered observable (Level 1). Significant increases (decreases) in these inputs could result in a significantly lower or higher fair value measurement. The contingent rent liability is measured at an estimated fair value based on probability-weighted estimated cash outflows. The contingent rent liability will be remeasured to fair value at each reporting period with changes recorded in the condensed consolidated statements of operations.
The following table shows a reconciliation of the beginning and ending balances for Level 3 financial liabilities measured at fair value on a recurring basis for the three months ended September 30, 2023:
Total
Level 3 financial liabilities, beginning of period659 
Issuance of contingent rent liability711 
Change in fair value of financial liabilities(622)
Level 3 financial liabilities, end of period748 
During the three and nine months ended September 30, 2023, there were no transfers out of Level 3.
7. Accrued Expenses
Accrued expenses recorded in our unaudited condensed consolidated balance sheet consist of the following (in thousands):
September 30, 2023December 31, 2022
External research and development expenses2,936 5,389 
Employee benefits, compensation and severance$693 $1,191 
Professional and consulting fees557 883 
Other364 482 
Total accrued expenses$4,550 $7,945 

12

Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. Loan and Security Agreement
Horizon Technology Finance Corporation Loan and Security Agreement
In December 2022, we entered into a loan agreement with Horizon (the "Loan Agreement"), as lender and collateral agent (the “Lender”), pursuant to which the Lender agreed to make term loans in an aggregate principal amount of up to $45.0 million, available to us on the closing date and we borrowed $45.0 million. On July 7, 2023, we entered with Horizon into a Waiver and Amendment to the Venture Loan and Security Agreement and Eleventh Extension of Standstill Agreement which amends the Loan Agreement dated as of December 15, 2022. For more information, please see "Note 16. Subsequent Events."
December 2022 Loan Agreement
Borrowings under the Loan Agreement are collateralized by substantially all of our personal property, excluding intellectual property, and we pledged our equity interests in our subsidiaries, subject to certain limitations with respect to our foreign subsidiaries (the "Collateral").
Interest on the outstanding loan balance accrues at a variable annual rate equal to the greater of (i) 11% and (ii) rate of interest noted in The Wall Street Journal, Money Rates section, as the “Prime Rate” plus the “Loan Rate Spread” as defined in the Loan Agreement. We are required to make interest-only payments on the loans on the stub period date (January 1, 2023) and for the first thirty-six monthly payment dates prior to when the loans are scheduled to begin amortizing on February 1, 2026 (the “Amortization Date”). Beginning on February 1, 2026, we must pay twenty-four equal consecutive monthly installment payments repaying $35.0 million of the principal, plus interest on all outstanding balance until the loans mature on January 1, 2028 (the “Maturity Date”). The remaining $10.0 million of principal is due and payable on the Maturity Date. At our option, we may prepay the loans in whole, subject to a prepayment fee of 3% of the amount prepaid if prepaid on or before the Amortization Date, or if the prepayment occurs after less than 12 months after Amortization Date, 2% of the amount prepaid, and if more than 12 months after the Amortization Date but before the Maturity Date, 1%. A final payment equal to 4.25% of the principal borrowed on the closing date is due on the Maturity Date (or upon repayment in full of principal, if earlier).
Upon the entry into the Loan Agreement, we were required to pay Horizon a commitment fee of $0.5 million, as well as other customary fees and expenses. The Loan Agreement contains customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches of covenants, change of control and occurrence of a material adverse effect. Upon the occurrence and continuation of an event of default, a default interest rate of an additional 5% per annum may be applied to the outstanding loan balances, and Horizon may declare all outstanding obligations immediately due and payable and exercise all of their rights and remedies as set forth in the Loan Agreement and under applicable law. Our subsidiary, Evelo Biosciences Security Corporation, may maintain cash or cash equivalents so long as we satisfy certain liquidity requirements.
In connection with the entry into the Loan Agreement, we also issued to Horizon warrants to purchase up to an aggregate 23,191 shares of our common stock (on a post reverse share split basis), with an exercise price of $38.80 per share (on a post reverse split basis). The warrants are exercisable immediately and expire on December 15, 2032, provided that, under certain circumstances, the warrants may terminate and expire earlier in connection with the closing of certain acquisition transactions involving us. The warrants provide that Horizon may elect to exercise the warrant on a net “cashless” basis at any time prior to the expiration thereof. The fair market value of one share of our common stock in connection with any cashless exercise shall be the closing price or last sale price per share of our common stock on a nationally recognized securities exchange, inter-dealer quotation system or over-the-counter market on which our common stock is traded on the business day immediately prior to the date the holder elects to exercise the warrants on a cashless basis.
The warrants were deemed to be a freestanding financial instrument as it is legally detachable and separately exercisable from the debt obligations. We evaluated the terms and conditions of the warrants and concluded it met the criteria to be classified as a liability. As such, we recorded the warrants as a noncurrent liability at its issuance date.
On May 10, 2023, we (expressly without conceding that an "Event of Default" (as defined under the Loan Agreement) has occurred) entered with Horizon into a Standstill Agreement (as amended on by that certain First Extension of Standstill Agreement dated as of May 14, 2023 through the Tenth Extension of Standstill Agreement dated as of June 30, 2023, the “Standstill Agreement”) pursuant to which Horizon agreed to forbear from exercising,
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Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
and not to exercise, any and all remedies available to it under the Loan Agreement, warrants, notes and other Financing Documents (as defined in the Standstill Agreement) during the period commencing on May 10, 2023 and ending on July 7, 2023 (the “Standstill Period”).
Waiver and Amendment to Loan Agreement and Eleventh Extension of Standstill Agreement
On July 7, 2023, we entered into a Waiver and Amendment to the Venture Loan and Security Agreement and Eleventh Extension of Standstill Agreement (the “First Amendment”) with Horizon. The First Amendment amends the Loan Agreement dated as of December 15, 2022 with Horizon, whereby Horizon agreed to forbear exercising remedies on specified potential defaults (which forbearance will cease to apply if specified conditions as set forth in the First Amendment are not met), we granted a security interest over substantially all of our intellectual property, we paid down on the closing date of the July 10, 2023 private placement (the "Private Placement") $5.0 million of the principal amount of the loans outstanding under the Loan Agreement, and Horizon converted $5.0 million of the principal amount of the loans outstanding under the Loan Agreement into shares of common stock at a price per share equal to the price paid by the Investors in the Private Placement. We also amended the payment schedule and have agreed to prepay up to an additional $10.0 million of the principal amount of the loans outstanding under the Loan Agreement (plus applicable final payments) and Horizon has agreed to convert up to an additional $10.0 million of the principal amount of the loans outstanding under the Loan Agreement into equity, in each case, concurrently with future sales of our equity securities, in amounts equal to 20% of the gross cash proceeds from such equity sales. Horizon further agreed to remove the $5.0 million cash financial covenant previously instituted in connection with an extension of the Standstill Agreement, and we agreed that, upon the failure to achieve specified performance milestones in the future, a $9.0 million cash and cash equivalents covenant would be imposed.
We agreed with Horizon to further extend the Standstill Period for a period to permit us to continue operations including advancing our Phase 2a study of EDP2939. Horizon extended the Standstill Period, but only to the extent, and in accordance with, the terms, and subject to the conditions, set forth in the Waiver and Amendment to Loan Agreement and Eleventh Extension of Standstill Agreement.
Forbearance and Second Amendment to Loan Agreement and Twelfth Extension of Standstill Agreement
On October 17, 2023, we announced that the top-line results from our Part B (Phase 2) clinical study of EDP2939 in moderate psoriasis did not achieve the primary endpoint. Accordingly, the Standstill Period was automatically extended by ten days after this announcement, based on the terms and conditions set forth in the Waiver and Amendment to Loan Agreement and Eleventh Extension of Standstill Agreement, to October 27, 2023 (the “Forbearance Period”).
On October 26, 2023, we entered into a Forbearance and Second Amendment to the Venture Loan and Security Agreement and Twelfth Extension of Standstill Agreement with Horizon (the “Second Amendment”). The Second Amendment amends the Loan Agreement, dated as of December 15, 2022, as further amended by the First Amendment, with Horizon, whereby Horizon agreed, among other things, to forbear exercising remedies on specified potential defaults through December 15, 2023. We also paid down $11.0 million in principal. For more information, please see "Note 16. Subsequent Events."
Subjective Acceleration Clause
The Loan Agreement contains a subjective acceleration clause which allows Horizon to accelerate the maturity of the principal payments under certain circumstances, following expiration of Twelfth Extension of Standstill Agreement with Horizon, pending the results of the strategic review process, Horizon may choose to exercise various remedies available to them. This may include, but is not limited to, demanding the repayment of outstanding loan amounts, advancing the loan maturity date, or taking actions against the collateral that secures our obligations under the Loan Agreement. Additionally, we might be compelled to explore seeking relief through the U.S. Bankruptcy Courts, or winding down our operations.
Based upon our significant operating losses, going concern assessment as of September 30, 2023, and conditions of the First Amendment, we determined that we should classify our loan facility with Horizon, which would otherwise be classified as long-term debt, as a current liability on our consolidated balance sheet as of September 30, 2023.
We have the following minimum aggregate future loan payments as of September 30, 2023 related to the Loan Agreement, excluding the subsequent Waiver and Amendment to the Venture Loan and Security Agreement impact:
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Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands)
2024$ 
2025 
20266,875 
20277,500 
Thereafter20,625 
Total minimum payments35,000 
Debt discount(1,052)
Total Debt as of September 30, 2023
$33,948 
For the three months ended September 30, 2023 and 2022, interest expense was approximately $1.3 million and $1.1 million. For the nine months ended September 30, 2023 and 2022, interest expense was approximately $4.4 million and $3.2 million.
9. In-License Agreements
Mayo Foundation for Medical Education and Research
In August 2017, we and the Mayo Clinic amended the 2016 Mayo License Agreement. Under the amended 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 September 30, 2023, we incurred milestone payments since inception of approximately $0.3 million and no amounts are currently due.
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 and extracellular vesicles ("EVs") 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.
In June 2023, we amended our July 2019 agreement with Sacco pursuant to which the 2023 annual exclusivity payment of €0.6 million was deferred from July 2023 to the first quarter of 2024.
Additionally, we have a contractual arrangement with an affiliate of Sacco for manufacturing that required us to spend an aggregate minimum amount of €3.9 million, consisting of €1.5 million annually during each of 2023 and 2024 and €0.9 million on or before March 1, 2025.
In June 2023, we have also amended this agreement and revised the aggregate minimum spend amount to be nil additional spend in 2023, €1.7 million during 2024 and €2.4 million during 2025.
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 currently are not a party to any material litigation and have established no contingency reserves for any litigation liability.
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Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
11. Stockholders’ Deficit
Preferred Stock
We have authorized 10,000,000 shares of Preferred Stock, $0.001 par value, of which the board of directors can set the designation, rights and privileges. No shares of Preferred Stock have been issued or are outstanding.
Common Stock
We have authorized 200,000,000 shares of Common Stock, $0.001 par value, of which the board of directors can set the designation, rights and privileges. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of our stockholders. Common stockholders are not entitled to receive dividends, unless declared by the board of directors.
Reverse Split
At our 2023 annual meeting of stockholders, a resolution was passed to effect a reverse stock split of all outstanding shares of our common stock within a certain ratio. On June 29, 2023, we effected a 1-for-20 reverse stock split of our common stock. The reverse stock split had no impact on the number of authorized shares or the par value of preferred and common stock. Trading of our common stock on The Nasdaq Global Select Market commenced on a split-adjusted basis on June 30, 2023.
2023 Private Placement
On July 7, 2023, we entered into a purchase agreement with the purchasers named therein, pursuant to which we agreed to issue and sell an aggregate of 11,025,334 shares of our common stock to the purchasers in a private placement, at a purchase price of $2.31 per share, for aggregate gross proceeds of approximately $25.5 million, before deducting private placement expenses.
Additionally, on July 11, 2023, Horizon converted $5.0 million of the principal amount of the loans outstanding under the Loan Agreement into 2,164,502 shares of common stock at a conversion price of $2.31 per share, equal to the price paid by the purchasers in the Private Placement.
Warrants
In connection with our current and prior loan agreements, we issued warrants exercisable for shares of our common stock. The following table summarizes outstanding warrants as of September 30, 2023, reflected on a post split basis:
TransactionsNumber of Shares IssuableExercise PriceExpiration Date
K2 HealthVentures warrants
33,187 $40.00 June 16, 2031
Horizon Technology warrants
23,191 $38.80 December 15, 2032
56,378 
12. Stock-Based Compensation
Equity Plans
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. As of September 30, 2023, 40,500 shares of common stock (on a post reverse split basis) 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. In June 2023, our board of directors adopted, and our
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Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
stockholders approved, an amendment and restatement of the 2018 Plan to increase the number of shares of our common stock available for issuance by 200,000 shares. As of September 30, 2023, 0 shares of common stock were available for the future grant under the 2018 Plan.
Stock Options
A summary of our stock option activity and related information for the nine months ended September 30, 2023 is as follows: 
SharesWeighted-
Average
Exercise Price
Weighted Average - Remaining Contractual Life (years)Aggregate Intrinsic Value (1) (in thousands)
Options outstanding as of December 31, 2022
558,565 $155.93 6.91$746 
Granted120,943 17.39 
Exercised  
Forfeited(94,310)175.82 
Canceled(90,251)187.31 
Options outstanding as of September 30, 2023
494,947 $112.56 6.23$15 
Exercisable as of September 30, 2023
321,230 $138.59 4.85$120 
(1) The aggregate intrinsic value of options is calculated as the difference between the exercise price of the stock options and the fair value of our common stock for those stock options that had exercise prices lower than the fair value of the common stock as of the end of the period.
We had 173,717 unvested stock options outstanding as of September 30, 2023. The weighted-average fair value of options granted during the nine months ended September 30, 2023 and 2022 was $7.98 and $57.82, respectively. There were no stock options exercised during the nine months ended September 30, 2023. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2023 and 2022 was zero. The remaining unrecognized compensation expense for outstanding stock options as of September 30, 2023 was $7.5 million and the weighted-average period over which this cost is expected to be recognized is 2.6 years.
Restricted Stock Units
We issue restricted stock units ("RSUs") under our 2018 Plan and 2021 Inducement Plan. A summary of the RSU activity and related information for the nine months ended September 30, 2023 is as follows: 
SharesWeighted-Average
Grant Date Fair Value
Unvested balance at December 31, 2022
11,966 $145.51 
Granted579,300 11.72 
Vested(118,997)19.86 
Forfeited(48,733)37.09 
Unvested balance at September 30, 2023
423,536 $10.29 
Stock-based compensation expense related to RSUs was $1.2 million and $0.2 million for the three months ended September 30, 2023 and 2022, respectively. Stock-based compensation expense related to RSUs was $2.8 million and $0.9 million for the nine months ended September 30, 2023 and 2022, respectively.
The fair value of vested RSUs for the nine months ended September 30, 2023 and 2022 was $0.7 million and $0.6 million, respectively. The remaining unrecognized compensation expense for outstanding restricted stock units as of September 30, 2023 was $3.3 million and the weighted-average period over which this cost is expected to be recognized is 0.91 years.
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Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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. As of September 30, 2023, a total of 113,103 shares of common stock were reserved for issuance under the ESPP.
The compensation expense recognized related to the ESPP for the three and nine months ended September 30, 2023 and 2022 was immaterial. No shares were purchased under the ESPP during the three months ended September 30, 2023 and 2022, and 2,168 and 3,797 shares were sold during the nine months ended September 30, 2023 and 2022, respectively.
Stock-Based Compensation Expense
Stock-based compensation expense included in our unaudited condensed consolidated statements of operations is as follows (in thousands):
 Three Months Ended September 30,Nine months ended September 30,
 2023202220232022
Research and development$1,429 $1,694 $4,421 $5,431 
General and administrative1,047 1,769 3,329 6,306 
Total stock-based compensation expense$2,476 $3,463 $7,750 $11,737 
13. Net Loss Per Share
Basic and diluted net loss per common share is determined by dividing the net loss by the weighted-average common shares outstanding during the period, as follows (net loss in thousands):
Three Months Ended September 30,Nine months ended September 30,
2023202220232022
Numerator
Net loss$(12,364)$(30,564)$(58,808)$(90,986)
Denominator
Weighted average shares outstanding used in computing net loss per share17,384,243 5,402,592 9,546,129 3,976,438 
Net loss per share, basic and diluted$(0.71)$(5.66)$(6.16)$(22.88)
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 anti-dilutive. 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:
September 30,
20232022
Stock options to purchase common stock494,947 571,606 
Warrant56,378 6,988 
RSUs423,536 15,065 
Conversion option 18,797 
Common stock from the ESPP124 2,009 
Total974,985 614,465 

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Evelo Biosciences, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
14. 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 nine months ended September 30, 2023 and 2022, we paid Weatherden $0.1 million or less. As of September 30, 2023 and 2022, the amounts owed to Weatherden under the supply of service agreement were approximately $0.1 million or less.
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 2,712,317 total shares offered, officers and directors purchased an aggregate of 19,691 shares and other related parties purchased an aggregate of 1,412,671 shares of our common stock for $29.20 per share, a price equal to the offering price per share of, and on equal terms as, common stock sold to the public.
In July 2023, in connection with the private placement, we entered into a securities purchase agreement with a group of purchasers including two related parties. Of the 11,025,334 total shares offered, related parties purchased an aggregate of 7,778,582 shares of our common stock for $2.31 per share, a price equal to the offering price per share of, and on equal terms as, common stock sold to all purchasers.
15. Workforce Reduction
On January 31, 2023, our board of directors approved a plan to reduce the Company's workforce by 48 employees, or approximately 45% of our total headcount as of January 31, 2023, and further reductions in the workforce were made in the second quarter of 2023, in order to preserve cash and prioritize investment in our core clinical programs. During the three and nine months ended September 30, 2023, we recognized less than $0.1 million and $3.1 million of charges in the condensed consolidated statement of operations related to this workforce reduction. These charges primarily consisted of severance costs.

16. Subsequent Events
On October 26, 2023, we entered into the Second Amendment with Horizon, whereby Horizon agreed, among other things, to forbear exercising remedies on specified potential defaults through December 15, 2023, and we paid down $11.0 million of the principal amount of the loans outstanding under the Loan Agreement. Horizon further agreed to remove from the Loan Agreement certain covenants relating to our obligations (i) to maintain ongoing clinical trials, (ii) to maintain a minimum amount of cash or cash equivalents on deposit in controlled accounts, and (iii) to repay the loans outstanding under the Loan Agreement with a percentage of the proceeds of future equity sales.
The Second Amendment also provides that no cash interest-only payments are required to be paid to Horizon effective as of October 1, 2023 and that such interest payments shall be treated as payments-in-kind and added to the outstanding principal balance of the loans. The Second Amendment amends the mandatory prepayment provision in the Loan Agreement to require us to prepay a portion of the loans outstanding under the Loan Agreement in an amount equal to 70% of any net proceeds received by us from equity sales, licensing or sale of our assets.
Finally, the Second Amendment waives all prepayment fees and eliminates or defers the final payment fees related to the $11.0 million in principal paid in connection with the Second Amendment, depending upon repayment of principal.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 Annual Report"), including the audited consolidated financial statements and notes thereto contained in our 2022 Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, these forward-looking statements. In this Quarterly Report on Form 10-Q, unless otherwise stated or as the context otherwise requires, references to “Evelo,” “Evelo Biosciences,” the “Company,” “we,” “us,” “our” and similar references refer to Evelo Biosciences, Inc. and its consolidated subsidiaries.
Overview
Evelo is a clinical-stage biotechnology company focused on discovering and developing a new class of oral medicines that act on immune cells in the small intestine with systemic effects.
The small intestinal axis ("SINTAX") is the network of connections that links the small intestine and the rest of the body. Immune cells and other cells in the small intestine act as sentinels and are constantly sensing the contents of the gut. Depending on what is sensed, these cells relay messages from the gut to the rest of the body that modulate systemic immunity.
We are discovering and developing a new class of orally delivered investigational medicines that are designed to act on cells in the small intestine with systemic therapeutic effects that have the potential to address many inflammatory diseases. Evelo’s orally delivered product candidates are pharmaceutical compositions of specific single strains of commensal microbes or the extracellular vesicles ("EVs") they shed.
Preclinical studies have shown that our product candidates engaged with immune cells in the small intestine, which led to the generation and mobilization of CD4+ regulatory T cells. These regulatory T cells circulate throughout the body and have the potential to resolve inflammation without immunosuppression, which we believe could overcome the limitations of current anti-inflammatory drugs. Our product candidates have not been observed to colonize the gut nor modify the microbiome.
A first-generation product candidate, EDP1815, which is a mixture of whole cells and EVs from a specific, single strain of bacteria, delivered durable, clinically meaningful improvement in disease for some patients in a Phase 2 trial of psoriasis. In more than 800 patients to date, EDP1815 has displayed a safety and tolerability profile comparable to placebo. EDP2939 is a second generation product candidate that is a pharmaceutical composition of purified EVs produced by the same strain of bacteria as in EDP1815. The small size of the EVs allows us to concentrate many of them in a single dose and favorably influences their diffusion properties in the small intestine.
These discoveries may create the potential for a new type of effective, safe, well tolerated, and convenient medicine for people with many types and stages of many inflammatory diseases, if approved. If shown to be effective in inflammatory disease mediated by the Th1, Th2 or Th17 inflammatory pathways, we believe this investigational medicine has potential utility in additional inflammatory diseases, such as psoriatic and other forms of arthritis, asthma, allergy, and inflammatory bowel disease.
Strategic Review
On October 17, 2023, we announced that the top-line results from the Part B (Phase 2) clinical study with EDP2939 in moderate psoriasis did not achieve the primary endpoint. Given these results, we have initiated a process to explore strategic alternatives, including without limitation seeking to partner EDP1815 and/or the SINTAX platform.
There can be no assurance that this strategic review process will result in us pursuing a transaction or that any transaction, if pursued, will be completed on attractive terms. We have not set a timetable for completion of this process and do not intend to comment further unless or until the Board of Directors has approved a definitive course of action, the process is concluded, or it is determined that other disclosure is appropriate.
20


Forbearance and Second Amendment to the Venture Loan and Security Agreement and Twelfth Extension of Standstill Agreement
The Standstill Period in respect to our debt with Horizon Technology Finance Corporation ("Horizon”) was automatically extended by ten days following the October 17, 2023 announcement that the primary endpoint was not met in the EDP2939 Phase 2 study, based on the terms and conditions set forth in the Waiver and Amendment to Loan Agreement and Eleventh Extension of Standstill Agreement, dated as of July 7, 2023 (the “First Amendment”), to October 27, 2023 (the “Forbearance Period”).
On October 26, 2023, we entered into a Forbearance and Second Amendment to the Venture Loan and Security Agreement and Twelfth Extension of Standstill Agreement (the “Second Amendment”) with Horizon. The Second Amendment amends the Venture Loan and Security Agreement, dated as of December 15, 2022 (the “Original Agreement”), as further amended by the First Amendment (the Original Agreement together with the First Amendment, the “Loan Agreement”), with Horizon, whereby Horizon agreed, among other things, to forbear exercising remedies on specified potential defaults through December 15, 2023, and we paid down $11.0 million of the principal amount of the loans outstanding under the Loan Agreement. Horizon further agreed to remove from the Loan Agreement certain covenants relating to the our obligations (i) to maintain ongoing clinical trials, (ii) to maintain a minimum amount of cash or cash equivalents on deposit in controlled accounts, and (iii) to repay the loans outstanding under the Loan Agreement with a percentage of the proceeds of future equity sales. The Second Amendment also provides that no cash interest-only payments are required to be paid to Horizon effective as of October 1, 2023 and that such interest payments shall be treated as payments-in-kind (“PIK”) and added to the outstanding principal balance of the loans. The Second Amendment amends the mandatory prepayment provision in the Loan Agreement to require us to prepay a portion of the loans outstanding under the Loan Agreement in an amount equal to 70% of any net proceeds received by us from equity sales, licensing or sale of our assets. Finally, the Second Amendment waives all prepayment fees and eliminates or defers the final payment fees related to the $11.0 million in principal paid in connection with the Second Amendment, depending upon repayment of principal.
Clinical Programs
EDP2939
EDP2939, our first EV product candidate, represents a potential pipeline-in-a-product that has demonstrated biologic and JAK inhibitor-like activity in preclinical studies of Th1 and Th17 inflammation. Due to the purity, enhanced potency, and increased concentration of EVs in EDP2939 relative to EDP1815, EDP2939 may have greater activity than EDP1815. We believe that EDP2939, if successfully developed and approved, has the potential to serve as a foundational treatment for numerous inflammatory diseases, including psoriatic arthritis, rheumatoid arthritis, axial spondyloarthritis and inflammatory bowel disease.
Dosing in our Phase 1/2, randomized, placebo-controlled trial was being conducted in two parts. Part A evaluated the safety and tolerability of EDP2939 in healthy volunteers. The primary endpoints of Part A (Phase 1) are safety endpoints, including adverse events, vital signs and safety laboratory tests. Part A included three sequential, escalating multiple dose cohorts. The Safety Review Committee ("SRC") reported no notable safety or tolerability concerns for the three cohorts of Part A (Phase 1). Part B (Phase 2) evaluated the safety, tolerability and preliminary efficacy in adults with moderate psoriasis. The primary endpoint of Part B is the proportion of participants with moderate psoriasis achieving a PASI-50 response compared to placebo.
On October 17, 2023, we announced that the top-line results from the Part B (Phase 2) clinical study with EDP2939 in moderate psoriasis did not achieve the primary endpoint. Although there was no statistically significant difference between the proportion of patients who achieved a PASI-50 response on EDP2939 compared to placebo, it was notable that such numeric proportion went from being inferior to placebo at week 16 (19.6% on EDP2939 vs 25% on placebo) to being superior at the week 20 follow-up visit (33.9% on EDP2939 vs 26.9% on placebo).
Given these results, we decided to cease development of EDP2939.
EDP1815
EDP1815 is a pharmaceutical preparation of a single strain of Prevotella histicola isolated from a human donor and selected for its specific pharmacology. It contains a mixture of whole cells and EVs. EDP1815 has been studied in more than 800 patients to date and has displayed a safety and tolerability profile comparable to placebo.
Psoriasis
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In September 2021, we announced positive data from a Phase 2 trial of EDP1815 in psoriasis. The trial evaluated three doses of EDP1815 in patients with mild and moderate psoriasis and consisted of a treatment phase (Part A) and an off-treatment follow-up phase (Part B). 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, and other clinical measures of disease such as PGA, BSA, PGA x BSA, PSI, and DLQI.
In Part A, 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. EDP1815 was observed to be well tolerated in Part A (treatment phase) of the trial. The safety data were comparable to placebo, and there were no drug related serious adverse events. Part B results in February 2022 demonstrated durable and deeper clinical responses without any new psoriasis medication being used during this time. There were no drug-related adverse events in Part B, and no flare or rebound following cessation of dosing.
Atopic dermatitis
In February 2022, we initiated a Phase 2 trial of EDP1815 for atopic dermatitis treatment, aiming to evaluate its efficacy and safety compared to placebo. The primary endpoint was a 50% improvement in EASI score at week 16. In February 2023, interim data revealed that Cohorts 1, 2, and 3 did not meet the primary endpoint, with high placebo response rates. In April 2023, we announced that Cohort 4 also failed to meet the primary endpoint due to high placebo response. The high placebo response rate was consistent across all cohorts. Due to these results, further development of EDP1815 in atopic dermatitis was discontinued, following a wind-down of the clinical study.
Financial Operations Overview
Revenue
We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. As discussed in Note 3 - ALJ Collaborative Agreement to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we have entered into a collaboration agreement that will result in the recognition of $7.5 million of revenue upon the satisfaction of the performance obligation identified within the agreement. If our development efforts for our current product candidates or additional product candidates that we may develop in the future are successful and result in marketing approval, or if we enter into additional collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements.
Operating Expenses
Our operating expenses since inception have consisted primarily of research and development ("R&D") activities and general and administrative ("G&A") costs.
Research and Development Expenses
R&D expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the development of our product candidates, which include:
expenses incurred under agreements with third parties, including investigative sites, external laboratories and CROs, that conduct research, preclinical activities and clinical trials on our behalf;
manufacturing process-development costs as well as technology transfer and other expenses incurred with CMOs that manufacture drug substance and drug product for use in our preclinical activities and any current or future clinical trials;
salaries, benefits, severance and other related costs, including stock-based compensation expense, for personnel in our research and development functions;
expenses to acquire technologies to be used in research and development;
costs of outside consultants, including their fees, stock-based compensation and related travel expenses;
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the cost of laboratory supplies and acquiring, developing and manufacturing preclinical and clinical trial materials;
costs related to compliance with regulatory requirements; and
facility-related expenses, which include direct depreciation costs, allocated expenses for rent and maintenance of facilities and other operating costs.
We expense R&D costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our unaudited condensed consolidated financial statements as prepaid or accrued R&D expenses. Nonrefundable advance payments for goods or services to be received in the future for use in R&D activities are deferred and capitalized, even when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
Our primary focus of R&D since inception has been building a platform to enable us to develop medicines based on an understanding of the gut-body network and to show potential clinical utility and develop the first set of clinical assets. Our platform and program expenses consist principally of costs, such as preclinical research, process development research, clinical and preclinical manufacturing activity costs, clinical development costs, licensing expense as well as an allocation of certain indirect costs, facility and office related expenses. We do not allocate personnel costs, which include salaries, discretionary bonus and stock-based compensation costs, as such costs are separately classified as R&D personnel costs.
R&D activities have historically been central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to decrease in the near future as we stop the further development of our product candidates while we explore strategic alternatives. Subject to the results of the strategic review and obtaining future funding, we expect that our R&D expenses could increase if we were to resume our efforts to discover and develop product candidates, seek regulatory approvals for any products that successfully complete clinical trials, source or potentially build manufacturing capabilities, hire additional R&D personnel and expand into additional therapeutic areas.
At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales or licensing of our product candidates. This is due to the numerous risks and uncertainties associated with drug development, including without limitation the uncertainty of:
the outcome of the strategic review process;
our ability to add and retain key research and development personnel;
our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates;
our ability to obtain regulatory approval to conduct registration trials;
our successful enrollment in and completion of clinical trials;
any delays in clinical trials, as a result of public health crises, such as the COVID-19 pandemic;
global economic slowdown and market instability, including the impact from supply chain delays and increasing inflation and interest rates;
the costs associated with the development of our current product candidates and/or any additional product candidates that we identify in-house or acquire through collaborations;
our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the impact on disease progression of our product candidates;
our ability to establish an appropriate safety profile with IND-enabling toxicology studies;
our ability to establish and maintain agreements with CMOs and other entities for clinical trial supply and future commercial supply, if our product candidates are approved;
the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;
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our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved;
our receipt of marketing approvals from applicable regulatory authorities;
our ability to commercialize products, if and when approved, whether alone or in collaboration with others; and
the continued acceptable safety profiles of the product candidates following approval.
A change in any of these or other variables with respect to the development of any of our current or future product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. While the strategic review process is underway, we expect our research and development costs will decrease given the reduction in our workforce, winding down of clinical activities and other cost reduction initiatives. The outcome of the review of strategic alternatives will inform future development plans and costs. If we decide to resume the development of our product candidates, however, we expect our research and development expenses would increase at least over the next several years as we implement our business strategy, advance our current programs, expand our research and development efforts, seek regulatory approvals for any product candidates that successfully complete clinical trials, identify and develop additional product candidates, and incur expenses associated with hiring additional or retaining existing personnel to support our research and development efforts.
General and Administrative Expenses
G&A expenses consist primarily of salaries, severance and other related costs, including stock-based compensation, for personnel in our executive, finance, pre-commercial, corporate and business development, and administrative functions. G&A expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs; and other costs associated with operating a public company including investor relations and board related fees and expenses.
Interest Expense, Net
During the three and nine months ended September 30, 2023 and 2022, interest expense, net consisted primarily of interest at the stated rate on borrowings under our loan and security agreements, amortization of deferred financing costs and interest expense related to the accretion of debt discount offset by interest earned on institutional money market instruments.
We anticipate that the interest expense on our outstanding loan will increase in the near term, if and as interest rates rise in response to actions taken by the U.S. Federal Reserve. We expect that interest income earned on our money market accounts may increase in response to rising interest rates; however the net impact is uncertain given our fluctuating cash/money market balances.
Other Miscellaneous Expense, Net
For the three and nine months ended September 30, 2023, other miscellaneous expense, net consists of government R&D tax credits related to our operations in the UK, offset by foreign currency exchange losses and changes in the fair value of common stock warrants.
Income Taxes
Income tax expense primarily relates to tax expense at our UK subsidiary.
Since our inception in 2014, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items.
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Results of Operations
Comparison of the Three Months Ended September 30, 2023 and 2022
Our statement of operations for the three months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended September 30,Change
20232022
Operating expenses:
Research and development$6,499 $21,928 $(15,429)
General and administrative3,891 7,126 (3,235)
Loss on disposal and impairment of property and equipment793 — 793 
Total operating expenses11,183 29,054 (17,871)
Loss from operations(11,183)(29,054)17,871 
Other income (expense):
Interest expense, net(1,162)(788)(374)
Change in fair value of warrants(9)— (9)
Other miscellaneous income (expense), net(27)(615)588 
Total other expenses, net(1,198)(1,403)205 
Loss before income taxes(12,381)(30,457)18,076 
Income tax benefit (expense)17 (107)124 
Net loss$(12,364)$(30,564)$18,200 
Net Loss
The net loss was $12.4 million for the three months ended September 30, 2023, compared to $30.6 million for the three months ended September 30, 2022. The decrease in net loss of $18.2 million was primarily the result of a decrease of $17.9 million in total operating expenses, a $0.6 million decrease in other miscellaneous expense, and a $0.1 million decrease in income tax expense, partially offset by a $0.4 million increase in net interest expense. Of total operating expenses, R&D expenses decreased by $15.4 million and G&A expenses decreased by $3.2 million as discussed in further detail below.
Research and Development Expenses (in thousands):
Three Months Ended September 30,Change
20232022
Inflammation programs$1,429 $12,624 $(11,195)
Personnel costs1,459 5,130 (3,671)
Platform expenses2,166 2,702 (536)
Stock-based compensation1,429 1,694 (265)
Other16 (222)238 
Total research and development expenses$6,499 $21,928 $(15,429)
R&D expenses were $6.5 million for the three months ended September 30, 2023, compared to $21.9 million for the three months ended September 30, 2022. The overall decrease of $15.4 million was driven primarily by a $11.2 million decrease in inflammation programs spending given lower investment in clinical trials, a $3.7 million decrease in personnel costs and a $0.3 million decrease in stock-based compensation, both due to the reduction in the number of employees, and a $0.5 million decrease in platform expenses as a result of overall cost controls in lab operations.
Overall, we expect to continue to closely control spending in research and development, pending the outcome of the strategic review process.
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General and Administrative Expenses (in thousands):
Three Months Ended September 30,Change
20232022
Personnel costs$788 $3,185 $(2,397)
Stock-based compensation1,047 1,769 (722)
Professional fees1,736 1,133 603 
Facility costs, office expense and other320 1,039 (719)
Total general and administrative expenses$3,891 $7,126 $(3,235)
G&A expenses were $3.9 million for the three months ended September 30, 2023, compared to $7.1 million for the three months ended September 30, 2022. The decrease of $3.2 million was driven by a $2.4 million decrease in personnel-related costs and a $0.7 million decrease in stock-based compensation, both due to a reduction in employees as well as a $0.7 million decrease in facilities and other costs given our recent focus on cost reduction. These decreases were partially offset by a $0.6 million increase in professional fees, mainly due to higher legal-related expenses.
Loss on Disposal and Impairment of Property and Equipment
Loss on disposal and impairment of property and equipment for the three months ended September 30, 2023 was $0.6 million and $0.2 million, respectively, compared to zero for the three months ended September 30, 2022. The impairment charge is attributed to furniture and fixtures and office equipment associated with the early termination of our office sublease at 620 Memorial Drive, Cambridge, MA 02139. The carrying value of these assets, totaling $0.3 million, was deemed irrecoverable and was adjusted downward to its fair value of $0.1 million.
Total Other Expense, Net
Total other expense, net for the three months ended September 30, 2023 was $1.2 million compared to $1.4 million for the three months ended September 30, 2022. This decrease of $0.2 million was primarily driven by a $0.4 million increase in net interest expense as a result of both higher current year average debt balances and interest rates, and a $0.6 million decrease in other miscellaneous expense.
Results of Operations
Comparison of the Nine Months Ended September 30, 2023 and 2022
Our statement of operations for the nine months ended September 30, 2023 and 2022 (in thousands):
Nine Months Ended September 30,Change
20232022
Operating expenses:
Research and development$37,399 $62,470 $(25,071)
General and administrative15,849 24,909 (9,060)
Loss on disposal and impairment of property and equipment2,409 — 2,409 
Total operating expenses55,657 87,379 (31,722)
Loss from operations(55,657)(87,379)31,722 
Other income (expense):
Interest expense, net(3,642)(2,835)(807)
Change in fair value of warrants622 — 622 
Other miscellaneous income (expense), net230 (386)616 
Total other expenses, net(2,790)(3,221)431 
Loss before income taxes(58,447)(90,600)32,153 
Income tax benefit (expense)(361)(386)25 
Net loss$(58,808)$(90,986)$32,178 
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Net Loss
The net loss was $58.8 million for the nine months ended September 30, 2023, compared to $91.0 million for the nine months ended September 30, 2022. The decrease in net loss of $32.2 million was primarily the result of a decrease of $31.7 million in total operating expenses, $0.6 million decrease in the fair value of warrants, and a $0.6 million decrease in other miscellaneous expense, partially offset by a $0.8 million increase in net interest expense. Of our total operating expenses, R&D expenses decreased by $25.1 million and G&A expenses decreased by $9.1 million.
Research and Development Expenses (in thousands):
Nine Months Ended September 30,Change
20232022
Inflammation programs$16,523 $30,011 $(13,488)
Personnel costs9,617 17,182 (7,565)
Platform expenses6,771 9,777 (3,006)
Stock-based compensation4,421 5,431 (1,010)
Other67 69 (2)
Total research and development expenses$37,399 $62,470 $(25,071)
R&D expenses were $37.4 million for the nine months ended September 30, 2023, compared to $62.5 million for the nine months ended September 30, 2022. The overall decrease of $25.1 million was driven primarily by a $13.5 million decrease in inflammation programs spending, a $7.6 million decrease in personnel costs and a decrease of $1.0 million in stock-based compensation, both due to fewer employees, including the impact of severance charge recorded, and a $3.0 million decrease in platform expenses as a result of overall cost controls in lab operations. As a result of the Workforce Reduction (as defined below), we incurred a severance charge of $1.6 million during the nine months ended September 30, 2023.
Overall, we expect to continue to closely control spending in research and development, pending the outcome of the strategic review process.
General and Administrative Expenses (in thousands):
Nine Months Ended September 30,Change
20232022
Personnel costs$5,483 $10,453 $(4,970)
Stock-based compensation3,329 6,306 (2,977)
Professional fees5,024 4,420 604 
Facility costs, office expense and other2,013 3,730 (1,717)
Total general and administrative expenses$15,849 $24,909 $(9,060)
G&A expenses were $15.8 million for the nine months ended September 30, 2023, compared to $24.9 million for the nine months ended September 30, 2022. The decrease of $9.1 million was driven by a $5.0 million decrease in personnel-related costs and a $3.0 million decrease in stock-based compensation as a result of fewer employees, and a $1.7 million decrease in facilities and other costs given focus on cost reduction. As a result of the Workforce Reduction, we incurred a severance charge of $1.5 million during the nine months ended September 30, 2023. These decreases were partially offset by a $0.6 million increase in professional fees, mainly due to higher legal-related expenses.
Loss on Disposal and Impairment of Property and Equipment
Loss on disposal and impairment of property and equipment for the nine months ended September 30, 2023 was $0.6 million and $1.8 million, respectively, compared to zero for the nine months ended September 30, 2022. This impairment charge is attributed to long-lived assets associated with the halted development of EDP1815 in atopic dermatitis and the early termination of our office sublease at 620 Memorial Drive, Cambridge, MA 02139. The carrying value of these assets, totaling $2.4 million, was deemed irrecoverable and was adjusted downward to its fair value of $0.6 million.

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Total Other Expense, Net
Total other expense, net for the nine months ended September 30, 2023 was $2.8 million compared to $3.2 million for the nine months ended September 30, 2022. This decrease of $0.4 million was primarily driven by a $0.6 million decrease in the fair value of warrants, and a $0.6 million decrease in other miscellaneous expense, partially offset by a $0.8 million increase in net interest expense as a result of both higher current year average debt balances and interest rates.

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Liquidity and Capital Resources
We were incorporated and commenced operations in 2014. Since our incorporation, we have historically devoted substantially all of our resources to developing preclinical and clinical product candidates, building our intellectual property portfolio and process development and manufacturing function, business planning, raising capital and providing general and administrative support for these operations. To date, we have financed our operations primarily with the proceeds from issuance of our common stock combined with proceeds from previous sales of our convertible preferred stock to our equity investors and borrowings under loan and security agreements. From our inception through September 30, 2023, we have received gross proceeds of $545.6 million from such transactions, which includes a net $45.0 million borrowed under debt facilities. As of September 30, 2023, we had cash and cash equivalents of $17.3 million and an accumulated deficit of $588.0 million.
In February 2023, we released interim data from the first three cohorts of our Phase 2 trial of EDP1815 in atopic dermatitis patients. Cohorts 1, 2 and 3 failed to meet the trial's primary endpoint. In connection with this data, we implemented cost reduction initiatives, including a reduction in workforce of 48 employees, or approximately 45% of our headcount as of the date of the reduction, in order to preserve cash and prioritize investment in our core clinical programs (the "Workforce Reduction"). In April 2023, and consistent with the first three cohorts of Phase 2 trial of EDP1815 in atopic dermatitis, we announced that Cohort 4 did not meet the primary endpoint. Given these results, we decided to cease further development of EDP1815 in atopic dermatitis, following a wind-down of the study, prioritize investment in the EV platform and in EDP2939 clinical development, and further reduce our workforce to save costs. Subsequently, on October 17, 2023, we announced that the top-line results from the Part B (Phase 2) clinical study with EDP2939 in moderate psoriasis did not achieve the primary endpoint. Given these results, we decided to cease development of EDP2939 and have initiated a process to explore strategic alternatives. We do not have any current or ongoing clinical trials or clinical development plans.
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 the unaudited condensed consolidated financial statements are issued. We incurred net losses of approximately $58.8 million for the nine months ended September 30, 2023. We have incurred losses and generated negative operating cash flows since our inception and anticipate that we will continue to incur losses for at least the next several years. The transition to profitability is dependent upon the successful development, approval, and commercialization of our products and product candidates and the achievement of a level of revenues adequate to support our cost structure. Based on our current operating plan, we believe that our cash and cash equivalents as of September 30, 2023 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 additional capital if we intend to pursue further development of our candidates. We are exploring strategic alternatives which will inform our future financial and clinical development plans. Management’s belief with respect to our ability to fund operations is based on estimates that are subject to risks and uncertainties, including the outcome of the strategic review process. Actual results may be different from management’s estimates. There can be no assurance that we will be able to obtain additional financial resources on acceptable terms, if at all. If we are unable to obtain sufficient financial resources, we may be required to permanently cease development efforts, which would adversely affect our business prospects. Because of the uncertainty as to the outcome of the strategic review and our ability to secure financial resources and the insufficient amount of cash and cash equivalent resources as of September 30, 2023, 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 statements are issued.
Funding Requirements
We have incurred losses and cumulative negative cash flows from operations since our inception. We anticipate that we will continue to incur significant losses for at least the next several years. While the strategic review process is underway, we expect our overall costs will decrease given the reduction in our workforce, winding down of clinical activities and other cost reduction initiatives. The outcome of the review of strategic alternatives will inform future development plans and costs. If we decide to resume the development of our product candidates, however, we expect that our research and development and general and administrative expenses would increase. We will need additional capital to fund our operations, which we may raise through a combination of the sale of equity, debt financings, or other sources, including potential collaborations.
We are currently evaluating our future development activities in conjunction with our strategic review process which will inform our future investment and spending. We expect to continue incur additional costs associated with operating as a public company. Our expenses will increase if and when we:
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invest in further clinical trials;
advance the clinical development of potential and additional product candidates;
conduct research and continue preclinical development of potential product candidates;
make strategic investments in manufacturing capabilities, including potentially planning and building a commercial manufacturing facility;
maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property;
seek to obtain regulatory approvals for our product candidates;
potentially establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products for which we may obtain regulatory approval;
add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts and to support our operations as a public company; and
experience any delays or encounter any issues with any of the above, including but not limited to failed studies or trials, complex results, safety issues or other regulatory or personnel challenges.
As of September 30, 2023, our principal source of liquidity is cash and cash equivalents, which totaled $17.3 million. Our cash and cash equivalents are maintained at financial institutions in amounts that exceed federally insured limits. On October 17, 2023, we announced that we were suspending development of EDP2939, implementing measures to reduce costs and undertaking a strategic review. On October 27, 2023, we announced, among other things, that we paid down $11.0 million of the principal amount of the loans outstanding under the Loan Agreement with Horizon. We expect that our existing cash and cash equivalents as of September 30, 2023, after the paydown under the Loan Agreement, will enable us to fund our planned limited operating expenses into the first quarter of 2024. Based on our current operating plan, we believe that our cash and cash equivalents 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. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. Our forecast is based on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Due to the uncertainty as to the outcome of the strategic review and our ability to securing additional funding, and the insufficient amount of cash and cash equivalent resources as of September 30, 2023, we have concluded that substantial doubt exists with respect to our ability to continue as a going concern within one year after the date of the filing of this Quarterly Report on Form 10-Q.
Because of the numerous risks and uncertainties associated with the development of our product candidates, including EDP1815 and EDP2939, any additional product candidates or any follow-on programs, and because the extent to which we may enter into further partnerships, collaborations or licensing arrangements with third parties for the development of these product candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements for our technology platform or our other programs will depend on many factors, including:
the outcome of the strategic review process;
the costs, progress and results of any future clinical trials, should we resume development activities;
the cost of manufacturing clinical supplies of our product candidates;
the scope, progress, results and costs of preclinical development, including laboratory testing and studies, for any other potential product candidates;
the costs, timing and outcome of regulatory review of our product candidates, should we resume development activities;
our ability to repay and/or refinance our existing debt and to do so on acceptable terms, if at all;
the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;
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the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
the effect of competing technological and market developments; and
the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration arrangements for product candidates, although we currently have no additional commitments or agreements to complete any such acquisitions or investments in businesses.
Identifying potential product candidates and conducting preclinical testing and clinical trials is a time consuming, expensive and uncertain process that takes years to complete. We may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, to the extent we resume development activities and if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.
Adequate additional funds may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Additional debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require or involve the issuance of warrants, which could potentially dilute the ownership interest of existing stockholders. The terms of our loan and security agreement with Horizon preclude us from paying dividends on our equity securities without their consent. If we lack sufficient capital to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations would be materially adversely affected.
If we raise additional funds through collaborations, partnerships, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.
Financing
We are a development stage company and have not generated any revenue. We do not have any current or ongoing clinical trials or clinical development plans. 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, to the extent we resume development activities, we expect to continue to incur significant research and development and other expenses related to our ongoing operations. 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, such as the ongoing conflicts in Europe and the Middle East, 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. We also continue to face liquidity issues as described below.
We also anticipate continuing increases in U.S. interest rates will result in both higher interest expense and potentially interest income depending upon our invested cash balance, but we are unable to anticipate with any certainty the future net effect to our consolidated net loss and resulting cash flows from operating activity.
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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, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
Equity Financing
In August 2021, we filed a Registration Statement on Form S-3 (File No. 333-259005) (the “2021 Shelf Registration Statement”) with the SEC in relation to the registration of common stock, preferred stock, debt securities, warrants and/or units of any combination thereof in the aggregate amount of up to $200 million for a period of up to three years from the date of its effectiveness on August 30, 2021.
In May 2022, we entered into a securities purchase agreement with the purchasers named therein, pursuant to which we agreed to issue and sell to the purchasers in a registered direct offering an aggregate of 2,712,317 shares of common stock, at a purchase price of $29.20 per share, pursuant to the 2021 Shelf Registration Statement and a related prospectus supplement filed with the SEC. The closing of the 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.
In July 2022, we entered into an “at-the-market” offering sales agreement with Cowen (the "2022 ATM") providing for the offering, issuance and sale of up to $75.0 million of common stock under the 2021 Shelf Registration Statement. We did not sell any shares of our common stock under the 2022 ATM during the nine months ended September 30, 2023. As of September 30, 2023, $69.1 million remained available to be sold under the 2022 ATM.
In July 2023, we entered into a securities purchase agreement with the purchasers named therein, pursuant to which we agreed to issue and sell an aggregate of 11,025,334 shares of our common stock to the purchasers in a private placement, at a purchase price of $2.31 per share, for aggregate gross proceeds of approximately $25.5 million, and an estimated net proceeds of $24.6 million after deducting transaction costs. The closing of the July 2023 Private Placement occurred on July 11, 2023.
Additionally, on July 11, 2023, Horizon converted $5.0 million of the principal amount of the loans outstanding under the Loan Agreement into 2,164,502 shares of common stock at a conversion price of $2.31 per share, equal to the price paid by the purchasers in the private placement.
Debt Financing
Horizon Technology Finance Corporation Loan and Security Agreement
In December 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Horizon (as lender and collateral agent, the “Lender”) pursuant to which Horizon agreed to make term loans in an aggregate principal amount of up to $45.0 million available to us on the closing date, and we borrowed $45.0 million. Borrowings under the Loan Agreement are collateralized by substantially all of our personal property, excluding intellectual property, and we pledged our equity interests in our subsidiaries, subject to certain limitations with respect to our foreign subsidiaries.
Interest on the outstanding loan balance accrues at a variable annual rate equal to the greater of (i) 11% and (ii) rate of interest noted in The Wall Street Journal, Money Rates section, as the “Prime Rate” plus the “Loan Rate Spread” as defined in the loan agreement. We are required to make interest-only payments on the loans on the stub period date (January 1, 2023) and for the first thirty-six monthly payment dates prior to when the loans are scheduled to begin amortizing on February 1, 2026. Beginning on February 1, 2026, we must pay twenty-four equal consecutive monthly installment payments repaying $35.0 million of the principal, plus interest on all outstanding balance until the loans mature on January 1, 2028 (the “Maturity Date”). The remaining $10.0 million of principal is due and payable on the Maturity Date. At our option, we may prepay the loans in whole, subject to a prepayment fee of 3% of the amount prepaid if prepaid on or before the Amortization Date, or if the prepayment occurs after less than 12 months after Amortization Date, 2% of the amount prepaid, and if more than 12 months after the Amortization Date but before the Maturity Date, 1%. A final payment equal to 4.25% of the principal borrowed on the closing date is due on the Maturity Date (or upon repayment in full of principal, if earlier).
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Upon the entry into the Loan Agreement, we were required to pay Horizon a commitment fee of $0.5 million, as well as other customary fees and expenses. The Loan Agreement contains customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches of covenants, change of control and occurrence of a material adverse effect. Upon the occurrence and continuation of an event of default, a default interest rate of an additional 5% per annum may be applied to the outstanding loan balances, and Horizon may declare all outstanding obligations immediately due and payable and exercise all of their rights and remedies as set forth in the loan agreement and under applicable law. Our subsidiary, Evelo Biosciences Security Corporation, may maintain cash or cash equivalents so long as we satisfy certain liquidity requirements.
In connection with the entry into the Loan Agreement, we also issued to Horizon warrants to purchase up to an aggregate 23,191 shares of our common stock, with an exercise price of $38.80 per share. The warrants are exercisable immediately and expire on December 15, 2032, provided that, under certain circumstances, the warrants may terminate and expire earlier in connection with the closing of certain acquisition transactions involving us. The warrants provide that Horizon may elect to exercise the warrant on a net “cashless” basis at any time prior to the expiration thereof. The fair market value of one share of our common stock in connection with any cashless exercise shall be the closing price or last sale price per share of our common stock on a nationally recognized securities exchange, inter-dealer quotation system or over-the-counter market on which our common stock is traded on the business day immediately prior to the date the holder elects to exercise the warrants on a cashless basis.
On May 10, 2023, we (expressly without conceding that an ”Event of Default” (as defined under the Loan Agreement) has occurred) entered with Horizon into a Standstill Agreement (as amended on by that certain First Extension of Standstill Agreement dated as of May 14, 2023 through the Tenth Extension of Standstill Agreement dated as of June 30, 2023, the “Standstill Agreement”) pursuant to which Horizon agreed to forbear from exercising, and not to exercise, any and all remedies available to it under the Loan Agreement, warrants, notes and other Financing Documents (as defined in the Standstill Agreement) during the period commencing on May 10, 2023 and ending on July 7, 2023 (the “Standstill Period”).
On July 7, 2023, we entered with Horizon into the First Amendment. The First Amendment amends the Loan Agreement dated as of December 15, 2022 with Horizon, whereby Horizon agreed to forbear exercising remedies on specified potential defaults (which forbearance will cease to apply if specified conditions as set forth in the First Amendment are not met), we granted a security interest to Horizon over substantially all of our intellectual property, we paid down $5.0 million of the principal amount of the loans outstanding under the Loan Agreement, and Horizon converted $5.0 million of the principal amount of the loans outstanding under the Loan Agreement into shares of common stock at a price per share equal to the price paid by the purchasers in the July 2023 Private Placement. We also amended the payment schedule and have agreed to prepay up to an additional $10.0 million of the principal amount of the loans outstanding under the Loan Agreement (plus applicable final payments) and Horizon agreed to convert up to an additional $10.0 million of the principal amount of the loans outstanding under the Loan Agreement into equity, in each case, concurrently with future sales of our equity securities, in amounts equal to 20% of the gross cash proceeds from such equity sales. Horizon further agreed to remove the $5.0 million cash financial covenant previously instituted in connection with an extension of the Standstill Agreement, and we agreed that, upon the failure to achieve specified performance milestones in the future, a $9.0 million cash and cash equivalents covenant would be imposed. The Standstill Period was extended in accordance with the terms, and subject to the conditions, set forth in the Amendment for a period to permit us to continue operations through the top-line readout of our Phase 2 study of EDP 2939.
On October 17, 2023, we announced that the top-line results from the Phase 2 clinical study of EDP2939 in moderate psoriasis did not achieve the primary endpoint. Accordingly, the Standstill Period was automatically extended by ten days after this announcement, based on the terms and conditions set forth in the Waiver and Amendment to Loan Agreement and Eleventh Extension of Standstill Agreement, to October 27, 2023 (the “Forbearance Period”).
On October 26, 2023, we entered into the Second Amendment with Horizon. The Second Amendment amends Loan Agreement with Horizon, whereby Horizon agreed, among other things, to forbear exercising remedies on specified potential defaults through December 15, 2023, and we paid down $11.0 million of the principal amount of the loans outstanding under the Loan Agreement. Horizon further agreed to remove from the Loan Agreement certain covenants relating to our obligations (i) to maintain ongoing clinical trials, (ii) to maintain a minimum amount of cash or cash equivalents on deposit in controlled accounts, and (iii) to repay the loans outstanding under the Loan Agreement with a percentage of the proceeds of future equity sales. The Second Amendment also provides that no cash interest-only payments are required to be paid to Horizon effective as of October 1, 2023 and that such
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interest payments shall be treated as PIK and added to the outstanding principal balance of the loans. The Second Amendment amends the mandatory prepayment provision in the Loan Agreement to require us to prepay a portion of the loans outstanding under the Loan Agreement in an amount equal to 70% of any net proceeds received by us from equity sales, licensing or sale of our assets. Finally, the Second Amendment waives all prepayment fees and eliminates or defers the final payment fees related to the $11.0 million in principal paid in connection with the Second Amendment, depending upon repayment of principal.
The Loan Agreement contains a subjective acceleration clause which allows Horizon to accelerate the maturity of the principal payments under certain circumstances. Based upon our significant operating losses, going concern assessment as of September 30, 2023, and ongoing negotiations with Horizon relating to the Standstill Agreement and conditions of the Waiver and Amendment to Loan Agreement and Eleventh Extension of Standstill Agreement, we determined that we should classify our loan facility with Horizon, which would otherwise be classified as long-term debt, as a current liability on our consolidated balance sheet as of September 30, 2023.
Due our liquidity issues, and in connection with the strategic review process, we are currently considering, our financial needs and our future debt obligations. If we are not able to secure additional financial resources, and/or enter into further agreements with the Lender, the Lender could seek to, among other remedies available to it, if circumstances are triggered under the Loan Agreement, as amended, demand repayment of amounts outstanding under the Loan Agreement, accelerate any Loan to maturity or pursue remedies against the collateral securing our obligations under the Loan Agreement. In addition, we could be forced to pursue alternative options, including, but not limited to, a further workforce reduction, implementing other cost-reduction initiatives, seeking relief in the U.S. Bankruptcy Courts and/or winding down operations.
See Note 8 - Loan and Security Agreement to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding our debt facility.
Contractual Obligations
On July 14, 2023, we entered into a sublease termination and surrender agreement with our landlord Bio-Rad, pursuant to which the parties agreed to terminate the certain sublease agreement, dated as of December 27, 2017, effective as of September 15, 2023. See Note 16 – Subsequent Events to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):
Three Months Ended September 30,
20232022
Cash used in operating activities$(50,511)$(78,045)
Cash provided by (used in) investing activities501 (394)
Cash provided by financing activities19,021 79,916 
Effect of exchange rate changes on cash and cash equivalents(50)(1,022)
Net (decrease)/increase in cash, cash equivalents and restricted cash$(31,039)$455 
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2023, was $50.5 million, driven primarily by our net loss of $58.8 million which originates from investments in research and clinical study costs to advance our programs, as well as general and administrative costs which include costs to operate as a public company. This net loss figure is reduced by non-cash charges consisting of stock-based compensation expense of $7.8 million, lease expense of $3.3 million, impairment of property and equipment of $2.4 million, depreciation expense of $1.0 million, interest expense of $0.4 million. These reductions were partially offset by $0.6 million decrease in the fair value of warrants. The change in operating assets and liabilities, primarily the pay-down of liabilities including the operating lease for our office, account for $6.1 million of cash used in operations.
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We anticipate continuing increases in U.S. interest rates will result in both higher interest income and interest expense, but we are unable to anticipate with any certainty the future net effect to our consolidated net loss and resulting cash flows from operating activity.
Net cash used in operating activities for the nine months ended September 30, 2022 was $78.0 million, driven primarily by our net loss of $91.0 million. This was partially offset by non-cash charges consisting of stock-based compensation expense of $11.7 million, depreciation expense of $1.5 million, non-cash lease expense of $2.2 million, and non-cash interest expense of $0.2 million. The change in operating assets and liabilities account for $3.9 million of cash used in operations.
Investing Activities
Net cash provided by investing activities for the nine months ended September 30, 2023 was $0.5 million, primarily due to the sale of property and equipment during the quarter.
Net cash used in investing activities for the nine months ended September 30, 2022 was $0.4 million, consisting of the purchase of capital equipment.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2023 was $19.0 million, consisting of $24.3 million in proceeds from the issuance of common stock, net of issuance cost, and a $5.0 million payment of the long-term debt principal under the Loan Agreement.
Net cash provided by financing activities for the nine months ended September 30, 2022 was $79.9 million, consisting of net proceeds from the issuance of common stock and the exercise of stock options.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.
There were no material changes to our critical accounting policies in the three and nine months ended September 30, 2023 from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2022 Annual Report.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide this information.
Item 4. Controls and Procedures
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures as defined under 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023.
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Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in claims and proceedings arising in the course of our business. The outcome of any such claim or proceeding, regardless of the merits, is inherently uncertain. We are not subject to any material legal proceedings.

Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and the related notes and Part I, Item 2. “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and in our Annual Report on Form 10-K filed with the SEC on March 16, 2023, including our consolidated financial statements and the related notes thereto, before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Financial Position and Need for Additional Capital
We are a development-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
Since inception, we have incurred significant operating losses. Our net loss was $58.8 million and $30.6 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, we had an accumulated deficit of $588.0 million. As noted below, we have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. Through September 30, 2023, we have financed our operations through proceeds from equity offerings of our common stock, private placements of our since redeemed preferred stock and borrowings under loan and security agreements. We have devoted substantially all of our financial resources and efforts to developing our platform, identifying potential product candidates and conducting preclinical studies and clinical trials. We are in the early stages of developing our product candidates, and we have not completed the development of any product candidate. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase substantially as we, without limitation:
•    seek to initiate additional and larger clinical trials of our product candidates;
•    seek to enhance our platform and discover and develop additional product candidates;
•    seek regulatory approvals for any product candidates that successfully complete clinical trials;
•    seek to establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products for which we may obtain regulatory approval;
•    maintain, expand and protect our intellectual property portfolio; and
•    add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts, and to support our operations as a public company.
In addition, we anticipate that our expenses will increase substantially if we experience any delays or encounter any issues with any of the above, including but not limited to failed studies or trials, complex results, safety issues or other regulatory challenges.
To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing preclinical studies and clinical trials of our product candidates, discovering additional product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory approval. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, we may never generate revenue that is significant enough to achieve profitability.
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Because of the numerous risks and uncertainties associated with pharmaceutical product and biological product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. If we are required by the FDA or other regulatory authorities to perform preclinical studies or clinical trials in addition to those currently expected, or if there are any delays in completing our preclinical studies or clinical trials or the development of any of our product candidates, our expenses could increase and revenue could be further delayed.
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress our value and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations.
With our current cash resources, we will be unable to meet our future debt repayment obligation to our current Lender unless we are able to raise additional capital and / or restructure our existing debt, which may be on unfavorable terms, if available at all, and we could be forced to pursue alternative options, including, but not limited to, a further workforce reduction, implementing other cost-reduction initiatives, seeking relief in the U.S. Bankruptcy Courts and/or winding down operations.
Pursuant to the terms of the Loan and Security Agreement (the “Loan Agreement”) entered into on December 15, 2022 with Horizon Technology Finance Corporation, as lender and collateral agent ("Horizon" or the “Lender”), we are required, and have begun, to make interest-only payments on the loans on the stub period date (January 1, 2023) and for the first thirty-six monthly payment dates prior to when the loans are scheduled to begin amortizing on February 1, 2026. Beginning on February 1, 2026, we must pay twenty-four equal consecutive monthly installment payments repaying $35.0 million of the principal, plus interest on all outstanding balances until the loans mature on January 1, 2028 (the “Maturity Date”). The remaining $10.0 million of principal is due and payable on the Maturity Date. See Note 8 - Loan and Security Agreement to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding our debt facility.
As our current cash resources are insufficient to meet these principal and interest obligations, we will need to raise additional capital and / or restructure the existing debt obligation on new terms which may be less favorable than the existing terms, if available at all. Such new terms, if available, may include additional encumbrances placed on our assets, incremental dilutive conversion features, the imposition of more restrictive covenants or other onerous conditions.
Upon an event of default under the Loan Agreement, the Lender may accelerate all of our repayment obligations and / or exercise all of their other rights and remedies under the Loan Agreement and applicable law, potentially requiring us to renegotiate our agreement on terms less favorable to us or to immediately cease operations. During the third quarter of 2022, we identified instances of noncompliance with provisions of the Loan Agreement, which resulted in events of default that were not identified on a timely basis. There is no certainty that future defaults under the current Loan Agreement will not occur or that the Lender (or any then applicable lender) would agree to similar corrective actions as those accepted by the Lender to waive these events of default, not assert their right to accelerate any outstanding loans in full and not charge penalty interest. Future defaults could result in, among other things, immediate acceleration of principal payment under the loan and penalty interest being assessed. Further, if we are liquidated, the Lender's rights to repayment would be senior to the rights of the holders of our common stock to receive any proceeds from the liquidation. The Lender could declare an event of default upon the occurrence of any event, among others, that they interpret as a material adverse effect (including potentially with respect to our declining cash position or negative data results) or a change of control as delineated under the Loan Agreement, payment events of default, or breaches of covenants thereby requiring us to repay the loan immediately, which we would be unable to do given our current cash position, or to attempt to reverse the declaration of default through negotiation or litigation. Any declaration by the Lender of an event of default would significantly harm our business and prospects and could cause the price of our common stock to decline or force us to discontinue our operations immediately. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.
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On July 7, 2023, the Company, the lenders party thereto and Horizon, as collateral agent, entered into a Waiver and Amendment to the Loan Agreement and Eleventh Extension of Standstill Agreement (the “First Amendment”). The First Amendment amends the Loan Agreement with Horizon, whereby Horizon agreed to forbear exercising remedies on specified potential events of default (which forbearance will cease to apply if specified conditions as set forth in the First Amendment are not met), we granted a security interest to Horizon over substantially all of our intellectual property, and we paid down as a condition to the effectiveness of the Loan Amendment $5.0 million of the principal amount of the loans outstanding under the Loan Agreement, and Horizon converted $5.0 million of the principal amount of the loans outstanding under the Loan Agreement into shares of common stock at a price per share equal to the price paid by investors in our concurrent private placement. We also amended the payment schedule and have agreed to prepay up to an additional $10.0 million of the principal amount of the loans outstanding under the Loan Agreement (plus applicable final payments) and Horizon agreed to convert up to an additional $10.0 million of the principal amount of the loans outstanding under the Loan Agreement into equity in the Company, in each case, concurrently with future sales of our equity securities, in amounts equal to 20% of the gross cash proceeds from such equity sales. Horizon further agreed to remove the existing $5.0 million minimum cash financial covenant, and we agreed that, upon the failure to achieve specified performance milestones in the future, a $9.0 million minimum cash and cash equivalents covenant would be imposed.
Due to our liquidity issues, we are currently considering, and are seeking to make, changes to our capital structure to increase our cash runway, maintain sufficient liquidity, strengthen our balance sheet and meet our future debt obligations. If we are not able to secure additional financing, and/or enter into further agreements with the Lender, the Lender could seek to, among other remedies available to it, if circumstances are triggered under the Loan Agreement demand repayment of amounts outstanding under the Loan Agreement, accelerate any Loan to maturity or pursue remedies against the collateral securing our obligations under the Loan Agreement, which may result in the loss of crucial assets, including our intellectual property rights. In addition, we could be forced to pursue alternative options, including, but not limited to, a further workforce reduction, implementing other cost-reduction initiatives, seeking relief in the U.S. Bankruptcy Courts and/or winding down operations. There can be no assurance that we will be successful in our efforts to secure the requisite financing needed to continue our operations as intended.
We will need additional funding in order to complete development of our product candidates, should we resume development activities, and commercialize our products, if approved. If we are unable to raise capital when needed, we could be forced to delay, reduce or discontinue our product development programs or commercialization efforts.
As of September 30, 2023, our cash and cash equivalents, totaled $17.3 million. On October 17, 2023, we announced that we were suspending development of EDP2939, implementing measures to reduce costs and undertaking a strategic review. On October 27, 2023, we announced, among other things, that we paid down $11.0 million of the principal amount of the loans outstanding under the Loan Agreement with Horizon. We expect that our existing cash and cash equivalents as of September 30, 2023, after the paydown under the Loan Agreement, will enable us to fund our planned limited operating expenses into the first quarter of 2024.
We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:
•    the outcome of the strategic review process;
•    the progress and results of any future clinical trials, should we resume development activities;
•    the cost of manufacturing clinical supplies of our product candidates;
•    the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for any future product candidates;
•    the costs, timing and outcome of regulatory review of our product candidates, should we resume development activities;
•    our ability to repay and / or refinance our existing debt and to do so on acceptable terms, if at all;
•    the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution for any of our product candidates for which we receive marketing approval;
•    the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
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•    the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
•    the effect of competing technological and market developments; and
•    the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration arrangements for product candidates.

Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Additionally, market volatility resulting from among other things, global economic factors, including rising interest and inflation rates, could also adversely impact our ability to access capital as and when needed. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities by us, whether equity or debt, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity, including any shares subject to warrants that we have previously issued or may in the future issue, or of convertible securities, would dilute all of our stockholders. The occurrence of additional indebtedness could result in increased fixed payment obligations, and we may be required to agree to certain restrictive covenants such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborators or others at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects. In addition, we maintain our cash and cash equivalents at financial institutions, and our deposits at these institutions exceed federally insured limits. Market conditions can impact the viability of these institutions and, in the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all.
If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or product development programs or the commercialization of any product candidates or cease our operations. In addition, we may be unable to make milestone and royalty payments due under our intellectual property license agreements or other payments under our agreements with Contract Research Organizations ("CROs") and academic research collaborators, or expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.
Any financial or strategic option we pursue may not be successful.
On October 17, 2023, we announced that the top-line results from the Part B (Phase 2) clinical study with EDP2939 in moderate psoriasis did not achieve the primary endpoint. Given these results, we decided to cease development of EDP2939 and have initiated a process to explore strategic alternatives. We do not have any current or ongoing clinical trials or clinical development plans.
The process of continuing to evaluate these strategic options may be costly, time-consuming and complex and the Company may incur significant costs related to this continued evaluation, such as legal, accounting and advisory fees and expenses and other related charges. There can be no assurance of completion of any particular course of action or a defined timeline for completion, and we can provide no assurance that any strategic alternative we pursue will have a positive impact on our results of operations or financial condition.
Our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.
Since our inception in 2014, we have devoted substantially all of our resources to identifying and developing our product candidates, building our intellectual property portfolio, process development and manufacturing function, planning our business, raising capital and providing general and administrative support for these operations. All of our product candidates are in clinical or preclinical development. We have not yet demonstrated our ability to successfully complete a Phase 3 or other pivotal clinical trial, obtain regulatory approvals to commercialize a product, manufacture a commercial scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Additionally, we expect our
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financial condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history.
We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.
We will be forced to delay or reduce the scope of our development programs, reduce our research and development costs and/or limit or cease our operations if we are unable to obtain additional funding to support our current operating plan. We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. As of September 30, 2023, we had $17.3 million in cash and cash equivalents. Based on our available cash resources, including the net proceeds from the July 2023 private placement, we believe we do not have sufficient cash and cash equivalents on hand to support current operations for at least one year from the date of issuance of the financial statements appearing within this Quarterly Report on Form 10-Q. This condition raises substantial doubt about our ability to continue as a going concern for at least one year from the date that our financial statements for the quarter ended September 30, 2023 are issued. Nevertheless, our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We will need to raise additional capital to fund our future operations and remain as a going concern. There can be no assurance that we will be able to obtain additional funding on acceptable terms, if at all. To the extent that we raise additional capital through future equity offerings, the ownership interest of common stockholders will be diluted, which may be significant. However, we cannot guarantee that we will be able to obtain any or sufficient additional funding or that such funding, if available, will be obtainable on terms satisfactory to us. In the event that we are unable to obtain any or sufficient additional funding, there can be no assurance that we will be able to continue as a going concern, and we will be forced to delay, reduce or discontinue our product development programs or commercialization efforts.
Should we resume development of our product candidates, we would be highly dependent on the success of our product candidates, and if none of our candidates receives regulatory approval or is not successfully commercialized, our business may be harmed.
We have historically invested a significant portion of our efforts and financial resources in the development of our product candidates. Our future success and ability to generate product revenue is substantially dependent on our ability to successfully develop, obtain regulatory approval for and successfully commercialize our product candidates. We currently have no products that are approved for commercial sale and may never be able to develop marketable products, and we have stopped development activities. Should we resume development of our product candidates, we expect that a substantial portion of our efforts and expenditures over the next few years would be devoted to development of these candidates, which would require additional clinical development, management of clinical and manufacturing activities, regulatory approval in multiple jurisdictions, securing manufacturing supply, building of a commercial organization, substantial investment and significant marketing efforts before we can generate any revenues from any commercial sales. Accordingly, our business currently depends heavily on the successful development, regulatory approval and commercialization of our product candidates, which may never occur. Therefore, we cannot be certain that any of our product candidates would be successful in future clinical trials, receive regulatory approval or be successfully commercialized even if we receive regulatory approval.
Our decision to discontinue our research and development activities and implementation of other cost-saving measures may not result in the anticipated savings and could disrupt our business.
In connection with our decision to limit our operating expenses, we decided to halt the initiation of any new research and development efforts. We do not have any current or ongoing clinical trials or clinical development plans. We have also terminated the sublease for our principal office and research and development space and will be operating in a virtual environment beginning in September 2023. We may not realize, in full or in part, the anticipated benefits and savings in operating expenses from these decisions due to unforeseen difficulties, delays or unexpected costs. This may include higher than expected costs associated with winding down certain of our clinical programs. If we are unable to realize the expected cost savings, our financial condition would be adversely affected. Furthermore, the transition to operating in a virtual environment may result in weaknesses in our infrastructure and operations and may increase the risk that we become unable to comply with legal and regulatory requirements.
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The terms of our loan and security agreements place restrictions on our operating and financial flexibility, and if we are unable to comply with any of the covenants, we could be subject to adverse consequences including, without limitation, our having to immediately repay all amounts outstanding under the Loan Agreement and the Lender could seek to foreclose on the collateral.
On December 15, 2022 (the “Loan Closing Date”), we entered into the Loan Agreement with Horizon, as lender and collateral agent, pursuant to which the Lender agreed to make term loans, in an aggregate principal amount of up to $45.0 million, available to us on the Loan Closing Date, and we borrowed $45.0 million. Borrowings under the Loan Agreement are collateralized by substantially all of our personal property, excluding intellectual property, and we pledged our equity interests in our subsidiaries, subject to certain limitations with respect to certain our domestic and foreign subsidiaries. The loans carry a 3-year interest-only period and begin to amortize in February 2026. As of September 30, 2023, the outstanding principal balance under the Loan Agreement was $45.0 million.
On July 7, 2023, we entered into the First Amendment, whereby Horizon agreed to forbear exercising remedies on specified potential defaults (which forbearance will cease to apply if specified conditions as set forth in the First Amendment are not met), we granted a security interest to Horizon over substantially all of our intellectual property, we paid down $5.0 million of the principal amount of the loans outstanding under the Loan Agreement as a condition to the First Amendment, and Horizon convert $5.0 million of the principal amount of the loans outstanding under the Loan Agreement into shares of common stock at a price per share equal to the price paid by investors in our concurrent private placement. We also amended the payment schedule and have agreed to prepay up to an additional $10.0 million of the principal amount of the loans outstanding under the Loan Agreement (plus applicable final payments) and Horizon agreed to convert up to an additional $10.0 million of the principal amount of the loans outstanding under the Loan Agreement into equity in the Company, in each case, concurrently with future sales of our equity securities, in amounts equal to 20% of the gross cash proceeds from such equity sales. Horizon further agreed to remove the existing $5.0 million cash financial covenant, and we agreed that, upon the failure to achieve specified performance milestones in the future, a $9.0 million cash and cash equivalents covenant would be imposed.
On October 26, 2023, we entered into a Forbearance and Second Amendment to the Venture Loan and Security Agreement and Twelfth Extension of Standstill Agreement with Horizon (the “Second Amendment”). The Second Amendment amends the Loan Agreement, as further amended by the First Amendment, with Horizon, whereby Horizon agreed, among other things, to forbear exercising remedies on specified potential defaults through December 15, 2023, and we paid down $11.0 million of the principal amount of the loans outstanding under the Loan Agreement. Horizon further agreed to remove from the Loan Agreement certain covenants relating to our obligations (i) to maintain ongoing clinical trials, (ii) to maintain a minimum amount of cash or cash equivalents on deposit in controlled accounts, and (iii) to repay the loans outstanding under the Loan Agreement with a percentage of the proceeds of future equity sales. The Second Amendment also provides that no cash interest-only payments are required to be paid to Horizon effective as of October 1, 2023 and that such interest payments shall be treated as payment-in-kind and added to the outstanding principal balance of the loans. The Second Amendment amends the mandatory prepayment provision in the Loan Agreement to require us to prepay a portion of the loans outstanding under the Loan Agreement in an amount equal to 70% of any net proceeds received by us from equity sales, licensing or sale of our assets. Finally, the Second Amendment waives all prepayment fees and eliminates or defers the final payment fees related to the $11.0 million in principal paid in connection with the Second Amendment, depending upon repayment of principal.
The Loan Agreement and subsequent amendments contain customary representations, warranties, affirmative and negative covenants and events of default applicable to us and our subsidiaries. The Loan Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to: incur additional indebtedness; incur certain liens; pay dividends or make other distributions on equity interests; consolidate, merge or sell or otherwise dispose of our assets; make investments, loans, advances, guarantees and acquisitions; enter into transactions with affiliates; and change our business or ownership. Our ability to comply with these and other covenants in the Loan Agreement may be affected by events and factors beyond our control. In the event that we breach one or more covenants, the Lender may choose to declare an event of default and require that we immediately repay all amounts outstanding under the Loan Agreement, and the Lender could seek to foreclose on the collateral. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

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Additionally, the credit markets and the financial services industry have been experiencing disruption characterized by the bankruptcy, failure, collapse or sale of various financial institutions, increased volatility in securities prices, diminished liquidity and credit availability and intervention from the U.S. and other governments. As a result, the cost and availability of credit has been and may continue to be adversely affected. If we are unable to obtain funding when needed and on acceptable terms, if at all, our financial condition and business prospects could be adversely impacted.
We have in the past and may continue to seek to establish collaboration agreements in the future, and we may not be successful or we may not be able to establish them on commercially reasonable terms and may have to alter our development and commercialization plans.
We have in the past and may continue to seek to form collaborations to fund our operations, potentially accelerate research and development activities, expand our capabilities, and provide for commercialization activities by third parties. These relationships have and may in the future require us to incur up-front expenses, increase our near and long-term expenditures, commit to substantial future milestone and royalty payments, issue securities that dilute our existing stockholders, and divert attention of our management.
If and when we seek to enter into future collaborations, we may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of a product candidate, reduce or delay development programs, delay potential commercialization, or reduce the scope of any sales or marketing activities.
Risks Related to the Discovery, Development and Regulatory Approval of Our Product Candidates
We are early in our development efforts and, should we resume development of our product candidates, may not be successful in our efforts to use our platform to build a pipeline of product candidates and develop marketable drugs.
We are using our technology platform to harness SINTAX, or the small intestinal axis, with an initial focus on developing therapies in immunology, specifically inflammatory diseases. We are at an early stage of development and our platform has not yet, and may never lead to, approvable or marketable products. We have stopped development activities. Should we resume such activities, we would expect to develop product candidates and possible additional product candidates that we intend to use to potentially treat other diseases. We may have problems applying our technologies to these other areas, and our new product candidates may not demonstrate a comparable ability in treating disease as our initial product candidates. Even if we are successful in identifying additional product candidates, they may not be suitable for clinical development as a result of our inability to manufacture more complex oral biologics, limited efficacy, unacceptable safety profiles or other characteristics that indicate that they are unlikely to be products that will receive marketing approval and achieve market acceptance. Should we resume development of our product candidates, the success of our product candidates will depend on several factors, including the following:
•    completion of preclinical studies and clinical trials with positive results;
•    receipt of marketing approvals from applicable regulatory authorities;
•    obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;
•    making arrangements with CMOs, or establishing our own commercial manufacturing capabilities;
•    launching commercial sales of our products, if and when approved, whether alone or in collaboration with others;
•    entering into new collaborations throughout the development process as appropriate, from preclinical studies through to commercialization;
•    acceptance of our products, if and when approved, by patients, the medical community and third-party payors;
•    effectively competing with other therapies;
•    obtaining and maintaining coverage and adequate reimbursement by third-party payors, including government payors, for our products, if approved;
•    protecting our rights in our intellectual property portfolio;
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•    operating without infringing or violating the valid and enforceable patents or other intellectual property of third parties;
•    maintaining an acceptable safety profile of the products following approval; and
•    maintaining and growing an organization of scientists and business people who can develop and commercialize our products and technology.
If we do not successfully develop and commercialize product candidates based upon our technical approach, we will not be able to obtain product revenue in future periods, which likely would result in significant harm to our financial position and adversely affect our stock price. In February and April 2023, for example, we announced that each of the four patient cohorts in a Phase 2 trial of EDP1815 in atopic dermatitis trial failed to meet the primary endpoint, which adversely affected our stock price. Further, on October 17, 2023, we announced that the top-line results from the Part B (Phase 2) clinical study with EDP2939 in moderate psoriasis did not achieve the primary endpoint and, given these results, decided to cease development of EDP2939. We do not have any current or ongoing clinical trials or clinical development plans.
Our product candidates are designed to act on cells in the small intestine to produce systemic therapeutic effects with limited systemic exposure. This biological interaction between the small intestine and the rest of the body may not function in humans the way we have observed in mice and our drugs may not reproduce the systemic effects we have seen in preclinical and early clinical data.
We believe our product candidates have the potential to work by modulating systemic responses via interactions with cells in the small intestine. Dosing to achieve sufficient exposure may require an inconvenient dosing regimen. Even with a successful formulation and appropriate delivery profile to achieve proper exposure of our microbes or extracellular vesicles to the small intestine, we may not get sufficient or even any activity at the site of disease. This may be because our understanding of the mechanisms of the small intestine do not work in humans the way we believe they do. Despite there being strong academic literature to support the concept and our observations in preclinical studies in mice and early clinical trials in human patients with psoriasis, these principles and the ability to use pharmaceutical preparations derived from single strains of microbes to modulate the immune system and other systems have not yet been proven in humans.
Our product candidates are an unproven approach to therapeutic intervention.
All of our product candidates are based on targeting SINTAX. We have not, nor to our knowledge has any other company, received regulatory approval for an oral therapeutic based on this approach. We cannot be certain that our approach will lead to the development of approvable or marketable products. In addition, our product candidates may have different safety profiles and efficacy in various indications. Finally, the FDA or other regulatory agencies may lack experience in evaluating the safety and efficacy of products based on singe strains of microbes or extracellular vesicles, which could result in a longer than expected regulatory review process, increase our expected development costs and delay or prevent commercialization of our product candidates.
Our platform relies on third parties for biological materials to expand our microbial library.
Our platform relies on third parties for biological materials, including human samples containing bacteria, to expand our microbial library. Some biological materials have not always met our expectations or requirements, and any disruption in the supply of these biological materials could materially adversely affect our business and ability to build our pipeline of product candidates. For example, if any supplied biological materials are contaminated, we would not be able to use such biological materials. Although we have quality control processes and screening procedures, biological materials are susceptible to damage and contamination. Improper storage of these materials, by us or any third-party supplier, may require us to destroy some or all of our raw materials or products.
Even if our product candidates do not cause off-target adverse events, there may be immunotoxicity associated with the fundamental pharmacology of our product candidates.
Our product candidates are designed to work by modulating the immune system. While we have observed limited systemic exposure in preclinical studies and early clinical trials, the pharmacological immune effects we aim to induce are systemic. Systemic immunomodulation from taking our product candidates could lead to immunotoxicity in patients, which may cause us or regulatory authorities to delay, limit or suspend clinical development. Other immunomodulatory agents have shown immunotoxicity. This includes immune suppressive agents, such as
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HUMIRA or REMICADE, which have shown an increased risk of infection or, in rare instances, certain types of blood cancer. In the case of immune activating agents, such as YERVOY, induction of adverse auto-immune events has been observed in some patients. Immunotoxicity in one program could cause regulators to view these adverse events as a class effect of our product candidates which may impact the timing of the development of our pipeline of potential product candidates. Even if the adverse events are manageable, the profile of the drug may be such that it limits or diminishes the possible number of patients who could receive our therapy.
Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following marketing approval, if any.
Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics. For example, some of our product candidates may consist of live biological material that may remain viable in humans, which carries a risk of causing infections in patients. Some infections may require treatment with antibiotics to eliminate the bacteria. All of our product candidates are screened for antibiotic sensitivity, but it is possible that if antibiotic therapy does not eliminate the live biological material, a resistant version of our strain could emerge. These events, while unlikely, could cause a delay in our clinical development and/or could increase the regulatory standards for the entire class of our product candidates. In an instance where the infection risk of taking our product candidates is high, this may cause the benefit risk profile of therapy to be non-competitive in the market and may lead to discontinuation of development of the product candidate.
In addition, it is possible that infections from our product candidates could be rare and not frequently observed in our clinical trials. In larger post marketing authorization trials, however, data could show that the infection risk, while small, does exist. If unacceptable side effects arise in the development of our product candidates, we, the FDA or comparable foreign regulatory authorities, the IRBs at the institutions in which our clinical trials are conducted, or the data safety monitors could suspend or terminate our clinical trials, or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-related side effects could also affect patient recruitment or the ability of enrolled patients to complete the trial or could result in potential product liability claims. In addition, these side effects may not be appropriately recognized or managed by the treating medical staff. We expect to have to train medical personnel using our product candidates to understand the side effect profiles for our clinical trials and upon any commercialization of any of our product candidates. Inadequate training in recognizing or managing the potential side effects of our product candidates could result in patient injury or death. Any of these occurrences may harm our business, financial condition and prospects significantly.
If any of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:
•    regulatory authorities may withdraw their approval of the product;
•    we may be required to recall a product or change the way such product is administered to patients;
•    additional restrictions may be imposed on the marketing of the particular product or the manufacturing processes for the product or any component thereof;
•    we may be required to conduct post-marketing studies or clinical trials;
•    regulatory authorities may require the addition of labeling statements, such as a "black box" warning or a contraindication;
•    we may be required to implement a risk evaluation and mitigation strategy or create a medication guide outlining the risks of such side effects for distribution to patients or similar risk management measures;
•    we could be sued and held liable for harm caused to patients;
•    the product may become less competitive; and
•    our reputation may suffer.
Any of the foregoing events could prevent us from achieving or maintaining market acceptance of a particular product candidate, if approved, and result in the loss of significant revenues to us, which would materially and adversely affect our results of operations and business.
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Companies with microbiome products or differing microbial products may produce negative clinical data which will adversely affect public perception of our product candidates, and may negatively impact regulatory approval of, or demand for, our potential products.
Our product candidates are pharmaceutical composition