Evelo Biosciences(EVLO) - 2021 Q3 - Quarterly Report

Forward-Looking Statements The report contains forward-looking statements subject to significant known and unknown risks and uncertainties - This report contains forward-looking statements regarding future operations, financial position, business strategy, clinical trials, and product development. These statements are subject to known and unknown risks and uncertainties[7] - Key risks highlighted include the company's development-stage status, expectation of future losses, need for additional funding, unproven therapeutic approach (SINTAX™), reliance on clinical trial success, manufacturing dependencies, and the impact of the COVID-19 pandemic[8] Summary Risk Factors The company faces substantial risks including its development-stage status, going concern uncertainty, and reliance on third parties - The company is a development-stage entity with significant losses and a limited operating history, making future viability difficult to assess[13] - There is substantial doubt about the company's ability to continue as a going concern, as it requires additional funding to complete product development and commercialization[14] - The company's therapeutic approach, targeting the small intestinal axis (SINTAX™), is unproven, and its product candidates must successfully complete clinical development and receive regulatory approval[15] - Evelo relies on third parties for conducting clinical trials and manufacturing, which increases risks related to timelines, costs, and supply sufficiency[17][18] - The COVID-19 pandemic has adversely impacted and may continue to affect the company's business, including preclinical studies and clinical trials[23] PART I: FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's analysis for the period Item 1. Financial Statements (Unaudited) Unaudited statements show increased assets and liabilities, a growing net loss, and a significant going concern uncertainty Condensed Consolidated Balance Sheets The balance sheet reflects increased cash, total assets, and liabilities, with a widening accumulated deficit by Q3 2021 Condensed Consolidated Balance Sheets (in thousands) | | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $95,938 | $68,857 | | Total current assets | $97,915 | $70,980 | | Total assets | $116,458 | $90,639 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $20,727 | $19,833 | | Long-term debt | $46,520 | $30,048 | | Deferred revenue | $7,500 | $0 | | Total liabilities | $83,382 | $60,154 | | Accumulated deficit | ($386,043) | ($292,519) | | Total stockholders' equity | $33,076 | $30,485 | Condensed Consolidated Statements of Operations The company reported no revenue and a significantly wider net loss driven by increased R&D and G&A expenses Condensed Consolidated Statements of Operations (Unaudited, in thousands) | | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Research and development | $22,599 | $14,910 | $64,762 | $47,503 | | General and administrative | $10,111 | $5,272 | $23,075 | $16,185 | | Total operating expenses | $32,710 | $20,182 | $87,837 | $63,688 | | Loss from operations | ($32,710) | ($20,182) | ($87,837) | ($63,688) | | Loss on extinguishment of debt | $0 | $0 | ($3,226) | $0 | | Net loss | ($33,730) | ($20,923) | ($93,524) | ($64,616) | | Net loss per share, basic and diluted | ($0.63) | ($0.45) | ($1.77) | ($1.74) | Condensed Consolidated Statements of Cash Flows Financing activities provided $97.7 million in cash, offsetting the $68.9 million used in operations for the nine-month period Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) | | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | ($68,879) | ($54,110) | | Net cash used in investing activities | ($1,956) | ($906) | | Net cash provided by financing activities | $97,666 | $58,763 | | Net increase in cash, cash equivalents and restricted cash | $26,831 | $3,747 | Notes to the Condensed Consolidated Financial Statements Key disclosures include a going concern uncertainty, a new license agreement, an amended credit facility, and stock compensation details - Management has concluded that substantial doubt exists about the Company's ability to continue as a going concern, as cash and cash equivalents of $95.9 million at September 30, 2021, are not sufficient to fund operations for at least twelve months[53][55] - In March 2021, the company entered into a commercialization and license agreement with ALJ for EDP1815, receiving a $7.5 million non-refundable upfront payment recorded as deferred revenue[92][93][95] - In June 2021, the company amended its credit facility with K2HV, drawing down a new $15.0 million tranche, resulting in a non-cash loss on debt extinguishment of $3.2 million[106][109][112] - Stock-based compensation expense for the nine months ended September 30, 2021, was $11.5 million, a significant increase from $6.1 million in the same period of 2020[137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses clinical program progress, financial results, and liquidity issues, reiterating the going concern uncertainty Clinical Programs The company's lead candidate EDP1815 shows positive Phase 2 data, with other pipeline candidates advancing toward clinical trials - In the Phase 2 psoriasis trial for EDP1815, 25% to 32% of patients achieved a PASI-50 response at week 16, compared to 12% for placebo, with plans to advance towards registration trials[163] - A Phase 2 trial of EDP1815 in atopic dermatitis is ongoing after the FDA lifted a clinical hold, with results expected in Q4 2022[169][170] - The company is advancing EDP1867 in a Phase 1b trial for atopic dermatitis, with interim data now expected in the first half of 2022 due to slow enrollment[177] - Two new candidates, EDP2939 (inflammation) and EDP1908 (oncology), are expected to enter clinical development in 2022[179][180] Results of Operations The net loss widened year-over-year due to increased R&D and G&A expenses from clinical trial progression and higher headcount Comparison of Operating Expenses (in thousands) | Expense Category | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Change | | :--- | :--- | :--- | :--- | | Research and development | $64,762 | $47,503 | $17,259 | | General and administrative | $23,075 | $16,185 | $6,890 | | Total operating expenses | $87,837 | $63,688 | $24,149 | - The $17.3 million increase in nine-month R&D expense was driven by $12.1 million in higher inflammation program costs and $6.2 million in higher personnel costs[224] - The $6.9 million increase in nine-month G&A expense was primarily due to a $5.3 million increase in personnel costs and $1.3 million in professional fees[227] - Total other expense for the nine months ended Sep 30, 2021, was $5.4 million, a $4.6 million increase from the prior year, mainly due to a $3.2 million non-cash loss on debt extinguishment[228] Liquidity and Capital Resources Current cash of $95.9 million is only expected to fund operations into late Q3 2022, raising substantial going concern doubts - The company had cash and cash equivalents of $95.9 million and an accumulated deficit of $386.0 million as of September 30, 2021[230] - In the first nine months of 2021, the company raised $97.7 million from financing activities, including $82.0 million from common stock sales and $14.8 million from long-term debt[244] - Existing cash is expected to fund operations and capital expenditures only into the late third quarter of 2022, excluding funds for Phase 3 trials[195][237] - The company has concluded that its financial condition raises substantial doubt about its ability to continue as a going concern for at least one year[195] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, this information is not required - As a smaller reporting company, Evelo Biosciences is not required to provide quantitative and qualitative disclosures about market risk[253] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of the end of the quarter - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[255] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, such controls[256] PART II: OTHER INFORMATION This part covers legal proceedings, risk factors, and other required disclosures Item 1. Legal Proceedings The company is not subject to any material legal proceedings - The company is not a party to any material legal proceedings[259] - An opposition was filed against a European patent held by the company, but it does not relate to current product candidates and is not expected to impact development[260] Item 1A. Risk Factors The company faces significant financial, developmental, third-party dependency, and intellectual property risks - Financial Risks: The company has a history of significant losses, expects to incur losses for the foreseeable future, and has identified conditions that raise substantial doubt about its ability to continue as a going concern[262][269][277] - Development and Regulatory Risks: The company's SINTAX therapeutic approach is unproven, clinical development is lengthy and uncertain, and the COVID-19 pandemic may cause delays[292][298][311] - Third-Party and Manufacturing Risks: The company relies on third parties to conduct clinical trials and for all manufacturing, which increases risks related to quality, cost, and supply[363][368][375] - Intellectual Property Risks: The company's success depends on its ability to obtain and maintain patent protection and faces risks of patent challenges and infringement claims[444][459][478] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were made during the period beyond what was previously reported - There were no unregistered sales of equity securities during the period, other than what was previously reported on a Form 8-K on February 2, 2021[580] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities - None[582] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[583] Item 5. Other Information The company reports no other information for this item - None[584] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including corporate governance documents and officer certifications