Evelo Biosciences(US:EVLO)2020-07-31 15:12markdown [Forward-Looking Statements](index=3&type=section&id=FORWARD-LOOKING%20STATEMENTS) This section outlines forward-looking statements that are subject to numerous risks and uncertainties, cautioning readers not to rely on them as predictions of future events - The company identifies several key risks that could cause actual results to differ from forward-looking statements, including[6](index=6&type=chunk) - - Status as a **development-stage company** with expected future losses[6](index=6&type=chunk) - - Ability to continue as a **going concern** and the need to raise additional funds[6](index=6&type=chunk) - - **Unproven therapeutic approach** and ability to successfully complete clinical trials[6](index=6&type=chunk) - - Impact of the **COVID-19 pandemic** on operations and clinical trials[6](index=6&type=chunk) - - Ability to establish manufacturing facilities and protect intellectual property[6](index=6&type=chunk) [PART I: FINANCIAL INFORMATION](index=5&type=section&id=PART%20I%3A%20FINANCIAL%20INFORMATION) [Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Unaudited financial statements for June 30, 2020, show increased assets and liabilities due to a public offering and new lease standards, with the company continuing to incur net losses and facing a 'Going Concern' uncertainty [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2020, total assets increased to **$113.9 million** and liabilities to **$44.7 million**, primarily due to higher cash and a public offering boosting stockholders' equity to **$69.2 million** Condensed Consolidated Balance Sheet Data (in thousands) | Balance Sheet Item | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $90,173 | $77,833 | | Total current assets | $92,717 | $81,009 | | Total assets | $113,905 | $90,920 | | **Liabilities & Stockholders' Equity** | | | | Total current liabilities | $13,608 | $9,743 | | Total liabilities | $44,699 | $30,723 | | Accumulated deficit | ($242,546) | ($198,853) | | Total stockholders' equity | $69,206 | $60,197 | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) For the six months ended June 30, 2020, the company's net loss increased to **$43.7 million** from **$41.2 million** year-over-year, primarily due to higher research and development expenses Statement of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Research and development | $15,174 | $15,464 | $32,593 | $31,141 | | General and administrative | $5,071 | $5,923 | $10,913 | $11,050 | | Loss from operations | ($20,245) | ($21,387) | ($43,506) | ($42,191) | | Net loss | ($20,652) | ($20,941) | ($43,693) | ($41,240) | | Net loss per share | ($0.63) | ($0.65) | ($1.35) | ($1.29) | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2020, net cash used in operations was **$35.9 million**, offset by **$48.9 million** from financing activities, resulting in a **$12.3 million** net cash increase and a **$91.7 million** cash balance Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($35,891) | ($33,349) | | Net cash (used in)/provided by investing activities | ($645) | $49,520 | | Net cash provided by financing activities | $48,876 | $203 | | Net increase in cash | $12,340 | $16,374 | [Notes to the Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) Notes to the financial statements detail a 'Going Concern' issue due to insufficient funding, alongside a **$48.4 million** public stock offering in June 2020, a **$20.0 million** loan facility drawdown in July 2019, and a further **$10.0 million** in July 2020, plus CARES Act payroll tax deferrals - Management has concluded that **substantial doubt** exists about the Company's ability to continue as a **going concern** within one year, as its cash and cash equivalents at June 30, 2020, are **not sufficient** to fund operations for the next twelve months[37](index=37&type=chunk) - In June 2020, the company sold 13.8 million shares of common stock in a public offering, generating estimated net proceeds of **$48.4 million**[35](index=35&type=chunk)[93](index=93&type=chunk) - The company has a loan facility with K2 HealthVentures (K2HV) for up to **$45.0 million** An initial **$20.0 million** was funded in July 2019, and a second tranche of **$10.0 million** was drawn on July 14, 2020[74](index=74&type=chunk) - Under the CARES Act, the company deferred **$0.2 million** in employer payroll taxes as of June 30, 2020[107](index=107&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's oral biologics development, including EDP1815 and EDP1503, noting COVID-19's impact on trials, continued significant losses of **$43.7 million**, a **$48.4 million** public offering, and substantial doubt about its ability to continue as a going concern without further financing [Recent Clinical Developments](index=27&type=section&id=Recent%20Clinical%20Developments) The company is advancing its clinical pipeline, with EDP1815 Phase 2 trials for COVID-19 and psoriasis, EDP1503 showing a **25%** overall response rate in TNBC, and EDP1867 Phase 1b planned for atopic dermatitis - **EDP1815 (Inflammatory Diseases):** - **COVID-19:** FDA cleared a Phase 2 trial; data from this and the UK-based TACTIC-E trial are expected in **Q4 2020**[129](index=129&type=chunk)[132](index=132&type=chunk)[134](index=134&type=chunk)[137](index=137&type=chunk) - **Psoriasis:** A Phase 2 dose-ranging trial is set to begin in **Q3 2020**, with interim data anticipated by **mid-2021**[129](index=129&type=chunk)[132](index=132&type=chunk)[134](index=134&type=chunk)[137](index=137&type=chunk) - **Atopic Dermatitis:** A new cohort is expected to start in **Q4 2020**, with initial data in **Q1 2021**[129](index=129&type=chunk)[132](index=132&type=chunk)[134](index=134&type=chunk)[137](index=137&type=chunk) - **EDP1503 (Oncology):** - Interim data showed a **25% Overall Response Rate (ORR)** in high-dose triple-negative breast cancer (TNBC) patients[141](index=141&type=chunk)[142](index=142&type=chunk) - The company will prioritize development for TNBC, with further data expected in **Q4 2020**[141](index=141&type=chunk)[142](index=142&type=chunk) - **EDP1867 (Inflammatory Diseases):** - A Phase 1b clinical trial in individuals with atopic dermatitis is planned to start in **Q1 2021**[139](index=139&type=chunk) [Results of Operations](index=35&type=section&id=Results%20of%20Operations) For the six months ended June 30, 2020, R&D expenses increased by **$1.5 million** to **$32.6 million** due to personnel and platform costs, while G&A expenses remained stable at **$10.9 million** Comparison of Operating Expenses (in thousands) | Expense Category | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Research & Development | $15,174 | $15,464 | $32,593 | $31,141 | | General & Administrative | $5,071 | $5,923 | $10,913 | $11,050 | | **Total Operating Expenses** | **$20,245** | **$21,387** | **$43,506** | **$42,191** | [Liquidity and Capital Resources](index=38&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2020, the company held **$90.2 million** in cash, having raised **$48.4 million** from a June 2020 public offering and an additional **$10.0 million** debt drawdown in July 2020, but still faces substantial doubt about its ability to continue as a going concern beyond Q3 2021 without further capital - The company had cash and cash equivalents of **$90.2 million** as of June 30, 2020[183](index=183&type=chunk) - In June 2020, a public offering of common stock raised estimated net proceeds of **$48.4 million**[186](index=186&type=chunk) - Existing cash, including a **$10.0 million** debt drawdown in July 2020, is expected to fund operations into the beginning of the third quarter of 2021 This raises **substantial doubt** about the company's ability to continue as a **going concern**[190](index=190&type=chunk)[152](index=152&type=chunk) [Quantitative and Qualitative Disclosure About Market Risk](index=41&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosure%20About%20Market%20Risk) The company faces interest rate risk on its variable-rate debt, though a **10%** prime rate change would be immaterial, and while foreign currency risk is currently insignificant, it may increase, with inflation having no material operational effect - The company has **$20.0 million** outstanding under a variable-rate credit facility as of June 30, 2020, exposing it to interest rate risk However, due to the rate floor, a **10%** change in the prime rate would have no impact on interest payments[207](index=207&type=chunk) [Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2020, with no material changes to internal control over financial reporting identified - Management concluded that the company's disclosure controls and procedures were **effective** as of June 30, 2020[212](index=212&type=chunk) [PART II: OTHER INFORMATION](index=42&type=section&id=PART%20II%3A%20OTHER%20INFORMATION) [Legal Proceedings](index=42&type=section&id=Item%201.%20Legal%20Proceedings) The company is not subject to material legal proceedings, though an ongoing patent matter involves the USPTO finding licensed patent claims unpatentable, prompting the University of Chicago to file a re-issue application for narrowed claims - In April 2020, the USPTO found all current claims **unpatentable** in a patent exclusively licensed by the company from the University of Chicago In June 2020, the University filed a re-issue application to seek narrowed claims[217](index=217&type=chunk) [Risk Factors](index=42&type=section&id=Item%201A.%20Risk%20Factors) The company faces extensive risks, including a history of significant losses, the need for additional capital, substantial doubt about its going concern ability, unproven therapeutic approaches, clinical trial uncertainties exacerbated by COVID-19, and challenges in manufacturing, intellectual property, competition, and commercialization - The company is a **development-stage company** with a history of **significant losses** (**$242.5 million** accumulated deficit as of June 30, 2020) and expects to incur losses for the foreseeable future[219](index=219&type=chunk)[220](index=220&type=chunk) - There is **substantial doubt** about the company's ability to continue as a **going concern**, as existing cash is only expected to fund operations into the beginning of **Q3 2021**[238](index=238&type=chunk) - The company's product candidates are based on monoclonal microbials, an **unproven therapeutic approach**, and the biological mechanism of acting on the small intestine for systemic effects has **not been proven in humans**[246](index=246&type=chunk)[244](index=244&type=chunk)[245](index=245&type=chunk) - The **COVID-19 pandemic** has **adversely impacted** and may continue to impact clinical trial enrollment, regulatory timelines, and manufacturing supply chains[279](index=279&type=chunk)[280](index=280&type=chunk) [Other Information](index=98&type=section&id=Item%205.%20Other%20Information) The company reports that in July 2020, Chief Development Officer Neil Graham departed from his role - In July 2020, Chief Development Officer Neil Graham **left the company**[528](index=528&type=chunk)