Evelo Biosciences(EVLO) - 2019 Q1 - Quarterly Report

PART I: FINANCIAL INFORMATION Item 1. Financial Statements Presents Evelo Biosciences' unaudited condensed consolidated financial statements, detailing balance sheets, operations, equity, cash flows, and explanatory notes Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (in thousands) | Assets/Liabilities/Equity (in thousands) | March 31, 2019 | December 31, 2018 | | :--------------------------------------- | :------------- | :---------------- | | Assets | | | | Cash and cash equivalents | $105,490 | $93,101 | | Short-term investments | $23,949 | $54,818 | | Total current assets | $133,282 | $151,622 | | Total assets | $141,934 | $159,867 | | Liabilities | | | | Total current liabilities | $11,216 | $9,235 | | Total liabilities | $23,051 | $22,918 | | Stockholders' Equity | | | | Total stockholders' equity | $118,883 | $136,949 | Condensed Consolidated Statements of Operations and Comprehensive Loss This section outlines the company's financial performance over a period, showing revenues, expenses, and the resulting net loss Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Operating Expenses/Loss (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Research and development | $15,680 | $7,143 | | General and administrative | $5,124 | $3,282 | | Total operating expenses | $20,804 | $10,425 | | Loss from operations | $(20,804) | $(10,425) | | Net loss | $(20,299) | $(10,500) | | Net loss per share (basic and diluted) | $(0.64) | $(3.29) | - The company's net loss increased from $10.5 million in Q1 2018 to $20.3 million in Q1 2019, primarily due to increased operating expenses[19] Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) This section details changes in the company's equity structure, including common shares, additional paid-in capital, and accumulated deficit Equity Item (in thousands) | Equity Item (in thousands) | December 31, 2018 | March 31, 2019 | | :----------------------------------- | :---------------- | :------------- | | Common Shares Outstanding | 31,825,769 | 32,030,635 | | Additional Paid-in Capital | $250,316 | $252,533 | | Accumulated Deficit | $(113,381) | $(133,680) | | Total Stockholders' Equity | $136,949 | $118,883 | - Total stockholders' equity decreased from $136.9 million at December 31, 2018, to $118.9 million at March 31, 2019, mainly due to the accumulated deficit increasing by $20.3 million[21] Condensed Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities over a period Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Operating activities | $(17,993) | $(8,316) | | Investing activities | $30,124 | $(1,000) | | Financing activities | $258 | $85,381 | | Net increase in cash | $12,389 | $76,065 | | Cash, cash equivalents & restricted cash – end of period | $106,740 | $115,811 | - Net cash used in operating activities increased significantly from $8.3 million in Q1 2018 to $18.0 million in Q1 2019. Investing activities provided $30.1 million in Q1 2019, primarily from investment maturities, a shift from cash used in Q1 2018[26] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Organization This note describes Evelo Biosciences, Inc.'s business, its development-stage status, and its financial viability outlook - Evelo Biosciences, Inc. is a biotechnology company focused on discovering and developing therapies that engage immune cells in the small intestine to treat inflammatory diseases and oncology[29] - The company has incurred operating losses since inception and expects this to continue, with an accumulated deficit of $133.7 million as of March 31, 2019[31][32] - Management believes existing cash, cash equivalents, and short-term investments ($129.4 million at March 31, 2019) are sufficient to fund operations for at least the next twelve months[31][32] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the financial statements, including those for emerging growth companies - The unaudited interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP, with certain information condensed or omitted as permitted[33] - Evelo is an 'emerging growth company' and has elected to use the extended transition period for complying with new or revised accounting standards, which may affect comparability[38] - Research and development costs are expensed as incurred, and stock-based compensation is recorded based on grant date fair value over the vesting period[51][54] Cash, Cash Equivalents, and Restricted Cash (in thousands) | Item | March 31, 2019 | December 31, 2018 | | :------------------------------------- | :------------- | :---------------- | | Cash | $953 | $1,300 | | Money market funds | $104,537 | $91,801 | | Total cash and cash equivalents | $105,490 | $93,101 | | Restricted cash | $1,250 | $1,250 | | Cash, cash equivalents and restricted cash | $106,740 | $94,351 | 3. Investments This note details the company's investment portfolio, primarily consisting of available-for-sale U.S. treasury securities - All of the Company's investments are classified as available-for-sale securities, consisting entirely of U.S. treasury securities[43][63] Short-term Investments (in thousands) | Description | March 31, 2019 (Fair Value) | December 31, 2018 (Fair Value) | | :------------------- | :-------------------------- | :----------------------------- | | U.S. treasury securities | $23,949 | $54,818 | | Total | $23,949 | $54,818 | 4. Fair Value Measurements This note explains the valuation techniques and hierarchy used for financial instruments, categorizing assets by their input levels - The company uses a three-tier fair value hierarchy (Level 1, 2, 3) for financial instruments, with money market funds classified as Level 1 and U.S. treasury securities as Level 2[47][65][66] Fair Value Measurements (in thousands) | Description (Assets) | March 31, 2019 | Level 1 | Level 2 | Level 3 | | :------------------------------------------------- | :------------- | :--------- | :--------- | :------ | | Money market funds | $104,537 | $104,537 | — | — | | U.S. treasury securities | $23,949 | — | $23,949 | — | | Total | $128,486 | $104,537 | $23,949 | — | 5. Property and Equipment, Net This note provides a breakdown of the company's tangible assets, including lab equipment and leasehold improvements, and related depreciation Property and Equipment, Net (in thousands) | Item | March 31, 2019 | December 31, 2018 | | :--------------------------------- | :------------- | :---------------- | | Lab equipment | $6,051 | $5,393 | | Leasehold improvements | $1,873 | $1,824 | | Construction-in-process | $924 | $1,011 | | Total property and equipment, net | $7,332 | $6,925 | - Depreciation expense was $0.4 million for Q1 2019, compared to $0.6 million for Q1 2018[67] 6. Loan and Security Agreement This note describes the company's credit facility, its terms, and future payment obligations - The company has a $15.0 million credit facility secured by a lien on all company assets, excluding intellectual property[68] - In February 2018, the remaining $5.0 million was drawn, increasing the interest rate and extending the interest-only period to August 15, 2019[69] Minimum Aggregate Future Loan Payments (in thousands) | Period Ending March 31, | Amount | | :---------------------- | :----- | | 2020 | $5,175 | | 2021 | $7,913 | | 2022 | $3,170 | | Total minimum payments | $16,258 | 7. In-License Agreements This note details the company's licensing arrangements for intellectual property and microbial strains, including milestone and royalty obligations - The company has license agreements with Mayo Foundation for Medical Education and Research and the University of Chicago for intellectual property and microbial strains[75][76][78] - Under these agreements, Evelo has paid upfront fees and annual maintenance fees, and may owe significant milestone payments (up to $56.0 million to Mayo and $60.9 million to University of Chicago) and royalties on net sales[76][78] - As of March 31, 2019, milestone payments incurred totaled approximately $0.2 million for Mayo and $0.4 million for the University of Chicago[76][78] 8. Commitments and Contingencies This note outlines the company's contractual obligations, such as lease commitments and manufacturing agreements, and potential legal contingencies - The company has operating lease arrangements for office and research space, with a primary sublease expiring in September 2025[79] Minimum Aggregate Future Lease Commitments (in thousands) | Year | Amount | | :--------- | :----- | | 2020 | $3,304 | | 2021 | $2,989 | | 2022 | $2,995 | | 2023 | $3,085 | | 2024 | $3,178 | | Thereafter | $4,934 | | Total | $20,485 | - Evelo has an exclusivity and commitment agreement with Biose Industrie for manufacturing microbial biotherapeutic products, incurring annual exclusivity fees of $0.3 million[82] - In April 2019, the USPTO granted a petition for post-grant review of a University of Chicago patent licensed by Evelo, which could potentially invalidate or narrow the patent claims[84] 9. Stockholders' Equity and Convertible Preferred Stock This note details changes in the company's equity, including the impact of its initial public offering and authorized share capital - On May 11, 2018, the company completed its IPO, issuing 5,312,500 shares of common stock for $85.0 million gross proceeds, and all outstanding convertible preferred stock converted into 22,386,677 shares of common stock[86][87] - The restated certificate of incorporation authorizes 200,000,000 shares of common stock and 10,000,000 shares of preferred stock[86] 10. Stock-Based Compensation This note explains the company's equity incentive plan and the associated compensation expense recognized for stock options and awards - The 2018 Incentive Award Plan, effective May 8, 2018, allows for grants of cash and equity-based awards, with 1,273,031 additional shares authorized on January 1, 2019[90] Stock-Based Compensation Expense (in thousands) | Expense Category | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--------------------------- | :-------------------------------- | :-------------------------------- | | General and administrative | $1,062 | $410 | | Research and development | $891 | $242 | | Total stock-based compensation expense | $1,953 | $652 | - Total unrecognized stock-based compensation expense for unvested stock options was $25.3 million as of March 31, 2019, to be recognized over a weighted average period of 3.18 years[99] 11. Income Taxes This note discusses the company's income tax position, including the impact of operating losses and valuation allowances on deferred tax assets - No significant income tax provisions or benefits were recorded for Q1 2019 due to incurred losses and uncertainty of realizing favorable tax attributes, resulting in a full valuation allowance against net deferred tax assets[104][105] 12. Net Loss Per Share This note explains the calculation of net loss per common share, identifying anti-dilutive securities excluded from diluted EPS - Basic and diluted net loss per common share are equivalent due to net losses, making potential common shares anti-dilutive[107] Anti-Dilutive Securities Excluded from Diluted EPS | Security Type | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Unvested common stock from early exercise | 102,436 | 226,319 | | Stock options to purchase common stock | 5,685,275 | 3,227,795 | | Total | 5,787,711 | 25,896,792 | 13. Related Party Transactions This note discloses transactions with entities or individuals having a close relationship with the company, such as advisory services and sublease arrangements - The company paid Weatherden Ltd. $0.3 million in Q1 2019 ($0.2 million in Q1 2018) for clinical advisory services; Duncan McHale, CMO, is a part owner[109] - A sublease arrangement with Ring Therapeutics (an affiliate of Flagship Venture Funds) generated $0.2 million in rental income offset against rent expense in Q1 2019[110] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes Evelo Biosciences' Q1 2019 financial condition and operations, covering development status, clinical trials, expenses, and future funding needs Overview This section introduces Evelo Biosciences' therapeutic approach, clinical pipeline, financial status as a development-stage company, and future funding expectations - Evelo Biosciences is developing oral biologics (monoclonal microbials) targeting the small intestine for systemic therapeutic effects in inflammatory diseases and cancer[113] - Current clinical candidates include EDP1066 and EDP1815 for inflammatory diseases, and EDP1503 for oncology, with initial clinical data expected from EDP1066 in Q3 2019[114][117] - New formulations significantly enhance pharmacological potency (up to 30-fold in preclinical models) and will be introduced into clinical trials starting in H2 2019[115][118] - The company is a development-stage company with no revenue to date, incurring a net loss of $20.3 million for Q1 2019 and an accumulated deficit of $133.7 million[126] - Expenses are expected to increase substantially due to ongoing clinical trials, new trials, preclinical development, potential manufacturing investments, and intellectual property maintenance[127][128] - Existing cash, cash equivalents, and investments ($129.4 million) are expected to fund operations into the second half of 2020, with additional financing anticipated[132] Financial Operations Overview This section describes the company's revenue strategy, primary operating expenses (R&D, G&A), and how interest income/expense is recognized - The company has not generated any revenue since inception and does not expect to in the near future, relying on product sales or collaboration/license agreements for future revenue[133] - Operating expenses primarily consist of research and development (R&D) and general and administrative (G&A) costs[134] - R&D expenses include third-party agreements (CROs, CMOs), personnel costs, technology acquisition, and facility-related expenses, expensed as incurred[135][137][138] - G&A expenses cover executive, finance, corporate, business development, and administrative functions, including salaries, legal fees, professional fees, and facility costs[145] - Interest income (expense), net, includes interest on cash/investments offset by interest on debt[147] Results of Operations This section analyzes the company's financial performance for the three months ended March 31, 2019, compared to 2018, focusing on changes in expenses and net loss Comparison of Three Months Ended March 31, 2019 and 2018 (in thousands) | Item | 2019 | 2018 | Change | | :--------------------------- | :---------- | :---------- | :---------- | | Research and development | $15,680 | $7,143 | $8,537 | | General and administrative | $5,124 | $3,282 | $1,842 | | Total operating expenses | $20,804 | $10,425 | $10,379 | | Loss from operations | $(20,804) | $(10,425) | $(10,379) | | Interest income (expense), net | $505 | $46 | $459 | | Net loss | $(20,299) | $(10,500) | $(9,799) | - Research and development expenses increased by $8.5 million (119.5%) to $15.7 million in Q1 2019, driven by inflammation and oncology program costs (clinical trials, manufacturing) and personnel costs[152] - General and administrative expenses increased by $1.8 million (56.1%) to $5.1 million in Q1 2019, primarily due to increased headcount, compensation (including stock-based), and facility costs supporting growth and public company status[154] - Other income (expense), net, shifted from a $0.1 million expense in Q1 2018 to a $0.5 million income in Q1 2019, mainly due to higher interest income from larger cash balances[155] Liquidity and Capital Resources This section discusses the company's ability to meet its financial obligations, detailing funding sources, cash position, and future capital needs - The company has incurred significant losses and negative operating cash flows since inception, with a net loss of $20.3 million in Q1 2019 and an accumulated deficit of $133.7 million[156] - Primary funding sources include IPO proceeds ($75.8 million net in May 2018), convertible preferred stock sales, and debt financing, totaling $257.6 million gross proceeds through March 31, 2019[156][157] - Existing cash, cash equivalents, and short-term investments ($129.4 million as of March 31, 2019) are projected to fund operations into the second half of 2020[158] - Future financing needs are expected to be met through equity offerings, debt financings, or collaborations, with risks of dilution or restrictive covenants[159] Cash Flows Summary (in thousands) | Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :----------------------------------------- | :-------------------------------- | :-------------------------------- | | Cash used in operating activities | $(17,993) | $(8,316) | | Cash provided by/(used in) investing activities | $30,124 | $(1,000) | | Cash provided by financing activities | $258 | $85,381 | | Net increase in cash | $12,389 | $76,065 | | Cash, cash equivalents & restricted cash – end of period | $106,740 | $115,811 | - Net cash used in operating activities increased to $18.0 million in Q1 2019, primarily due to the net loss, partially offset by non-cash charges[163] - Net cash provided by investing activities was $30.1 million in Q1 2019, mainly from maturities of investments, a significant change from $1.0 million used in Q1 2018[165] - Net cash provided by financing activities was $0.3 million in Q1 2019, primarily from stock option exercises, a decrease from $85.4 million in Q1 2018 which included proceeds from preferred stock and long-term debt issuance[166] Critical Accounting Policies and Use of Estimates This section highlights the accounting policies that require significant management judgment and estimates, such as for R&D expenses and stock-based compensation - The financial statements require management to make estimates and assumptions, particularly for accrued research and development expenses and stock-based compensation[170] - No material changes to critical accounting policies were reported from the previous Annual Report on Form 10-K[171] Item 3. Quantitative and Qualitative Disclosure About Market Risk Discusses the company's exposure to market risks, including interest rate, foreign currency, and inflation, and their potential financial impact - The company is exposed to interest rate risk from cash, cash equivalents, short-term investments (money market, U.S. treasuries) and variable-rate debt ($15.0 million outstanding)[172][173] - An immediate 10% change in market interest rates or the Prime Rate would not have a material impact on the fair value of the investment portfolio or debt obligations[172][173] - The company is not currently exposed to significant foreign currency fluctuation risk but may be in the future due to foreign vendors[174] - Inflation did not have a material effect on the business during the three months ended March 31, 2019 and 2018[175] Item 4. Controls and Procedures Details the effectiveness of disclosure controls and procedures and reports on any changes in internal control over financial reporting - Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2019[178] - No material changes in internal control over financial reporting occurred during the period covered by this report[179] PART II: OTHER INFORMATION Item 1. Legal Proceedings Discloses material legal proceedings, specifically a post-grant review of a licensed patent - In April 2019, the USPTO granted a third-party petition for post-grant review of a University of Chicago patent, exclusively licensed by Evelo[182] - The outcome is uncertain, with a possibility of patent invalidation or narrowing of claims, and Evelo is responsible for defense costs[182] Item 1A. Risk Factors Outlines significant risks for investors in Evelo Biosciences' common stock, covering financial, development, manufacturing, commercial, IP, and operational challenges Risks Related to Our Financial Position and Need for Additional Capital This section details financial risks, including accumulated losses, the need for substantial future funding, limited operating history, and restrictions from debt agreements - The company is a development-stage entity with significant accumulated losses ($133.7 million as of March 31, 2019) and expects to incur further losses, potentially never achieving profitability[184][185] - Substantial additional funding will be required to complete product development and commercialization, with current capital expected to last into the second half of 2020[192][193] - The limited operating history since 2014 makes it difficult to assess future viability, as no clinical trials have been completed, and no products have received regulatory approval[198] - Restrictions from the $15.0 million loan and security agreement with Pacific Western Bank limit operating and financial flexibility, with potential for acceleration of repayment upon default[200][201] Risks Related to the Discovery, Development and Regulatory Approval of Our Product Candidates This section covers risks inherent in drug development, such as unproven platforms, potential side effects, clinical trial failures, and regulatory approval challenges - The company's monoclonal microbial platform is unproven, and there is no assurance it will lead to approvable or marketable products, especially for new disease areas[204][210][211] - Product candidates rely on modulating the immune system via the gut-body network, a mechanism not yet fully proven in humans, and may require inconvenient dosing or fail to achieve sufficient immune activity[208][209] - Potential immunotoxicity from systemic immunomodulation or undesirable side effects (e.g., infections from live biological material) could delay or halt clinical trials, or result in restrictive labels[214][217] - Negative clinical data from other microbiome or microbial therapies could adversely affect public perception and regulatory approval of Evelo's products[222][223] - Catastrophic loss or destruction of master cell banks (MCBs) could impair manufacturing and supply of product candidates[225][226] - Clinical drug development is lengthy, expensive, and uncertain, with high risk of failure; delays in patient enrollment or unforeseen events could prevent or delay commercialization[227][228][231] - Failure to obtain or delays in regulatory approvals (FDA, EMA, etc.) would materially impair revenue generation, as the process is expensive, lengthy, and subject to regulatory discretion[238][239][242] - Strategic resource allocation to specific product candidates or indications may cause the company to miss more profitable opportunities[246][247] - Fast track, breakthrough therapy, or orphan drug designations, if obtained, do not guarantee faster development, review, or approval, nor do they increase the likelihood of marketing approval[250][253][258][259] Risks Related to our Dependence on Third Parties and Manufacturing This section addresses risks associated with relying on external partners for clinical trials and manufacturing, including compliance issues and supply chain disruptions - The company relies heavily on third parties (CROs, CMOs, etc.) for clinical trials and manufacturing, which reduces control and increases risks of delays, non-compliance, or insufficient supply[260][261][265][266][268] - Third-party manufacturers may fail to comply with cGMP regulations, leading to sanctions, clinical holds, or delays in approval, especially since they have not produced FDA-approved therapeutics[270] - The company lacks experience in commercial-scale manufacturing and establishing its own facility would require substantial funds, qualified personnel, and stringent regulatory qualification[272][273][274] Risks Related to Commercialization of Our Product Candidates and Other Legal Compliance Matters This section outlines challenges in bringing products to market, including market acceptance, competition, pricing, reimbursement, product liability, and regulatory compliance - Even if approved, product candidates may fail to achieve market acceptance due to competition, physician reliance on existing treatments, pricing, or convenience[276][277] - The company lacks a sales organization and faces risks in establishing effective sales, marketing, and distribution capabilities, or in securing favorable third-party arrangements[278][279][280] - Substantial competition from major pharmaceutical and biotechnology companies, with greater resources and market presence, could reduce or eliminate commercial opportunities[284][285][286] - Unfavorable pricing regulations or inadequate third-party coverage and reimbursement policies could harm business, as government and private payors increasingly focus on cost containment[290][291][292] - Product liability lawsuits related to clinical trials or commercial sales could result in substantial liabilities, regulatory actions, and reputational harm, potentially exceeding insurance coverage[295][296][298] - Approved biologic products may face competition sooner than anticipated from biosimilars, potentially shortening market exclusivity periods (e.g., 12 years in the U.S., 10-11 years in Europe)[299][300][302] - Failure to obtain international marketing approvals or delays in foreign regulatory processes would prevent product commercialization abroad, as requirements vary significantly by country[304][305] - Post-marketing restrictions, withdrawal from the market, or penalties for non-compliance with regulatory requirements (e.g., cGMP, safety reporting, off-label marketing) could significantly impact approved products[306][307][308][309][310] - Relationships with healthcare providers and payors are subject to anti-kickback, fraud and abuse, and other healthcare laws (e.g., federal Anti-Kickback Statute, False Claims Act, HIPAA), risking criminal sanctions, civil penalties, and exclusion from government programs[317][318][322] - Recent and future healthcare legislation, such as the Affordable Care Act, may increase costs, delay approvals, and exert downward pressure on drug prices and reimbursement[323][324][325][330] - Strict price controls in foreign countries, particularly in the European Union, could adversely affect revenues and the ability to recoup investment[333] - Non-compliance with environmental, health, and safety laws (e.g., handling hazardous materials like human stool) could lead to fines, penalties, or substantial costs[335][336][338] Risks Related to Our Intellectual Property This section details risks concerning the protection and enforcement of the company's intellectual property, including patent challenges, licensing obligations, and trade secret protection - Inadequate protection of proprietary technology and patents could allow competitors to directly compete, materially harming the business[339] - The patent prosecution process is expensive, time-consuming, and uncertain; pending applications may not issue, or issued patents may not provide sufficient scope or competitive advantage[341][343][344] - Adverse determinations in patent challenges (e.g., post-grant review of a University of Chicago patent) could reduce the scope or invalidate patent rights[348] - Failure to comply with obligations in third-party license agreements (e.g., with University of Chicago, Mayo Clinic) could result in loss of important rights[354][355] - Licensed intellectual property from government-funded programs may be subject to federal regulations like 'march-in' rights and U.S. manufacturing preferences, limiting exclusive rights and manufacturing flexibility[359][360][361] - Inability to protect trade secrets and know-how, or their independent development by competitors, would harm the company's competitive position[362][363] - Changes in U.S. patent law (e.g., Leahy-Smith Act, Supreme Court rulings on patent eligibility) could diminish patent value, increase prosecution costs, and weaken enforcement capabilities[365][366][368][369][371] - Third-party allegations of intellectual property infringement could lead to costly litigation, require licensing, or force cessation of product development/commercialization[375][376][379][381] - Issued patents could be found invalid or unenforceable if challenged in court, leading to loss of patent protection[383][384] - Noncompliance with procedural requirements of patent agencies could result in abandonment or lapse of patent rights[385][386] - Claims challenging inventorship or ownership of patents and intellectual property, or allegations of misappropriation by employees, could lead to litigation and loss of valuable rights[388][389][390][391] - Inadequate protection of trademarks and trade names could impede brand recognition and competitive effectiveness[393][394] - Not seeking patent protection in all jurisdictions, or weaker enforcement in foreign countries, could allow competitors to use technologies and export infringing products[396][397][398][400] Risks Related to Employee Matters and Managing Growth and Other Risks Related to Our Business This section covers operational risks such as talent retention, managing organizational growth, international operations, cybersecurity, and the impact of government agency funding - Future success depends on retaining key executives and attracting/retaining qualified scientific, clinical, manufacturing, and sales/marketing personnel, which is challenging due to intense competition[402][404] - Anticipated significant growth in employees and operations (development, regulatory, sales, marketing) may lead to difficulties in management, requiring improved systems and additional personnel[405][406] - International operations expose the company to risks including conflicting laws, regulatory hurdles, intellectual property enforcement challenges, staffing difficulties, and financial risks (e.g., currency fluctuations)[407] - Brexit creates uncertainty regarding trade, regulatory arrangements, and movement of goods between the UK, EU, and US, potentially disrupting manufacturing and clinical trials[411][412] - Information technology and system failures, security breaches, or unauthorized access to systems (including cloud-based services) could disrupt operations, lead to data loss, and incur liability[413][415][416][419] - Changes in funding for government agencies like the FDA and SEC could hinder their ability to perform functions, delaying regulatory reviews and impacting business operations[422][423][424] - Acquisitions or joint ventures could disrupt business, cause stockholder dilution, incur liabilities, and divert management attention[425] Risks Related to Our Common Stock This section addresses risks specific to the company's stock, including price volatility, control by principal stockholders, potential dilution, and public company compliance costs - The price of common stock is likely to be volatile due to various factors, including clinical trial results, competitive developments, regulatory actions, and financial performance, potentially leading to substantial losses for investors[428][430] - Executive officers, directors, and principal stockholders collectively hold approximately 73% of voting stock, enabling them to control or significantly influence matters submitted to stockholders, potentially against minority interests[433][434] - A significant portion of outstanding shares are eligible for sale, which could cause the market price of common stock to drop[435][436] - As an 'emerging growth company' and 'smaller reporting company,' reduced disclosure requirements may make the common stock less attractive to investors, potentially leading to a less active trading market or lower stock price[437][438][442][443] - Operating as a public company incurs increased costs and requires substantial management time for compliance initiatives and corporate governance, especially after no longer being an emerging growth company[444][445][448] - Disclosure controls and procedures, despite being well-conceived, can only provide reasonable assurance and may not prevent or detect all errors or fraud[450][451] - Lack of research or adverse opinions from securities analysts could cause the stock price and trading volume to decline[452][453] - Provisions in the restated certificate of incorporation and bylaws (e.g., classified board, no cumulative voting, board's right to fill vacancies) could make company acquisition more difficult and prevent changes in management[454][455][457][458] - The Court of Chancery of the State of Delaware is the exclusive forum for most disputes, potentially limiting stockholders' ability to choose a favorable judicial forum[459][460] - No cash dividends are anticipated in the foreseeable future, making capital appreciation the sole source of gain for stockholders[461][462] - The ability to use net operating losses (NOLs) and research and development credits to offset future taxable income may be limited by ownership changes (Sections 382 and 383 of the Code) and the Tax Cuts and Jobs Act of 2017 (TCJA)[464][465] - Recent U.S. tax legislation (TCJA) may materially adversely affect financial condition, results of operations, and cash flows, including reducing the corporate tax rate and limiting NOL utilization[466][467] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details the use of proceeds from the company's IPO, confirming no material change in expected fund utilization - The company completed its IPO on May 11, 2018, issuing 5,312,500 shares of common stock for $85.0 million gross proceeds, and all outstanding convertible preferred stock converted into 22,386,677 shares of common stock[468][470] - Net proceeds have been invested in government-backed money market funds and U.S. treasury securities[470] - As of March 31, 2019, $62.2 million of the net IPO proceeds had been used, with no material change in the expected use of funds[470] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reported period - There were no defaults upon senior securities during the reported period[473] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to Evelo Biosciences, Inc[474] Item 5. Other Information No other information is reported in this section - No other information is reported in this section[475] Item 6. Exhibits Lists exhibits filed with the Quarterly Report on Form 10-Q, including corporate documents, agreements, certifications, and XBRL taxonomy - Exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, Loan and Security Agreement, employment terms, and various certifications (e.g., Section 302, Section 906)[478][479][480][481][482][483][484][485] - XBRL Instance Document and Taxonomy Extension documents are also filed[486][488][489][490][491][492] SIGNATURES Contains signatures of the principal executive and financial officers, certifying the report's submission - The report is signed by Balkrishan (Simba) Gill, Ph.D., President and Chief Executive Officer, and Jonathan Poole, Chief Financial Officer, on May 3, 2019[495]