Quarterly Report (10-q)

Date : 08/06/2019 @ 10:14AM
Source : Edgar (US Regulatory)
Stock : Evofem Biosciences Inc (EVFM)
Quote : 5.2  -0.23 (-4.24%) @ 8:55PM

Quarterly Report (10-q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________
 
FORM 10-Q
  ____________________________________________________
  (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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: 001-36754
  _____________________________________________________
  EVOFEM BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
 ___________________________________________________ 
Delaware
(State or other jurisdiction
of incorporation)
 
20-8527075
(IRS Employer
Identification No.)
12400 High Bluff Drive, Suite 600
San Diego, CA 92130
(Address of Principal Executive Offices)
 
92130
(Zip Code)
Registrant’s telephone number, including area code: (858) 550-1900
Not applicable.
(Former name or former address, if changed since last report.)
 ____________________________________________________

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 x 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 x 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 x  
 
Smaller reporting company x  
 
 
Emerging growth company x  

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.   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x
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 $0.0001 per share
EVFM
The Nasdaq Stock Market LLC
(Nasdaq Capital Market)

The number of shares of the registrant’s common stock, $0.0001 par value, outstanding as of July 31, 2019 was 46,601,058 .



Table of Contents

 
 
 
Page
 
 
PART I.
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II.
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 




FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q (Quarterly Report) contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements, other than statements of historical facts, contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, projected costs, prospects, plans and objectives of management, are forward-looking statements. Words such as, but not limited to, “anticipate,” “aim,” “believe,” “contemplate,” “continue,” “could,” “design,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “suggest,” “strategy,” “target,” “will,” “would,” and similar expressions or phrases, or the negative of those expressions or phrases, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on our projections of the future that are subject to known and unknown risks and uncertainties and other factors that may cause our actual results, level of activity, performance or achievements expressed or implied by these forward-looking statements, to differ. These forward-looking statements include, among other things, statements about:
our projected financial position;
our estimates regarding expenses, future revenues and capital requirements;
our ability to continue as a going concern;
our ability to raise additional capital to fund our operations;
our ability to obtain the necessary regulatory approvals to market and commercialize our lead Multipurpose Vaginal pH Regulator (MVP-R TM ) product candidate, Amphora® (L-lactic acid, citric acid, and potassium bitartrate) for prevention of pregnancy, prevention of urogenital transmission of chlamydia in women and prevention of urogenital transmission of gonorrhea in women, our MVP-R product candidate for reduction of recurrent bacterial vaginosis (BV), and any other product candidate we may seek to develop;
the success, cost and timing of our clinical trials;
our ability to obtain additional patent protection for our product candidates;
our dependence on third parties in the conduct of our clinical trials;
our ability to establish and develop sales, manufacturing and marketing capabilities or our ability to enter into agreements with third parties to manufacture or to market and sell any approved product candidates we may have;
the potential for changes to current regulatory mandates requiring health insurance plans to cover FDA-cleared or approved contraceptive products without cost sharing, our ability to obtain third-party payer coverage and adequate reimbursement, and our reliance on the willingness of patients to pay out-of-pocket absent full or partial third-party payer reimbursement;
top-line or initial data figures; and
our ability to expand our organization to accommodate potential growth and our ability to retain and attract key personnel.
Our current product candidates have not been approved by the United States Food and Drug Administration (FDA), the European Commission or any other regulatory commission. Our product candidates have not been, nor may they ever be, approved by any regulatory agency or competent authority nor marketed anywhere in the world.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. All forward-looking statements are qualified in their entirety by this cautionary statement. Forward-looking statements should be regarded solely as our current plans, estimates and beliefs. You should read this Quarterly Report and the documents that we have filed as exhibits to this Quarterly Report and incorporated by reference herein completely and with the understanding that our actual future results may be materially different from the plans, intentions and expectations disclosed in the forward-looking statements we make. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. The forward-looking statements contained in this Quarterly Report are made as of the date of this Quarterly Report, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.



1



PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
  
(Unaudited)
(In thousands, except par value and share data)
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
50,679

 
$
1,330

Restricted cash
401

 
431

Prepaid and other current assets
1,769

 
717

Total current assets
52,849

 
2,478

Property and equipment, net
461

 
593

Operating lease right-of-use assets
483

 

Other noncurrent assets
622

 
939

Total assets
$
54,415

 
$
4,010

Liabilities and stockholders’ equity (deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
8,567

 
$
8,882

Note payable

 
4,010

Accrued expenses
7,217

 
11,513

Accrued compensation
2,259

 
2,924

        Operating lease liabilities
580

 

Total current liabilities
18,623

 
27,329

Deferred rent

 
37

Total liabilities
18,623

 
27,366

Commitments and contingencies (Note 6)

 

Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding

 

Stockholders’ equity (deficit):
 
 
 
Common stock, $0.0001 par value; 300,000,000 shares authorized; 46,426,315 and 25,867,248 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively;
5

 
3

Additional paid-in capital
522,451

 
409,787

Accumulated deficit
(486,664
)
 
(433,146
)
Total stockholders’ equity (deficit)
35,792

 
(23,356
)
Total liabilities and stockholders’ equity
$
54,415

 
$
4,010


See accompanying notes to the condensed consolidated financial statements (unaudited).

2


EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS   
(Unaudited)
(In thousands, except share and per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Operating expenses:
 
 
 
 
 
 
 
Research and development
$
5,246

 
$
11,833

 
$
13,135

 
$
23,792

General and administrative
6,695

 
11,409

 
12,438

 
20,436

Total operating expenses
11,941

 
23,242

 
25,573

 
44,228

Loss from operations
(11,941
)
 
(23,242
)
 
(25,573
)
 
(44,228
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
108

 
32

 
126

 
62

Other expense, net
(7
)
 
(32
)
 
(21
)
 
(82
)
Loss on issuance of warrants

 

 

 
(47,920
)
Loss on issuance of Purchase Rights
(674
)
 

 
(674
)
 

Change in fair value of warrants
(3,315
)
 

 
(7,755
)
 

Change in fair value of Purchase Rights
(19,617
)
 

 
(19,617
)
 

Change in fair value of Series D 2X liquidation preference

 

 

 
(130
)
Total other expense, net
(23,505
)
 

 
(27,941
)
 
(48,070
)
Loss before income tax
(35,446
)
 
(23,242
)
 
(53,514
)
 
(92,298
)
Income tax expense
(4
)
 
(2
)
 
(4
)
 
(2
)
Net loss
(35,450
)
 
(23,244
)
 
(53,518
)
 
(92,300
)
Accretion of Series D redeemable convertible preferred stock dividends

 

 

 
(66
)
Net loss attributable to common stockholders
$
(35,450
)
 
$
(23,244
)
 
$
(53,518
)
 
$
(92,366
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.97
)
 
$
(1.11
)
 
$
(1.68
)
 
$
(5.15
)
Weighted-average shares used to compute net loss attributable to common stockholders, basic and diluted
36,732,568

 
20,868,554

 
31,941,850

 
17,937,788

See accompanying notes to condensed consolidated financial statements (unaudited).

3


EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the Six Months Ended June 30, 2019
(Unaudited)
(In thousands, except share data)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Equity (Deficit)
 
Shares
 
Amount
Balance at December 31, 2018
25,867,248

 
$
3

 
$
409,787

 
$
(433,146
)
 
$
(23,356
)
Issuance of common stock upon cash exercise of warrants and issuance of Reload Warrants (see Note 11)
2,376,065

 

 
10,617

 

 
10,617

Restricted stock awards issued
470,500

 

 

 

 

Shares withheld to cover taxes related to vesting of restricted stock awards
(1,639
)
 

 
(6
)
 

 
(6
)
Stock-based compensation

 

 
1,962

 

 
1,962

Net loss

 

 

 
(18,068
)
 
(18,068
)
Balance at March 31, 2019
28,712,174

 
$
3

 
$
422,360

 
$
(451,214
)
 
$
(28,851
)
Issuance of common stock in connection with the Private Placement (see Note 10)
17,777,779

 
2

 
68,322

 

 
68,324

Issuance of common stock - exercise of stock options
16,823

 

 
46

 

 
46

Restricted stock awards issued/restricted stock units released
6,000

 

 

 

 

Shares withheld to cover taxes related to vesting of restricted stock awards
(86,461
)
 

 
(518
)
 

 
(518
)
Reclassification of warrant and Purchase Rights liability to equity

 

 
29,726

 

 
29,726

Stock-based compensation

 

 
2,515

 

 
2,515

Net loss

 

 

 
(35,450
)
 
(35,450
)
Balance at June 30, 2019
46,426,315

 
$
5

 
$
522,451


$
(486,664
)
 
$
35,792

See accompanying notes to condensed consolidated financial statements (unaudited).

4


EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
For the Six Months Ended June 30, 2018
(Unaudited)
(In thousands, except share data)


 
Series A
Convertible
Preferred Stock
 
Series B
Convertible
Preferred Stock
 
Series C-1
Convertible
Preferred Stock
 
Series C
Convertible
Preferred Stock
 
Series D
Redeemable Convertible Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Equity (Deficit)
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Balance at December 31, 2017
12,618,279

 
$
23,848

 
13,801,318

 
$
43,616

 
8,558,686

 
$
34,382

 
5,037,784

 
$
19,469

 
80

 
$
68,556

 
2,082,053

 
$

 
$
17,731

 
$
(307,277
)
 
$
(289,546
)
Conversion of convertible preferred stock into common stock, excluding Series D (see Note 8)
(12,618,279
)
 
(23,848
)
 
(13,801,318
)
 
(43,616
)
 
(8,558,686
)
 
(34,382
)
 
(5,037,784
)
 
(19,469
)
 

 

 
1,027,079

 

 
121,315

 

 
121,315

Cancellation of restricted stock awards (see Note 12)

 

 

 

 

 

 

 

 

 

 
(122,149
)
 

 

 

 

Issuance of common stock upon cashless exercise of Invesco Warrants (see Note 11)

 

 

 

 

 

 

 

 

 

 
3,968,473

 
1

 
47,919

 

 
47,920

Accretion and payment of Series D dividends (see Note 8)

 

 

 

 

 

 

 

 

 
66

 

 

 
(66
)
 
(157
)
 
(223
)
Conversion of Series D dividends and Series D (see Note 8)

 

 

 

 

 

 

 

 
(80
)
 
(5,226
)
 
6,878,989

 
1

 
5,225

 

 
5,226

Redemption of Series D 2X liquidation preference upon conversion of Series D (see Note 8)

 

 

 

 

 

 

 

 

 

 

 

 
80,000

 

 
80,000

Deemed contribution upon conversion of Series D (see Note 8)

 

 

 

 

 

 

 

 

 
(49,334
)
 

 

 
49,334

 

 
49,334

Issuance of common stock and WIM Warrants (see Note 8)

 

 

 

 

 

 

 

 

 
(14,062
)
 
3

 

 
14,062

 

 
14,062

Private placement of common stock
(see Note 3)

 

 

 

 

 

 

 

 

 

 
1,614,289

 

 
20,000

 

 
20,000

Record pre-merger Neothetics’ stockholders’ equity and elimination of Neothetics’ historical accumulated deficit (see Note 3)

 

 

 

 

 

 

 

 

 

 
2,308,430

 

 
1,946

 

 
1,946

Issuance of common stock - exercise of stock options

 

 

 

 

 

 

 

 

 

 
6,173

 

 
42

 

 
42

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 
688

 

 
688

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 
(69,056
)
 
(69,056
)
Balance at March 31, 2018

 
$

 

 
$

 

 
$

 

 
$

 

 
$

 
17,763,340

 
$
2

 
$
358,196

 
$
(376,490
)
 
$
(18,292
)
Issuance of common stock, prefunded warrants and common
warrants in connection with the
Offering, net of underwriting
discounts, commissions and offering
costs (see Note 9)


 

 

 

 

 

 

 

 

 

 
7,436,171

 
1

 
36,130

 

 
36,131

Stock-based compensation


 

 

 

 

 

 

 

 

 

 

 

 
10,663

 

 
10,663

Net loss


 

 

 

 

 

 

 

 

 

 

 

 

 
(23,244
)
 
(23,244
)
Balance at June 30, 2018

 
$

 

 
$

 

 
$

 

 
$

 

 
$

 
25,199,511

 
$
3

 
$
404,989

 
$
(399,734
)
 
$
5,258

See accompanying notes to condensed consolidated financial statements (unaudited).

5


EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(53,518
)
 
$
(92,300
)
Adjustments to reconcile net loss to net cash, cash equivalents and restricted cash used in operating activities:
 
 
 
Loss on issuance of warrants

 
47,920

Loss on issuance of Purchase Rights
674

 
 
Change in fair value of warrants
7,755

 

Change in fair value of Purchase Rights
19,617

 
 
Change in fair value of Series D 2X liquidation preference

 
130

Stock-based compensation
4,477

 
11,351

Depreciation
132

 
131

        Noncash lease expenses
319

 

Changes in operating assets and liabilities:
 
 
 
Prepaid and other assets
(985
)
 
(465
)
Accounts payable
(478
)
 
(1,757
)
Accrued expenses and other liabilities
(4,176
)
 
(1,249
)
Accrued compensation
(665
)
 
(879
)
        Operating lease liabilities
(378
)
 

        Deferred rent, net of current portion

 
(207
)
Net cash, cash equivalents and restricted cash used in operating activities
(27,226
)
 
(37,325
)
Cash flows from investing activities:
 
 
 
Proceeds from sale of Softcup line of business
250

 
250

Cash acquired in connection with the Merger

 
1,900

Net cash, cash equivalents and restricted cash provided by investing activities
250

 
2,150

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock- exercise of warrants
6,273

 

Proceeds from issuance of common stock, warrants and Purchase Rights in connection with Private Placement, net of financial advisory fees
75,400

 
20,000

Proceeds from issuance of common stock, pre-funded warrants and common warrants in connection with the Offering, net of underwriting discounts and commissions

 
37,542

Proceeds from issuance of common stock - exercise of stock options
46

 
42

Repayment of Note Payable
(4,010
)
 

Payment of cash dividends for Series D redeemable convertible preferred stock

 
(157
)
Cash paid for deferred financing costs
(890
)
 
(611
)
Payments of tax withholdings related to vesting of restricted stock awards
(524
)
 

Net cash, cash equivalents and restricted cash provided by financing activities
76,295

 
56,816

Net change in cash, cash equivalents and restricted cash
49,319

 
21,641

Cash, cash equivalents and restricted cash, beginning of period
1,761

 
1,701

Cash, cash equivalents and restricted cash, end of period
$
51,080

 
$
23,342

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Operating right-of-use assets obtained in exchange for new operating lease liabilities
$
802

 
$

Deferred financing costs included in accounts payable and accrued expenses
$
257

 
$
800

Reclassification of warrants and Purchase Rights liability to equity
$
6,120

 
$

Net assets acquired in connection with the Merger
$

 
$
46

Conversion of convertible preferred stock into common stock (excluding Series D)
$

 
$
121,315

Conversion of Series D redeemable convertible preferred stock into common stock
$

 
$
68,622

Redemption of Series D 2X liquidation preference upon conversion of Series D redeemable convertible preferred stock into common stock
$

 
$
80,000

See accompanying notes to condensed consolidated financial statements (unaudited).


6


EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Business and Basis of Presentation
Merger

On January 17, 2018, Neothetics, Inc., a Delaware corporation (Neothetics), now known as Evofem Biosciences, Inc. (the Company), completed its merger (the Merger) with privately-held Evofem Biosciences Operations, Inc. (Private Evofem), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated October 17, 2017 (the Merger Agreement), whereby Nobelli Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Neothetics, merged with and into Private Evofem, with Private Evofem surviving as Neothetics’ wholly-owned subsidiary.

In connection with the Merger, Neothetics filed a certificate of amendment to the amended and restated certificate of incorporation to, among other things, affect a 6 :1 reverse stock split of its common stock (the Reverse Stock Split) and change its name from “Neothetics, Inc.” to “Evofem Biosciences, Inc.” Both the name change and the Reverse Stock Split were effective on January 17, 2018 (the Closing Date). Shares of the Company's common stock commenced trading on The Nasdaq Capital Market under the ticker symbol “EVFM” as of January 18, 2018. See discussions of the transactions in connection with the Merger at Note 3- Merger and Related Transactions.

Evofem Biosciences, Inc.’s operations include those of its wholly-owned subsidiaries, Evofem Biosciences Operations, Inc., a Delaware corporation; Evofem Inc. (Evofem Inc.), a Delaware corporation; Evofem North America, Inc., a Delaware corporation (ENA); Evofem Limited, LLC, a Delaware limited liability company; and, Evofem Ltd., a limited company registered in England and Wales and those of its partially owned subsidiary, Evolution Pharma, a Dutch limited partnership (EP) with 99% of the outstanding partnership interests held by Evofem Inc. and 1% of the outstanding partnership interests held by Evofem Limited, LLC. Evofem Limited, LLC and Evofem Ltd. are currently inactive.

Unless otherwise noted, (i) references in this report to “Evofem” and the “Company” refer to Evofem Biosciences, Inc. and its subsidiaries following the closing of the Merger on the Closing Date, (ii) references to “Private Evofem” refer to Evofem Biosciences Operations, Inc. and its subsidiaries prior to the closing the Merger on the Closing Date, (iii) references to “Neothetics” refer to Neothetics, Inc. and its subsidiaries prior to the closing of the Merger on the Closing Date, and (iv) references to share amounts, figures (other than exchange ratios) and other information have been adjusted to reflect the Reverse Stock Split.

Description of Business
Evofem is a San Diego-based clinical-stage biopharmaceutical company committed to developing and commercializing innovative products to address unmet needs in women’s sexual and reproductive health. Evofem exists to advance the lives of women by developing innovative solutions, such as woman-controlled contraception and potential protection from certain sexually transmitted infections (STIs). The Company is leveraging its proprietary Multipurpose Vaginal pH Regulator (MVP-R TM ) platform to develop product candidates for several potential indications, including prevention of pregnancy, prevention of STIs, and reduction of recurrent bacterial vaginosis (BV).
Evofem's MVP-Rs are acid-buffering bioadhesive vaginal gels designed to regulate vaginal pH within the normal range of 3.5 to 4.5. This vaginal pH range is inhospitable to spermatozoa, as well as certain viral and bacterial pathogens associated with STIs, but is integral to the survival of healthy bacteria in the vagina.
Evofem’s lead MVP-R product candidate, Amphora ® (L-lactic acid, citric acid, and potassium bitartrate), is a non-hormonal, in the moment, woman-controlled vaginal gel. In December 2018 the Company reported top-line data from AMPOWER, its single-arm Phase 3 trial evaluating Amphora for prevention of pregnancy in approximately 1,400 women in the United States. Amphora is also currently being evaluated in a Phase 2b trial for prevention of urogenital transmission of chlamydia and gonorrhea in women (AMPREVENCE). AMPREVENCE was fully enrolled at approximately 50 study centers in the United States at the end of March 2019 and its top-line data is expected in the fourth quarter of 2019.
Evofem’s pipeline also includes an MVP-R product candidate for reduction of recurrent BV.  The Company anticipates conducting a Phase 2 clinical trial for this indication, building on favorable Phase 1 trial results.  




7


Basis of Presentation and Principles of Consolidation

Since Private Evofem was determined to be the accounting acquirer in connection with the Merger, it recorded Neothetics’ assets and liabilities at fair value as of the Closing Date. Therefore, for periods prior to the Merger, the condensed consolidated financial statements were prepared on a stand-alone basis for Private Evofem and did not include the combined entities' financial position. Subsequent to the Merger, the condensed consolidated financial statements as of and for the three and six months ended June 30, 2018 from the Closing Date included Neothetics' assets and liabilities.
 
The Company prepared the unaudited interim condensed consolidated financial statements included in this Quarterly Report in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission (SEC) related to quarterly reports on Form 10-Q.

The Company’s financial statements are presented on a consolidated basis, which include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim condensed consolidated financial statements do not include all information and disclosures required by GAAP for annual audited financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2018 included in its Annual Report on Form 10-K as filed with the SEC on March 1, 2019 (the 2018 Audited Financial Statements).

The unaudited interim condensed consolidated financial statements included in this report have been prepared on the same basis as the Company's audited consolidated financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations, cash flows, and statements of convertible preferred stock and stockholders’ deficit for the periods presented. The results for the three and six months ended June 30, 2019 are not necessarily indicative of the results expected for the full year. The condensed consolidated balance sheet as of December 31, 2018 was derived from the 2018 Audited Financial Statements.
Immaterial Restatement
        
Subsequent to the issuance of the March 31, 2018 and June 30, 2018 interim condensed consolidated financial statements, the Company identified an error in the previously reported amounts of par value of common stock and additional paid-in-capital as of December 31, 2017, which amounts were previously reported as $81,000 and $17.7 million , respectively, on the condensed consolidated balance sheet as of December 31, 2017, and on the condensed consolidated statements of convertible preferred stock and stockholders’ deficit, for the three and six month periods ended March 31, 2018 and June 30, 2018, included in the Company’s Forms 10-Q for these periods. In addition, the number of common shares included in such condensed consolidated statements of convertible preferred stock and stockholders’ deficit were incorrectly presented as of December 31, 2017, and for share activity from January 1, 2018 to the merger consummation date of January 18, 2018. As a result, the Company has corrected the presentation of the amounts of par value of common stock and additional paid-in-capital as of December 31, 2017, and the number of common shares shown as of December 31, 2017 and for share activity from January 1, 2018 to January 18, 2018, to present such dollar and share amounts on a post-split basis, as shown below. This change is reflected in the condensed consolidated statement of convertible preferred stock and stockholders’ deficit for the six months ended June 30, 2018. Management has considered these errors from a qualitative and quantitative perspective and believes the impact of these errors is not material to the financial statements for the applicable periods.

The following table shows the restated number of common shares as of December 31, 2017 and for share activity for the six months ended June 30, 2018, and corresponding common stock par value and additional paid-in-capital as previously reported and as corrected.
 
 
As Previously Reported
 
As Corrected
 
 
Common Stock
 
Additional Paid-in Capital
 
Common Stock
 
Additional Paid-in Capital
In thousands, except share data
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Balance at December 31, 2017
 
81,119,014

 
$
81

 
$
17,650

 
2,082,053

 
$

 
$
17,731

Conversion of convertible preferred stock into common stock, excluding Series D
 
40,016,067

 
40

 
121,275

 
1,027,079

 

 
121,315

Cancellation of restricted stock awards
 
(4,759,091
)
 
(5
)
 
5

 
(122,149
)
 

 

Issuance of common stock upon cashless exercise of Invesco Warrants
 
154,593,455

 
155

 
47,765

 
3,968,473

 
1

 
47,919

Exchange of 270,969,445 Private Evofem common stock (par value $0.001) for 6,955,456 shares of Neothetics  common stock (par value $0.0001)
 
(264,013,989
)
 
(270
)
 
270

 

 

 


8


Risks, Uncertainties and Going Concern

The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities, in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of this uncertainty.
The Company’s principal operations have been related to research and development (R&D), including development of Amphora, as well as raising capital, recruiting personnel and establishing a corporate infrastructure to support a commercial product. The Company has no revenues and, as such, has incurred operating losses and negative cash flows from operating activities since inception. As described in Note 8- Convertible Preferred Stock , Note 9- Public Offering and Note 10- Private Placement , the Company received gross proceeds of approximately $6.3 million upon the exercise of warrants in February 2019, and proceeds of approximately $28.2 million and $47.2 million , net of financial advisory fees, upon the sale and issuance of common stock pursuant to a Private Placement with certain investors in April 2019 and June 2019, respectively. As of June 30, 2019 , the Company had cash and cash equivalents of $50.7 million , working capital of $34.2 million and an accumulated deficit of $486.7 million .
The Company is subject to risks common to other life science companies in the development stage including, but not limited to, uncertainty of product development and commercialization, lack of marketing and sales history, potential development by its competitors of new technological innovations, dependence on key personnel, market acceptance of products, product liability, protection of proprietary technology, ability to raise additional financing, and compliance with U.S. Food and Drug Administration (FDA) and other government regulations. If the Company does not successfully commercialize any product candidates, it will be unable to generate recurring product revenue or achieve profitability. Management’s plans to meet its short- and long-term operating cash flow requirements include obtaining additional funding, such as through the issuance of its common stock, from other equity or debt financings, or through collaborations or partnerships with other companies.

The Company anticipates it will continue to incur net losses for the foreseeable future and incur additional costs associated with being a public company. R&D expenses are expected to decrease for the foreseeable future due to the completion of the clinical phase of the confirmatory Phase 3 clinical trial for Amphora for prevention of pregnancy. According to management estimates, liquidity resources as of June 30, 2019 are not sufficient to maintain its planned level of operations for the 12 months from the date of issuance of the financial statements.

These circumstances and the uncertainties associated with the Company's ability to (i) obtain additional equity financing on terms that are favorable to Evofem, (ii) enter into collaborative agreements with strategic partners and (iii) succeed in its future operations raise substantial doubt about the Company's ability to continue as a going concern.

If the Company is not able to obtain the required funding in the near term, through equity financings or other means, or is unable to obtain funding on terms favorable to the Company, this will have a material adverse effect on its operations and strategic development plan for future growth. If the Company cannot successfully raise additional funding and implement its strategic development plan, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, suspend or curtail planned programs or cease operations entirely. Any of these could materially and adversely affect its liquidity, financial condition and business prospects and the Company would not be able to continue as a going concern. If the Company is unable to continue as a going concern, it may have to liquidate its assets and may receive less than the value at which those assets are carried on the financial statements.
Subsequent Events
Subsequent events were evaluated through the filing date of this Quarterly Report, August 6, 2019. See Note 7- Related-party Transactions for discussions on subsequent events occurred in July 2019.

2.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the notes thereto.

S ignificant estimates affecting amounts reported or disclosed in the consolidated financial statements include, but are not limited to: the discount rate used in estimating the fair value of the operating lease right-of-use (ROU) assets and operating lease liabilities, the measurement of the Series D 2X liquidation preference, assumptions used in estimating the fair value of warrants and Purchase Rights issued, the useful lives of property and equipment, the recoverability of long-lived assets, preclinical and clinical trial accruals, and assumptions used in estimating the fair value of stock-based compensation expense.

9


The Company’s assumptions regarding the measurement of the Purchase Rights, the Series D 2X liquidation preference, and stock-based compensation are more fully described in Note 5 — Fair Value of Financial Instruments and Note 12 — Stock-based Compensation, respectively. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances and adjusts when facts and circumstances dictate. The estimates are the basis for making judgments about the carrying values of assets and liabilities and recorded expenses that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results may materially differ from those estimates or assumptions.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, who is the Chief Executive Officer (CEO) of the Company, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. Deposits in the Company’s checking and time deposit accounts are maintained in federally insured financial institutions in excess of federally insured limits. The Company invests in funds through a major U.S. bank and is exposed to credit risk in the event of default to the extent of amounts recorded on the consolidated balance sheets.

The Company has not experienced any losses in such accounts and believes it is not exposed to significant concentrations of credit risk on its cash, cash equivalents and restricted cash balances due to the financial position of the depository institutions in which these deposits are held.

Significant Accounting Policies

There have been no changes to the significant accounting policies that were described in Note 2 to the 2018 Audited Financial Statements during the first six months of fiscal year 2019, except the accounting policy for leases as disclosed below.

On January 1, 2019 (Adoption Date), the Company adopted Accounting Standards Update (ASU) No. 2016-02,  Leases (Topic 842 ) (ASU No. 2016-02), as amended, using the modified retrospective approach, which provides a method for recording existing leases at adoption and does not require recasting comparative financial information. The Company also elected the package of practical expedients permitted under the transition guidance under ASU No. 2016-02 , which among other things, allowed the Company to not reassess the lease classification for any existing leases, whether any expired or existing contracts are or contain leases and initial direct costs for any existing leases. The Company did not elect the hindsight practical expedient to determine the lease term for existing leases. In addition, the Company elected the additional transition method permitted under ASU No. 2018-11 ( Leases (Topic 842): Targeted Improvements, under which the Company initially applied the new lease standard, Accounting Standards Codification (ASC) 842, at adoption and there was no cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. For the comparative period presented in these condensed consolidated financial statements, lease related disclosures continue to be in accordance with the legacy GAAP, ASC 840.

The Company determines if an arrangement is a lease or implicitly contains a lease at inception based on the definition in accordance with ASC 842. Operating leases are included in operating lease ROU assets and operating lease liabilities in its condensed consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date or the Adoption Date for existing leases based on the present value of lease payments over the lease term using an estimated discount rate. As the Company's leases do not provide an implicit rate, the Company used an incremental borrowing rate based on the information available at commencement date or the Adoption Date in determining the present value of lease payments over a similar term. In determining the estimated incremental borrowing rate, the Company considered a rate obtained from its primary banker for discussion purposes of a potential collateralized loan with a term similar to the lease term, the Company's historical borrowing capability in the market, and the Company's costs incurred for underwriting discounts and financing costs in its previous equity financing. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease and non-lease components within a contract are generally accounted for separately.

Operating lease ROU assets and operating lease liabilities were $0.5 million and $0.6 million , respectively, at June 30, 2019 . Adoption of the new standard did not materially impact the Company's condensed consolidated statement of operations

10


and cash flows. See Note 6 - Commitments and Contingencies for more detail discussions on leases and financial statements information under ASC 842.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of readily available cash in checking and money market accounts. Restricted cash consists of cash held in monthly time deposit accounts, which are collateral for the Company’s credit cards and facility lease.
The following table provides a reconciliation of cash, cash equivalents and restricted cash, reported within the condensed consolidated statements of cash flows (in thousands): 
 
Six Months Ended June 30,
 
2019
 
2018
Cash and cash equivalents
$
50,679

 
$
22,788

Restricted cash
401

 
554

Total cash, cash equivalents and restricted cash presented in the condensed consolidated statements of cash flows
$
51,080

 
$
23,342

Net Loss Per Share
Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, potentially dilutive securities are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and, therefore, basic and diluted net loss per share were the same for all periods presented. Potentially dilutive securities excluded from the calculation of diluted net loss per share are summarized in the table below.
 
Three and Six Months Ended June 30,
 
2019
 
2018
Unvested restricted stock subject to repurchase
344,325

 

Unvested restricted stock units
151,500

 

Common stock to be purchased under the 2019 ESPP
42,290

 

Options to purchase common stock
6,134,179

 
3,573,640

Warrants to purchase common stock
6,369,270

 
4,775,886

Total
13,041,564

 
8,349,526

Recently Adopted Accounting Pronouncements

The Company qualifies as an “emerging growth company” (EGC) pursuant to the provisions of the Jumpstart Our Business Startups (JOBS) Act and expects to continue to qualify as an EGC until December 31, 2019. Section 7(a)(2)(B) of the Securities Act of 1933, as amended, permits EGCs to defer compliance with new or revised accounting standards until non-issuers are required to comply with such standards. However, the Company elected not to take advantage of the extended transition period for implementation of new or revised financial accounting standards, and as a result, the Company will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

As described above, on January 1, 2019, the Company adopted ASU No. 2016-02, as amended, applying the practical expedients as a package allowed under the transition guidance.
Recently Issued Accounting Pronouncements — Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-13,  Fair Value Measurement (Topic 820 ) (ASU No. 2018-13), which removes, modifies and adds certain disclosure requirements on fair value measurements in Topic 820. ASU No. 2018-13 will be effective for the Company beginning January 1, 2020. Early adoption is permitted. The Company does not plan to early adopt this new standard and does not expect the adoption of this new standard to have an impact on current disclosures in its consolidated financial statements.


11


3.    Merger and Related Transactions

As described in Note 1- Description of Business and Basis of Presentation, Private Evofem merged with the Company effective on the Closing Date. The Merger was accounted for as a reverse recapitalization with Private Evofem treated as the accounting acquirer pursuant to ASC 805- Business Combinations. Under reverse recapitalization accounting, the accounting acquirer shall measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values.
        
The following transactions were completed with the Merger and recorded by the Company:

Recorded Neothetics’ assets and liabilities at fair value as of the Closing Date, including $1.9 million of cash and cash equivalents, $0.5 million in prepaid and other current assets, $0.4 million in current and noncurrent liabilities and $1.9 million in common stock (Neothetics had 2,308,430 shares of common stock outstanding as of the Closing Date on a post-split basis at par value of $0.0001 per share) and additional paid-in capital (including the reclassification of Neothetics' historical accumulated deficit into additional paid-in capital);

Converted each share of Private Evofem’s capital stock including its Series A convertible preferred stock, Series B convertible preferred stock, Series C-1 convertible preferred stock and Series C convertible preferred stock into the Company's common stock on a one -for-one basis effecting the merger exchange ratio of 0.1540 , subject to adjustment for the Reverse Stock Split (the Exchange Ratio) and the Reverse Stock Split for an aggregate of 1,027,079 shares. Upon such conversion, reclassified the net proceeds from issuance of these preferred stocks to common stock at par value and additional paid-in capital, net of par value;

Cancelled 122,149 shares of unvested restricted common stock;

Issued warrants for the purchase up to an aggregate of 3,980,437 shares of common stock to funds affiliated with Invesco Ltd. (the Invesco Warrants), which were immediately net exercised on a cashless basis for 3,968,473 shares of common stock;

Converted 80 shares of Private Evofem’s Series D redeemable convertible preferred stock (Series D) into 6,878,989 shares of the Company's common stock, including:

i. Adjustment for the final change in fair value of Private Evofem’s Series D 2X liquidation preference;

ii. Redemption of the Series D 2X liquidation preference upon conversion;

iii. Private Evofem’s Series D Warrant Rights (as defined below) were assumed by the Company and exchanged for three shares of the Company's common stock and warrants for the purchase of 2,000,000 shares of the Company's common stock (the WIM Warrants). The Company recorded the fair value of the WIM Warrants and related capital contribution upon issuance of the WIM Warrants; and

iv. Recording cash dividends between January 6, 2018 and the Closing Date, which was paid upon closing of the Merger to Woodford Investment Management Ltd. (WIM).
The Company effected the Reverse Stock Split, and thus the Company adjusted common stock and additional paid-in capital associated with shares issued in connection with the Merger due to the 6:1 reverse stock split, which the Company has affected in the amounts described within this footnote;
The Company assumed options to purchase Private Evofem common stock that were outstanding and unexercised as of immediately prior to the Merger (the Private Evofem Plan Options). The Private Evofem Plan Options were converted into options to purchase 159,325 shares of the Company' common stock, as adjusted for the Exchange Ratio and Reverse Stock Split, at a weighted average price of $56.72 ; and
Sold 1,614,289 shares of the Company's common stock in a private placement for gross proceeds of $20.0 million .

4.    Balance Sheet Details
Prepaid and Other Current Assets
Prepaid and other current assets consist of the following (in thousands):  

12


 
June 30, 2019

 
December 31, 2018

Flex note receivable (1)
$
250

 
$
250

Insurance
883

 
199

Prepaid marketing costs
279

 

Other
357

 
268

Total
$
1,769

 
$
717

_______________________
(1) In June 2016, Private Evofem’s board of directors committed to a plan to sell its Softcup line of business (Softcup) and re-direct its available cash resources to further develop Amphora. In July 2016, the Company entered into an Asset Purchase Agreement with The Flex Company (Flex), whereby Flex would acquire certain assets and assume certain liabilities associated with Softcup. Total consideration for the Softcup sale was $1.9 million , with $0.6 million received in cash at closing and the remaining $1.3 million due and payable under a note in favor of the Company (the Flex Note) through January 1, 2021 (the Maturity Date). The Flex Note bears simple interest at a rate of 5.0% per annum on the remaining principal amount outstanding. An annual principal payment of approximately $0.3 million and the annual accrued and unpaid interest are payable each January 1, beginning in 2017 through the Maturity Date.

The Flex Note is secured by the Softcup assets and has been recorded at present value. The Company’s incremental borrowing rate and the stated interest rate of the Flex Note are materially consistent.
Property and Equipment, Net
Property and equipment, net, consists of the following (in thousands):
 
Useful Life
 
June 30, 2019

 
December 31, 2018

Research equipment
5 years
 
$
639

 
$
639

Computer equipment and software
3 years
 
13

 
13

Office furniture
5 years
 
205

 
205

Leasehold improvements
5 years or less
 
340

 
340

 
 
 
1,197

 
1,197

Less: accumulated depreciation
 
 
(736
)
 
(604
)
Total, net
 
 
$
461

 
$
593

Depreciation expense was $66,000 and $65,000 for the three months ended June 30, 2019 and 2018 , respectively, and $0.1 million for both the six months ended June 30, 2019 and 2018.
Other Noncurrent Assets
Other noncurrent assets consist of the following (in thousands):
 
June 30, 2019

 
December 31, 2018

Flex note receivable, net of current portion
$
250

 
$
500

Prepaid directors & officers insurance
372

 
439

Total
$
622

 
$
939


Note Payable
   
On December 5, 2018, the Company entered into a promissory note (Note) with our clinical research organization (CRO) for AMPOWER, where the Company agreed to pay the CRO on invoiced amounts totaling approximately $4.0 million for clinical trial related services and had a due date of February 15, 2019. Any matured and unpaid amounts pursuant to this Note bear an annual interest rate of the lesser of 1% per month or the maximum amount permitted by the Laws of the State of Massachusetts.

In late February 2019, the Company amended the Note, which extended the due date to April 15, 2019. In April 2019, the Company paid the Note in full.


13


Accrued Expenses
Accrued expenses consist of the following (in thousands):
 
June 30, 2019

 
December 31, 2018

Clinical studies
$
5,299

 
$
9,153

Sublicense fees payable to related parties
1,117

 
1,117

Accrued interest on unpaid sublicense fees payable to related parties
174

 
174

Legal and other professional fees
376

 
549

Other
251

 
520

Total
$
7,217

 
$
11,513

 

5.    Fair Value of Financial Instruments
The fair values of the Company’s assets, including the money market fund and Flex Note receivable, measured on a recurring basis are summarized in the following tables, as applicable (in thousands):  
 
June 30, 2019
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Money market fund (1)
$
13

 
$
13

 
$

 
$

Flex note receivable
500

 

 
500

 

Total assets
513

 
13

 
500

 

 
December 31, 2018
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Money market fund (1)
$
154

 
$
154

 
$

 
$

Flex note receivable
750

 

 
750

 

Total assets
904

 
154

 
750

 

_______________________
(1) Included as a component of cash and cash equivalents on the accompanying condensed consolidated balance sheet.
As discussed in Note 10- Private Placement , the First Closing Warrants and Purchase Rights were determined to be liability classified. Therefore, they were stated at fair value at issuance and subject to mark-to-market at each reporting date until a subsequent event occurred that would change their classification from liability to equity. Series D 2X liquidation preference issued in connection with the issuance of Series D in 2016 and 2017 was also stated at fair value.
The First Closing Warrants, Purchase Rights and Series D 2X liquidation preference were considered Level 3 instruments because the fair value measurement was based, in part, on significant inputs not observed in the market. The Company determined the fair value of these three instruments as described below.
The following table summarizes the changes in Level 3 financial liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2019 and six months ended June 30, 2018 (in thousands). There were no activities for the three months ended June 30, 2018.
 
Warrant Liability
Balance at December 31, 2018
$

 Initial warrant liability at issuance
3,611

 Change in fair value of warrants
3,315

 Reclassification from warrant liability to equity
(6,926
)
Balance at June 30, 2019
$




14


 
Purchase Rights Liability
Balance at December 31, 2018
$

 Initial purchase rights liability at issuance
3,183

 Change in fair value of purchase rights
19,617

 Reclassification from purchase rights liability to equity
(22,800
)
Balance at June 30, 2019
$

 
Series D 2X Liquidation Preference Liability
Balance at December 31, 2017
$
79,870

 Change in fair value of Series D 2X liquidation preference
130

 Redemption of Series D 2X liquidation preference upon conversion of Series D
(80,000
)
Balance at June 30, 2018
$

First Closing Warrants

The fair value of the First Closing Warrants issued in April 2019 in connection with the Private Placement and the change in fair value of warrants as a result of mark-to-market were determined using the Black-Scholes-Merton (BSM) option-pricing model based on the following weighted-average assumptions for the periods indicated.
 
Three and Six Months Ended June 30, 2019
Expected volatility
75.0
%
Risk-free interest rate
2.2
%
Expected dividend yield
%
Expected term (years)
6.9

Purchase Rights

The fair value of the Purchase Rights issued during the First Closing in connection with the Private Placement and the change in fair value of Purchase Rights as a result of the mark-to-market due to their classification change from liability to equity upon stockholder approval of the Private Placement were determined using a combination of a lattice model and a BSM option-pricing model. The lattice model was used to determine a range of future value of the Company's common stock as of the Second Closing. The BSM option-pricing model was used to determine the fair value of the warrants issued at the Second Closing and the existing warrants subsequently canceled at the Second Closing (see discussion of the warrants canceled in Note 10- Private Placement ) based on the applicable assumptions, including the future value of the Company's common stock as determined by the lattice model, warrants exercise price, time to expiration, expected volatility of our peer group, risk-free interest rate and expected dividend. The fair value of the Purchase Rights was then calculated as the difference between the sum of the future value of the Company's common stock and value of the Second Closing warrants, and the sum of the purchase price of $4.50 for the Second Closing and the value of canceled warrants. The fair value of the Purchase Rights was calculated through backward induction within the lattice model framework.
Series D 2X Liquidation Preference
As described in Note 2 to the 2018 Audited Financial Statements, under the terms of the Series D issued, in a liquidation transaction Private Evofem’s Series D participated, prior and in preference to the other series of convertible preferred stock and common stock, at a rate of two times its initial investment, plus accrued and unpaid dividends (the Series D 2X Liquidation Preference). The Company determined the Series D 2X Liquidation Preference represented an embedded derivative, which required bifurcation and separate liability accounting and was initially recorded at fair value. See the Series D Redeemable Convertible Preferred Stock discussion in Note 8 — Convertible Preferred Stock for the terms of the Series D.
To determine the final fair value of the Series D 2X liquidation preference, the Company utilized a hybrid valuation model that considers the probability of achieving certain exit scenarios, the Company’s cost of capital, the estimated period the Series D 2X liquidation preference would be outstanding, consideration received for the instrument with the Series D 2X liquidation preference and at what price and changes, if any, in the fair value of the underlying instrument to the Series D 2X liquidation preference. At December 31, 2017, the most significant assumption was the probability of occurrence, which was concluded to be high, and as a result the fair value as of December 31, 2017 approximated the final redemption value.
In connection with the Merger, Private Evofem converted 80 shares of Series D into the Company's common stock. The valuations resulted in a concluded fair value of the Series D 2X liquidation preference of $80.0 million as of the Closing

15


Date, which was reclassified from a Series D 2X liquidation preference to additional paid-in capital upon the conversion into the Company's common stock.
The change in fair value of the Series D 2X liquidation preference for the six months ended June 30, 2018 was $0.1 million . There was no such change for the three months ended June 30, 2018, and three and six months ended June 30, 2019 as the Series D was converted into common stock in connection with the Merger.

6.    Commitments and Contingencies
Operating Leases
2015 Lease
            
Effective January 30, 2015, Private Evofem entered into a sublease for office space under a noncancelable lease agreement that expires in March 2020 (the 2015 Lease), which is the Company's primary office space. The sublease provides for two renewal periods of five years each, but the sub-lessor is not expected to renew its lease. In lieu of paying a security deposit directly to the sub-lessor, the Company maintains a time deposit in favor of the sub-lessor (the Deposit), which is included in restricted cash in the condensed consolidated balance sheets. During months 13 through 58 of the 2015 Lease term, subject to certain restrictions, approximately $5,000 of the Deposit may be released each month through November 2019 and approximately $66,000 of the Deposit may be released each month between December 2019 and March 2020. As of June 30, 2019 and December 31, 2018 , restricted cash maintained as collateral for the Company’s Deposit was $0.3 million for both periods.
Concurrent with the execution of the 2015 Lease, Private Evofem entered into a sublease with WomanCare Global Trading, Inc. (WCGT) whereby WCGT agreed to sublease approximately 25% (subject to annual adjustment), as amended, of the Company’s primary office space aforementioned (the WCG Sublease). The Company remains the primary obligor under the WCG Sublease and records all sublease income as a reduction of rent expense in the condensed consolidated statements of operations. WCGT paid an initial security deposit of approximately $0.3 million (the WCG Security Deposit). Effective April 1, 2018, the WCG Sublease was reassigned from WCGT to WCG Cares, whereby WCG Cares agreed to pay the Company 20% of the overall lease payment under the 2015 Lease. All terms and conditions remain the same as the original WCG Sublease. The remaining WCG Security Deposit totaled approximately $0.2 million was repaid to WCGT in June 2018. The Company terminated the WCG Sublease in the fourth quarter of 2018. There were no sublease payments received pursuant to the WCG Sublease during the three and six months ended June 30, 2019 , and $40,000 sublease payments were received during the three and six months ended June 30, 2018.
            
Leased Space
In August 2017, the Company entered into a manufacturing and supply agreement with an outside supplier for non-recoverable expenses incurred by the supplier during non-commercial periods for a term of one year from August 2017. This agreement was further renewed by both parties to cover the period from August 2018 to late 2019. Under the agreement, the supplier provides a dedicated packaging space for the Company with a fixed monthly cost. The Company determined that this dedicated space is accounted for as an operating lease under ASC 842 Leases.
 
Supplemental Financial Statement Information
Lease Assets and Liabilities (in thousands)
 
June 30, 2019

Operating right-of-use assets
 
$
483

Operating lease liabilities
 
580

 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Lease Cost (in thousands)
 
Classification
 
2019

 
2018

 
2019

 
2018

Operating lease expense
 
Research and development
 
$
83

 
$
30

 
$
165

 
$
73

Operating lease expense
 
General and administrative
 
103

 
$
66

 
212

 
$
181

Total
 
 
 
$
186

 
$
96

 
$
377

 
$
254

Lease Term and Discount Rate
 
June 30, 2019

Weighted average remaining lease term (in years)
 
0.73

Weighted average discount rate
 
12
%

16


Maturity of Operating Lease Liabilities (in thousands)
 
June 30, 2019

Year ending December 31, 2019
 
$
408

Year ending December 31, 2020
 
201

Total lease payments
 
609

Less: imputed interest
 
(29
)
Total
 
$
580

Maturity of Operating Lease Liabilities under the 2015 Lease (in thousands)
 
December 31, 2018

Year ending December 31, 2019
 
$
777

Year ending December 31, 2020
 
201

Total
 
$
978

Other information (in thousands)
 
Six Months Ended
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
     Operating cash flows from operating leases
 
$
427

Contingencies
From time to time the Company may be involved in various lawsuits, legal proceedings or claims that arise in the ordinary course of business. There were no claims or actions pending against the Company as of June 30, 2019 and December 31, 2018 , which management believes would have, individually or in the aggregate, a material adverse effect on its business, liquidity, financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm the Company’s business.
Intellectual Property Rights
In 2014, Private Evofem entered into an amended and restated license agreement with Rush University (the Rush License Agreement) pursuant to which Rush University granted Private Evofem an exclusive, worldwide license of certain patents and know-how, related to its MVP-R technology authorizing Private Evofem to make, distribute and commercialize products and processes for any and all therapeutic, prophylactic and/or diagnostic uses, including, without limitation, use for female vaginal health and/or birth control.
The Company may be obligated to pay an earned royalty based upon a percentage of net sales in the range of mid-single digits. Commencing on January 1 of year three after a product has received regulatory approval and has been introduced to market, the Company may become obligated to pay minimum annual royalties, to the extent the earned royalty or sublicensing fees, as applicable, do not exceed the minimum annual royalties.
In October 2015, the Company's subsidiaries, ENA and EP entered into separate sublicense agreements (the Sublicenses) with WomanCare Global Trading CIC (WCGCIC) for a contraceptive vaginal ring. In August 2016, ENA, EP and WCGCIC entered into a side letter to modify the timing of the 2016 and 2017 payments due under the Sublicenses. On an aggregate basis, consideration under the Sublicenses consisted of (i) payments or potential payments to the licensor of (a) an upfront payment of $10.0 million , (b) potential regulatory and commercial milestone payments up to $32.0 million , (c) potential royalty payments on net product sales and (d) potential royalty payments on net sales of an equivalent generic product and (ii)  $5.0 million in annual sublicense fees through October 1, 2019 to WCGCIC. In December 2016, under the terms of the Sublicenses, ENA and EP provided 90-days written notice of termination of the Sublicenses to WCGCIC, which period concluded on March 28, 2017.
During the quarter ended March 31, 2019, the Sublicenses were reassigned to WCG Cares, upon which, the unpaid sublicense fees ceased accruing interest and all accrued sublicense fees and interest expense of $1.3 million were transferred and became payable to WCG Cares. As of June 30, 2019 and December 31, 2018 , the Company had accrued sublicense fees and accrued interest expense on unpaid sublicense fees of approximately $1.1 million and $0.2 million , respectively, for both periods, which are included in the condensed consolidated balance sheets. See Note 7 – Related-party Transactions for a summary of the Company’s transactions with WCGCIC, WomanCare Global International, a non-profit organization registered in England and Wales (WCGI) and related entities, and WCG Cares.



17


7.    Related-party Transactions
Consulting Agreements
Effective April 1, 2016, Private Evofem entered into a one -year consulting agreement (the 2016 Consulting Agreement) with Thomas Lynch, the chairman of the Company’s board of directors. Pursuant to the 2016 Consulting Agreement, Mr. Lynch provides consulting services with respect to investor relations and business development activities as requested from time to time. Pursuant to the 2016 Consulting Agreement, Mr. Lynch (i) received compensation of approximately $0.4 million , including $0.1 million related to his board services, (ii) received a stock option for the purchase of 3,850 shares of common stock with an exercise price of $46.36 per share, which vest over a one -year period through March 1, 2017 and (iii) was issued a restricted stock unit (RSU) for the rights to 2,566 shares of common stock. Upon the closing of the Merger, Mr. Lynch agreed to cancel all of his unvested RSU received pursuant to the 2016 Consulting Agreement. See Restricted Stock Units discussion in Note 12 — Stock-based Compensation for the accounting treatment for Mr. Lynch’s RSU granted in 2016. On July 2, 2018, under the Amended and Restated 2014 Plan (as defined below), the Company issued 150,000 RSUs to Mr. Lynch in consideration for certain consulting services provided to the Company in connection with the 2016 Consulting Agreement. The RSUs were fully vested on the grant date.
In August 2017, Private Evofem and Mr. Lynch entered into a two -year consulting agreement (the 2017 Consulting Agreement), which was effective as of April 1, 2017. The 2017 Consulting Agreement expired in accordance with its terms on March 31, 2019. This 2017 Consulting Agreement provided for (i) annual compensation of $0.4 million , including $0.1 million related to his board services and (ii) a stock option for the purchase of 6,416 shares of common stock that was to vest quarterly through March 31, 2018, which remained unissued at the time of the Merger. On March 12, 2018, the Company issued a stock option for the purchase of 225,000 shares of the Company's common stock with an exercise price of $7.29 per share in lieu of the unissued stock option pursuant to the 2017 Consulting Agreement, of which 125,000 shares vested on the grant date and the remaining shares vested in a series of twelve successive equal monthly installments upon completion of each additional month of service measured from April 1, 2018. The option was awarded in connection with Mr. Lynch's consulting services for the Company for the fiscal years 2016 to 2018. On July 31, 2018, the Company issued additional stock options for the purchase of 85,500 shares of the Company's common stock with an exercise price of $2.10 per share pursuant to the 2017 Consulting Agreement, which shares will vest in a series of 36 successive equal monthly installments upon completion of each additional month of service measured from the grant date. In addition, on July 31, 2018, the Compensation Committee, with the authorization of the board of directors, approved a one-time, discretionary cash bonus award to Mr. Lynch in the amount of $50,000 .
Effective April 1, 2019, the Company entered into a new two -year consulting agreement with Mr. Lynch (the 2019 Consulting Agreement). The 2019 Consulting Agreement provides for (i) annual compensation of $0.4 million , including $0.1 million related to Mr. Lynch’s board services, (ii) an annual grant of 150,000 RSUs, which will vest quarterly over one year from April 1, 2019 and (iii) an annual bonus of up to 100% of Mr. Lynch’s annual consulting fees based upon the achievement of the Company’s corporate goals and objectives as determined by and subject to approval of the board of directors.
Consulting fees incurred under the 2017 and 2019 Consulting Agreements were approximately $0.3 million and $0.1 million for the three months ended June 30, 2019 and 2018, respectively, and $0.4 million and $0.1 million for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019 and December 31, 2018, accrued compensation, excluding board fees, owed to Mr. Lynch was $0.1 million for both periods.
Transactions with WCGI and Related Entities
From 2009 to 2016, Ms. Saundra Pelletier was the founding CEO of WCGI. In February 2013, Private Evofem and WCGI formed an alliance (the WCGI Alliance) and Ms. Pelletier also became Private Evofem’s CEO. Concurrent with the forming of the WCGI Alliance, Private Evofem and WCGI entered into (i) a service agreement to which the companies shared resources and employees and (ii) a three -year grant agreement under which the Private Evofem provided funding of $4.0 million per year to WCGI.
From 2011 to 2017, Ms. Pelletier served as a director of the board of WCGT, a WCGI subsidiary. As described in Note 6 — Commitments and Contingencies , (i) effective in February 2015, Private Evofem and WCGT, entered into a sublease for office space, which was terminated and reassigned to WCG Cares effective April 1, 2018, and (ii) in October 2015, (a) Private Evofem, through its wholly-owned subsidiaries, entered into two sublicense agreements whereby Private Evofem was responsible for paying $5.0 million in annual sublicense fees, net of amounts paid under the grant agreement during 2015, to WCGCIC, also a WCGI affiliate, and (b) the service and grant agreements were canceled.
Effective January 2016, Private Evofem and WCGI entered into a shared-services agreement (the SSA), which replaced the prior service agreement. Under the terms of the SSA, Private Evofem and WCGI cross charge the other company’s services provided by each entity on behalf of the other. The SSA also allows for netting of due to and due from shared-services

18


fees. Services provided under the SSA on behalf of WCGI were immaterial for the three months ended June 30, 2018, and the three and six months ended June 30, 2019 . Such amounts were approximately $0.1 million for the six months ended June 30, 2018 . Net shared-services due to the Company were immaterial as of June 30, 2019 and December 31, 2018 . In July 2019, the SSA was terminated.
The following table summarizes receivables and payables related to the Company's transactions with WCGI related entities for the periods indicated (in thousands). Such amounts were immaterial as of June 30, 2019 and for the three and six months ended June 30, 2019 . All accrued sublicense fees and interest expense related to the Sublicenses as of December 31, 2018 became payable to WCG Cares during the first quarter of 2019.
 
 
 
 
December 31, 2018

Receivables
 
 
 
$
3

Payables
 
 
 
$
1,291

 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Payments
 
$
883

 
$
883

Expenses
 
$
28

 
$
59

Transactions with WCG Cares
      
In 2013, WCG Cares, a 501(c)(3) nonprofit organization, was incorporated under the laws of the State of California. Its primary purpose is to directly engage in and/or fund the development and implementation of programs that promote reproductive health, education, research and increased access to high-quality, innovative and affordable reproductive healthcare and healthcare products around the world. Ms. Pelletier served as the CEO and President of WCG Cares from 2013 to November 2017. She became a member of its board in November 2017 and served as chair of its board of directors from November 2017 to May 2018. Additionally, Mr. Justin J. File served as WCG Cares' Chief Financial Officer from November 2017 to May 2018. Dr. Kelly Culwell served as WCG Cares' Chief Medical Officer from November 2017 to December 2018. Dr. Culwell also became a director of its board in January 2019 with a term of three years until December 31, 2021. See shared-services agreement discussion below.
      
The Company agreed to be a corporate sponsor of WCG Cares’ U.S. education campaign, the Tryst Network, which officially launched in February 2018. The Company paid WCG Cares a one-time payment of $0.3 million in March 2018 in connection with this corporate sponsorship of the Tryst Network. During the second quarter of 2018, the Company ceased its corporate sponsorship of the Tryst Network.

In March 2018, the Company and WCG Cares entered into a shared-services agreement (the Cares Shared Services Agreement). Under the terms of the Cares Shared Services Agreement, the Company and WCG Cares cross charge services provided by each entity (or its subsidiaries) on behalf of the other. The Cares Shared Services Agreement also allows for netting of due to and due from shared-services fees. Services provided under the Cares Shared Services on behalf of WCG Cares were approximately $0.1 million for both the three and six months ended June 30, 2018, and immaterial for both the three and six months ended June 30, 2019 . As of June 30, 2019 and December 31, 2018, net shared-services due to the Company were immaterial for both periods. In July 2019, the Company provided a notice of termination to WCG Cares to terminate the Cares Shared Services Agreement effective September 2019.
The following table summarizes receivables, payables, payments and expenses related to the Company's transactions with WCG Cares for the periods indicated (in thousands). Such amounts were immaterial as of December 31, 2018, for the three months ended June 30, 2018, and for the three and six months ended June 30, 2019 .
 
 
June 30, 2019

Receivables
 
$

Payables
 
$
1,291

 
 
 
 
 
Six Months Ended June 30, 2018
Payments
 
$
300

Operating expense
 
$
126





19


Variable Interest Entity Considerations
Due to shared management and numerous agreements between the Company and WCGI and the Company and WCG Cares, management reviewed its relationship with both WCGI and its subsidiaries and WCG Cares in accordance with the authoritative guidance for variable interest entities within ASC 810 - Consolidation . The Company concluded that due to WCGI’s and WCG Cares’ status as not-for-profit entities, the scope exception from qualifying as a variable interest entity was met and, therefore, the Company is not required to consolidate WCGI or WCG Cares.

8.    Convertible Preferred Stock
Immediately prior to the Merger, as described in Note 1- Description of Business and Basis of Presentation , each share of Private Evofem’s capital stock (other than Private Evofem’s Series D), including its Series A convertible preferred stock, Series B convertible preferred stock, Series C-1 convertible preferred stock and Series C convertible preferred stock was converted into shares of the Company's common stock on a one-for-one basis effecting the Exchange Ratio and the Reverse Stock Split for an aggregate of 1,027,079 shares. In addition, each share of Private Evofem’s Series D was converted into approximately 85,987 shares of the Company’s common stock for an aggregate of 6,878,989 shares. As of June 30, 2019 and December 31, 2018, no shares of convertible preferred stock were issued and outstanding.
Dividends on the Series D were payable (i) upon conversion, (ii) redemption or (iii) liquidation. As such, although the Company’s board of directors had not declared dividends, the Company accrued dividends on the Series D. Upon closing of the Merger, the Company paid cash dividends of $0.2 million for the accrued dividends only for the period of January 6, 2018 to the Closing Date and the accrued and unpaid dividends of $5.2 million as of December 31, 2017 were reclassified to additional paid-in capital upon conversion of 80 shares of Series D into common stock.
The designated, issued and outstanding shares of convertible preferred stock, by series, as of December 31, 2017 were as follows (aggregate liquidation amount and proceeds, net of issuance costs, in thousands): 
 
Shares
Designated
 
Original
Issue Price
 
Shares
Issued and
Outstanding
 
Common
Stock
Equivalents (1)
 
Aggregate
Liquidation
Amount
 
Proceeds,
Net of
Issuance
Costs
Series A
12,768,492

 
$
1.9579445

 
12,618,279

 
12,618,279

 
$
24,706

 
$
23,848

Series B
31,034,696

 
$
3.2222

 
13,801,318

 
13,801,318

 
44,471

 
43,616

Series C-1
8,660,572

 
$
3.97

 
8,558,686

 
8,558,686

 
33,978

 
34,382

Series C
5,037,784

 
$
3.97

 
5,037,784

 
5,037,784

 
20,000

 
19,469

Series D (2)(3)
80

 
$
500,000

 
80

 
 
 
85,160

 
39,739

Total
57,501,624

 
 
 
40,016,147

 
 
 
$
208,315

 
$
161,054

_______________________
(1)
The Series D shares were convertible into shares in the next equity financing (either preferred or common) at a 50% discount to the fair value price per share of the shares to be issued in the next financing, therefore, the Series D common stock equivalents and the totals for common stock equivalents have been left blank.
(2)
Aggregate liquidation amount included accrued and unpaid dividends of $5.2 million as of December 31, 2017.
(3)
Proceeds, net of issuance costs, included $35.0 million in cash and $5.0 million from the conversion of the Amended Cosmederm Note (see more discussions below) less issuance costs of approximately $0.3 million . This line excluded the Series D 2X liquidation preference net issuance price of $18.2 million , the loss on the issuance of Series D of $35.2 million , loss on extinguishment of related-party note payable of $6.7 million and accrued Series D dividends of $5.2 million .

Private Evofem and Cosmederm entered a promissory note during 2015, which was amended in July 2016 in conjunction with the Private Evofem’s Series D financing (the Amended Cosmederm Note). Cosmederm assigned the Amended Cosmederm Note with the then outstanding principal balance of $10.0 million to WIM. As a condition to closing the Private Evofem’s Series D, WIM immediately converted $5.0 million of the Amended Cosmederm Note into 10 shares of the Private Evofem’s Series D and canceled the remaining $5.0 million .
Series D
In July 2016, Private Evofem entered into a Series D purchase agreement with WIM, which was subsequently amended in July 2017 to increase the number of authorized preferred stock for issuance (as amended, the Series D SPA). The Series D SPA authorized the issuance and sale of an aggregate of 80 shares of Series D, which was sold at an issuance price per share of $500,000 . WIM also received the right to receive warrant shares to be determined in the next equity financing (Warrant Rights). See Warrant Rights discussion below.

20


Warrant Rights

Upon completion of the Merger, Private Evofem’s Series D Warrant Rights were assumed by the Company and exchanged for an aggregate of three shares of the Company's common stock and the WIM Warrants to purchase up to 2,000,000 shares of the Company's common stock. The shares of common stock issued in connection with the WIM Warrants may not be transferred separately from the WIM Warrants. The WIM Warrants became exercisable on January 17, 2019 and remain exercisable until the earlier of January 18, 2022 or immediately prior to the completion of an acceleration event, as defined therein, and have an exercise price of $8.35 per share.

The Company determined that the WIM Warrants are free standing financial instruments and classified as equity in accordance with ASC 480— Distinguish Liabilities from Equity. To determine the fair value of the WIM Warrants, the Company utilized the BSM option-pricing model, where the warrants’ exercise price was determined based on a Monte Carlo simulation. The valuations resulted in a concluded fair value of the WIM Warrants of $14.1 million as of January 18, 2018, which was recorded as additional paid-in capital in the condensed consolidated balance sheet.

On February 5, 2019, the Company entered into letter agreements (the Repricing Letter Agreements) with WIM and certain other holders of outstanding warrants to purchase common stock of the Company by exercising certain outstanding warrants. Upon execution of the Repricing Letter Agreements, investment funds affiliated with WIM exercised certain WIM Warrants to purchase an aggregate of 1,525,000 shares of common stock at a reduced exercise price of $2.64 per share. The Company determined that the incremental fair value as a result of the modification to these WIM Warrants from change of the exercise price was approximately $1.4 million , which was recorded as change in fair value of warrants in the condensed consolidated statement of operations for the six months ended June 30, 2019.

On June 10, 2019, upon the Second Closing of the Private Placement as discussed at Note 10- Private Placement , the remaining WIM Warrants to purchase up to 475,000 shares of common stock were canceled.

9.    Public Offering

On May 24, 2018, the Company completed an underwritten public offering (the Offering), whereby the Company issued 7,436,171 shares of common stock at a public offering price of $4.69 per share and pre-funded warrants to purchase 1,063,829 shares of common stock at a public offering price of $4.68 per warrant and an exercise price of $0.01 per share. Each share of common stock and each pre-funded warrant was issued together with a common warrant to purchase one-fifth of a share of the Company's common stock at a public offering price of $0.01 per warrant and an exercise price of $7.50 per share. An aggregate of 8,500,000 common warrants were issued in connection with the Offering and are exercisable to purchase an aggregate of 1,700,000 shares of common stock. The common warrants issued to the three funds affiliated with WIM that participated in the Offering were issued as a unit with one share of common stock totaling three unit shares in the aggregate (the Unit Shares). Except with respect to the Unit Shares, the shares of common stock, pre-funded warrants and common warrants are separately transferable. The Company determined that the pre-funded warrants and common warrants are free standing financial instruments and equity classified in accordance with ASC 480- Distinguish Liabilities from Equity .
The Company received proceeds from the Offering of approximately $37.5 million , net of underwriting discounts and commissions, but before deducting the estimated offering costs of $1.5 million . The estimated offering costs were recorded as contra additional-paid in capital in the condensed consolidated balance sheet. The common stock and warrants issued in the Offering were registered pursuant to a registration statement on Form S-1 filed with the SEC on May 16, 2018 and declared effective on May 21, 2018.
On June 26, 2018, the Company issued an additional 912 common warrants to purchase approximately 182 shares of common stock upon an underwriter's exercise of its overallotment option. The offering price and exercise price were the same as the common warrants issued on May 24, 2018. The net proceeds received from this issuance were immaterial.
In February 2019, per the terms of the Repricing Letter Agreements, WIM and other holders of common warrants issued in the Offering exercised their common warrants to purchase an aggregate of 851,062 shares of common stock at a reduced exercise price of $2.64 per share. The Company determined that the incremental fair value as a result of the modification to these common warrants issued in the Offering from change of the exercise price was $0.5 million , which was recorded as change in fair value of warrants in the condensed consolidated statement of operations for the six months ended June 30, 2019.

10. Private Placement
 
On April 10, 2019, the Company entered into a Securities Purchase Agreement with PDL BioPharma, Inc., a Delaware corporation (PDL), funds discretionally managed by Invesco Ltd. (Invesco) and funds managed by WIM (collectively, the Purchasers), providing for the issuance and sale to the Purchasers of an aggregate of up to $80 million of the Company’s

21


common stock, par value $0.0001 per share (the Shares) at a purchase price of $4.50 per share, and warrants to purchase shares of common stock with an exercise price of $6.38 per share (collectively, the Securities) in a private placement (the Private Placement) to be funded in up to two separate closings.

The first closing was completed on April 11, 2019 (the First Closing), pursuant to which the Company (i) issued and sold to PDL 6,666,667 shares of its common stock and warrants to purchase up to 1,666,667 shares of common stock (the First Closing Warrants) and (ii) provided to the Purchasers an option, but not an obligation, from the Company to issue and sell to each Purchaser the shares of common stock and warrants as specified in the aforementioned Securities Purchase Agreement during the period beginning on April 11, 2019 and ending on June 10, 2019 (the Purchase Rights). The total consideration for the First Closing was $30 million .

The second closing was completed on June 10, 2019 (the Second Closing), pursuant to which the Company issued and sold to PDL, Invesco and WIM (i) 6,666,667 , 2,222,222 , and 2,222,223 shares of its common stock, respectively and (ii) warrants to purchase up to 1,666,667 , 555,556 and 555,556 shares of common stock (the Second Closing Warrants), respectively, for an aggregate purchase price of $50 million . Shares of common stock issued to WIM included one voting share issued in connection with the issuance of its warrants.

The Company's stockholders approved the Private Placement at its 2019 Annual Meeting of Stockholders held on June 5, 2019 (the Approval Date).

The warrants have a seven (7) year term and will become exercisable at any time on or after the date that is six (6) months following their respective issuance dates. The Company determined the First Closing Warrants were free standing financial instruments and liability classified in accordance with ASC 480- Distinguish Liabilities from Equity (ASC 480) due to the requirement to obtain stockholder approval pursuant to Nasdaq Listing Rule 5635(b). The Company utilized the BSM option-pricing model to calculate the fair value of warrants at issuance and on the Approval Date for the First Closing Warrants, and recorded the following in the condensed consolidated financial statements: (i) $3.6 million warrant liability at issuance; (ii) $3.3 million change in fair value of warrants in the condensed consolidated statement of operations as a result of mark-to-market on the Approval Date; and (iii) $6.9 million reclassification from warrant liability to additional paid-in capital in the condensed consolidated balance sheet on the Approval Date.

The Second Closing Warrants were determined to be free standing financial instruments and equity classified in accordance with ASC 815- Derivatives and Hedging (ASC 815). The Company utilized the BSM option-pricing model to calculate the fair value of warrants at issuance and recorded an estimated fair value of $12.7 million as additional paid-in capital in the condensed consolidated balance sheet.
                 
The Company also determined the Purchase Rights were free standing financial instruments and liability classified in accordance with ASC 480 due to the stockholder approval provision noted above. As described in Note 5- Fair Value Financial Instruments , the Company utilized a combination of a lattice model and a BSM option-pricing model to calculate the fair value of the Purchase Rights at issuance and on the Approval Date. The Company recorded the following in the condensed consolidated financial statements: (i) $3.2 million purchase rights liability at issuance for the Purchase Rights provided to PDL; (i) $0.7 million loss on issuance of purchase rights at issuance in the condensed consolidated statement of operations for the Purchase Rights provided to Invesco and WIM; (iii) $19.6 million change in fair value of purchase rights in the condensed consolidated statement of operations as a result of mark-to-market on the Approval Date; and (iii) $22.8 million reclassification from purchase rights liability to additional paid-in capital in the condensed consolidated balance sheet on the Approval Date.
    
Upon completion of the First and Second Closing, the Company received proceeds of approximately $28.2 million and $47.2 million , net of $1.8 million and $2.8 million in advisory fees to financial advisors, respectively, and expects to use these proceeds for clinical research and development purposes, including resubmission of the New Drug Application (NDA) for Amphora with the FDA, pre-commercialization activities, and for general corporate purposes.

Additionally, upon completion of the Second Closing, the previously issued WIM Warrants and Reload Warrants to purchase up to 475,000 shares and 1,188,029 shares of common stock, respectively, were canceled. See Note 11- Stockholders' Equity (Deficit) for additional details on the Reload Warrants. The Company included such cancellation in valuing the Purchase Rights described above.








22


11.    Stockholders' Equity (Deficit)

Warrants
         
As referenced in Note 8- Convertible Preferred Stock and Note 9- Public Offering , warrants to purchase an aggregate of 2,376,062 shares of common stock were exercised at an exercise price of $2.64 per share in February 2019 per the Repricing Letter Agreements. The Company received gross proceeds of approximately $6.3 million from these exercises.

On February 8, 2019 and per the terms of the Repricing Letter Agreements, the Company issued warrants to purchase up to 1,188,029 shares of the Company's common stock (Reload Warrants) to the holders party to the Repricing Letter Agreements and have an exercise price of $5.20 per share. The Company determined the Reload Warrants are free standing financial instruments and equity classified in accordance with ASC 480— Distinguish Liabilities from Equity. Since these Reload Warrants were issued in addition to the reduced exercise price to induce Holders of WIM Warrants and common warrants to exercise their warrants, the Company determined the fair value of the Reload Warrants was also the incremental fair value as a result of the modification to the WIM warrants and common warrants exercised. To determine the fair value of the Reload Warrants, the Company utilized the BSM option-pricing model, which resulted in an estimated fair value of the Reload Warrants of $2.5 million , which was recorded as additional paid-in capital in the condensed consolidated balance sheet and change in fair value of warrants in the condensed consolidated statement of operations. Upon completion of the Second Closing of the Private Placement as discussed at Note 10- Private Placement , all Reload Warrants were canceled.

As referenced in Note 10- Private Placement , warrants to purchase an aggregate of 4,444,446 were issued in connection with the Private Placement at an exercise price of $6.38 per share in April and June 2019.

As of June 30, 2019 , warrants to purchase up to 6,369,270 shares of the Company's common stock remain outstanding at a weighted average exercise price of $5.50 per share. These warrants are summarized below:
Type of Warrants
 
Underlying Common Stock to be Purchased
 
Exercise Price
 
Issue Date
 
Exercise Period
Common Warrants
 
2,020

 
$
67.71

 
January 25, 2010
 
January 25, 2010- February 25, 2020
Common Warrants
 
878

 
$
51.24

 
March 30, 2012
 
March 30, 2012 to March 30, 2022
Common Warrants
 
1,171

 
$
51.24

 
August 17, 2012
 
August 17, 2012 to July 17, 2022
Common Warrants
 
7,806

 
$
3.69

 
June 11, 2014
 
June 11, 2014 to June 11, 2024
Pre-funded Warrants
 
1,063,829

 
$
0.01

 
May 24, 2018
 
May 24, 2018 until shares are exercised
Common Warrants
 
848,938

 
$
7.50

 
May 24, 2018
 
May 24, 2018 to May 24 2025
Common Warrants
 
182

 
$
7.50

 
June 26, 2018
 
June 26, 2018 to June 26, 2025
Common Warrants
 
1,666,667

 
$
6.38

 
April 11, 2019
 
October 11, 2019 to October 11, 2026
Common Warrants
 
2,777,779

 
$
6.38

 
June 10, 2019
 
December 10, 2019 to December 10, 2026
Total
 
6,369,270

 
 
 
 
 
 
Common Stock
Effective January 17, 2018 and in connection with the Merger, the Company amended and restated its certificate of incorporation, under which the Company is currently authorized to issue up to 300,000,000 shares of common stock, $0.0001 par value per share, and 5,000,000 shares of preferred stock, $0.0001 par value per share.
On February 5, 2019, the Company issued 2,376,062 shares of common stock upon the exercise of outstanding warrants in connection with the Repricing Letter Agreements. On February 8, 2019, the Company issued 3 shares of common stock to each of the investment funds affiliated with WIM in connection with the issuance of Reload Warrants. These shares issued to funds affiliated with WIM may not be transferred separately from the Reload Warrants issued to WIM.
On February 25, 2019, the Company issued 470,500 shares of restricted stock pursuant to the Amended and Restated 2014 Plan (as defined below) and are further discussed in Note 12 - Stock-based Compensation .
The Company issued 6,666,667 and 11,111,112 shares of common stock on April 11, 2019 and June 10, 2019, respectively, in connection with the First and Second Closing of the Private Placement as discussed in Note 10- Private Placement .
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance is as follows in common equivalent shares as of June 30, 2019 :  

23


Common stock issuable upon the exercise of stock options outstanding
6,134,179

Common stock issuable upon release of restricted stock units
151,500

Common stock issuable upon the exercise of common stock warrants
6,369,270

Common stock available for future issuance under the 2019 ESPP
500,000

Common stock available for future issuance under the Amended and Restated 2014 Plan
636,944

Common stock available for future issuance under the Inducement Plan
156,000

Total common stock reserved for future issuance
13,947,893


12. Stock-based Compensation
    
Equity Incentive Plans
The following table summarizes stock-based compensation expense related to stock options, restricted stock awards (RSAs) and RSUs granted to employees and non-employee directors included in the condensed consolidated statements of operations as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Research and development
$
369

 
$
2,365

 
$
657

 
$
2,595

General and administrative
2,146

 
8,298

 
3,820

 
8,756

Total
$
2,515

 
$
10,663

 
$
4,477

 
$
11,351

In September 2012, Private Evofem adopted the 2012 Equity Incentive Plan (the 2012 Plan) that provides for the issuance of RSAs, RSUs, or non-qualified and incentive common stock options to its employees, non-employee directors and consultants, from its authorized shares. In general, the options expire ten years from the date of grant and generally vest either (i) over a four -year period, with 25% exercisable at the end of one year from the employee’s hire date and the balance vesting ratably thereafter or (ii) over a three -year period, with 25% exercisable at the grant date and the balance vesting ratably thereafter. Upon completion of the Merger, Private Evofem's 2012 Plan was assumed by the Company and awards outstanding under the 2012 Plan became awards for the Company's common stock. Effective as of the Merger, no further awards may be issued under the 2012 Plan.

On September 15, 2014, Neothetics’ board of directors adopted, and stockholders approved, the 2014 Equity Incentive Plan (the 2014 Plan). In May 2018, the Company's board of directors adopted, and stockholders approved, the amendment and restatement of the 2014 Plan of the Company (the Amended and Restated 2014 Plan), that, among other things, would increase the number of authorized shares under the 2014 Plan from 749,305 to an aggregate of 5,300,000 shares. On November 28, 2018, the Company's board of directors approved, subject to stockholder approval, and recommended its stockholders approve at the 2019 Annual Meeting, an additional 2,500,000 authorized shares reserved for issuance under the Amended and Restated 2014 Plan to an aggregate of 7,800,000 shares, including the Evergreen Shares discussed below. Such approval was obtained at the 2019 Annual Meeting held on June 5, 2019. Per the terms of the Amended and Restated 2014 Plan, the shares reserved will automatically increase on each January 1 through 2024, by an amount equal to the smaller of (1) 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31; or (2) an amount determined by our board of directors. This provision resulted in an additional 1,034,689 shares (Evergreen Shares) added to the total number of authorized shares on January 1, 2019. As of June 30, 2019 , there were 636,944 shares available to grant under the Amended and Restated 2014 Plan.

On July 24, 2018, upon the recommendation by the Compensation Committee, the board of directors adopted the Evofem Biosciences, Inc. 2018 Inducement Equity Incentive Plan (the Inducement Plan), pursuant to which the Company reserved 250,000 shares for the issuance of equity awards under the Inducement Plan. The only persons eligible to receive awards under the Inducement Plan are individuals who satisfy the standards for inducement grant recipients under Nasdaq Marketplace Rule 5635(c)(4), generally, a person not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to the individual's entering into employment with the Company. As of June 30, 2019 , there were 156,000 shares available to grant under the Inducement Plan.

Stock Options
         
There were 384,000 and 134,375 shares of stock options granted during the three months ended June 30, 2019 and 2018, respectively, and 443,000 and 3,270,405 shares of stock options granted during the six months ended June 30, 2019 and 2018, respectively. The stock options granted during the three months ended March 31, 2018 were granted out of the share

24


reserve increase approved by the board of directors under the Amended and Restated 2014 Plan on March 11, 2018 and were subject to the Company obtaining the requisite stockholder approval that was obtained on May 8, 2018.

T he stock options granted during the three months ended March 31, 2018 have vesting terms pursuant to which a majority of these options vested as of June 30, 2018, and as a result a significant amount of stock-based compensation expense was recognized during the three months ended June 30, 2018. As of June 30, 2019 , unrecognized stock-based compensation expense for employees and non-employee stock options was approximately $8.0 million , which the Company expects to recognize over a weighted-average remaining period of 2.1 years, assuming all unvested options become fully vested.
Summary of Assumptions
The fair value of stock-based compensation for stock options granted to employees and non-employees was estimated on the date of grant using the BSM option pricing model based on the following weighted-average assumptions for options granted for the periods indicated.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019

 
2018

 
2019

 
2018

Expected volatility
76.1
%
 
86.8
%
 
76.1
%
 
85.9
%
Risk-free interest rate
2.1
%
 
2.8
%
 
2.1
%
 
2.8
%
Expected dividend yield
%
 
%
 
%
 
%
Expected term (years)