The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several important factors, including without limitation those set forth under "Summary Risk Factors" and Part I, Item1A "Risk Factors" and elsewhere in this Annual Report on Form 10-K. You should carefully read the "Risk Factors" section of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled "Special Note Regarding Forward-Looking Statements." A discussion of the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , as well as a discussion of our 2018 fiscal year, specifically, has been reported previously in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 14, 2020 , under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Overview
We are discovering and developing a new class of oral biologics that are intended to act on cells in the small intestine to produce therapeutic effects throughout the body. The target cells in the small intestine play a central role in governing human immune, metabolic and neurological systems. We refer to this biology as the small intestinal axis, or SINTAXTM. We have built a platform to discover and develop novel oral medicines which target the small intestinal axis. By harnessing the small intestinal axis, we have the potential to transform healthcare via medicines that have the potential to be effective, safe, convenient and affordable and to thereby treat patients at all stages of diseases and to treat patients globally. Our first product candidates are orally delivered pharmaceutical preparations of naturally occurring, specific single strains of microbes. In preclinical models, our product candidates engaged immune cells in the small intestine and drove changes in systemic biology without any observed systemic exposure. We have observed in early clinical trials and preclinical studies that our approach led to modulated immune responses throughout the body by acting on the small intestinal axis. Our most advanced product candidate, EDP1815 is being developed for the treatment of inflammatory diseases and the hyperinflammatory response associated with COVID-19. Additional product candidates include EDP1867 and EDP2939 for the treatment of inflammatory disease and EDP1908 for the treatment of cancer. Impact of COVID-19
At
The COVID-19 pandemic has had, and for an extended period of time is expected to have, negative impacts on our operations and supply chain. Our ability to continue to operate without any significant negative impacts will, in part, depend on our ability to protect our employees and our supply chain. We have endeavored to follow recommended actions of government and health authorities to protect our employees with particular measures in place for those working in our laboratories, such as staggered work shifts and flexible schedules, and telecommuting for office workers. We are working with our CMOs to minimize delays and disruptions to scheduled manufacturing batch runs for our product candidates and to ensure conformity to product specifications. The COVID-19 pandemic has impacted and continues to impact our enrollment of new patients into, and the retention of existing patients in, our ongoing clinical trials, due primarily to lower patient participation. The pandemic likely will impact enrollment and retention of patients in new and existing clinical trials. We continue to recruit individuals in line with the local and national guidelines of the clinical research sites. We are keeping in close contact with our CROs and clinical sites to provide support and guidance to ensure the safety of the patients in our clinical trials. We have prioritized our drug supply operations to secure the re-supply of patients currently enrolled in our clinical trials. 75
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The extent to which the COVID-19 pandemic impacts our business and finances will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, travel restrictions and social distancing inthe United States , theUnited Kingdom and other countries, business closures or business disruptions and the effectiveness of actions taken inthe United States , theUnited Kingdom and other countries to contain and treat the disease. See "Risk Factors - The COVID-19 pandemic has adversely impacted and may continue to adversely impact our business, including our preclinical studies and clinical trials and finances." in Part I, Item 1A of this Annually Report on Form 10-K.
Clinical programs
We are advancing SINTAX medicines to potentially treat a spectrum of immune mediated diseases with an initial focus on inflammatory diseases and oncology. The efficiency of our platform has, in a relatively short period of time, allowed us to advance multiple product candidates into clinical trials for a range of diseases.
EDP1815, a whole microbe candidate for inflammatory diseases
EDP1815 is in clinical development for psoriasis, atopic dermatitis and COVID-19.
Psoriasis
Based on previously reported positive clinical data in two cohorts of individuals with mild and moderate psoriasis in a Phase 1b clinical trial, we have advanced EDP1815 into a Phase 2 dose ranging trial, evaluating three doses of A' EDP1815 in capsules versus placebo in approximately 225 individuals with mild and moderate psoriasis. The primary endpoint of the trial is the mean reduction in PASI score at 16 weeks. Other clinical measures of psoriasis are also being evaluated. We initiated the Phase 2 clinical trial inOctober 2020 and have completed enrollment and, therefore, now plan to report topline data in the third quarter of 2021. Clinical data from this trial, if positive, may enable us to advance directly into Phase 3 registrational trials, subject to end of Phase 2 discussions with regulatory agencies. We intend to evaluate EDP1815 in additional inflammatory disease indications, depending on the results from the Phase 2 trial. Potential indications include psoriatic arthritis, axial spondylarthritis and rheumatoid arthritis.
Atopic dermatitis
InNovember 2018 , we initiated our ongoing Phase 1b double-blind placebo-controlled dose-escalating safety and tolerability trial of EDP1815 in healthy volunteers and individuals with mild and moderate psoriasis or atopic dermatitis. The primary endpoint of the phase 1b trial is safety and tolerability. InDecember 2020 andJanuary 2021 , we reported positive clinical data from a cohort of patients with mild and moderate atopic dermatitis (n=24), randomized 2:1 to receive EDP1815 in capsules or placebo for 56 days. Atopic dermatitis is the most common type of eczema. EDP1815 was well-tolerated with no treatment-related adverse events of moderate or severe intensity, and no serious adverse events. Secondary endpoints included a range of established markers of clinical efficacy in atopic dermatitis, suchEASI , IGA* BSA, and SCORAD scores. The data showed consistent improvements in percentage change from baseline compared to placebo for all three clinical scores:EASI , IGA*BSA, and SCORAD. In addition, 7 out of 16 (44%) patients treated with EDP1815 achieved an outcome of a 50% improvement from baseline inEASI score by day 70, compared with 0% in the placebo group, showing sustained improvement in those patients responding to EDP1815. In addition to physician-reported clinical outcomes, this trial also assessed patient-reported outcomes. Treatment with EDP1815 resulted in clinically meaningful improvement in the DLQI and POEM. These patient-reported outcomes capture the important impact of the disease on patients, including the domains of itch and sleep, both of which saw improvements in patients receiving EDP1815 in the trial. All five measures of itch within the Pruritus-NRS, SCORAD, POEM, and DLQI showed greater improvements in the treated group at day 56 compared with placebo. These results provide further evidence that modulating SINTAX can drive significant clinical benefit without the need for systemic exposure. 76
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Subject to regulatory approval, we expect to launch a Phase 2 trial of EDP1815 in atopic dermatitis in the third quarter of 2021.
COVID-19[feminine
EDP1815 is being evaluated in two ongoing clinical trials for the treatment of hospitalized COVID-19 patients. The first is a Phase 2 double-blind, placebo-controlled clinical trial evaluating the safety and efficacy of EDP1815 for the treatment of individuals diagnosed with COVID-19 early in the course of their disease. The clinical trial initially will evaluate 60 individuals to determine if early intervention with EDP1815 can prevent the progression of COVID-19 symptoms and the development of COVID-Related complications. Individuals who have presented at the emergency room within the last 36 hours and tested positive for SARS-CoV-2 are randomized 1:1 to receive the capsule formulation of EDP1815 targeted for release in the small intestine or placebo for 14 days, along with the standard of care. The primary endpoint is reduced requirements for oxygen therapy, as measured by the ratio of oxygen saturation (SpO2) / fraction of inspired oxygen (FiO2). Key secondary endpoints include total symptom duration, progression along the WHO scale of disease severity, and mortality. The trial is led byReynold A. Panettieri , Jr., M.D., Vice Chancellor for Translational Medicine and Science at Rutgers Biomedical and Health Sciences and Professor of Medicine atRutgers Robert Wood Johnson Medical School . EDP1815 is also included as a treatment arm in the TACTIC-E clinical trial. TACTIC-E is a Phase 2/3 randomized trial, sponsored byCambridge University Hospitals NHS Foundation Trust , that is expected to evaluate up to 469 patients per arm atAddenbrooke's Hospital and other leading clinical centers in theUnited Kingdom and select international sites. The trial is investigating the safety and efficacy of certain experimental therapies in the prevention and treatment of life-threatening complications associated with COVID-19 in hospitalized individuals at early stages of the disease. The trial is enrolling individuals with COVID-19 who have identified risk factors for developing severe complications and are at risk of progression to the intensive care unit or death. The primary outcome measure of the trial is time to incidence (up to day 14) of any one of the following: death, mechanical ventilation, extracorporeal membrane oxygenation, cardiovascular organ support, renal failure, hemofiltration or dialysis. Secondary outcome measures include duration of stay in hospital, duration of oxygen therapy, changes in biomarkers associated with COVID-19 progression, and time to clinical improvement. As a result of the varying infection rates and resulting hospitalizations that have occurred with the pandemic, we experienced slower than expected enrollment early on in both trials and now expect to report data from the clinical trial conducted at theRobert Wood Johnson University Hospital and interim safety data and futility analysis from TACTIC-E in the second quarter of 2021. In order to expedite patient recruitment and expand access to potential therapies for COVID-19, new trial sites have been opened for TACTIC-E, including in theUnited Kingdom andMexico .
Modèle expérimental humain de l’inflammation
In addition to testing our product candidates in patients with inflammatory disease, we also have employed a human experimental model of inflammation in healthy volunteers. This model is very similar in design to a standard preclinical model of T cell driven inflammation. We have recently used this model to test two different concentrations of EDP1815 to investigate the relative effectiveness of the different concentrations. A total of 32 volunteers were enrolled into the trial and treated with either EDP1815 (n=12 per formulation) or placebo (n=4 per formulation) daily for 28 days. The participants were immunized with an antigen used in preclinical inflammation experiments. After 28 days of daily oral dosing with EDP1815 or placebo, the participants were given a skin challenge with the same antigen, which causes measurable skin inflammation a day later. Inflammation was determined by measuring five parameters in the skin at the challenge site. The increased concentration of drug results from improvements made in the commercial-scale manufacturing process, referred to as A2. This is the same active drug at four times the concentration compared to a prior manufacturing process, referred to as A'. Twelve participants were dosed with A' EDP1815. Another 12 participants were given the higher concentration A2 EDP185. Eight participants who received a placebo were divided between the two treatment groups. The results are in the figure below. 77 -------------------------------------------------------------------------------- Table of Contents A2 EDP1815 is more effective than A' at same total dose in human experimental model of inflammation [[Image Removed: evlo-20201231_g4.jpg]]The higher concentration A2, given in fewer capsules, resulted in numerically superior reductions across the full range of skin scores compared to A 'and placebo. A2 and A 'were given at the same total daily dose of drug. These results are consistent with preclinical data that showed increased drug concentration resulted in increased activity. This is a key advance in our understanding of how to get more benefit from SINTAX medicine candidates. We plan to evaluate tablets and capsules containing the higher concentration A2 EDP1815 in patients with psoriasis in our on-going Phase 1b trial, and expect to report data in the third quarter of 2021. Results from the Phase 1b trial and our on-going Phase 2 trial in psoriasis will position us to go forward into Phase 3 trials with an optimized dose and formulation of EDP1815, which may further improve on the positive results already seen.
EDP1867 – a whole microbe candidate for inflammatory diseases
EDP1867 is an inactivated investigational oral biologic being developed for the treatment of inflammatory diseases. EDP1867 was selected from a broad screen of single strains of microbes in in vitro cellular assays and in vivo models of inflammation. In preclinical studies EDP1867 was shown to resolve multiple pathways of inflammation. This observed activity suggests a number of possible initial clinical indications for EDP1867, including TH2-dependent inflammation which underlies atopic diseases and a large spectrum of asthma. We initiated our first Phase 1b clinical trial of EDP1867 in healthy volunteers and patients with moderate atopic dermatitis in February of 2021 and expect to report interim data in the fourth quarter of 2021.
EDP2939 – an extracellular vesicle (EV) candidate for inflammatory diseases
EDP2939 is an EV investigational oral biologic being developed for the treatment of inflammatory diseases. EDP2939 is the first EV product candidate we have nominated in our inflammation program and we anticipate initiation of clinical development in 2022.
EDP1908 – an EV candidate for oncology
InDecember 2020 , we announced EDP1908 as our lead candidate in oncology following presentation of preclinical data at theSociety for Immunotherapy for Cancer meeting inNovember 2020 . Preclinical data presented showed that orally administered EDP1908, an EV, resulted in superior tumor growth control versus the parent microbial strain or anti-PD-1 therapy, with an observed dose-dependent reduction in tumor growth. We anticipate initiation of clinical development in 2022.
Funding
We were incorporated and commenced operations in 2014. Since our incorporation, we have devoted substantially all of our resources to developing our clinical and preclinical candidates, building our intellectual property portfolio and process development and manufacturing function, business planning, raising capital and providing general and administrative support for these operations. To date, we have financed our operations 78 -------------------------------------------------------------------------------- Table of Contents primarily with proceeds from sales of common and convertible preferred stock to our equity investors and borrowings under loan and security agreements with financial institutions. ThroughDecember 31, 2020 , we have received gross proceeds of$332.0 million through the issuance of our common stock, convertible preferred stock and borrowings under our loan and security agreements. OnJuly 19, 2019 we entered into a loan and security agreement, as amended, with K2HV providing for up to$45.0 million in potential debt financing, the proceeds of which were used to prepay our entire existing outstanding loan balance, and additional amounts are intended for the advancement of our research and development activities related to our pipeline of oral biologics and for general corporate purposes. Under terms of the 2019 Credit Facility, the aggregate principal amount of$45.0 million was available in three tranches of term loans of$20.0 million ,$10.0 million , and$15.0 million , respectively. At closing onJuly 19, 2019 , we borrowed$20.0 million , representing the first tranche under the 2019 Credit Facility. OnJuly 14, 2020 , we drew down the second tranche of$10.0 million and availability of the third tranche expired onJanuary 15, 2021 . Interest on the outstanding loan balance accrues at a variable rate equal to the greater of (i) 8.65% and (ii) the prime rate as published in theWall Street Journal , plus 3.15%. We are required to make monthly interest-only payments throughFebruary 2022 . Subsequent to the interest-only period, we are required to make equal monthly principal payments plus any accrued interest until the loans mature inAugust 2024 . Upon final payment or prepayment of the loans, we are required to pay a final payment equal to 4.3% of the loans borrowed. InJune 2020 , we sold 13,800,000 shares of our common stock in an underwritten public offering at a public offering price of$3.75 per share, for gross proceeds of$51.8 million and net proceeds of$48.4 million , after deducting underwriting discounts and commission and other offering expenses payable by us. For the year endedDecember 31, 2020 , pursuant to theJune 2019 sales agreement withCowen and Company, LLC , we sold 1,232,131 shares of our common stock, in "at-the-market" offerings under a registration statement on Form S-3 that we previously filed with theSEC with offering prices ranging between$4.25 to$11.15 per share for gross proceeds of$6.8 million and net proceeds of$6.6 million , after deducting commission and other offering expenses payable by us. InJanuary 2021 , we issued 139,734 additional shares of our common stock with offering prices ranging between of$12.54 and$13.17 per share for gross proceeds of$1.8 million and net proceeds of$1.7 million , after deducting commission and other offering expenses payable by us. OnFebruary 2, 2021 , we sold 5,175,000 shares of our common stock in an underwritten public offering at a public offering price of$15.00 per share, including the underwriters' exercise of their option to purchase 675,000 shares to cover over-allotment, generating gross proceeds of$77.6 million and net proceeds of$73.0 million , after deducting underwriting discounts and commissions, exclusive of other offering expenses payable by us. OnJanuary 28, 2021 , we entered into a stock purchase agreement withALJ Health Care & Life Sciences Company Limited ("ALJ"), pursuant to which onFebruary 2, 2021 , ALJ purchased$7.5 million of our common stock in a private placement at a purchase price of$15.00 per share. The sale of these 500,000 shares was not registered under the Securities Act. We are a development stage company and have not generated any revenue. All of our product candidates are in early clinical or preclinical development. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. Since our inception, we have incurred significant operating losses and we continue to incur significant research and development and other expenses related to our ongoing operations. For the years endedDecember 31, 2020 and 2019 our net loss was$93.7 million and$85.5 million , respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$292.5 million . We do not expect to generate revenue from sales of any products for the foreseeable future, if at all. We expect that our expenses will increase substantially in connection with our ongoing activities, particularly as we: •continue the ongoing clinical trials for EDP1815 and EDP1867; •initiate additional clinical trials for EDP1815; •initiate or advance the clinical development of additional product candidates; •conduct research and continue preclinical development of potential product candidates; •make strategic investments in manufacturing capabilities, including potentially planning and building our own manufacturing facility; 79 -------------------------------------------------------------------------------- Table of Contents •maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property; •increase research and development employees and employee-related expenses including salaries, benefits, travel and stock-based compensation expense; and •seek to obtain regulatory approvals for our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so. Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. As ofDecember 31, 2020 , our principal source of liquidity is cash and cash equivalents, which totaled approximately$68.9 million . During the first quarter of 2021 we raised net proceeds of$82.2 million from the issuance of common stock exclusive of certain other fees payable by us. We expect that our existing cash and cash equivalents as ofDecember 31, 2020 , together with the net proceeds raised in the first quarter of 2021 from the issuance of our common stock, will enable us to fund our planned operating expenses and capital expenditure requirements into the third quarter of 2022. We have based these estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. See "Liquidity and Capital Resources." 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. 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 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 activities and general and administrative costs. Research and Development Expenses Research and development 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 contract manufacturing organizations, or CMOs, that manufacture drug substance and drug product for use in our preclinical activities and any current or future clinical trials; •salaries, benefits 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; 80
-------------------------------------------------------------------------------- Table of Contents •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 and allocated expenses for rent and maintenance of facilities and other operating costs. We expense research and development 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 consolidated financial statements as prepaid or accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized, 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 research and development 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 research and development personnel costs. Research and development activities are 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 that our research and development expenses will continue to increase in the foreseeable future as we continue our ongoing clinical trials for our product candidates, including EDP1815 and EDP1867, initiate additional clinical trials of other product candidates, including EDP2939 and EDP1908, continue to discover and develop additional product candidates, hire additional research and development personnel, build manufacturing capabilities 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 the uncertainty of: •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 successful enrollment in and completion of clinical trials; •the costs associated with the development of our current product candidates and/or any additional product candidates 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; •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; 81 -------------------------------------------------------------------------------- Table of Contents •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 variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We expect our research and development expenses to increase at least over the next several years as we continue to 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 personnel to support our research and development efforts. General and Administrative Expenses General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development, and administrative functions. General and administrative 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. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our product candidates. We also expect to incur increased expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance costs and investor and public relations costs. Interest (Expense) Income, Net Interest income (expense), net consisted primarily of interest earned on our cash, cash equivalents and short-term investments balances offset by interest expense at the stated rate on borrowings under our loan and security agreement, amortization of deferred financing costs and interest expense related to the accretion of debt discount associated with the loan and security agreement. Other (Expense) Income, Net For the year endedDecember 31, 2020 , other income (expense), net primarily consists of foreign currency gains and government grants related to our operations in theUnited Kingdom . Income Taxes Income tax expense primarily relates to tax expense at ourUK subsidiary. Since our inception in 2014, we have not recorded anyU.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. 82
-------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of Years EndedDecember 31, 2020 and 2019 The following table summarizes our results of operations for the years endedDecember 31, 2020 and 2019 (in thousands): Year Ended December 31, Increase/ 2020 2019 (Decrease) Operating expenses: Research and development$ 69,616 $ 63,128 $ 6,488 General and administrative 22,270 23,229 (959) Total operating expenses 91,886 86,357 5,529 Loss from operations (91,886) (86,357) (5,529) Other (expense) income: Interest (expense) income, net (2,109) 1,049 (3,158) Other income, net 738 26 712 Other (expense) income, net (1,371) 1,075 (2,446) Net loss before income taxes (93,257) (85,282) (7,975) Income tax expense (409) (190) (219) Net loss$ (93,666) $ (85,472) $ (8,194)
Research and development costs (in thousands):
Year Ended December 31, Increase/ 2020 2019 (Decrease) Platform expenses$ 11,487 $ 10,468 $ 1,019 Inflammation programs 30,467 25,161 5,306 Oncology programs 5,487 9,226 (3,739)
Research and development personnel costs (including stock-based compensation)
22,175 18,273 3,902 Total research and development expenses$ 69,616
Research and development expenses were$69.6 million for the year endedDecember 31, 2020 , compared to$63.1 million for the year endedDecember 31, 2019 . The increase of$6.5 million was primarily driven by a$5.3 million increase in inflammation program costs due to the progression of EDP1815 to Phase 2, the addition of COVID-19 studies utilizing EDP-1815, and costs incurred in contract manufacturing to enable EDP1867 Phase 1 clinical trials partially offset by the closeout of the EDP1066 program. In addition, personnel costs increased by$3.9 million due to increases in clinical development and technical operations headcount to support increased clinical program activities. Finally, there was a$1.0 million increase for platform expenses which is in line with our strategy to maximize the potential of our platform. These increases were partially offset by a$3.7 million decrease in our oncology program costs, primarily related to the clinical trial stage and the impact of the COVID-19 pandemic on patient recruitment. Overall, we expect that our research and development expenses will continue to increase in the foreseeable future as we continue our clinical trials for our product candidates, including EDP1815 and EDP1867, initiate new clinical trials, potentially expand into additional therapeutic areas, continue discovery and development efforts for additional product candidates, hire additional research and development personnel, and seek to increase manufacturing capabilities. General and Administrative Expenses (in thousands): Year Ended December 31, Increase/ 2020 2019 (Decrease)
General and administrative staff costs (including stock-based compensation)
$ 12,261 $ 12,345 $ (84) Professional fees 5,513 6,725 (1,212) Facility costs, office expense and other 4,496 4,159 337 Total general and administrative expenses$ 22,270 $ 23,229 $ (959) 83
-------------------------------------------------------------------------------- Table of Contents General and administrative expenses were$22.3 million for the year endedDecember 31, 2020 , compared to$23.2 million for the year endedDecember 31, 2019 . The decrease of$1.0 million was primarily driven by$1.2 million lower cost associated with legal, consulting and other professional fees, partially offset by higher IT, facilities and other office expenses costs. We expect this decrease to be temporary and general and administrative expenses to increase due to higher personnel and related costs, professional, legal, and patent fees and consulting expenses in support of our continued growth. Other (Expense) Income, Net Other income (expense), net for the year endedDecember 31, 2020 was expense of$1.4 million compared to income of$1.1 million for the year endedDecember 31, 2019 . This decrease was primarily driven by a decrease in interest income as a result of lower interest rates and a lower cash and cash equivalent balance and an increase in interest expense as a result of a higher interest rate on a greater principal balance from the 2019 Credit Facility, partially offset by foreign currency gains and a grant related to our operations in theUnited Kingdom . Net Loss Net loss was$93.7 million for the year endedDecember 31, 2020 , compared to$85.5 million for the year endedDecember 31, 2019 . The increase of$8.2 million was primarily the result of the increase in research and development expenses and decrease in other income (expense), net discussed above, partially offset by the decrease in general and administrative expenses discussed above. Liquidity and Capital Resources 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 throughDecember 31, 2020 , we have received gross proceeds of$332.0 million from such transactions, including$30.0 million borrowed under the 2019 Credit Facility. As ofDecember 31, 2020 , we had cash and cash equivalents of$68.9 million and an accumulated deficit of$292.5 million . During the first quarter of 2021 we raised net proceeds of$82.2 million from the issuance of common stock exclusive of certain other fees payable by us. We expect that our existing cash and cash equivalents as ofDecember 31, 2020 , together with the net proceeds raised in the first quarter of 2021 from the issuance of our common stock, will enable us to fund our planned operating expenses and capital expenditure requirements into the third quarter of 2022. OnJune 3, 2019 , we filed a Registration Statement on Form S-3 (File No. 333-231911) (the "Shelf") with theSEC under which we can offer from time to time common stock, preferred stock, debt securities, warrants and/or units of any combination thereof in an aggregate amount of up to$200.0 million over a period of up to three years from the date of its effectiveness onJune 6, 2019 . We also simultaneously entered into a sales agreement withCowen and Company, LLC , as sales agent, providing for the offering, issuance and sale by us of up to an aggregate$50.0 million of our common stock from time to time in "at-the-market" offerings under the Shelf. For the year endedDecember 31, 2020 , we had issued 1,232,131 shares of our common stock with offering prices ranging between$4.25 to$11.15 per share for gross proceeds of$6.8 million and net proceeds of$6.6 million , after deducting commission and other offering expenses payable by us. InJanuary 2021 , we issued 139,734 additional shares of our common stock with offering prices ranging between$12.54 and$13.17 per share for gross proceeds of$1.8 million and net proceeds of$1.7 million , after deducting commission and other offering expenses payable by us. OnFebruary 2, 2021 , we sold 5,175,000 shares of our common stock in an underwritten public offering at a public offering price of$15.00 per share, including the underwriters' exercise of their option to purchase 675,000 shares to cover over-allotment, generating gross proceeds of$77.6 million and net proceeds of underwriting discounts and commission of$73.0 million , exclusive of certain other offering expenses payable by us. OnJanuary 28, 2021 , we entered into a stock purchase agreement with ALJ, pursuant to which onFebruary 2, 2021 , ALJ purchased$7.5 million of our common stock in a private placement at a purchase price of$15.00 per share. The sale of such shares will not be registered under the Securities Act. Debt financing OnJuly 19, 2019 we entered into the 2019 Credit Facility with K2HV providing for up to$45.0 million of current and future potential debt financing. The aggregate principal amount was available in three tranches of term loans of$20.0 million ,$10.0 million , and$15.0 million , respectively. At closing onJuly 19, 2019 , we borrowed$20.0 million , 84 -------------------------------------------------------------------------------- Table of Contents representing the first tranche under the 2019 Credit Facility. OnJuly 14, 2020 , we drew down the second tranche of$10.0 million and availability of the third tranche expired onJanuary 15, 2021 . Interest on the outstanding loan balance will accrue at a variable rate equal to the greater of (i) 8.65% and (ii) the prime rate as published in theWall Street Journal , plus 3.15%. We are required to make monthly interest-only payments throughFebruary 2022 . Subsequent to the interest-only period, we are required to make equal monthly principal payments plus any accrued interest until the loans mature inAugust 2024 . Upon final payment or prepayment of the loans, we are required to pay a final payment equal to 4.3% of the loans borrowed. We have an option to prepay the loans in whole, subject to a prepayment fee of 2% of the amount prepaid or, if the prepayment occurs after the 18-month anniversary of the funding date of the loans, 1% of the amount prepaid. Contemporaneous with the closing of the first tranche of funding described above, we repaid the entire$15.0 million loan balance outstanding under an existing loan and security agreement with a separate financial institution. In accordance with the agreement underlying the prior debt facility, we paid an additional 0.5% prepayment fee as additional expense. 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. We incurred net losses of approximately$93.7 million and$85.5 million for the years endedDecember 31, 2020 and 2019, respectively. Until such time, if ever, as we can generate revenue from product sales, we expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaborations, license and development agreements. To the extent that we raise additional capital through future equity offerings or debt financings, the ownership interest of common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of the common stockholders. Debt and equity financings, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. There can be no assurance that such financings will be obtained on terms acceptable to us, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue our research and development programs or future commercialization efforts. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties for one or more of our current or future drug candidates, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or to grant licenses on terms that may not be favorable to us. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy. Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):
End of year
2020 2019 Cash used in operating activities$ (73,063) $ (71,980) Cash (used in)/provided by investing activities (1,315) 51,970 Cash provided by financing activities 65,465 4,992
Net decrease in cash, cash equivalents and restricted cash
$ (15,018) Operating Activities Net cash used in operating activities for the year endedDecember 31, 2020 , was$73.1 million , primarily due to our net loss of$93.7 million . This was partially offset by non-cash charges, including stock-based compensation expense of$8.5 million , depreciation expense of$2.0 million , lease expense of$2.0 million and reduction in working capital of$7.8 million . Net cash used in operating activities for the year endedDecember 31, 2019 , was$72.0 million , primarily due to our net loss of$85.5 million . This was partially offset by non-cash charges, including stock-based compensation expense of$8.2 million , depreciation expense of$1.8 million , and reduction in working capital of$3.5 million . Investing Activities Net cash used in investing activities for the year endedDecember 31, 2020 , was$1.3 million , primarily due to the purchase of capital equipment. 85 -------------------------------------------------------------------------------- Table of Contents Net cash provided by investing activities for the year endedDecember 31, 2019 , was$52.0 million , primarily consisting of maturity of investments totaling$55.0 million , slightly offset by the purchase of capital equipment totaling$3.0 million during the year. Financing Activities Net cash provided by financing activities for the year endedDecember 31, 2020 was$65.5 million , primarily due to proceeds from issuance of commons stock totaling$55.0 million , issuance of long-term debt under our 2019 Credit Facility totaling$10.0 million and proceeds from the issuance of common stock in connection with the exercise of options totaling$0.5 million . Net cash provided by financing activities for the year endedDecember 31, 2019 was$5.0 million , primarily due to proceeds from the issuance of long-term debt under our 2019 Credit Facility and proceeds from the issuance of common stock in connection with the exercise of options totaling$0.5 million , partially offset by the repayment of our prior debt facility. Funding Requirements We have incurred losses and cumulative negative cash flows from operations since our inception. As ofDecember 31, 2020 , we had an accumulated deficit of$292.5 million . We anticipate that we will continue to incur significant losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase. As a result, 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 expect our expenses to increase substantially in connection with our ongoing development activities related to the initiation of clinical studies and preclinical work on additional monoclonal microbial product candidates, which are still in development, and our follow-on therapeutics and other programs. In addition, we expect to incur additional costs associated with increased personnel and operating as a public company. We anticipate that our expenses will increase substantially if and as we: •continue our proof of concept clinical trials of EDP1815; •advance the clinical development of any additional monoclonal microbial product candidates; •conduct research and continue preclinical development of potential product candidates; •make strategic investments in manufacturing capabilities, including potentially planning and building a small-scale 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 transition to a public company; and •experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, safety issues or other regulatory challenges. During the first quarter of 2021 we raised net proceeds of$82.2 million from the issuance of common stock exclusive of certain other fees payable by us. We expect that our cash and cash equivalents as ofDecember 31, 2020 together with the net proceeds raised in the first quarter of 2021 from the issuance of our common stock, will enable us to fund our planned operating expenses and capital expenditure requirements into the third quarter of 2022. 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. Because of the numerous risks and uncertainties associated with the development of EDP1815 and EDP1867, any additional monoclonal microbial product candidates or any follow-on programs and because the extent to which we may enter into collaborations with third parties for development of these product candidates is unknown, we are 86
-------------------------------------------------------------------------------- Table of Contents 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 progress and results of clinical studies of EDP1815 and EDP1867; •the cost of manufacturing clinical supplies of our product candidates; •the scope, progress, results and costs of preclinical development, laboratory testing for any other potential product candidates; •the costs, timing and outcome of regulatory review of our product candidates; •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; •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 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, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, 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 the issuance of warrants, which could potentially dilute the ownership interest of existing stockholders. The terms of our 2019 Credit Facility with K2HV 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, 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. Contractual Obligations and Commitments We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide this information. Off-Balance Sheet Arrangements As ofDecember 31, 2020 , we did not have, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC . 87
-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Use of Estimates Our management's discussion and analysis of financial condition and results of operations are based on our consolidated financial statements which are prepared in accordance with generally accepted accounting principles, or GAAP, inthe United States of America . The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described below may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate our estimates and assumptions on an ongoing basis using historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions and conditions.Accrued Research and Development Expenses As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to: •CROs in connection with performing research services on our behalf including, but not limited to, clinical trials and preclinical studies; •investigative sites and other providers in connection with clinical trials and preclinical studies; •other research and development service providers such as academic institutions and laboratory services providers in connection with discovery, preclinical and clinical development activities; and •vendors related to product manufacturing, development and distribution of clinical supplies. We base our expenses related to clinical trials and preclinical studies on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs, investigative sites, laboratories and other providers that conduct and manage those studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses. Stock-Based Compensation We measure stock options and other stock-based awards granted to employees and directors based on the fair value on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. Generally, we issue stock options and restricted stock awards with only service-based vesting conditions and record the expense for these awards using the straight-line method, adjusting for pre-vesting forfeitures in the period in which the forfeitures occur. We measure stock-based awards granted to consultants and non-employees based on the fair value of the award on the date of the grant. Compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. Prior toJanuary 1, 2020 , we accounted for these awards in accordance with the provisions of ASC Subtopic 505-50, Equity-Based Payments to Non-employees ("ASC 505-50"). Under ASC 505-50, share-based awards to nonemployees were subject to periodic fair value re-measurement at the end of each financial reporting period prior to completion of the service. 88
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Table of Contents As discussed in Note 2 (Significant Accounting Policies) to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K under the heading "New Accounting Pronouncements - Adopted during the current period," we adopted ASU No. 2018-07, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting (Topic 718), onJanuary 1, 2020 . As a result, our accounting for nonemployee awards is now generally consistent with that of employee awards. Beginning onJanuary 1, 2020 , the measurement date for nonemployee awards is the date of grant without any subsequent changes in the fair value of the award. We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. Use of this model requires that we make assumptions as to the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options, and our expected dividend yield. Prior toMay 2018 , we were a privately-held company with limited operating history and no company-specific historical and implied volatility information and accordingly, we estimate our expected volatility based on the historical volatility of a group of publicly traded peer companies. We expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded stock price. We use the simplified method prescribed bySEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term of options granted to employees and directors. We base the expected term of options granted to consultants and non-employees on the contractual term of the options. We determine the risk-free interest rate by reference to theU.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.
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