UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-38473

Evelo Biosciences, Inc.

 (Exact name of registrant as specified in its charter)

Delaware		46-5594527
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
620 Memorial Drive Cambridge, Massachusetts		02139
(Address of principal executive offices)	(617) 577-0300	(Zip Code)
	(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	EVLO	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐   No  ☒

As of May 8, 2023, there were 111,993,605 shares of the registrant's common stock outstanding.

Evelo Biosciences, Inc.

Form 10-Q for the Quarterly Period Ended March 31, 2023

Table of Contents

Special Note Regarding Forward-Looking Statements
Summary Risk Factors
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022	1
Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022	2
Condensed Consolidated Statements of Stockholders' Deficit for the three months ended March 31, 2023 and 2022	3
Condensed Consolidated Statements of Cash flows for the three months ended March 31, 2023 and 2022	4
Notes to the Condensed Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosure About Market Risk	28
Item 4. Controls and Procedures	28
PART II: OTHER INFORMATION
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	77
Item 3. Defaults Upon Senior Securities	77
Item 4. Mine Safety Disclosures	77
Item 5. Other Information	77
Item 6. Exhibits	78
Signatures	79

i

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, including within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. These statements involve known and unknown risks, uncertainties, assumptions and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” "target," “predict,” “project,” "contemplate," “should,” “will,” “would,” "continue" or the negative or plural of those terms or other similar expressions.

Forward-looking statements may include, but are not limited to, statements about:

•our status as a development-stage company and our expectation to incur losses in the future;

•our ability to continue as a going concern, our cash runway, our future capital needs, our ability to satisfy our debt obligations (including any restrictive covenants) and our need to raise additional funds;

•our estimates, including our future expenses, research and development and general and administrative costs, future revenues and anticipated future capital requirements;

•our future results of operations, financial position, business strategy and prospective products;

•our ability to build a pipeline of product candidates and develop and commercialize drugs;

•our ability to develop therapeutic interventions;

•plans and objectives of management for future operations and the future results of anticipated products;

•our ability to design preclinical studies and clinical trials, to enroll patients and volunteers in clinical trials, to timely and successfully complete those trials and to receive necessary regulatory approvals;

•timing and plans for clinical trials, including registration trials, and product candidate approvals;

•the timing, progress, receipt and release of data from our ongoing and planned clinical trials and the potential use of our product candidates to treat various indications;

•our ability to establish our own manufacturing facilities, to effectively leverage our contract manufacturing organization partnerships and to receive or manufacture sufficient quantities of our product candidates;

•our expectations regarding the potential safety, efficacy or clinical utility of our product candidates;

•the impact of the COVID-19 pandemic on our operations, including our preclinical studies and clinical trials, and the continuity of our business;

•our ability to protect and enforce our intellectual property rights;

•federal, state, local and foreign regulatory requirements, including regulation of our product candidates by the U.S. Food and Drug Administration ("FDA"), European Medicines Agency ("EMA") and UK Medicines and Healthcare products Regulatory Agency ("MHRA") and our interactions with such agencies;

•our ability to successfully address regulatory questions and requirements and the likelihood of regulatory filings and approvals;

•our ability to obtain and retain key executives and attract and retain qualified personnel;

•activities related to strategic collaborations and anticipated revenue therefrom;

•our ability to maintain our listing on Nasdaq; and

•developments relating to our competitors and our industry.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions, some of which cannot be predicted or quantified and some of which are beyond our control. Risks, uncertainties and assumptions that may cause actual

results to differ materially from current expectations include, among other things, those set forth below in “Summary Risk Factors,” in Part I, Item 1A “Risk Factors," in Part II, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations," and for the reasons described elsewhere in this Quarterly Report on Form 10-Q. Any forward-looking statement in this Quarterly Report on Form 10-Q reflects our current view with respect to future events, speaks only as of the date of this Quarterly Report on Form 10-Q, and is subject to these and other risks, uncertainties and assumptions. Given these uncertainties, you should not rely on these forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our information may be incomplete or limited and we cannot guarantee future results. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by law, we do not plan, and assume no obligation, to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. We qualify all of our forward-looking statements by these cautionary statements.

This Quarterly Report on Form 10-Q may also contain estimates, projections and other information concerning our industry, our business and the markets for certain drugs and consumer products, including data regarding the estimated size of those markets, their projected growth rates and the incidence of certain medical conditions. Information that is based on estimates, forecasts, projections or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained these industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry, medical and general publications, government data and similar sources, and we have not independently verified the data from third party sources. In some cases, we do not expressly refer to the sources from which these data are derived.

In this Quarterly Report on Form 10-Q, unless otherwise stated or as the context otherwise requires, references to the "Company," “Evelo,” “we,” “us,” “our” and similar references refer to Evelo Biosciences, Inc. and our wholly owned subsidiaries. This Quarterly Report on Form 10-Q may also contain references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to, including logos, artwork and other visual displays, may appear without the "®" or "TM" symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend any use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

ii

SUMMARY RISK FACTORS

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. Principal risks and uncertainties affecting our business include the following:

•    We are a development-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.

•With our current cash resources, we will be unable to meet our future debt repayment obligation to our current Lender unless we are able to raise additional capital and / or restructure our existing debt, which may be on unfavorable terms, if available at all, and we could be forced to pursue alternative options, including, but not limited to, a further workforce reduction, implementing other cost-reduction initiatives, seeking relief in the U.S. Bankruptcy Courts and/or winding down operations.

•We will need additional funding in order to complete development of our product candidates and commercialize our products, if approved. If we are unable to raise capital when needed, we could be forced to delay, reduce or discontinue our product development programs or commercialization efforts.

•Our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.

•We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.

•The terms of our loan and security agreements place restrictions on our operating and financial flexibility, and if we are unable to comply with any of the covenants, we could be subject to adverse consequences including, without limitation, our having to immediately repay all amounts outstanding under the Loan Agreement and the Lender could seek to foreclose on the collateral.

•We are early in our development efforts and may not be successful in our efforts to use our platform to build a pipeline of product candidates and develop marketable drugs.

•Our product candidates are an unproven approach to therapeutic intervention.

•Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

•If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our product candidates or will not be able to do so as soon as anticipated, and our ability to generate revenue will be materially impaired.

•We rely, and will continue to rely, on third parties to conduct the clinical trials for our product candidates, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

•We rely on third parties for the manufacture of our product candidates for preclinical and clinical testing and expect to continue to do so for the foreseeable future. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or that such quantities may not be available at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

•We have no experience manufacturing our product candidates at commercial scale, and if we decide to establish our own manufacturing facility, we cannot assure you that we can manufacture our product candidates in compliance with regulations at a cost or in quantities necessary to make them commercially viable.

•Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing regulations or third-party coverage and reimbursement policies, any of which could harm our business.

•We face substantial competition, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.

•Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, cause us to suspend or discontinue clinical trials, limit the commercial profile of an approved label or result in significant negative consequences following marketing approval, if any.

•If we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents which

iii

are sufficient to protect our product candidates, other companies could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.

•Our common stock may be delisted from The Nasdaq Global Select Market if we cannot maintain compliance with Nasdaq’s continued listing requirements, which could harm our business, the trading price of our common stock, our ability to raise additional capital and the liquidity of the market for our common stock.

iv

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Evelo Biosciences, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

(Unaudited)
	March 31, 2023		December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	27,472	$	47,940
Prepaid expenses and other current assets	2,609		3,633
Total current assets	30,081		51,573
Property and equipment, net	4,409		4,842
Right of use asset - operating lease	6,324		6,868
Other assets	1,156		1,158
Total assets	$	41,970	$	64,441
Liabilities and stockholders’ deficit
Current liabilities:
Debt, current portion	$	43,774	$	—
Accounts payable	1,514		1,764
Accrued expenses	9,506		7,945
Operating lease liability, current portion	2,343		2,259
Other current liabilities	110		427
Total current liabilities	57,247		12,395
Noncurrent liabilities:
Debt, net of current portion	—		43,614
Operating lease liability, net of current portion	4,579		5,265
Deferred revenue	7,500		7,500
Other noncurrent liabilities	32		659
Total liabilities	69,358		69,433
Commitments and contingencies (Note 9)
Stockholder’s deficit:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	—		—
Common stock, $0.001 par value; 200,000,000 shares authorized; 110,930,084 and 110,852,741 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	111		111
Additional paid-in capital	527,064		524,119
Accumulated deficit	(554,563)		(529,222)
Total stockholders’ deficit	(27,388)		(4,992)
Total liabilities and stockholders’ deficit	$	41,970	$	64,441

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

1

Evelo Biosciences, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share and share amounts)

(Unaudited)
	Three Months Ended March 31,
	2023		2022
Operating expenses:
Research and development	$	17,857	$	19,321
General and administrative	7,043		9,417
Total operating expenses	24,900		28,738
Loss from operations	(24,900)		(28,738)
Other income (expense):
Interest expense, net	(1,111)		(1,027)
Change in fair value of warrants	627		—
Other miscellaneous income, net	188		20
Total other expenses, net	(296)		(1,007)
Loss before income taxes	(25,196)		(29,745)
Income tax expense	(145)		(116)
Net loss	$	(25,341)	$	(29,861)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.23)	$	(0.56)
Weighted average number of common shares outstanding, basic and diluted	110,905,822		53,619,635

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

2

Evelo Biosciences, Inc.

Condensed Consolidated Statements of Stockholders’ Deficit

(In thousands, except share amounts)

(Unaudited)
	Three Months Ended March 31, 2023
	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total
	Shares	Amount
Balance - December 31, 2022	110,852,741	$	111	$	524,119	$	(529,222)	$	(4,992)
Issuance of common stock under Employee Stock Purchase Plan	40,886	—		36		—		36
Vesting of restricted common stock	36,457	—		—		—		—
Stock-based compensation expense	—	—		2,909		—		2,909
Net loss	—	—		—		(25,341)		(25,341)
Balance - March 31, 2023	110,930,084	$	111	$	527,064	$	(554,563)	$	(27,388)

(Unaudited)
	Three Months Ended March 31, 2022
	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total
	Shares	Amount
Balance - December 31, 2021	53,576,454	$	54	$	423,308	$	(414,695)	$	8,667
Issuance of common stock under Employee Stock Purchase Plan	36,329	—		129		—		129
Vesting of restricted common stock	35,406	—		—		—		—
Stock-based compensation expense	—	—		4,275		—		4,275
Fees associated with public offering of common stock	—	—		(12)		—		(12)
Net loss	—	—		—		(29,861)		(29,861)
Balance - March 31, 2022	53,648,189	$	54	$	427,700	$	(444,556)	$	(16,802)

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

3

Evelo Biosciences, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)
	Three Months Ended March 31,
	2023		2022
Operating activities
Net loss	$	(25,341)	$	(29,861)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	2,909		4,275
Depreciation expense	445		517
Non-cash interest expense	160		59
Non-cash lease expense	725		491
Decrease in fair value of warrants	(627)		—
Loss on disposal of property and equipment	—		232
Net foreign currency losses	(2)		—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	1,024		(1,011)
Accounts payable	(256)		159
Accrued expenses and other current liabilities	1,470		(3,267)
Operating lease liabilities	(783)		(526)
Net cash used in operating activities	(20,276)		(28,932)
Investing activities
Purchases of property and equipment	(12)		(153)
Net cash used in investing activities	(12)		(153)
Financing activities
Proceeds from the issuance of common stock under employee stock purchase plan and the exercise of stock options	36		129
Fees associated with debt issuance and public offering of common stock	(235)		(12)
Net cash (used in) provided by financing activities	(199)		117
Effect of exchange rate changes on cash and cash equivalents	17		—
Net decrease in cash, cash equivalents and restricted cash	(20,470)		(28,968)
Cash, cash equivalents and restricted cash – beginning of period	49,098		69,754
Cash, cash equivalents and restricted cash – end of period	$	28,628	$	40,786
Supplemental disclosure of cash flow information
Cash paid for interest	$	1,343	$	973
Cash paid for taxes	$	—	$	393
Noncash investing and financing activities
Property and equipment additions in accounts payable and accrued expenses	—		$	27

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

4

Evelo Biosciences, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization and Basis of Presentation

Evelo Biosciences, Inc. ("Evelo," "we," "our," "us" or the "Company”) is a biotechnology company incorporated in Delaware on May 6, 2014. We are a clinical-stage biotechnology company focused on discovering and developing a new class of oral medicines that act on immune cells in the small intestine with systemic effects. We are advancing these investigational medicines with the aim of treating a broad range of inflammatory diseases, with an initial focus on psoriasis and atopic dermatitis. Our headquarters is located in Cambridge, Massachusetts.

Since inception, we have devoted substantially all of our efforts to research and development and raising capital. We have not generated any product or license revenue related to our primary business purpose to date. We are subject to a number of risks similar to those of other development stage companies, including the inherent uncertainties in drug development, the need to develop commercially viable products, the competition from other companies, many of which are larger and better capitalized, the need to obtain adequate additional financing to fund the development of our product candidates and a dependence on key individuals.

We have incurred operating losses since inception and expect such losses and negative operating cash flows to continue for the foreseeable future. As of March 31, 2023, we had cash and cash equivalents of $27.5 million and an accumulated deficit of $554.6 million. Since inception, we have financed operations primarily with the proceeds from the issuance of common stock and since-redeemed preferred stock to equity investors, and from debt financing.

In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that these unaudited condensed consolidated statements are issued. The transition to profitability is dependent upon the successful development, approval and commercialization of our product candidates, and the achievement of a level of revenues adequate to support our cost structure. Based on our current operating plan, we believe that our cash and cash equivalents balance as of March 31, 2023 will not be sufficient to fund operations and capital expenditures for at least the twelve months following the filing of this Quarterly Report on Form 10-Q, and we will need to obtain additional funding. We intend to obtain additional funding through financing sources which may include additional public offerings of common stock, private financing of debt or equity, and/or the pursuit of strategic partnerships, licensing arrangements or collaborations. Management’s belief with respect to our ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, we may need to seek additional funding sooner than would otherwise be expected. There can be no assurance that we will be able to obtain additional funding on acceptable terms, if at all. If we are unable to obtain sufficient funding, we may be required to delay development efforts, limit activities and reduce research and development costs, which could adversely affect our business prospects. Because of the uncertainty in securing additional funding and the insufficient amount of cash and cash equivalent resources as of March 31, 2023, management concluded that substantial doubt exists with respect to our ability to continue as a going concern within one year after the date that these unaudited condensed consolidated statements are issued.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification and ASU of the FASB.

Use of Estimates

The preparation of unaudited condensed consolidated statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include, but are not limited to, estimates related to the application of Revenue from Contracts with Customers (Topic 606) ("ASC 606") to our collaboration agreement with

5

Evelo Biosciences, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Meddist Company Limited ("ALJ"), the accrual of research and development expenses, the expected future lives of property and equipment, the valuation of stock-based awards, and common stock warrants. We base our estimates on historical experience and market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.

Unaudited Interim Financial Information

Our unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The unaudited condensed consolidated financial statements include the accounts of our business and our wholly owned and controlled subsidiaries.

All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

The accompanying unaudited condensed consolidated balance sheet as of March 31, 2023 has been derived from our audited consolidated financial statements for the year ended December 31, 2022. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

These unaudited condensed consolidated financial statements are prepared on the same basis as the audited financial statements. In the opinion of our management, the accompanying unaudited condensed consolidated financial statements contain all adjustments which are necessary to present fairly our financial position as of March 31, 2023, and the results of operations and stockholders' deficit for the three months ended March 31, 2023 and 2022. Such adjustments are of a normal and recurring nature. The results for the three months ended March 31, 2023 are not necessarily indicative of the results to be realized for the year ending December 31, 2023, or for any future period.

Subsequent Event Considerations

We consider events or transactions that occur after the balance sheet date but prior to the issuance of the unaudited condensed consolidated financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure.

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and we may take advantage of reduced reporting requirements that are otherwise applicable to other public companies. We may take advantage of these exemptions until we no longer are an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and, as a result of this election, our unaudited condensed consolidated statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our IPO or such earlier time that we no longer are an emerging growth company.

We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of the initial public offering of our common stock, or December 31, 2023, (b) in which we have total annual gross revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our outstanding common stock that are held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three year period.

6

Evelo Biosciences, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We are also a smaller reporting company, and we will remain a smaller reporting company until the fiscal year following the determination that our voting and non-voting common shares held by non-affiliates is more than $250 million measured on the last business day of our second fiscal quarter, and our annual revenues are more than $100 million during the most recently completed fiscal year and our voting and non-voting common shares held by non-affiliates is more than $700 million measured on the last business day of our second fiscal quarter. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.

Concentrations of Credit Risk and Off-Balance Sheet Risk

Financial instruments that potentially expose us to concentrations of credit risk primarily consist of cash and cash equivalents. We placed our operating cash in demand deposit accounts at a single financial institution since February 2022, which have exceeded and are expected to continue to exceed federally insured limits. Our money market funds are held in an investment account at an affiliate institution.

As of March 31, 2023 and 2022, we have no off-balance sheet risk such as foreign exchange contracts, option contracts, or other foreign hedging arrangements.

Comprehensive Loss

Comprehensive loss consists of net loss and changes in equity during a period arising from transactions and other equity and circumstances, of which we have none. Our comprehensive loss equals our net loss for all periods presented.

Cash, Cash Equivalents and Restricted Cash

Cash equivalents are highly liquid investments that are readily convertible into cash with original maturities of three months or less, which consist of cash held in banks and funds held in money market accounts. Cash equivalents are stated at cost, which approximates market value. Our restricted cash consists of the deposits held for the building lease for our office and laboratory premises and for our credit card facility. As of March 31, 2023 and 2022, we had $1.2 million and $1.2 million in restricted cash balance recorded within other assets.

The following reconciles cash, cash equivalents and restricted cash as of March 31, 2023 and 2022, as presented on the statements of cash flows, to the related balance sheet accounts (in thousands):

	March 31, 2023		March 31, 2022
Cash and cash equivalents:
Cash	$	1,878	$	5,224
Money market funds	25,594		34,407
Total cash and cash equivalents	27,472		39,631
Restricted cash	1,156		1,155
Cash, cash equivalents and restricted cash	$	28,628	$	40,786

Research and Development Costs

Research and development costs are expensed in the period incurred. Research and development expenses consist of both internal and external costs associated with the development of our product candidates, such as payroll, consulting, and manufacturing costs associated with the development of our product candidates. Costs for certain development activities, such as clinical trials and manufacturing development activities, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, and information provided to us by our vendors on their actual costs incurred or level of effort expended. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected on the unaudited condensed consolidated balance sheets as prepaid or accrued research and development expenses.

Segments

We have one operating segment. Our chief operating decision maker, the Chief Executive Officer, manages our operations on a consolidated basis for the purposes of allocating resources.

7

Evelo Biosciences, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accounting Pronouncements Issued and Not Yet Effective as of March 31, 2023

No new accounting pronouncements issued or effective in the period had or are expected to have a material impact on our accompanying unaudited condensed consolidated statements.

3. ALJ Collaborative Agreement

In March 2021, we entered into a collaborative commercialization and license agreement (“ALJ Agreement”) with ALJ. Pursuant to the ALJ Agreement, we granted to ALJ an exclusive, non-transferable, sublicensable license to our product candidate EDP1815. In consideration for the rights granted under the ALJ Agreement, ALJ was obligated to pay a one-time, non-refundable upfront fee of $7.5 million. The parties will also share the future operating profits and losses for certain products in certain territories equally (50:50) as well as certain development, regulatory and commercialization costs. We have concluded that the delivery of the license to ALJ shall be accounted for under ASC 606. The development, regulatory and commercialization activities within the territories shall be accounted for under the FASB guidance of Collaborative Arrangements (Topic 808) ("ASC 808").

We have recognized no revenue under the ALJ Agreement to date as we have yet to undertake any of our performance obligations within the agreement. The $7.5 million upfront fee is recorded as deferred revenue as a non-current liability in the accompanying unaudited condensed consolidated balance sheets because the performance obligation is not expected to be completed within the next twelve months.

We anticipate payments under the cost-sharing or profit and loss sharing arrangements will be classified in the statement of operations consistent with the guidance of ASC 808. To date, we have neither received nor incurred any such payments..

4. Leases

In January 2018, we entered into an operating sublease arrangement for approximately 40,765 square feet for our office and research and development space at 620 Memorial Drive, Cambridge, MA 02139 from February 2018 extending through September 2025. The lease requires a security deposit, which we fulfilled with a standing letter of credit secured by restricted cash on deposit.

We recorded rent expense of $0.7 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively. Operating cash flows used for operating leases were $0.8 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively.

The following table presents supplemental balance sheet information related to our operating leases (in thousands):

	March 31, 2023			December 31, 2022
Assets:
Operating lease right-of-use assets	$	6,324		$	6,868
Liabilities:
Operating lease liabilities, current	2,343			2,259
Operating lease liabilities, noncurrent	4,579			5,265
Total lease liabilities	$	6,922		$	7,524
Other information:
Weighted-average remaining lease term (in years)	2.50 years			2.75 years
Weighted-average discount rate	9.5		%	9.5		%

8

Evelo Biosciences, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. Fair Value Measurements

The following tables present information about our financial assets and liabilities that have been measured at fair value as of March 31, 2023 and December 31, 2022 (in thousands):

Description	March 31, 2023		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents:
Money market funds	$	25,594	$	25,594	$	—	$	—
Other assets:
Restricted cash held in money market funds	1,156		1,156		—		—
Total	$	26,750	$	26,750	$	—	$	—
Financial Liabilities
Other noncurrent liabilities:
Warrant liabilities	$	32	—		—		$	32
Total	$	32	$	—	$	—	$	32

Description	December 31, 2022		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents:
Money market funds	$	46,660	$	46,660	$	—	$	—
Other assets:
Restricted cash held in money market funds	1,158		1,158		—		—
Total	$	47,818	$	47,818	$	—	$	—
Financial Liabilities
Other noncurrent liabilities:
Warrant liabilities	$	659	—		—		$	659
Total	$	659	$	—	$	—	$	659

Our financial assets are reported as cash equivalents and other assets, which are held in money market funds, are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices in active markets as of March 31, 2023 and 2022. The money market funds are invested in a fund comprised of U.S. government securities and instruments.

Our financial liability reported as other noncurrent liabilities are common stock warrants issued in connection with the loan arrangement with Horizon Technology Finance Corporation (“Horizon”) (See Note 7). The fair value of the common stock warrants was determined based on the Black-Scholes option-pricing model and classified within Level 3 of the fair value hierarchy. As of March 31, 2023, the expected volatility input of 70% used in the model was deemed unobservable and was determined based on historical share price data of comparable companies for a term equal to the remaining contractual term of the warrants. Other required inputs used in the model were considered observable (Level 1). Significant increases (decreases) in these inputs could result in a significantly lower or higher fair value measurement.

The following table shows a reconciliation of the beginning and ending balances for Level 3 financial liabilities measured at fair value on a recurring basis for the three months ended March 31, 2023:

	Total
Level 3 financial liabilities, beginning of period	659
Change in fair value of financial liabilities	(627)
Level 3 financial liabilities, end of period	32

9

Evelo Biosciences, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

During the three months ended March 31, 2023, there were no transfers out of Level 3. The change in unrealized depreciation attributable to Level 3 financial liabilities still held at March 31, 2023 is $0.6 million.

6. Accrued Expenses

Accrued expenses recorded in our unaudited condensed consolidated balance sheet consist of the following (in thousands):

	March 31, 2023		December 31, 2022
External research and development expenses	4,704		5,389
Employee severance, compensation and benefits	$	3,574	$	1,191
Professional and consulting fees	1,067		883
Other	161		482
Total accrued expenses	$	9,506	$	7,945

7. Loan and Security Agreement

Horizon Technology Finance Corporation Loan and Security Agreement

In December 2022, we entered into a loan agreement with Horizon (the "Loan Agreement"), as lender and collateral agent (the “Lender”), pursuant to which the Lender agreed to make term loans in an aggregate principal amount of up to $45.0 million, available to us on the closing date and we borrowed $45.0 million. Borrowings under the Loan Agreement are collateralized by substantially all of our personal property, excluding intellectual property, and we pledged our equity interests in our subsidiaries, subject to certain limitations with respect to our foreign subsidiaries (the "Collateral").

Interest on the outstanding loan balance will accrue at a variable annual rate equal to the greater of (i) 11% and (ii) rate of interest noted in The Wall Street Journal, Money Rates section, as the “Prime Rate” plus the “Loan Rate Spread” as defined in the loan agreement. We are required to make interest-only payments on the loans on the stub period date (January 1, 2023) and for the first thirty-six monthly payment dates prior to when the loans are scheduled to begin amortizing on February 1, 2026 (the “Amortization Date”). Beginning on February 1, 2026, we must pay twenty-four equal consecutive monthly installment payments repaying $35.0 million of the principal, plus interest on all outstanding balance until the loans mature on January 1, 2028 (the “Maturity Date”). The remaining $10.0 million of principal is due and payable on the Maturity Date. At our option, we may prepay the loans in whole, subject to a prepayment fee of 3% of the amount prepaid if prepaid on or before the Amortization Date, or if the prepayment occurs after less than 12 months after Amortization Date, 2% of the amount prepaid, and if more than 12 months after the Amortization Date but before the Maturity Date, 1%. A final payment equal to 4.25% of the principal borrowed on the closing date is due on the Maturity Date (or upon repayment in full of principal, if earlier).

Upon the entry into the Loan Agreement, we were required to pay Horizon a commitment fee of $0.5 million, as well as other customary fees and expenses. The Loan Agreement contains customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches of covenants, change of control and occurrence of a material adverse effect. Upon the occurrence and continuation of an event of default, a default interest rate of an additional 5% per annum may be applied to the outstanding loan balances, and Horizon may declare all outstanding obligations immediately due and payable and exercise all of their rights and remedies as set forth in the loan agreement and under applicable law. Our subsidiary, Evelo Biosciences Security Corporation, may maintain cash or cash equivalents so long as we satisfy certain liquidity requirements. As of March 31, 2023, we believe we were in compliance with all covenants under the Loan Agreement.

In connection with the entry into the Loan Agreement, we also issued to Horizon warrants to purchase up to an aggregate 463,915 shares of our common stock, with an exercise price of $1.94 per share. The warrants are exercisable immediately and expire on December 15, 2032, provided that, under certain circumstances, the warrants may terminate and expire earlier in connection with the closing of certain acquisition transactions involving us. The warrants provide that Horizon may elect to exercise the warrant on a net “cashless” basis at any time prior to the expiration thereof. The fair market value of one share of our common stock in connection with any cashless exercise shall be the closing price or last sale price per share of our common stock on a nationally recognized

10

Evelo Biosciences, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

securities exchange, inter-dealer quotation system or over-the-counter market on which our common stock is traded on the business day immediately prior to the date the holder elects to exercise the warrants on a cashless basis.

The warrants were deemed to be a freestanding financial instrument as it is legally detachable and separately exercisable from the debt obligations. We evaluated the terms and conditions of the warrants and concluded it met the criteria to be classified as a liability. As such, we recorded the warrants as a noncurrent liability at its issuance date.

We have the following minimum aggregate future loan payments as of March 31, 2023 related to the Loan Agreement (in thousands):

	Amount
2024	$	—
2025	—
2026	16,042
2027	17,500
Thereafter	11,458
Total minimum payments	45,000
Debt discount	(1,226)
Total Debt as of March 31, 2023	$	43,774

The Loan Agreement contains a subjective acceleration clause which allows Horizon to accelerate the maturity of the principal payments under certain circumstances. Based upon our significant operating losses and going concern assessment as of March 31, 2023, we determined that we should classify our loan facility with Horizon, which would otherwise be classified as long-term debt, as a current liability on our consolidated balance sheet as of March 31, 2023.

For the three months ended March 31, 2023 and 2022, interest expense was approximately $1.5 million and $1.0 million.

8. In-License Agreements

Mayo Foundation for Medical Education and Research

In August 2017, we and the Mayo Clinic amended the 2016 Mayo License Agreement. Under the amended agreement, the Mayo Clinic granted us (i) an exclusive, worldwide, sublicensable license under the Mayo Clinic’s rights to certain intellectual property and microbial strains and (ii) a non-exclusive, worldwide, sublicensable license to certain related know-how to develop and commercialize certain microbial strains and licensed products incorporating such strains. As consideration, we paid a nonrefundable upfront fee of $0.3 million and are obligated to pay annual license maintenance fees. The nonrefundable upfront fees were expensed to research and development expense in 2017. Annual maintenance fees are expensed as incurred over the term of the agreement. We may owe the Mayo Clinic milestone payments upon the achievement of certain milestones up to a maximum of $59.1 million in the aggregate, as well as royalties on net sales of licensed products in low single-digit percentages. As of March 31, 2023, we incurred milestone payments since inception of approximately $0.3 million and no amounts are currently due.

9. Commitments and Contingencies

Manufacture and Supply Agreement with Sacco S.r.l.

In July 2019, we entered into an agreement with Sacco S.r.l. ("Sacco") pursuant to which Sacco will manufacture and supply single strain, non-genetically modified microbes intended for oral delivery or oral use in pharmaceutical products exclusively for us for a period of five years. Sacco may terminate the agreement if the provision of manufacturing services has been, or is scheduled to be, inactive for a consecutive period of six months. We agreed to pay Sacco an aggregate of €3.0 million, consisting of payments of €0.6 million annually during the exclusivity period. We have incurred annual exclusivity fees since inception of approximately €2.4 million, and no amounts are currently due.

11

Evelo Biosciences, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We have an additional contractual arrangement with an affiliate of Sacco for manufacturing that will require us to spend an aggregate minimum amount of €3.9 million, consisting of €1.5 million annually during each of 2023 and 2024 and €0.9 million on or before March 1, 2025. Relating to the manufacturing purchase arrangement €0.1 million is currently due.

Litigation and Other Proceedings

We may periodically become subject to legal proceedings and claims arising in connection with on-going business activities, including claims or disputes related to patents issued to us or that are pending. We currently are not a party to any material litigation and have established no contingency reserves for any litigation liability.

10. Stock-Based Compensation

Equity Plans

2021 Inducement Plan

In May 2021, our board of directors adopted the Evelo Biosciences, Inc. 2021 Employment Inducement Award Plan (the “Inducement Award Plan”) without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Stock Market LLC listing rules. As of March 31, 2023, 672,500 shares of common stock are available for future grant under the Inducement Award Plan.

2018 Incentive Award Plan

In April 2018, our board of directors adopted, and our stockholders approved, the 2018 Incentive Award Plan (the "2018 Plan"), effective May 2018, under which we may grant cash and equity-based incentive awards to our employees, officers, directors, consultants and advisors. As of March 31, 2023, awards representing 705,306 shares were available for future grant under the 2018 Plan.

Stock Options

A summary of our stock option activity and related information is as follows: 

	Shares	Weighted- Average Exercise Price		Weighted Average - Remaining Contractual Life (years)	Aggregate Intrinsic Value (1) (in thousands)
Options outstanding as of December 31, 2022	11,175,272	$	7.79	6.91	$	746
Granted	1,128,900	0.97
Exercised	—	—
Forfeited	(1,327,593)	9.77
Canceled	(201,221)	10.03
Options outstanding as of March 31, 2023	10,775,358	$	6.80	5.90	$	—
Exercisable as of March 31, 2023	6,972,813	$	7.84	4.38	$	—

(1) The aggregate intrinsic value of options is calculated as the difference between the exercise price of the stock options and the fair value of our common stock for those stock options that had exercise prices lower than the fair value of the common stock as of the end of the period.

We had 3,802,545 unvested stock options outstanding as of March 31, 2023. The weighted-average fair value of options granted during the three months ended March 31, 2023 and 2022 was $0.78 and $3.77, respectively. The aggregate intrinsic values of options exercised during the three months ended March 31, 2023 and 2022 were zero. The remaining unrecognized compensation expense for outstanding stock options as of March 31, 2023 was $13.0 million and the weighted-average period over which this cost is expected to be recognized is 2.6 years.

12

Evelo Biosciences, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Restricted Stock Units

We issue restricted stock units ("RSUs") under our 2018 Plan and 2021 Inducement Plan. A summary of the RSU activity and related information is as follows: 

	Shares	Weighted-Average Grant Date Fair Value
Unvested balance at December 31, 2022	239,448	$	7.23
Granted	4,886,000	0.97
Vested	(36,457)	8.76
Forfeited	(87,021)	6.84
Unvested balance at March 31, 2023	5,001,970	$	1.11

Stock-based compensation expense related to RSUs was $0.7 million and $0.4 million for the three months ended March 31, 2023 and 2022, respectively.

The aggregate intrinsic value of vested RSUs for the three months ended March 31, 2023 and 2022 was immaterial. The remaining unrecognized compensation expense for outstanding restricted stock units as of March 31, 2023 was $4.7 million and the weighted-average period over which this cost is expected to be recognized is 1.1 years.

2018 Employee Stock Purchase Plan

In April 2018, our board of directors adopted, and our stockholders approved, the 2018 Employee Stock Purchase Plan (“ESPP”), which became effective in May 2018. As of March 31, 2023, a total of 2,262,518 shares of common stock were reserved for issuance under the ESPP.

The compensation expense recognized related to the ESPP for the three months ended March 31, 2023 and 2022 was immaterial. Under the ESPP plan, 40,886 and 36,329 shares were sold during the three months ended March 31, 2023 and 2022, respectively.

Stock-Based Compensation Expense

Stock-based compensation expense included in our unaudited condensed consolidated statements of operations is as follows (in thousands):

	Three Months Ended March 31,
	2023		2022
Research and development	$	1,521	$	2,036
General and administrative	$	1,388	$	2,239
Total stock-based compensation expense	$	2,909	$	4,275

11. Net Loss Per Share

Basic and diluted net loss per common share is determined by dividing the net loss by the weighted-average common shares outstanding during the period, as follows (net loss in thousands):

	Three Months Ended March 31,
	2023		2022
Numerator
Net loss	$	(25,341)	$	(29,861)
Denominator
Weighted average shares outstanding used in computing net loss per share	110,905,822		53,619,635
Net loss per share, basic and diluted	$	(0.23)	$	(0.56)

13

Evelo Biosciences, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We compute diluted net loss per common share by giving consideration to all potentially dilutive common shares, except where the effect of including such securities would be anti-dilutive. We have reported net losses since inception and, as such, have determined that all potentially dilutive common shares are anti-dilutive. Consequently, basic and diluted net loss per share of common stock were the same for all periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive.

The following table presents securities excluded from the computation of diluted weighted-average shares outstanding for the periods presented, as they are anti-dilutive:

	Three Months Ended March 31,
	2023	2022
Stock options to purchase common stock	10,775,358	11,240,002
Warrant	1,127,665	139,770
RSUs	5,001,970	366,311
Conversion option	—	375,940
Common stock from the ESPP	27,563	26,588
Total	16,932,556	12,148,611

12. Related Party Transactions

Weatherden Advisory Services Agreement

We receive clinical advisory services from Weatherden Ltd. (“Weatherden”) under agreements that were entered into during 2017 and 2018. Duncan McHale, our Chief Medical Officer, is a part owner of Weatherden. During each of the three months ended March 31, 2023 and 2022, we paid Weatherden $0.1 million or less. As of March 31, 2023 and 2022, the amounts owed to Weatherden under the supply of service agreement were approximately $0.1 million or less.

Epstein Consulting Services Agreement

In September 2019, we entered into a consulting agreement with David Epstein ("Consulting Agreement"), our former Chairman of the Board, for strategic advisory and other consulting services. The Consulting Agreement was amended in October 2020 and again in April 2021, and terminated pursuant to its terms on June 30, 2022. In accordance with the initial terms of the Consulting Agreement, Mr. Epstein was granted an option to purchase 75,000 shares of common stock, vesting in 36 equal monthly installments and subject to his continued provision of consulting services on the applicable vesting dates. Under the Consulting Agreement as amended in October 2020, Mr. Epstein was also entitled to receive (i) an annual equity award on each anniversary of the effective date of the Consulting Agreement in the form of an option to purchase shares of common stock having a grant date fair market value of approximately $0.2 million as determined by our board of directors in its discretion based on customary option pricing methodologies, vesting in 12 equal monthly installments and subject to his continued provision of consulting services on the applicable vesting date, and (ii) an aggregate annual cash consulting fee of $0.3 million. In the event the Consulting Agreement was renewed for a term of less than one year, the equity award and the number of shares of common stock would be adjusted proportionately to the length of the renewal term. In October 2020, in connection with the commencement of his second year of service as a consultant, Mr. Epstein was granted an option to purchase 44,743 shares of common stock, vesting in nine equal monthly installments and subject to his continued provision of consulting services on the vesting dates. Under the Consulting Agreement as amended in April 2021 and effective on June 30, 2021, Mr. Epstein was entitled to receive RSUs having an aggregate grant date fair value of approximately $0.5 million, as determined by our board of directors in its discretion based on a 10-day trailing average of the closing price of our common stock, as his sole compensation for his consulting services. The RSUs vested in 12 substantially equal monthly installments such that the RSUs became fully vested on June 30, 2022, in each case subject to Mr. Epstein's continued provision of consulting services on the applicable vesting date. In June 2022, terms of Mr. Epstein's unvested option grants were modified to allow immediate vesting upon his resignation as Chairman of the Board of Directors on June 30, 2022. All of the foregoing options and restricted stock units were or are subject to accelerated vesting under change in control provisions.

14

Evelo Biosciences, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Securities Purchase Agreement with Related Parties

In May 2022, in connection with our registered direct offering, we entered into the Purchase Agreement with a group of purchasers including certain of our executive officers, members of our board of directors and other related parties. Of the 54,246,358 total shares offered, officers and directors purchased an aggregate of 393,834 shares and other related parties purchased an aggregate of 28,253,422 shares of our common stock for $1.46 per share, a price equal to the offering price per share of, and on equal terms as, common stock sold to the public.

13. Workforce Reduction

On January 31, 2023, our Board of Directors approved a plan to reduce its workforce by 48 employees, or approximately 45% of our total headcount as of January 31, 2023, in order to preserve cash and prioritize investment in our core clinical programs. During the three months ended March 31, 2023, we recognized $2.7 million of charges in the condensed consolidated statement of operations. These charges included one-time termination benefits and contractual termination benefits for severance.

14.Subsequent Event

On May 10, 2023 (the “Effective Date”), the Company (expressly without conceding that an ”Event of Default” (as defined under the Loan Agreement) has occurred) and Horizon entered into a Standstill Agreement pursuant to which Horizon agreed to forbear from exercising, and not to exercise, any and all remedies available to it under the Loan Agreement, warrants, notes and other Financing Documents (as defined in the Standstill Agreement) or at law or in equity from the Effective Date until 9:59 p.m. (Eastern Time) on May 15, 2023 (as may be extended, the “Standstill Period”) as the Company continues negotiations with the Lender and pursues potential sources of financing and financial restructuring alternatives. The Company and Horizon agreed to extend the Standstill Period until May 22, 2023. In order to secure the Standstill Period, the Company has agreed, among other things, that during the Standstill Period, it will only use the Collateral under the Loan Agreement in the ordinary course of its business and in accordance with the provisions of the Loan Agreement and other Financing Documents. As of the date of the issuance of these condensed consolidated financial statements, the Lender has not made a demand for payment of amounts outstanding under the Financing Documents. purported to accelerate any Loan to maturity, or otherwise sought to exercise remedies.

15

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 Annual Report"), including the audited consolidated financial statements and notes thereto contained in our 2022 Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, these forward-looking statements. In this Quarterly Report on Form 10-Q, unless otherwise stated or as the context otherwise requires, references to “Evelo,” “Evelo Biosciences,” the “Company,” “we,” “us,” “our” and similar references refer to Evelo Biosciences, Inc. and its consolidated subsidiaries.

Overview

Evelo is a clinical-stage biotechnology company focused on discovering and developing a new class of oral medicines that act on immune cells in the small intestine with systemic effects.

The small intestinal axis ("SINTAX") is the network of connections that links the small intestine and the rest of the body. Immune cells and other cells in the small intestine act as sentinels and are constantly sensing the contents of the gut. Depending on what is sensed, these cells relay messages from the gut to the rest of the body that modulate systemic immunity.

We are discovering and developing a new class of orally delivered investigational medicines that are designed to act on cells in the small intestine with systemic therapeutic effects that have the potential to address many inflammatory diseases. Evelo’s orally delivered product candidates are pharmaceutical compositions of specific single strains of commensal microbes or the extracellular vesicles ("EVs") they shed.

Preclinical studies have shown that our product candidates engaged with immune cells in the small intestine, which led to the generation and mobilization of CD4+ regulatory T cells. These regulatory T cells circulate throughout the body and have the potential to resolve inflammation without immunosuppression, which we believe could overcome the limitations of current anti-inflammatory drugs. Our product candidates have not been observed to colonize the gut nor modify the microbiome.

A first-generation product candidate, EDP1815, which is a mixture of whole cells and EVs from a specific, single strain of bacteria, delivered durable, clinically meaningful improvement in disease for some patients in a Phase 2 trial of psoriasis. In more than 800 patients to date, EDP1815 has displayed a safety and tolerability profile comparable to placebo. EDP2939 is a second generation product candidate that is a pharmaceutical composition of purified EVs produced by the same strain of bacteria as in EDP1815. The small size of the EVs allows us to concentrate many of them in a single dose and favorably influences their diffusion properties in the small intestine. Preclinical data for EDP2939 demonstrate that EDP2939 has shown more potent activity than EDP1815 at a given dose, and we have observed activity on par with injected biologics and JAK inhibitors in these models.

These discoveries may create the potential for a new type of effective, safe, well tolerated, and convenient medicine for people with many types and stages of many inflammatory diseases. Evelo initially is developing our lead product candidates as treatments in psoriasis. If shown to be effective in inflammatory disease mediated by the Th1, Th2 or Th17 inflammatory pathways, we believe these same investigational medicines have potential utility in additional inflammatory diseases, such as psoriatic and other forms of arthritis, asthma, allergy, and inflammatory bowel disease.

Clinical Programs

EDP2939

EDP2939, our first EV product candidate, represents a potential pipeline-in-a-product that has demonstrated biologic and JAK inhibitor-like activity in preclinical studies, along with activity spanning Th1, Th2, and Th17 inflammation. Due to the purity, enhanced potent activity, and increased concentration of EVs in EDP2939 relative to EDP1815, we expect EDP2939 to have even greater activity than EDP1815. We believe that EDP2939, if successfully developed and approved, has the potential to serve as a foundational treatment for numerous

16

inflammatory diseases, including psoriatic arthritis, rheumatoid arthritis, axial spondyloarthritis and inflammatory bowel disease.

Dosing in our Phase 1/2, randomized, placebo-controlled trial has commenced and is being conducted in two parts. Part A evaluates the safety and tolerability of EDP2939 in healthy volunteers. The primary endpoints of Part A (Phase 1) are safety endpoints, including adverse events, vital signs and safety laboratory tests. It includes up to three sequential, escalating multiple dose cohorts. The Safety Review Committee ("SRC") reported no notable safety or tolerability concerns for Cohorts 1 and 2 of Part A (Phase1). Cohort 3 of Part A (Phase 1) is currently ongoing. Part B (Phase 2) evaluates the safety, tolerability and preliminary efficacy in adults with moderate psoriasis. The primary endpoint of Part B is the proportion of participants with moderate psoriasis achieving a PASI-50 response compared to placebo. The Part B (Phase 2) study of EDP2939 in moderate psoriasis is now fully enrolled, and we expect to report topline results early in the fourth quarter of 2023.

EDP1815

EDP1815 is a pharmaceutical preparation of a single strain of Prevotella histicola isolated from a human donor and selected for its specific pharmacology. It contains a mixture of whole cells and EVs. EDP1815 has been studied in more than 800 patients to date and has displayed a safety and tolerability profile comparable to placebo.

Psoriasis

In September 2021, we announced positive data from a Phase 2 trial of EDP1815 in psoriasis. The trial evaluated three doses of EDP1815 in patients with mild and moderate psoriasis and consisted of a treatment phase (Part A) and an off-treatment follow-up phase (Part B). The primary endpoint was the mean percentage change in PASI scores between treatment and placebo at 16 weeks. Secondary endpoints included the proportion of study patients who achieved at least a 50% improvement in PASI from baseline at the week 16 timepoint, and other clinical measures of disease such as PGA, BSA, PGA x BSA, PSI, and DLQI.

In Part A, 25% to 32% of patients across the three EDP1815 treated cohorts achieved a PASI-50 or greater reduction at week 16 compared to 12% on placebo. In Cohorts 1 and 2, this difference in response rate was statistically significant (p <0.05). Cohort 3 was not statistically significant, but directionally similar (25% vs. 12%). The pooled PASI-50 response across all three EDP1815 cohorts, an exploratory analysis, was 29% vs. 12% for placebo and was also statistically significant with a p-value of 0.027. EDP1815 was observed to be well tolerated in Part A (treatment phase) of the trial. The safety data were comparable to placebo, and there were no drug related serious adverse events. Part B results in February 2022 demonstrated durable and deeper clinical responses without any new psoriasis medication being used during this time. There were no drug-related adverse events in Part B, and no flare or rebound following cessation of dosing.

We believe EDP2939 may have greater potential activity than EDP1815 in psoriasis, with similar tolerability. The progression and development of EDP1815 is contingent upon the results of the ongoing EDP2939 trial and availability of funding and resources.

Atopic dermatitis

In February 2022, we initiated a Phase 2 trial of EDP1815 for atopic dermatitis treatment, aiming to evaluate its efficacy and safety compared to placebo. The primary endpoint was a 50% improvement in EASI score at week 16. In February 2023, interim data revealed that Cohorts 1, 2, and 3 did not meet the primary endpoint, with high placebo response rates. In April 2023, we announced that Cohort 4 also failed to meet the primary endpoint. The high placebo response rate was consistent across all cohorts, the cause of which has not been identified. Due to these results, further development of EDP1815 in atopic dermatitis will be discontinued, following a wind-down of the clinical study, and resources will be focused on the next generation of the EV platform and EDP2939.

Nasdaq Listing Notifications

On March 17, 2023, April 25, 2023 and April 28, 2023, we received letters from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying us of non-compliance with certain requirements for continued listing on The Nasdaq Global Select Market.

There can be no assurance that we will be able to maintain compliance with the continued listing requirements of The Nasdaq Global Select Market, or satisfy the requirements necessary to transfer the listing of our common stock

17

to The Nasdaq Capital Market. Delisting from the Nasdaq Global Select Market or any Nasdaq market could make trading our common stock more difficult for investors, potentially leading to declines in our share price and liquidity. In addition, delisting from Nasdaq could also make it more difficult for us to raise additional capital. See “Risk Factors—Our common stock may be delisted from The Nasdaq Global Select Market if we cannot regain compliance with Nasdaq’s continued listing requirements, which could harm our business, the trading price of our common stock, our ability to raise additional capital and the liquidity of the market for our common stock” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Financial Operations Overview

Revenue

We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. As discussed in Note 3 - ALJ Collaborative Agreement to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we have entered into a collaboration agreement that will result in the recognition of $7.5 million of revenue upon the satisfaction of the performance obligation identified within the agreement. If our development efforts for our current product candidates or additional product candidates that we may develop in the future are successful and result in marketing approval, or if we enter into additional collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements.

Operating Expenses

Our operating expenses since inception have consisted primarily of research and development ("R&D") activities and general and administrative ("G&A") costs.

Research and Development Expenses

R&D expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the development of our product candidates, which include:

•expenses incurred under agreements with third parties, including investigative sites, external laboratories and CROs, that conduct research, preclinical activities and clinical trials on our behalf;

•manufacturing process-development costs as well as technology transfer and other expenses incurred with CMOs that manufacture drug substance and drug product for use in our preclinical activities and any current or future clinical trials;

•salaries, benefits 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;

•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 R&D costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our unaudited condensed consolidated financial statements as prepaid or accrued R&D expenses. Nonrefundable advance payments for goods or services to be received in the future for use in R&D activities are deferred and capitalized, even when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

Our primary focus of R&D since inception has been building a platform to enable us to develop medicines based on an understanding of the gut-body network and to show potential clinical utility and develop the first set of clinical assets. Our platform and program expenses consist principally of costs, such as preclinical research, process

18

development research, clinical and preclinical manufacturing activity costs, clinical development costs, licensing expense as well as an allocation of certain indirect costs, facility and office related expenses. We do not allocate personnel costs, which include salaries, discretionary bonus and stock-based compensation costs, as such costs are separately classified as R&D personnel costs.

R&D activities 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. Subject to obtaining appropriate funding, we expect that our R&D expenses will continue to increase in the foreseeable future as we continue to implement our business strategy and our ongoing clinical trials for our product candidates including EDP1815 and EDP2939, initiate additional clinical trials including potentially for EDP1815 and EDP2939, discover and develop additional product candidates, seek regulatory approvals for any products that successfully complete clinical trials, continue to source or potentially build manufacturing capabilities, hire additional R&D personnel and expand into additional therapeutic areas.

At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales or licensing of our product candidates. This is due to the numerous risks and uncertainties associated with drug development, including without limitation the uncertainty of:

•our ability to add and retain key research and development personnel;

•our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates;

•our ability to obtain regulatory approval to conduct registration trials;

•our successful enrollment in and completion of clinical trials;

•any delays in clinical trials, as a result of public health crises, such as the COVID-19 pandemic;

•global economic slowdown and market instability, including the impact from supply chain delays and increasing inflation and interest rates;

•the costs associated with the development of our current product candidates and/or any additional product candidates that we identify in-house or acquire through collaborations;

•our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the impact on disease progression of our product candidates;

•our ability to establish an appropriate safety profile with IND-enabling toxicology studies;

•our ability to establish and maintain agreements with CMOs and other entities for clinical trial supply and future commercial supply, if our product candidates are approved;

•the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;

•our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved;

•our receipt of marketing approvals from applicable regulatory authorities;

•our ability to commercialize products, if and when approved, whether alone or in collaboration with others; and

•the continued acceptable safety profiles of the product candidates following approval.

A change in any of these or other variables with respect to the development of any of our current or future product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. 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 or retaining existing personnel to support our research and development efforts.

19

General and Administrative Expenses

G&A expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, pre-commercial, corporate and business development, and administrative functions. G&A expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs; and other costs associated with operating a public company including investor relations and board related fees and expenses.

Interest Expense, Net

During the three months ended March 31, 2023 and 2022, interest expense, net consisted primarily of interest at the stated rate on borrowings under our loan and security agreements, amortization of deferred financing costs and interest expense related to the accretion of debt discount offset by interest earned on institutional money market instruments.

We anticipate that the interest expense on our outstanding loan will increase in the near term, if and as interest rates rise in response to actions taken by the U.S. Federal Reserve. We expect that interest income earned on our money market accounts may increase in response to rising interest rates; however the net impact is uncertain given our fluctuating cash/money market balances.

Other Miscellaneous Income, Net

For the three months ended March 31, 2023, other miscellaneous income, net consists of government R&D tax credits related to our operations in the UK, offset by foreign currency exchange losses and changes in the fair value of common stock warrants.

Income Taxes

Income tax expense primarily relates to tax expense at our UK subsidiary.

Since our inception in 2014, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items.

Results of Operations

Comparison of the Three Months Ended March 31, 2023 and 2022

Our statement of operations for the three months ended March 31, 2023 and 2022 (in thousands):

	Three Months Ended March 31,				Change
	2023		2022
Operating expenses:
Research and development	$	17,857	$	19,321	$	(1,464)
General and administrative	7,043		9,417		(2,374)
Total operating expenses	24,900		28,738		(3,838)
Loss from operations	(24,900)		(28,738)		3,838
Other income (expense):
Interest expense, net	(1,111)		(1,027)		(84)
Change in fair value of warrants	627		—		627
Other miscellaneous income, net	188		20		168
Total other expenses, net	(296)		(1,007)		711
Loss before income taxes	(25,196)		(29,745)		4,549
Income tax expense	(145)		(116)		(29)
Net loss	$	(25,341)	$	(29,861)	$	4,520

20

Net Loss

The net loss was $25.3 million for the three months ended March 31, 2023, compared to $29.9 million for the three months ended March 31, 2022. The decrease in net loss of $4.5 million was the result of a decrease of $3.8 million in total operating expenses, a $0.6 million decrease in fair value of warrants, and a $0.2 million increase in other miscellaneous income, partially offset by a $0.1 million increase in net interest expense. Of our total operating expenses, R&D expenses decreased by $1.5 million and G&A expenses decreased by $2.4 million.

Research and Development Expenses (in thousands):

	Three Months Ended March 31,				Change
	2023		2022
Inflammation programs	$	8,442	$	7,000	$	1,442
Personnel costs	5,252		6,543		(1,291)
Platform expenses	2,585		3,658		(1,073)
Stock-based compensation	1,521		2,036		(515)
Other	57		84		(27)
Total research and development expenses	$	17,857	$	19,321	$	(1,464)

R&D expenses were $17.9 million for the three months ended March 31, 2023, compared to $19.3 million for the three months ended March 31, 2022. The overall decrease of $1.5 million was driven primarily by a $1.3 million decrease in personnel costs due to fewer employees, including the impact of the Workforce Reduction (as defined below) we implemented in February 2023, net of severance charge recorded in the first quarter of 2023, a decrease of $0.5 million stock-based compensation as a result of fewer employees, and a $1.1 million decrease in platform expenses as a result of overall cost controls in lab operations. As a result of the Workforce Reduction, we reduced our headcount by 34 employees in R&D and incurred a severance charge of $1.3 million during the three months ended March 31, 2023. We expect to fully realize the benefits of the Workforce Reduction throughout the remainder of fiscal year 2023. These decreases were partially offset by a $1.4 million increase in inflammation programs spending, which was driven by EDP2939 extracellular vesicles program and the continuation of the EDP1815 Phase 2 trial in atopic dermatitis.

Overall, we expect to continue to closely control spending in research and development, prioritizing spending on our key clinical programs and, as resources permit, potentially expand into additional therapeutic areas, continue development efforts and mechanism-of-action research, and seek to enhance manufacturing capabilities.

General and Administrative Expenses (in thousands):

	Three Months Ended March 31,				Change
	2023		2022
Personnel costs	$	3,408	$	3,730	$	(322)
Stock-based compensation	1,388		2,239		(851)
Professional fees	1,600		2,257		(657)
Facility costs, office expense and other	647		1,191		(544)
Total general and administrative expenses	$	7,043	$	9,417	$	(2,374)

G&A expenses were $7.0 million for the three months ended March 31, 2023, compared to $9.4 million for the three months ended March 31, 2022. The decrease of $2.4 million was driven by a $0.9 million decrease in stock-based compensation as a result of fewer employees, a $0.7 million decrease in general and administrative professional fees, a $0.5 million decrease in facilities and other costs given focus on cost reduction, and a $0.3 million decrease in personnel-related costs due to fewer employees, including the impact of the Workforce Reduction, net of severance charge recorded in the first quarter of 2023. As a result of the Workforce Reduction, we reduced our headcount by 14 employees in G&A and incurred a severance charge of $1.3 million during the three months ended March 31, 2023. We expect to fully realize the benefits of the Workforce Reduction throughout the remainder of fiscal year 2023.

21

Total Other Expense, Net

Total other expense, net for the three months ended March 31, 2023 was $0.3 million compared to $1.0 million for the three months ended March 31, 2022. This decrease of $0.7 million was primarily driven by a $0.6 million decrease in fair value of warrants, a $0.2 million increase in other miscellaneous income, partially offset by increased net interest expense of $0.1 million resulting from both higher current year average debt balances and interest rates.

22

Liquidity and Capital Resources

We were incorporated and commenced operations in 2014. Since our incorporation, we have devoted substantially all of our resources to developing preclinical and clinical product candidates, building our intellectual property portfolio and process development and manufacturing function, business planning, raising capital and providing general and administrative support for these operations. To date, we have financed our operations primarily with the proceeds from issuance of our common stock combined with proceeds from previous sales of our convertible preferred stock to our equity investors and borrowings under loan and security agreements. From our inception through March 31, 2023, we have received gross proceeds of $520.1 million from such transactions, which includes a net $45.0 million borrowed under debt facilities. As of March 31, 2023, we had cash and cash equivalents of $27.5 million and an accumulated deficit of $554.6 million.

In February 2023, we released interim data from the first three cohorts of our ongoing Phase 2 trial of EDP1815 in atopic dermatitis patients. Cohorts 1, 2 and 3 failed to meet the trial's primary endpoint. In connection with this data, we implemented cost reduction initiatives, including a reduction in workforce of 48 employees, or approximately 45% of our headcount as of the date of the reduction, in order to preserve cash and prioritize investment in our core clinical programs (the "Workforce Reduction"). In April 2023, and consistent with the first three cohorts of Phase 2 trial of EDP1815 in atopic dermatitis, Cohort 4 did not meet the primary endpoint. Given these results, we decided to cease further development of EDP1815 in atopic dermatitis, following a wind-down of the study, prioritize investment in the EV platform and in EDP2939 clinical development, and further reduce our workforce to save costs.

We evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are issued. We incurred net losses of approximately $25.3 million and $29.9 million for the three months ended March 31, 2023 and 2022, respectively. We have incurred losses and generated negative operating cash flows since our inception and anticipate that we will continue to incur losses for at least the next several years. The transition to profitability is dependent upon the successful development, approval, and commercialization of our products and product candidates and the achievement of a level of revenues adequate to support our cost structure. Based on our current operating plan, we believe that our cash and cash equivalents as of March 31, 2023 will not be sufficient to fund operations and capital expenditures for at least the twelve months following the filing of this Quarterly Report on Form 10-Q, and we will need to obtain additional funding. Until such time, if ever, as we can generate revenue from product sales, we intend to pursue strategic partnerships, licensing arrangements and collaborations, and obtain additional funding through our available financing sources, which may include additional public offerings of common stock and private financing of debt or equity. There can be no assurance that we will be successful in pursuing any such partnerships, licensing arrangements or collaborations, or that any 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 will have to significantly delay, scale back or discontinue our research and development programs, future commercialization efforts, or operations. Our beliefs about our ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from our estimates, we may need to seek additional funding, if it is available, sooner or on less desirable terms than would otherwise be expected.

We anticipate capital expenditures for the rest of 2023 to be minimal.

Funding Requirements

We have incurred losses and cumulative negative cash flows from operations since our inception. We anticipate that we will continue to incur significant losses for at least the next several years. 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 and extracellular vesicle 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 operating as a public company. We anticipate that our expenses will increase substantially if and as we:

•continue our clinical trials;

•advance the clinical development of potential and additional product candidates;

23

•conduct research and continue preclinical development of potential product candidates;

•make strategic investments in manufacturing capabilities, including potentially planning and building a commercial manufacturing facility;

•maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property;

•seek to obtain regulatory approvals for our product candidates;

•potentially establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products for which we may obtain regulatory approval;

•add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts and to support our operations as a public company; and

•experience any delays or encounter any issues with any of the above, including but not limited to failed studies or trials, complex results, safety issues or other regulatory or personnel challenges.

As of March 31, 2023, our principal source of liquidity is cash and cash equivalents, which totaled $27.5 million. Our cash and cash equivalents are maintained at financial institutions in amounts that exceed federally insured limits. We expect that our existing cash and cash equivalents as of March 31, 2023 will enable us to fund our planned operating expenses and capital expenditure requirements into the third quarter of 2023. Based on our current operating plan, we believe that our cash and cash equivalents will not be sufficient to fund operations and capital expenditures for at least the twelve months following the filing of this Quarterly Report on Form 10-Q, and we will need to obtain additional funding. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. Our forecast is based on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Due to the uncertainty in securing additional funding, and the insufficient amount of cash and cash equivalent resources as of March 31, 2023, we have concluded that substantial doubt exists with respect to our ability to continue as a going concern within one year after the date of the filing of this Quarterly Report on Form 10-Q.

Because of the numerous risks and uncertainties associated with the development of our product candidates, including EDP1815 and EDP2939, any additional product candidates or any follow-on programs, and because the extent to which we may enter into further partnerships, collaborations or licensing arrangements with third parties for the development of these product candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements for our technology platform or our other programs will depend on many factors, including:

•the costs, progress and results of our clinical trials, including of EDP1815 and EDP2939;

•the cost of manufacturing clinical supplies of our product candidates;

•the scope, progress, results and costs of preclinical development, including laboratory testing and studies, for any other potential product candidates;

•the costs, timing and outcome of regulatory review of our product candidates;

•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 additional commitments or agreements to complete any such acquisitions or investments in businesses.

24

Identifying potential product candidates and conducting preclinical testing and clinical trials is a time consuming, expensive and uncertain process that takes years to complete. We may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.

Adequate additional funds may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Additional debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require or involve the issuance of warrants, which could potentially dilute the ownership interest of existing stockholders. The terms of our loan and security agreement with Horizon preclude us from paying dividends on our equity securities without their consent. If we lack sufficient capital to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations would be materially adversely affected.

If we raise additional funds through collaborations, partnerships, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.

Financing

We are a development stage company and have not generated any revenue. 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. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution.

As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Additionally, our ability to raise capital may be impacted by global macroeconomic conditions including as a result of international political conflict, supply chain issues and rising inflation and interest rates. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so. We also continue to face liquidity issues as described below.

We also anticipate continuing increases in U.S. interest rates will result in both higher interest expense and potentially interest income depending upon our invested cash balance, but we are unable to anticipate with any certainty the future net effect to our consolidated net loss and resulting cash flows from operating activity.

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.

25

Equity Financing

In August 2021, we filed a Registration Statement on Form S-3 (File No. 333-259005) (the “2021 Shelf Registration Statement”) with the SEC in relation to the registration of common stock, preferred stock, debt securities, warrants and/or units of any combination thereof in the aggregate amount of up to $200 million for a period of up to three years from the date of its effectiveness on August 30, 2021.

In May 2022, we entered into a securities purchase agreement (the "Purchase Agreement") with the purchasers named therein (collectively, the "Purchasers"). Pursuant to the Purchase Agreement, we agreed to issue and sell to the Purchasers in a registered direct offering an aggregate of 54,246,358 shares of common stock, at a purchase price of $1.46 per share, pursuant to the 2021 Shelf Registration Statement and a related prospectus supplement filed with the SEC. The closing of the offering occurred on May 27, 2022. The placement generated gross proceeds of $79.2 million. There were no underwriting or placement fees associated with the transaction.

In July 2022, we entered into an “at-the-market” offering sales agreement with Cowen (the "2022 ATM") providing for the offering, issuance and sale of up to $75.0 million of common stock under the 2021 Shelf Registration Statement. We did not sell any shares of our common stock under the 2022 ATM during the three months ended March 31, 2023. As of March 31, 2023, $69.1 million remained available to be sold under the 2022 ATM.

Debt Financing

Horizon Technology Finance Corporation Loan and Security Agreement

In December 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Horizon (as lender and collateral agent, the “Lender”) pursuant to which Horizon agreed to make term loans in an aggregate principal amount of up to $45.0 million available to us on the closing date, and we borrowed $45.0 million. Borrowings under the loan agreement are collateralized by substantially all of our personal property, excluding intellectual property, and we pledged our equity interests in our subsidiaries, subject to certain limitations with respect to our foreign subsidiaries.

Interest on the outstanding loan balance will accrue at a variable annual rate equal to the greater of (i) 11% and (ii) rate of interest noted in The Wall Street Journal, Money Rates section, as the “Prime Rate” plus the “Loan Rate Spread” as defined in the loan agreement. We are required to make interest-only payments on the loans on the stub period date (January 1, 2023) and for the first thirty-six monthly payment dates prior to when the loans are scheduled to begin amortizing on February 1, 2026. Beginning on February 1, 2026, we must pay twenty-four equal consecutive monthly installment payments repaying $35.0 million of the principal, plus interest on all outstanding balance until the loans mature on January 1, 2028 (the “Maturity Date”). The remaining $10.0 million of principal is due and payable on the Maturity Date. At our option, we may prepay the loans in whole, subject to a prepayment fee of 3% of the amount prepaid if prepaid on or before the Amortization Date, or if the prepayment occurs after less than 12 months after Amortization Date, 2% of the amount prepaid, and if more than 12 months after the Amortization Date but before the Maturity Date, 1%. A final payment equal to 4.25% of the principal borrowed on the closing date is due on the Maturity Date (or upon repayment in full of principal, if earlier).

Upon the entry into the loan agreement, we were required to pay Horizon a commitment fee of $0.5 million, as well as other customary fees and expenses. The loan agreement contains customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches of covenants, change of control and occurrence of a material adverse effect. Upon the occurrence and continuation of an event of default, a default interest rate of an additional 5% per annum may be applied to the outstanding loan balances, and Horizon may declare all outstanding obligations immediately due and payable and exercise all of their rights and remedies as set forth in the loan agreement and under applicable law. Our subsidiary, Evelo Biosciences Security Corporation, may maintain cash or cash equivalents so long as we satisfy certain liquidity requirements. As of March 31, 2023, we believe we were in compliance with all covenants under the Loan Agreement.

In connection with the entry into the loan agreement, we also issued to Horizon warrants to purchase up to an aggregate 463,915 shares of our common stock, with an exercise price of $1.94 per share. The warrants are exercisable immediately and expire on December 15, 2032, provided that, under certain circumstances, the warrants may terminate and expire earlier in connection with the closing of certain acquisition transactions involving us. The warrants provide that Horizon may elect to exercise the warrant on a net “cashless” basis at any time prior to the expiration thereof. The fair market value of one share of our common stock in connection with any cashless

26

exercise shall be the closing price or last sale price per share of our common stock on a nationally recognized securities exchange, inter-dealer quotation system or over-the-counter market on which our common stock is traded on the business day immediately prior to the date the holder elects to exercise the warrants on a cashless basis.

The Loan Agreement contains a subjective acceleration clause which allows Horizon to accelerate the maturity of the principal payments under certain circumstances. Based upon our significant operating losses and going concern assessment as of March 31, 2023, we determined that we should classify our loan facility with Horizon, which would otherwise be classified as long-term debt, as a current liability on our consolidated balance sheet as of March 31, 2023.

In addition, on May 10, 2023 (the “Effective Date”), the Company (expressly without conceding that an ”Event of Default” (as defined under the Loan Agreement) has occurred) and Horizon entered into a Standstill Agreement pursuant to which Horizon agreed to forbear from exercising, and not to exercise, any all remedies available to it under the Loan Agreement, warrants, notes and other Financing Documents (as defined in the Standstill Agreement) or at law or in equity from the Effective Date until 9:59 p.m. (Eastern Time) on May 15, 2023 (as may be extended, the “Standstill Period”) as the Company continues negotiations with the Lender and pursues potential sources of financing and financial restructuring alternatives. The Company and Horizon agreed to extend the Standstill Period until May 22, 2023. In order to secure the Standstill Period, the Company has agreed, among other things, that during the Standstill Period, it will only use the collateral under the Loan Agreement in the ordinary course of its business and in accordance with the provisions of the Loan Agreement and other Financing Documents. As of the date of the issuance of these condensed consolidated financial statements, the Lender has not made a demand for payment of amounts outstanding under the Financing Documents. purported to accelerate any Loan to maturity, or otherwise sought to exercise remedies.

Due our liquidity issues, we are currently considering, and are seeking to make, changes to our capital structure to increase our cash runway, maintain sufficient liquidity, strengthen our balance sheet and meet our future debt obligations. If we are not able to secure additional financing, and/or enter into further agreements with the Lender, including extending the Standstill Period, the Lender could seek to, among other remedies available to it, if circumstances are triggered under the Loan Agreement, demand repayment of amounts outstanding under the Loan Agreement, accelerate any Loan to maturity or pursue remedies against the collateral securing our obligations under the Loan Agreement. In addition, we could be forced to pursue alternative options, including, but not limited to, a further workforce reduction, implementing other cost-reduction initiatives, seeking relief in the U.S. Bankruptcy Courts and/or winding down operations.

See Note 7 - Loan and Security Agreement to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding our debt facility.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):

	Three Months Ended March 31,
	2023		2022
Cash used in operating activities	$	(20,276)	$	(28,932)
Cash used in investing activities	(12)		(153)
Cash (used in) provided by financing activities	(199)		117
Effect of exchange rate changes on cash and cash equivalents	17		—
Net decrease in cash, cash equivalents and restricted cash	$	(20,470)	$	(28,968)

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2023, was $20.3 million, driven primarily by our net loss of $25.3 million which originates from investments in research and clinical study costs to advance our programs, as well as general and administrative costs which include costs to operate as a public company. This net loss figure is reduced by non-cash charges consisting of stock-based compensation expense of $2.9 million, lease expense of $0.7 million, depreciation expense of $0.4 million, interest expense of $0.2 million. These reductions were partially offset by $0.6 million decrease in the fair value of warrants. The change in operating assets

27

and liabilities, primarily the pay-down of liabilities including the operating lease for our office, account for $1.5 million of cash provided by operations.

We anticipate continuing increases in U.S. interest rates will result in both higher interest income and interest expense, but we are unable to anticipate with any certainty the future net effect to our consolidated net loss and resulting cash flows from operating activity.

Net cash used in operating activities for the three months ended March 31, 2022 was $28.9 million, driven primarily by our net loss of $29.9 million. This was partially offset by non-cash charges consisting of stock-based compensation expense of $4.3 million, depreciation expense of $0.5 million, non-cash lease expense of $0.5 million, and non-cash interest expense of $0.1 million. The change in operating assets and liabilities account for $4.6 million of cash used in operations.

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2023 and 2022 was less than $0.1 million and $0.2 million, respectively, primarily due to the purchase of capital equipment in 2022.

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2023 was $0.2 million, primarily due to a $0.2 million payment of fees accrued in 2022 regarding the issuance of long-term debt under the Horizon loan and security agreement.

Net cash provided by financing activities for the three months ended March 31, 2022 was $0.1 million, consisting of net proceeds from the exercise of stock options.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

There were no material changes to our critical accounting policies in the three months ended March 31, 2023 from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2022 Annual Report.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide this information.

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures as defined under 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2023.

28

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

29

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in claims and proceedings arising in the course of our business. The outcome of any such claim or proceeding, regardless of the merits, is inherently uncertain. We are not subject to any material legal proceedings.

Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and the related notes and Part I, Item 2. “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and in our Annual Report on Form 10-K filed with the SEC on March 16, 2023, including our consolidated financial statements and the related notes thereto, before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Financial Position and Need for Additional Capital

We are a development-stage company and have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.

Since inception, we have incurred significant operating losses. Our net loss was $25.3 million and $29.9 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, we had an accumulated deficit of $554.6 million. As noted below, we have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. Through March 31, 2023, we have financed our operations through proceeds from equity offerings of our common stock, private placements of our since redeemed preferred stock and borrowings under loan and security agreements. We have devoted substantially all of our financial resources and efforts to developing our platform, identifying potential product candidates and conducting preclinical studies and clinical trials. We are in the early stages of developing our product candidates, and we have not completed the development of any product candidate. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase substantially as we, without limitation:

•    seek to initiate additional and larger clinical trials of our product candidates;

•    seek to enhance our platform and discover and develop additional product candidates;

•    seek regulatory approvals for any product candidates that successfully complete clinical trials;

•    seek to establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products for which we may obtain regulatory approval;

•    maintain, expand and protect our intellectual property portfolio; and

•    add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts, and to support our operations as a public company.

In addition, we anticipate that our expenses will increase substantially if we experience any delays or encounter any issues with any of the above, including but not limited to failed studies or trials, complex results, safety issues or other regulatory challenges.

To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing preclinical studies and clinical trials of our product candidates, discovering additional product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory approval. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, we may never generate revenue that is significant enough to achieve profitability.

30

Because of the numerous risks and uncertainties associated with pharmaceutical product and biological product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. If we are required by the FDA or other regulatory authorities to perform preclinical studies or clinical trials in addition to those currently expected, or if there are any delays in completing our preclinical studies or clinical trials or the development of any of our product candidates, our expenses could increase and revenue could be further delayed.

Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress our value and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations.

With our current cash resources, we will be unable to meet our future debt repayment obligation to our current Lender unless we are able to raise additional capital and / or restructure our existing debt, which may be on unfavorable terms, if available at all, and we could be forced to pursue alternative options, including, but not limited to, a further workforce reduction, implementing other cost-reduction initiatives, seeking relief in the U.S. Bankruptcy Courts and/or winding down operations.

Pursuant to the terms of the Loan and Security Agreement (the “Loan Agreement”) entered into on December 15, 2022 with Horizon Technology Finance Corporation, as lender and collateral agent ("Horizon" or the “Lender”), we are required, and have begun, to make interest-only payments on the loans on the stub period date (January 1, 2023) and for the first thirty-six monthly payment dates prior to when the loans are scheduled to begin amortizing on February 1, 2026. Beginning on February 1, 2026, we must pay twenty-four equal consecutive monthly installment payments repaying $35.0 million of the principal, plus interest on all outstanding balances until the loans mature on January 1, 2028 (the “Maturity Date”). The remaining $10.0 million of principal is due and payable on the Maturity Date. See Note 7 - Loan and Security Agreement to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information regarding our debt facility.

As our current cash resources are insufficient to meet these principal and interest obligations, we will need to raise additional capital and / or restructure the existing debt obligation on new terms which may be less favorable than the existing terms, if available at all. Such new terms, if available, may include additional encumbrances placed on our assets, incremental dilutive conversion features, the imposition of more restrictive covenants or other onerous conditions.

Upon our default under the Loan Agreement, the Lender may accelerate all of our repayment obligations and/or exercise all of their other rights and remedies under the Loan Agreement and applicable law, potentially requiring us to renegotiate our agreement on terms less favorable to us or to immediately cease operations. During the third quarter of 2022, we identified instances of noncompliance with provisions of the Prior Loan Agreement, which resulted in events of default that were not identified on a timely basis. There is no certainty that future defaults under the current Loan Agreement will not occur or that the Lender (or any then applicable lender) would agree to similar corrective actions as those accepted by the Prior Lender to waive these events of default, not assert their right to accelerate any outstanding loans in full and not charge penalty interest. Future defaults could result in, among other things, immediate acceleration of principal payment under the loan and penalty interest being assessed. Further, if we are liquidated, the Lender's rights to repayment would be senior to the rights of the holders of our common stock to receive any proceeds from the liquidation. The Lender could declare a default upon the occurrence of any event, among others, that they interpret as a material adverse effect (including potentially with respect to our declining cash position or negative data results) or a change of control as delineated under the Loan Agreement, payment defaults, or breaches of covenants thereby requiring us to repay the loan immediately, which we would be unable to do given our current cash position, or to attempt to reverse the declaration of default through negotiation or litigation. Any declaration by the Lender of an event of default would significantly harm our business and prospects and could cause the price of our common stock to decline or force us to discontinue our operations immediately. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.

In addition, on May 10, 2023 (the “Effective Date”), the Company (expressly without conceding that an ”Event of Default” (as defined under the Loan Agreement) has occurred) and Horizon entered into a Standstill Agreement pursuant to which Horizon agreed to forbear from exercising, and not to exercise, any all remedies available to it under the Loan Agreement, warrants, notes and other Financing Documents (as defined in the Standstill Agreement) or at law or in equity from the Effective Date until 9:59 p.m. (Eastern Time) on May 15, 2023 (as may be extended, the “Standstill Period”) as the Company continues negotiations with the Lender and pursues potential

31

sources of financing and financial restructuring alternatives. The Company and Horizon agreed to extend the Standstill Period until May 22, 2023. In order to secure the Standstill Period, the Company has agreed, among other things, that during the Standstill Period, it will only use the collateral under the Loan Agreement in the ordinary course of its business and in accordance with the provisions of the Loan Agreement and other Financing Documents. As of the date of the issuance of these condensed consolidated financial statements, the Lender has not made a demand for payment of amounts outstanding under the Financing Documents. purported to accelerate any Loan to maturity, or otherwise sought to exercise remedies. Due our liquidity issues, we are currently considering, and are seeking to make, changes to our capital structure to increase our cash runway, maintain sufficient liquidity, strengthen our balance sheet and meet our future debt obligations. If we are not able to secure additional financing, and/or enter into further agreements with the Lender, including extending the Standstill Period, the Lender could seek to, among other remedies available to it, if circumstances are triggered under the Loan Agreement demand repayment of amounts outstanding under the Loan Agreement, accelerate any Loan to maturity or pursue remedies against the collateral securing our obligations under the Loan Agreement. In addition, we could be forced to pursue alternative options, including, but not limited to, a further workforce reduction, implementing other cost-reduction initiatives, seeking relief in the U.S. Bankruptcy Courts and/or winding down operations. There can be no assurance that we will be successful in our efforts to secure the requisite financing needed to continue our operations as intended.

We will need additional funding in order to complete development of our product candidates and commercialize our products, if approved. If we are unable to raise capital when needed, we could be forced to delay, reduce or discontinue our product development programs or commercialization efforts.

We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct clinical trials, scale or build manufacturing capacity and expand into additional therapeutic areas.

Based on our current operating plans, we expect that our existing cash and cash equivalents as of March 31, 2023 will be sufficient to enable us to fund operating expenses and capital expenditure requirements into the third quarter of 2023. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:

•    the progress and results of any ongoing and future clinical trials;

•    the cost of manufacturing clinical supplies of our product candidates, including EDP1815 and EDP2939;

•    the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for any other future product candidates;

•    the costs, timing and outcome of regulatory review of our product candidates;

•    our ability to repay and / or refinance our existing debt and to do so on acceptable terms, if at all;

•    the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution for any of our product candidates for which we receive marketing approval;

•    the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;

•    the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

•    the effect of competing technological and market developments; and

•    the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration arrangements for product candidates.

Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Additionally, market volatility resulting from the COVID-19 pandemic and global economic factors, including rising interest and inflation rates, could also adversely impact our ability to access capital as and when needed. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities by us, whether equity or debt, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity, including any shares subject to warrants that we have previously issued or may in the future issue, or of convertible securities, would dilute all of our stockholders. The occurrence of additional indebtedness could result in increased fixed payment obligations, and we may be required to agree to certain

32

restrictive covenants such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborators or others at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects. In addition, we maintain our cash and cash equivalents at financial institutions, and our deposits at these institutions exceed federally insured limits. Market conditions can impact the viability of these institutions and, in the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or product development programs or the commercialization of any product candidates or cease our operations. In addition, we may be unable to make milestone and royalty payments due under our intellectual property license agreements or other payments under our agreements with Contract Research Organizations ("CROs") and academic research collaborators, or expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.

Our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.

Since our inception in 2014, we have devoted substantially all of our resources to identifying and developing our product candidates, building our intellectual property portfolio, process development and manufacturing function, planning our business, raising capital and providing general and administrative support for these operations. All of our product candidates are in clinical or preclinical development. We have not yet demonstrated our ability to successfully complete a Phase 3 or other pivotal clinical trial, obtain regulatory approvals to commercialize a product, manufacture a commercial scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Additionally, we expect our financial condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history.

We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.

We will be forced to delay or reduce the scope of our development programs, reduce our research and development costs and/or limit or cease our operations if we are unable to obtain additional funding to support our current operating plan. We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. As of March 31, 2023, we had $27.5 million in cash and cash equivalents. Based on our available cash resources, we believe we do not have sufficient cash and cash equivalents on hand to support current operations for at least one year from the date of issuance of the financial statements appearing within this Quarterly Report on Form 10-Q. This condition raises substantial doubt about our ability to continue as a going concern for at least one year from the date that our financial statements for the quarter ended March 31, 2023 are issued. Nevertheless, our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We will need to raise additional capital to fund our future operations and remain as a going concern. There can be no assurance that we will be able to obtain additional funding on acceptable terms, if at all. To the extent that we raise additional capital through future equity offerings, the ownership interest of common stockholders will be diluted, which may be significant. However, we cannot guarantee that we will be able to obtain any or sufficient additional funding or that such funding, if available, will be obtainable on terms satisfactory to us. In the event that we are unable to obtain any or sufficient additional funding, there can be no assurance that we will be able to continue as a going concern, and we will be forced to delay, reduce or discontinue our product development programs or commercialization efforts.

33

The terms of our loan and security agreements place restrictions on our operating and financial flexibility, and if we are unable to comply with any of the covenants, we could be subject to adverse consequences including, without limitation, our having to immediately repay all amounts outstanding under the Loan Agreement and the Lender could seek to foreclose on the collateral.

On December 15, 2022 (the “Loan Closing Date”), we entered into the Loan Agreement with Horizon, as lender and collateral agent, pursuant to which the Lender agreed to make term loans, in an aggregate principal amount of up to $45.0 million, available to us on the Loan Closing Date, and we borrowed $45.0 million. Borrowings under the Loan Agreement are collateralized by substantially all of our personal property, excluding intellectual property, and we pledged our equity interests in our subsidiaries, subject to certain limitations with respect to certain our domestic and foreign subsidiaries. The loans carry a 3-year interest-only period and begin to amortize in February 2026. As of March 31, 2023, the outstanding principal balance under the Loan Agreement was $45.0 million.

The Loan Agreement contains customary representations, warranties, affirmative and negative covenants and events of default applicable to us and our subsidiaries. The Loan Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to: incur additional indebtedness; incur certain liens; pay dividends or make other distributions on equity interests; consolidate, merge or sell or otherwise dispose of our assets; make investments, loans, advances, guarantees and acquisitions; enter into transactions with affiliates; and change our business or ownership. Our ability to comply with these and other covenants in the Loan Agreement may be affected by events and factors beyond our control. In the event that we breach one or more covenants, the Lender may choose to declare an event of default and require that we immediately repay all amounts outstanding under the Loan Agreement, and the Lender could seek to foreclose on the collateral. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

Additionally, the credit markets and the financial services industry have been experiencing disruption characterized by the bankruptcy, failure, collapse or sale of various financial institutions, increased volatility in securities prices, diminished liquidity and credit availability and intervention from the U.S. and other governments. As a result, the cost and availability of credit has been and may continue to be adversely affected. If we are unable to obtain funding when needed and on acceptable terms, if at all, our financial condition and business prospects could be adversely impacted.

We have in the past and may continue to seek to establish collaboration agreements in the future, and we may not be successful or we may not be able to establish them on commercially reasonable terms and may have to alter our development and commercialization plans.

We have in the past and may continue to seek to form collaborations to fund our operations, potentially accelerate research and development activities, expand our capabilities, and provide for commercialization activities by third parties. These relationships have and may in the future require us to incur up-front expenses, increase our near and long-term expenditures, commit to substantial future milestone and royalty payments, issue securities that dilute our existing stockholders, and divert attention of our management.

If and when we seek to enter into future collaborations, we may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of a product candidate, reduce or delay development programs, delay potential commercialization, or reduce the scope of any sales or marketing activities.

Risks Related to the Discovery, Development and Regulatory Approval of Our Product Candidates

We are early in our development efforts and may not be successful in our efforts to use our platform to build a pipeline of product candidates and develop marketable drugs.

We are using our technology platform to harness SINTAX, or the small intestinal axis, with an initial focus on developing therapies in immunology, specifically inflammatory diseases. We are at an early stage of development and our platform has not yet, and may never lead to, approvable or marketable products. We are developing product candidates and possible additional product candidates that we intend to use to potentially treat other diseases. We may have problems applying our technologies to these other areas, and our new product candidates may not demonstrate a comparable ability in treating disease as our initial product candidates. Even if we are successful in identifying additional product candidates, they may not be suitable for clinical development as a result

34

of our inability to manufacture more complex oral biologics, limited efficacy, unacceptable safety profiles or other characteristics that indicate that they are unlikely to be products that will receive marketing approval and achieve market acceptance. The success of our product candidates will depend on several factors, including the following:

•    completion of preclinical studies and clinical trials with positive results;

•    receipt of marketing approvals from applicable regulatory authorities;

•    obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;

•    making arrangements with CMOs, or establishing our own commercial manufacturing capabilities;

•    launching commercial sales of our products, if and when approved, whether alone or in collaboration with others;

•    entering into new collaborations throughout the development process as appropriate, from preclinical studies through to commercialization;

•    acceptance of our products, if and when approved, by patients, the medical community and third-party payors;

•    effectively competing with other therapies;

•    obtaining and maintaining coverage and adequate reimbursement by third-party payors, including government payors, for our products, if approved;

•    protecting our rights in our intellectual property portfolio;

•    operating without infringing or violating the valid and enforceable patents or other intellectual property of third parties;

•    maintaining an acceptable safety profile of the products following approval; and

•    maintaining and growing an organization of scientists and business people who can develop and commercialize our products and technology.

If we do not successfully develop and commercialize product candidates based upon our technical approach, we will not be able to obtain product revenue in future periods, which likely would result in significant harm to our financial position and adversely affect our stock price. In February 2023, for example, we announced that the first three patient cohorts in a Phase 2 trial of EDP1815 in atopic dermatitis trial failed to meet the primary endpoint, which adversely affected our stock price.

Our product candidates are designed to act on cells in the small intestine to produce systemic therapeutic effects with limited systemic exposure. This biological interaction between the small intestine and the rest of the body may not function in humans the way we have observed in mice and our drugs may not reproduce the systemic effects we have seen in preclinical and early clinical data.

We believe our product candidates, such as EDP2939, have the potential to work by modulating systemic responses via interactions with cells in the small intestine. Dosing to achieve sufficient exposure may require an inconvenient dosing regimen. Even with a successful formulation and appropriate delivery profile to achieve proper exposure of our microbes or extracellular vesicles to the small intestine, we may not get sufficient or even any activity at the site of disease. This may be because our understanding of the mechanisms of the small intestine do not work in humans the way we believe they do. Despite there being strong academic literature to support the concept and our observations in preclinical studies in mice and early clinical trials in human patients with psoriasis, these principles and the ability to use pharmaceutical preparations derived from single strains of microbes to modulate the immune system and other systems have not yet been proven in humans.

Our product candidates are an unproven approach to therapeutic intervention.

All of our product candidates are based on targeting SINTAX. We have not, nor to our knowledge has any other company, received regulatory approval for an oral therapeutic based on this approach. We cannot be certain that our approach will lead to the development of approvable or marketable products. In addition, our product candidates may have different safety profiles and efficacy in various indications. Finally, the FDA or other regulatory agencies may lack experience in evaluating the safety and efficacy of products based on singe strains of microbes or extracellular vesicles, which could result in a longer than expected regulatory review process, increase our expected development costs and delay or prevent commercialization of our product candidates.

Our platform relies on third parties for biological materials to expand our microbial library.

35

Our platform relies on third parties for biological materials, including human samples containing bacteria, to expand our microbial library. Some biological materials have not always met our expectations or requirements, and any disruption in the supply of these biological materials could materially adversely affect our business and ability to build our pipeline of product candidates. For example, if any supplied biological materials are contaminated, we would not be able to use such biological materials. Although we have quality control processes and screening procedures, biological materials are susceptible to damage and contamination. Improper storage of these materials, by us or any third-party supplier, may require us to destroy some or all of our raw materials or products.

Even if our product candidates do not cause off-target adverse events, there may be immunotoxicity associated with the fundamental pharmacology of our product candidates.

Our product candidates, such as EDP2939, are designed to work by modulating the immune system. While we have observed limited systemic exposure in preclinical studies and early clinical trials, the pharmacological immune effects we aim to induce are systemic. Systemic immunomodulation from taking our product candidates could lead to immunotoxicity in patients, which may cause us or regulatory authorities to delay, limit or suspend clinical development. Other immunomodulatory agents have shown immunotoxicity. This includes immune suppressive agents, such as HUMIRA or REMICADE, which have shown an increased risk of infection or, in rare instances, certain types of blood cancer. In the case of immune activating agents, such as YERVOY, induction of adverse auto-immune events has been observed in some patients. Immunotoxicity in one program could cause regulators to view these adverse events as a class effect of our product candidates which may impact the timing of the development of our pipeline of potential product candidates. Even if the adverse events are manageable, the profile of the drug may be such that it limits or diminishes the possible number of patients who could receive our therapy.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics. For example, some of our product candidates may consist of live biological material that may remain viable in humans, which carries a risk of causing infections in patients. Some infections may require treatment with antibiotics to eliminate the bacteria. All of our product candidates are screened for antibiotic sensitivity, but it is possible that if antibiotic therapy does not eliminate the live biological material, a resistant version of our strain could emerge. These events, while unlikely, could cause a delay in our clinical development and/or could increase the regulatory standards for the entire class of our product candidates. In an instance where the infection risk of taking our product candidates is high, this may cause the benefit risk profile of therapy to be non-competitive in the market and may lead to discontinuation of development of the product candidate.

In addition, it is possible that infections from our product candidates could be rare and not frequently observed in our clinical trials. In larger post marketing authorization trials, however, data could show that the infection risk, while small, does exist. If unacceptable side effects arise in the development of our product candidates, we, the FDA or comparable foreign regulatory authorities, the IRBs at the institutions in which our clinical trials are conducted, or the data safety monitors could suspend or terminate our clinical trials, or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-related side effects could also affect patient recruitment or the ability of enrolled patients to complete the trial or could result in potential product liability claims. In addition, these side effects may not be appropriately recognized or managed by the treating medical staff. We expect to have to train medical personnel using our product candidates to understand the side effect profiles for our clinical trials and upon any commercialization of any of our product candidates. Inadequate training in recognizing or managing the potential side effects of our product candidates could result in patient injury or death. Any of these occurrences may harm our business, financial condition and prospects significantly.

If any of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

•    regulatory authorities may withdraw their approval of the product;

36

•    we may be required to recall a product or change the way such product is administered to patients;

•    additional restrictions may be imposed on the marketing of the particular product or the manufacturing processes for the product or any component thereof;

•    we may be required to conduct post-marketing studies or clinical trials;

•    regulatory authorities may require the addition of labeling statements, such as a "black box" warning or a contraindication;

•    we may be required to implement a risk evaluation and mitigation strategy or create a medication guide outlining the risks of such side effects for distribution to patients or similar risk management measures;

•    we could be sued and held liable for harm caused to patients;

•    the product may become less competitive; and

•    our reputation may suffer.

Any of the foregoing events could prevent us from achieving or maintaining market acceptance of a particular product candidate, if approved, and result in the loss of significant revenues to us, which would materially and adversely affect our results of operations and business.

Companies with microbiome products or differing microbial products may produce negative clinical data which will adversely affect public perception of our product candidates, and may negatively impact regulatory approval of, or demand for, our potential products.

Our product candidates are pharmaceutical compositions of commensal microbes or derivatives thereof. While we believe our approach is distinct from microbiome therapies, negative data from clinical trials using microbiome-based therapies (e.g., fecal transplant) and other microbial therapies could negatively impact the perception of the therapeutic use of microbial-based products. This could negatively impact our ability to enroll patients in clinical trials. The clinical and commercial success of our potential products will depend in part on the public and clinical communities’ acceptance of the use of therapeutic microbes and derivatives thereof. Moreover, our success depends upon physicians prescribing, and their patients being willing to receive, treatments that involve the use of product candidates we may develop in lieu of, or in addition to, existing treatments with which they are already familiar and for which greater clinical data may be available.

Adverse events in our preclinical studies or clinical trials, or those of our competitors or of academic researchers utilizing therapeutic microbes, even if not ultimately attributable to our product candidates, and the resulting publicity, could result in increased governmental regulation, unfavorable public perception, increased volatility in our stock price, potential regulatory delays in the testing or approval of our potential product candidates, stricter labeling requirements for our product candidates that are approved, if any, and a decrease in demand for any such products.

Catastrophic loss of our master cell banks could significantly impair our ability to manufacture our product candidates.

Our product candidates require that we manufacture our microbial strains from master cell banks ("MCBs"). There is a possibility of a catastrophic failure or destruction of our MCBs. This could make it impossible for us to continue to manufacture a specific product candidate or product. Recreating and re-certifying our MCBs is possible but not certain and could put at risk the supply of our product candidates for preclinical studies or clinical trials or any products, if approved, to our customers.

Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

All of our product candidates are currently in clinical or preclinical development. It is impossible to predict when or if any of our product candidates will prove effective and safe in humans or will receive regulatory approval, and the risk of failure through the product development process is high. Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failed clinical trial can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict

37

final results. For example, in certain of our clinical trials, investigational drug products are being delivered in a capsule for targeted release in the small intestine. This formulation has not previously been clinically tested, nor are we able to dose mice with a capsule for targeted release in the small intestine. Our ongoing clinical trials will be the first time this formulation is tested, and we cannot assure you that the results of this formulation will be consistent with the observations from our preclinical studies. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials due to adverse safety profiles or lack of efficacy, notwithstanding promising results in earlier trials, and we cannot be certain that we will not face similar setbacks.

The results from earlier clinical trials of product candidates may not predict the results that will be obtained in subsequent subjects or in subsequent human clinical trials of that product candidate. There can be no assurance that any trial will ultimately be successful or support further clinical advancement of any given product candidate.

In addition, we cannot be certain as to the type and number of clinical trials the FDA or similar foreign regulatory authorities will require us to conduct before we may successfully gain approval, referred to as licensure with respect to biological products in the United States, to market any of our product candidates. Requirements for us to conduct more or more complex clinical trials than we anticipate for a given product candidate could cause us to incur significant development costs, delay or prevent the commercialization of our products or otherwise adversely affect our business.

We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:

•    regulators, IRBs or ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

•    we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

•    clinical trials of our product candidates may demonstrate undesirable side effects or produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

•    the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be lower or slower than we anticipate, or patients may drop out of these clinical trials at a higher rate than we anticipate;

•    our CROs, CMOs and other third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

•    we may have to, or regulators or IRBs may require that we or our investigators, suspend or terminate clinical trials of our product candidates for various reasons, including noncompliance with regulatory requirements or a finding that patients are being exposed to unacceptable health risks;

•    the cost of clinical trials of our product candidates may be greater than we anticipate;

•    the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate;

•    regulators may revise the requirements for approving our product candidates, or such requirements may not be as we anticipate; and

•    regarding trials managed by any future collaborators, our collaborators may face any of the above issues, and may conduct clinical trials in ways they view as advantageous to them but potentially suboptimal for us.

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive, or if there are safety concerns, we may:

•    be delayed in obtaining marketing approval for our product candidates;

•    lose the support of any future collaborators, requiring us to bear more of the burden of developing certain microbial strains or derivatives thereof;

•    not obtain marketing approval at all;

•    obtain marketing approval in some countries and not in others;

38

•    obtain approval for indications or patient populations that are not as broad as we intend or desire;

•    obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;

•    be subject to additional post-marketing testing requirements; or

•    have the product removed from the market after obtaining marketing approval.

In addition, disruptions caused by the COVID-19 pandemic may increase the likelihood that we encounter such difficulties or delays in initiating, enrolling, conducting or completing our planned and ongoing clinical trials.

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by a data safety monitoring board or ethics committee for such trial or by the FDA or comparable foreign regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or comparable foreign regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, or changes in governmental regulations or administrative actions. For example, in September 2021 the FDA placed the IND for our Phase 2 atopic dermatitis trial of EDP1815 on clinical hold and requested that we amend our protocol to account for risks to patients that require their current atopic dermatitis medications be discontinued, the manner in which safety data is collected, and defined study halting criteria. The FDA subsequently lifted the clinical hold.

Further, conducting clinical trials in foreign countries, as we have and may continue to do for our product candidates, presents additional risks that may delay completion of our clinical trials. These risks include the failure of enrolled patients in foreign countries to adhere to the clinical protocol as a result of differences in healthcare services or cultural customs, managing additional administrative burdens associated with foreign regulatory schemes, as well as political and economic risks relevant to such foreign countries.

Our product development costs will increase if we experience delays in clinical testing or in obtaining marketing approvals. We do not know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical study or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, potentially impairing our ability to successfully commercialize our product candidates, if approved, and harming our business and results of operations.

In addition, the FDA’s and other regulatory authorities’ policies with respect to clinical trials may change and additional government regulations may be enacted. For instance, the regulatory landscape related to clinical trials in the EU recently evolved. The CTR, which was adopted in April 2014 and repeals the EU Clinical Trials Directive, became applicable on January 31, 2022. While the Clinical Trials Directive required a separate Clinical Trial Application (“CTA”) to be submitted in each member state in which the clinical trial takes place to both the competent national health authority and an independent ethics committee, the CTR introduces a centralized process and only requires the submission of a single application for multi-center trials. The CTR allows sponsors to make a single submission to both the competent authority and an ethics committee in each member state, leading to a single decision per member state. The assessment procedure of the CTA has been harmonized as well, including a joint assessment by all member states concerned, and a separate assessment by each member state with respect to specific requirements related to its own territory, including ethics rules. Each member state’s decision is communicated to the sponsor via the centralized EU portal. Once the CTA is approved, clinical study development may proceed. The CTR entails a three-year transition period. The extent to which ongoing and new clinical trials will be governed by the CTR varies. Clinical trials for which an application was submitted: (i) prior to January 31, 2022 under the Clinical Trials Directive, or (ii) between January 31, 2022 and January 31, 2023 and for which the sponsor has opted for the application of the EU Clinical Trials Directive, remain governed by said Directive until January 31, 2025. After this date, all clinical trials (including those which are ongoing) will become subject to the provisions of the CTR. Compliance with the CTR requirements by us and our third-party service providers, such as CROs, may impact our development plans.

It is currently unclear to what extent the UK will seek to align its regulations with the EU. The UK regulatory framework in relation to clinical trials is derived from existing EU legislation (as implemented into UK law, through secondary legislation). On January 17, 2022, the MHRA launched an eight-week consultation on reframing the UK legislation for clinical trials. The consultation closed on March 14, 2022 and aims to streamline clinical trial approvals, enable innovation, enhance clinical trials transparency, enable greater risk proportionality and promote

39

patient and public involvement in clinical trials. The outcome of the consultation is being closely watched and will determine whether the UK chooses to align with the (EU) CTR or diverge from it to maintain regulatory flexibility. Under the terms of the Protocol on Ireland/Northern Ireland, provisions of the (EU) CTR which relate to the manufacture and import of investigational medicinal products and auxiliary medicinal products apply in Northern Ireland. On February 27, 2023, the UK Government and the European Commission reached a political agreement on the “Windsor Agreement” which will revise the Protocol on Ireland/Northern Ireland in order to address some of the perceived shortcomings. Once implemented, this may have further impact on the application of the (EU) CTR in Northern Ireland. A decision by the UK Government not to closely align its regulations with the new approach that will be adopted in the EU may have an effect on the cost of conducting clinical trials in the UK as opposed to other countries.

If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies governing clinical trials, our development plans may be impacted.

If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.

We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. For example, we are developing certain product candidates to treat inflammatory diseases including psoriasis and atopic dermatitis. There are a limited number of patients from which to draw for clinical trials concerning any given indication.

Patient enrollment is also affected by other factors including:

•    the severity of the disease under investigation;

•    the patient eligibility criteria for the trial in question;

•    the perceived risks and benefits of the product candidate under study;

•    the availability of other treatments for the disease under investigation;

•    the existence of competing clinical trials;

•    the efforts to facilitate timely enrollment in clinical trials;

•    our payments for conducting clinical trials;

•    the patient referral practices of physicians;

•    the ability to monitor patients adequately during and after treatment; and

•    the proximity and availability of clinical trial sites for prospective patients.

Our inability to enroll a sufficient number of patients or volunteers for our clinical trials would result in significant delays and could require us to abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of our company to decline and limit our ability to obtain additional financing.

The COVID-19 pandemic has adversely impacted and may continue to adversely impact our business, including our preclinical studies and clinical trials, and finances.

The pandemic caused by the novel coronavirus disease, COVID-19, and government measures taken in response, had and continues to have an impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred, supply chains have been disrupted, and some facilities and production have been suspended. Due to the COVID-19 pandemic, enrollment of new patients into, and the retention of existing patients in, our clinical trials was impacted due primarily to lower patient participation.

The extent to which the outbreak impacts our business, preclinical studies and clinical trials will depend on future developments which are highly uncertain and cannot be predicted with confidence, such as the severity of the disease and its variants, the duration of the pandemic, and related impacts to our supply chain and available labor pool. While the continued potential economic impact brought by and the duration of the COVID-19 pandemic may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets reducing our ability to access capital, which has and could in the future

40

negatively affect our liquidity. In addition, recessions and market corrections resulting from the COVID-19 pandemic have and could continue to detrimentally impact our business and stock price.

We have conducted and may continue to conduct clinical trials for our product candidates in sites outside the United States, and the FDA may not accept data from trials conducted in foreign locations.

We have conducted and may continue to conduct clinical trials outside the U.S. for our product candidates. The acceptance of study data from clinical trials conducted outside the U.S. or another jurisdiction by the FDA or comparable foreign regulatory authority may be subject to certain conditions or may not be accepted at all. In cases where data from foreign clinical trials are intended to serve as the sole basis for marketing approval in the U.S., the FDA will generally not approve the application on the basis of foreign data alone, unless: (i) the data are applicable to the U.S. population and U.S. medical practice; (ii) the trials were performed by clinical investigators of recognized competence and pursuant to GCP regulations; and (iii) the data may be considered valid without the need for an on-site inspection by the FDA, or if the FDA considers such inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means. In addition, even where the foreign study data are not intended to serve as the sole basis for approval, the FDA will not accept the data as support for an application for marketing approval unless the study is well-designed and well-conducted in accordance with GCP requirements and the FDA is able to validate the data from the study through an onsite inspection, if deemed necessary. Many foreign regulatory authorities have similar approval requirements. In addition, such foreign trials would be subject to the applicable local laws of the foreign jurisdictions where the trials are conducted. There can be no assurance that the FDA or any comparable foreign regulatory authority will accept data from trials conducted outside of the U.S. or the applicable jurisdiction. If the FDA or any comparable foreign regulatory authority does not accept such data, it would result in the need for additional trials, which could be costly and time-consuming, and which may result in current or future product candidates that we may develop not receiving approval for commercialization in the applicable jurisdiction in a timely manner or at all.

Interim, "topline" and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publicly disclose preliminary or topline data from our preclinical studies and clinical trials, which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study or trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the topline or preliminary results that we report may differ from future results of the same trials, or different conclusions or considerations may qualify such results once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. For example, we previously disclosed certain SCORAD figures from a Phase 1b clinical trial that, upon further review and analysis, required modification in subsequent disclosure. As a result, topline and other preliminary data should be viewed with caution until the final data are available and have been fully analyzed.

From time to time, we may also disclose interim data from our preclinical studies and clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between topline, preliminary or interim data and final data could significantly harm our business prospects. Further, disclosure of interim data by us or by our competitors could result in volatility in the price of our common stock.

Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and our company in general. In addition, the information we choose to publicly disclose regarding a particular preclinical study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is material or otherwise appropriate information to include in our disclosure.

If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our product candidates or will not be able to do so as soon as anticipated, and our ability to generate revenue will be materially impaired.

41

Our product candidates and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation and requirements by the FDA and other regulatory agencies in the United States, EU and UK, by legislative bodies in the EU and EU member states and by other regulatory authorities outside these jurisdictions. Failure to obtain marketing approval for a product candidate in any jurisdiction will prevent us from commercializing the product candidate in that jurisdiction and may affect our plans for commercialization in other jurisdictions as well. We have not received approval to market any of our product candidates from regulatory authorities in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain marketing approvals and we expect to rely on third parties to assist us in this process.

Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy to such regulatory authorities’ satisfaction. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, regulatory authorities. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use.

The process of obtaining marketing approvals, both in the United States and abroad, is expensive and may take many years. The scope and amount of clinical data required to obtain marketing approvals can vary substantially from jurisdiction to jurisdiction, and it may be difficult to predict whether a particular regulatory body will require additional or different clinical trials than those conducted by a sponsor, especially for novel product candidates such as our product candidates. The FDA or other foreign regulatory authorities may delay, limit, or deny the approval of our product candidates for many reasons, including:

•    our inability to demonstrate that the clinical benefits of our product candidates outweigh any safety or other perceived risks;

•    the regulatory authority’s disagreement with the interpretation of data from nonclinical or clinical studies or trials;

•    the regulatory agency’s requirement that we conduct additional preclinical studies and clinical trials;

•    changes in marketing approval policies during the development period;

•    changes in or the enactment of additional statutes or regulations, or changes in regulatory review process for each submitted product application; or

•    the regulatory authority’s failure to approve the manufacturing processes or third-party manufacturers with which we contract.

Regulatory authorities have substantial discretion in the approval process and may refuse to accept a marketing application as deficient. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable. Of the large number of drugs in development, only a small percentage successfully complete the FDA or other regulatory approval processes and are commercialized.

Furthermore, our product candidates may not receive marketing approval even if they achieve their specified endpoints in clinical trials. Clinical data are often susceptible to varying interpretations, and many companies that have believed that their products performed satisfactorily in clinical trials have nonetheless failed to obtain FDA or applicable foreign regulatory agency approval for their products. The FDA or foreign regulatory authorities may disagree with our trial design and our interpretation of data from nonclinical and clinical studies and trials. Upon the review of data from any pivotal trial, the FDA or applicable foreign regulatory agency may request that the sponsor conduct additional analyses of the data and, if it believes the data are not satisfactory, could advise the sponsor to delay filing a marketing application.

Even if we eventually complete clinical testing and receive approval of a BLA or foreign marketing authorization for one of our product candidates, the FDA or applicable foreign regulatory agency may grant approval contingent on the performance of costly additional clinical trials which may be required after approval. The FDA or the applicable foreign regulatory agency may also approve our products for a more limited indication and/or a narrower patient population than we originally request, and the FDA or applicable foreign regulatory agency may not approve the

42

labeling that we believe is necessary or desirable for the successful commercialization of our products. Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of our product candidates and would materially adversely impact our business and prospects.

The development of SINTAX medicines and their interactions with cells in the small intestine is an emerging field, and it is possible that the FDA or other regulatory authorities or bodies could issue regulations or new policies in the future affecting our product candidates.

If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired.

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we intend to focus on developing product candidates for multiple initial indications that we identify as most likely to succeed in terms of both regulatory approval and commercialization. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that may prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and product development programs and product candidates for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements, in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

A fast track designation by the FDA may not actually lead to a faster development or regulatory review or approval process.

We may seek fast track designation for some of our product candidates. If a drug or biologic is intended for the treatment of a serious or life-threatening condition and nonclinical or clinical data demonstrate the potential to address unmet medical needs for this condition, the drug or biologic sponsor may apply for FDA fast track designation. Fast track designation provides increased opportunities for sponsor meetings with the FDA during preclinical and clinical development in addition to the potential for rolling review of a marketing application, if the relevant criteria are met. The FDA has broad discretion whether or not to grant this designation, and even if we believe a particular product candidate is eligible for this designation, we cannot assure you that the FDA would decide to grant it. Even if we do receive fast track designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures. Fast track designation does not assure ultimate approval by the FDA. The FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from the product development program. Additionally, similar considerations and concerns exist with respect to the pursuit of expedited regulatory approval pathways in jurisdictions outside of the U.S.

A breakthrough therapy designation by the FDA for our product candidates may not lead to a faster development or regulatory review or approval process, and it does not increase the likelihood that our product candidates will receive marketing approval.

We may seek a breakthrough therapy designation for our product candidates. A breakthrough therapy is defined as a drug or biologic that is intended to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug or biologic may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. For drugs that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor can help to identify the most efficient path for clinical development. Drugs designated as breakthrough therapies by the FDA receive all the Fast Track program features, including eligibility for rolling review of BLA submissions.

Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe one of our product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in a faster development process, review or approval compared to conventional

43

FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of our product candidates qualify as breakthrough therapies, the FDA may later decide that the products no longer meet the conditions for qualification and rescind the designation. Additionally, similar considerations and concerns exist with respect to the pursuit of expedited regulatory approval pathways in jurisdictions outside of the U.S.

Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products from being developed, approved or commercialized in a timely manner or at all, which could negatively impact our business.

The ability of the FDA and comparable foreign regulatory authorities to review and/or approve new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s and comparable foreign regulatory authorities’ ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s and comparable foreign regulatory authorities’ ability to perform routine functions. Average review times at the FDA and comparable foreign regulatory authorities have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies such as the EMA, following its relocation to Amsterdam and resulting staff changes, may also slow the time necessary for new drugs and biologics to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.

Separately, in response to the COVID-19 pandemic, the FDA postponed most inspections of domestic and foreign manufacturing facilities at various points. Even though the FDA has since resumed standard inspection operations of domestic facilities where feasible, the FDA has continued to monitor and implement changes to its inspectional activities to ensure the safety of its employees and those of the firms it regulates as it adapts to the evolving COVID-19 pandemic, and any resurgence of the virus or emergence of new variants may lead to further inspectional delays. Regulatory authorities outside the United States have adopted similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

Risks Related to our Dependence on Third Parties and Manufacturing

We rely, and expect to continue to rely, on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

We rely, and expect to continue to rely, on third parties, such as CROs, clinical data management organizations, medical institutions, clinical investigators and potential pharmaceutical partners, to conduct and manage our clinical trials.

Our reliance on these third parties for research and development activities will reduce our control over these activities but does not relieve us of our responsibilities. For example, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with regulatory standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, safety and welfare of patients are protected. Other countries’ regulatory agencies also have requirements for clinical trials with which we must comply. We also may be required in certain instances to register ongoing clinical trials and post the results of completed clinical trials on government-sponsored databases such as ClinicalTrials.gov or similar foreign databases within specified timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, do not meet expected deadlines, experience work stoppages, terminate their agreements with us or need to be replaced, or do not conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we may need to enter

44

into new arrangements with alternative third parties, which could be difficult, costly or impossible, and our clinical trials may be extended, delayed or terminated or may need to be repeated. If any of the foregoing occur, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and may not be able, or may be delayed in our efforts, to successfully commercialize our product candidates.

We also expect to rely on other third parties to store and distribute drug product required by our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, thereby producing additional losses and depriving us of potential product revenue.

We rely on third parties for the manufacture of our product candidates for preclinical and clinical testing and expect to continue to do so for the foreseeable future. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or that such quantities may not be available at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

We rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical and clinical testing, as well as for the commercial manufacture, if any, of our product candidates that may receive marketing approval. Reliance on third parties for the manufacture of our product candidates increases the risk that we will not have sufficient quantities of our product candidates on a timely basis or at all, or that such quantities will be available at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts.

We may be unable to establish agreements with third-party manufacturers on acceptable terms or at all. Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:

•    failure of third-party manufacturers to comply with regulatory requirements and maintain quality assurance;

•    breach of manufacturing agreements by the third-party manufacturers;

•    failure to manufacture our product according to our specifications;

•    failure to manufacture our product according to our schedule or at all;

•    misappropriation or disclosure of our proprietary information, including our trade secrets and know-how; and

•    termination or non-renewal of agreements by third-party manufacturers at times that are costly or inconvenient for us.

Third-party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocations, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products. Some of the contract manufacturers we rely on to produce our product candidates have never produced an FDA-approved therapeutic. If our contract manufacturers are unable to comply with cGMP or similar foreign regulations or if the FDA or foreign regulatory authorities do not approve their facility upon a pre-approval inspection, our product candidates may not be approved or may be delayed in obtaining approval. In addition, there are a limited number of manufacturers that operate under cGMP or similar foreign regulations that might be capable of manufacturing our products. Therefore, our product candidates and any future product candidates that we may develop may compete with other products for access to manufacturing facilities. Any failure to gain access to these limited manufacturing facilities could severely impact the clinical development, marketing approval and commercialization of our product candidates.

Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval. We may not, and may not be able to, have arrangements in place for redundant sources of all clinical supplies for both drug substance and drug product. If our current contract manufacturers cannot perform as agreed, we may be required to replace such manufacturers and we may be unable to replace them on a timely basis or at all. Our current and anticipated future dependence upon others for the manufacture of our product candidates or products could delay, prevent or impair our development and commercialization efforts. Moreover, as a result of the COVID-19 pandemic, third-party manufacturers may be affected, which could disrupt their activities

45

and, as a result, we could face difficulties and delays in the manufacture of our product candidates, which may negatively affect our preclinical and clinical development activities.

We have no experience manufacturing our product candidates at commercial scale, and if we decide to establish our own manufacturing facility, we cannot assure you that we can manufacture our product candidates in compliance with regulations at a cost or in quantities necessary to make them commercially viable.

We may establish one or more manufacturing facilities for our product candidates for production at a commercial scale. We have no experience in commercial-scale manufacturing of our product candidates. We may develop our manufacturing capacity in part by expanding our current facility or building additional facilities. These activities would require substantial additional funds and we would need to hire and train a significant number of qualified employees to staff these facilities. We may not be able to develop commercial-scale manufacturing facilities that are adequate to produce materials for additional later-stage clinical trials or commercial use.

The equipment and facilities employed in the manufacture of pharmaceuticals are subject to stringent qualification requirements by regulatory agencies, including validation of facility, equipment, systems, processes and analytics. We may be subject to lengthy delays and expense in conducting validation clinical trials, if we can meet the requirements at all.

Risks Related to Commercialization of Our Product Candidates and Other Legal Compliance Matters

Even if any of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, hospitals, third-party payors and others in the medical community necessary for commercial success.

If any of our product candidates receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For example, current psoriasis treatment involves the use of steroids and biologics that are well established in the medical community, and physicians may continue to rely on these treatments. If our product candidates receive approval but do not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable. The degree of market acceptance of our approved product candidates, if any, will depend on a number of factors, including:

•    their efficacy, safety and other potential advantages compared to alternative treatments;

•    the clinical indications for which our products are approved;

•    our ability to offer them for sale at competitive prices;

•    their convenience and ease of administration compared to alternative treatments;

•    the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

•    the strength of marketing and distribution support;

•    the availability of third-party coverage and adequate reimbursement for our product candidates;

•    the prevalence and severity of their side effects and their overall safety profiles;

•    any restrictions on the use of our products together with other medications;

•    interactions of our products with other medicines patients are taking; and

•    the inability of certain types of patients to take our product.

We currently have no sales organization. If we are unable to establish effective sales, marketing and distribution capabilities or we enter into agreements with third parties with such capabilities, we may not be successful in commercializing our product candidates if and when they are approved.

We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of our product candidates. To achieve commercial success for any product candidate for which we may obtain marketing approval, we will need to establish a sales and marketing organization or make arrangements with third parties to perform sales and marketing functions, and we may not be successful in doing so.

46

In the future, we expect to build a focused sales and marketing infrastructure to market or promote our product candidates in the United States and potentially elsewhere, if and when they are approved. There are risks involved with establishing our own sales, marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

Factors that may inhibit our efforts to commercialize our products on our own include:

•    our inability to recruit, train and retain an adequate number of effective sales and marketing personnel;

•    the inability of sales personnel to obtain access to or educate physicians on the benefits of our products;

•    the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines;

•    unforeseen costs and expenses associated with creating an independent sales and marketing organization; and

•    the inability to obtain sufficient coverage and reimbursement from third-party payors and governmental agencies.

Outside the United States, we may rely on third parties to sell, market and distribute our product candidates. We may not be successful in entering into arrangements with such third parties or may be unable to do so on terms that are favorable to us. In addition, our product revenue and our profitability, if any, may be lower if we rely on third parties for these functions than if we were to market, sell and distribute any products that we develop ourselves. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

We face substantial competition, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.

The development and commercialization of new drug and biologic products is highly competitive and is characterized by rapid and substantial technological development and product innovations. We face competition with respect to our current product candidates and will face competition with respect to product candidates that we may seek to develop or commercialize in the future, including from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. We are aware of a number of large pharmaceutical and biotechnology companies, including: AbbVie Inc., Amgen Inc., Arcutis Biotherapeutics Inc., Bristol Myers Squibb Company, Johnson & Johnson, Incyte Corporation, Novartis International A.G., Pfizer Inc., Regeneron Pharmaceuticals Inc., Roivant Sciences Ltd., and Sanofi S.A., as well as smaller, early-stage companies, that are pursuing the development of products, including microbial-based therapeutics, in some instances, for disease indications that we are targeting. Some of these competitive products and therapies are or may be based on scientific approaches that are the same as or similar to our approach, and others are or may be based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations.

Many of the companies and organizations against which we are competing or against which we may compete in the future have significantly greater financial resources, established presence in the market and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and reimbursement and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more