UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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| OTCQB |
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.
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
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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 ☐ | |
| Smaller
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| Emerging
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
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The number of shares of the registrant’s common stock, $0.0001 par value per share, outstanding as of November 9, 2023 was .
Table of Contents
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 section 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.
These forward-looking statements include, among other things, statements about:
| ● | our ability to continue as a going concern; | |
| ● | our ability to remediate the material weaknesses in our internal controls and procedures identified by management; | |
| ● | our ability to obtain necessary approvals of any corporate action needing stockholder, FINRA, or other approvals; | |
| ● | our ability to file Annual and Quarterly Reports on a timely basis; | |
| ● | our ability to raise additional capital to fund our operations; | |
| ● | our ability to achieve and sustain profitability; | |
| ● | our estimates regarding our future performance including, without limitation, any estimates of potential future revenues; | |
| ● | estimates regarding market size; | |
| ● | our estimates regarding expenses, revenues, financial performance and capital requirements, including the length of time our capital resources will sustain our operations; | |
| ● | our ability to maintain the listing of our shares on the OTCQB® Venture Market; | |
| ● | our ability to comply with the provisions and requirements of our debt arrangements, to avoid future defaults pursuant to our debt arrangements and to pay amounts owed, including any amounts that may be accelerated, pursuant to our debt arrangements; | |
| ● | estimates regarding health care providers’ (HCPs) recommendations of Phexxi® (lactic acid, citric acid, and potassium bitartrate) vaginal gel (Phexxi) to patients; | |
| ● | the rate and degree of market acceptance of Phexxi; | |
| ● | our ability to successfully commercialize and distribute Phexxi and continue to develop our sales and marketing capabilities; | |
| ● | our estimates regarding the effectiveness of our marketing campaigns; | |
| ● | our strategic plans for our business, including the commercialization of Phexxi; | |
| ● | the potential for changes to current regulatory mandates requiring health insurance plans to cover U.S. Food and Drug Administration (FDA)-cleared or -approved contraceptive products without cost sharing; | |
| ● | our ability to obtain or maintain third-party payer coverage and adequate reimbursement, and our reliance on the willingness of patients to pay out-of-pocket for Phexxi absent full or partial third-party payer reimbursement; | |
| ● | our ability to obtain the necessary regulatory approvals to market and commercialize any product candidate we may seek to develop; | |
| ● | the success, cost and timing of our potential future clinical trials, if any; | |
| ● | our ability to protect and defend our intellectual property position and our reliance on third party licensors; | |
| ● | our ability to obtain additional patent protection for our product and product candidates; | |
| ● | our dependence on third parties for the manufacture of Phexxi and in the conduct of potential future clinical trials, if any; | |
| ● | our ability to expand our organization to accommodate potential growth; and | |
| ● | our ability to retain and attract key personnel. |
| 1 |
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. 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 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 and 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.
This Quarterly Report contains estimates and other statistical data made by independent parties and by the Company relating to market size and growth and other data about its industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates.
Our first commercial product, Phexxi, is approved by the FDA for marketing in the United States. Phexxi has not been approved by the European Medicines Agency (EMA) or any other regulatory authority anywhere else in the world except in Nigeria, where Phexxi was approved, on October 6, 2022, as Femidence™ by the National Agency for Food and Drug Administration and Control.
Unless the context requires otherwise, references in this Quarterly Report to “Evofem,” “Company,” “we,” “us” and “our” refer to Evofem Biosciences, Inc. and its subsidiaries.
This Quarterly Report includes our trademarks, trade names and service marks, including “Phexxi®” and “Femidence™” which are protected under applicable intellectual property laws and are the property of Evofem Biosciences, Inc. or its subsidiaries. Solely for convenience, trademarks, trade names and service marks referred to in this Quarterly Report may appear without the ®, ™ or SM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply a relationship with, or endorsement or sponsorship of us by, these other parties.
| 2 |
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)
| As of | ||||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Trade accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities, convertible and redeemable preferred stock and stockholders’ deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Convertible notes – carried at fair value (Note 4) | ||||||||
| Convertible notes – Adjuvant (Note 4) | ||||||||
| Accrued expenses | ||||||||
| Accrued compensation | ||||||||
| Operating lease liabilities-current | ||||||||
| Derivative liabilities | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities- noncurrent | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 7) | ||||||||
| Convertible and redeemable preferred stock, $ par value, Senior to common stock | ||||||||
| Series B-1, B-2, C and E-1 convertible preferred stock, , , and shares authorized; shares of E-1 issued and outstanding at September 30, 2023; other shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock, $par value; shares authorized; shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income (loss) | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities, convertible and redeemable preferred stock and stockholders’ deficit | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements (unaudited).
| 3 |
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Product sales, net | $ | $ | $ | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Cost of goods sold | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on issuance of financial instruments | ( | ) | ( | ) | ( | ) | ||||||||||
Gain (loss) on debt extinguishment | ( | ) | ( | ) | ||||||||||||
| Change in fair value of financial instruments | ||||||||||||||||
| Total other income, net | ||||||||||||||||
| Income (loss) before income tax | ( | ) | ||||||||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | ( | ) | ||||||||||||||
| Convertible preferred stock deemed dividends | ||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | $ | $ | ( | ) | ||||||||||
| Net income (loss) per share attributable to common stockholders: | ||||||||||||||||
| Basic (Note 2) | $ | $ | $ | $ | ) | |||||||||||
| Diluted (Note 2) | $ | $ | ) | $ | $ | ) | ||||||||||
| Weighted-average shares used to compute net income (loss): | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
| 4 |
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Change in fair value of financial instruments attributed to credit risk change | ( | ) | ||||||||||||||
| Reclassification adjustment related to debt extinguishment | ( | ) | ( | ) | ||||||||||||
| Comprehensive income (loss) | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
| 5 |
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE AND REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
(Unaudited)
(In thousands, except share data)
| Series E-1 Convertible and Redeemable Preferred Stock | Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income (Loss) | Deficit | Deficit | |||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Issuance of common stock upon cash exercise of warrants | - | |||||||||||||||||||||||||||||||
| Issuance of common stock upon cash exercise of purchase rights | - | |||||||||||||||||||||||||||||||
| Issuance of February and March 2023 Notes (See Note 4) | - | - | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||
| Change in fair value of financial instruments attributed to credit risk change (see Note 4) | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Issuance of common stock upon cash exercise of warrants | - | |||||||||||||||||||||||||||||||
| Issuance of common stock upon noncash exercise of purchase rights | - | |||||||||||||||||||||||||||||||
| Noncash reclassification of liability-classified derivatives to equity | - | - | ||||||||||||||||||||||||||||||
| Issuance of April 2023 Notes (See Note 4) | - | - | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||
| Change in fair value of financial instruments attributed to credit risk change (see Note 4) | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Issuance of common stock upon cash exercise of warrants | - | |||||||||||||||||||||||||||||||
| Issuance of common stock upon noncash exercise of purchase rights | - | |||||||||||||||||||||||||||||||
| Issuance of common stock upon conversion of notes | - | |||||||||||||||||||||||||||||||
| Issuance of series E-1 convertible and redeemable preferred stock upon exchange of notes (Note 8) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Issuance of Q3 2023 Notes (See Note 4) | - | - | ||||||||||||||||||||||||||||||
| Issuance of additional purchase rights due to price reset (Note 4) | - | - | ||||||||||||||||||||||||||||||
| Down round feature adjustment to financial instruments (Note 6) | - | - | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||
| Extinguishment of Baker Notes (Note 4) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Change in fair value of financial instruments attributed to credit risk change (Note 4) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| 6 |
| Series B Convertible and Redeemable Preferred Stock | Series C Convertible and Redeemable Preferred Stock | Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Income | Deficit | Deficit | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Issuance of common stock – Stock Purchase Agreement (see Note 8) | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Conversion of series B-2 convertible preferred stock | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||||||
| Exchange of series B-2 convertible preferred stock (see Note 8) | ( | ) | ( | ) | - | |||||||||||||||||||||||||||||||||||
| Convertible preferred stock deemed dividends | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Restricted stock awards issued | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Change in fair value of financial instruments attributed to credit risk change (see Note 4) | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Modification of the Baker Warrants (see Note 8) | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (31,888 | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Issuance of common stock – Stock Purchase Agreement (see Note 8) | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock – May 2022 Public Offering (see Note 8) | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon cash exercise of warrants | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock – ESPP | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock – a360 Media | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Cash repurchase of fractional common stock after the reverse stock split | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Conversion of series B-2 convertible preferred stock | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Convertible preferred stock deemed dividends | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| May 2022 exchange transaction | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Restricted stock awards cancelled | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||
| Change in fair value of financial instruments attributed to credit risk change (see Note 4) | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Modification of the Baker Warrants (see Note 8) | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Issuance of common stock upon cash exercise of warrants | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon noncash exercise of Purchase Rights (see Note 4) | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock – a360 Media | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Issuance costs in connection with May 2022 Public Offering | - | - | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||||||||
| Restricted stock awards cancelled | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||
| Change in fair value of financial instruments attributed to credit risk change (see Note 4) | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Modification of the Baker Warrants (see Note 8) | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
| 7 |
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | ( | ) | ||||||
| Adjustments to reconcile net income (loss) to net cash and restricted cash used in operating activities: | ||||||||
| Loss on issuance of financial instruments | ||||||||
| (Gain) loss on debt extinguishment | ( | ) | ||||||
| Change in fair value of financial instruments | ( | ) | ( | ) | ||||
| Inventory write-down for excess & obsolescence | ||||||||
| Financial instrument modification expense | ||||||||
| Stock-based compensation | ||||||||
| Depreciation | ||||||||
| Noncash interest expense | ||||||||
| Noncash lease expenses | ||||||||
| Net gain on lease termination | ( | ) | ||||||
| Net loss on disposal of property and equipment | ||||||||
| Noncash instrument exchange expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ||||||||
| Prepaid and other assets | ||||||||
| Accounts payable | ||||||||
| Accrued expenses and other liabilities | ( | ) | ||||||
| Accrued compensation | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash and restricted cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash and restricted cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock – Stock Purchase Agreement | ||||||||
| Proceeds from issuance of common stock and warrants, net of discounts, fees and commissions – Public Offerings | ||||||||
| Proceeds from issuance of common stock – exercise of warrants | ||||||||
| Proceeds from issuance of common stock – ESPP and exercise of stock options | ||||||||
| Borrowings under term notes | ||||||||
| Payments under term notes | ( | ) | ( | ) | ||||
| Cash paid for financing costs | ( | ) | ||||||
| Cash repurchase of fractional common stock after the reverse stock split | ( | ) | ||||||
| Net cash and restricted cash provided by financing activities | ||||||||
| Net change in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents and restricted cash, beginning of period | ||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Exchange of convertible notes to Series E-1 convertible preferred stock | ||||||||
| Borrowings under term notes included in prepaid and other current assets | ||||||||
| Issuance of common stock upon exercise of purchase rights | ||||||||
| Financing costs included in accounts payable and accrued expenses | ||||||||
| Purchases of property and equipment included in accounts payable and accrued expenses | ||||||||
| Conversion of Series B-2 convertible preferred stock to common stock | ||||||||
| Exchange of series B-2 convertible preferred stock to series C convertible preferred stock | ||||||||
| Issuance of common stock for prepaid advertising | ||||||||
| Exchange of Adjuvant Notes to purchase rights | ||||||||
| Exchange of term notes to purchase rights | ||||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
| 8 |
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Basis of Presentation
Description of Business
Evofem is a San Diego-based, commercial-stage biopharmaceutical company committed to commercializing innovative products to address unmet needs in women’s sexual and reproductive health.
The
Company’s first commercial product, Phexxi® (lactic acid, citric acid, and potassium bitartrate) vaginal gel (Phexxi),
was approved by the U.S. Food and Drug Administration (FDA) on May 22, 2020, and is the first and only FDA-approved, hormone-free, woman-controlled,
on-demand prescription contraceptive gel for women. The Company commercially launched Phexxi in September 2020. Phexxi net product sales
were $
Basis of Presentation and Principles of Consolidation
The Company prepared the unaudited interim condensed consolidated financial statements included in this Quarterly Report in accordance with accounting principles generally accepted (GAAP) in the United States 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, 2022 included in its Annual Report on Form 10-K as filed with the SEC on April 27, 2023 (the 2022 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 and redeemable preferred stock and stockholders’ deficit for the periods presented. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results expected for the full year. The condensed consolidated balance sheet as of December 31, 2022 was derived from the 2022 Audited Financial Statements.
Reverse Stock Split
On
March 15, 2023, the Company’s shareholders approved
| 9 |
Risks, Uncertainties and Going Concern
Any disruptions in the commercialization of Phexxi and/or its supply chain could have a material adverse effect on the Company’s business, results of operations and financial condition.
The condensed consolidated 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 does 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, including the development of Phexxi, and to its
commercially related sales and marketing efforts. Additional activities have included raising capital, identifying alternative
manufacturing to lower the cost of goods sold (COGS), seeking ex-U.S. licensing partners to commercialize Phexxi outside the U.S.
and provide non-dilutive capital to the Company, and establishing and maintaining a corporate infrastructure to support a commercial
product. The Company has incurred operating losses and negative cash flows from operating activities since inception. In the nine
months ended September 30, 2023, as described in Note 4 – Debt and Note 8 – Stockholders’ Deficit,
the Company received net proceeds, before issuance costs, of approximately $
Effective October 3, 2022, the Company’s common stock is listed on the OTC Venture Market (the OTCQB) of the OTC Markets Group, Inc., a centralized electronic quotation service for over-the-counter securities, under the symbol “EVFM.” The OTCQB imposes, among other requirements, a minimum $ per share bid price requirement (the Bid Price Requirement) for continued inclusion on the OTCQB. The closing bid price for the Company’s common stock must remain at or above $ per share to comply with the Bid Price Requirement for continued listing. As of November 9, 2023, the closing price was $.
In October 2022, the Company reported that its Phase 3 clinical trial (EVOGUARD) did not achieve its efficacy endpoints. The Company has discontinued investment in this development program.
In
March 2023, the Company received a Notice of Event of Default and Reservation of Rights (the Notice of Default) from Baker Bros
claiming that the Company failed to maintain the required shares reserved amount per the Third Baker Amendment as defined in Note
4 – Debt. In addition, the Notice of Default resulted in a cross default under all outstanding debt; however, the cross
default was remedied by the Reverse Stock Split in May 2023. As of June 30, 2023, the Company had not met the affirmative covenant
requiring achievement of $
Management’s plans to meet the Company’s cash flow needs in the next 12 months include generating recurring product revenue, restructuring its current payables, and obtaining additional funding through means such as the issuance of its capital stock, non-dilutive financings, or through collaborations or partnerships with other companies, including license agreements for Phexxi in the United States or foreign markets, or other potential business combinations.
The Company anticipates it will continue to incur net losses for the foreseeable future. According to management estimates, liquidity resources as of September 30, 2023 are not sufficient to maintain the Company’s cash flow needs for the twelve months from the date of issuance of these condensed consolidated financial statements.
| 10 |
If the Company is not able to obtain the required funding through a significant increase in revenue, equity or debt financings, license agreements for Phexxi in the United States or foreign markets, or other means, or is unable to obtain funding on terms favorable to the Company, or if there is another event of default affecting the notes payable, there will be a material adverse effect on commercialization and development operations and the Company’s ability to execute its 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 further reductions in spending, including spending in connection with its commercialization activities, extend payment terms with suppliers, liquidate assets where possible at a potentially lower amount than as recorded in the condensed consolidated financial statements, suspend or curtail planned operations, or cease operations entirely. Any of these could materially and adversely affect the Company’s liquidity, financial condition and business prospects, and the Company would not be able to continue as a going concern. The Company has concluded that these circumstances and the uncertainties associated with the Company’s ability to obtain additional equity or debt financing on terms that are favorable to the Company, or at all, and otherwise succeed in its future operations raise substantial doubt about the Company’s ability to continue as a going concern.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the notes thereto.
Significant estimates affecting amounts reported or disclosed in the condensed consolidated financial statements include, but are not limited to: the assumptions used in measuring the revenue gross-to-net variable consideration items; the trade accounts receivable credit loss reserve estimate; the discount rate used in estimating the fair value of the lease right-of-use (ROU) assets and lease liabilities; the assumptions used in estimating the fair value of convertible notes, warrants and purchase rights issued and modified; the useful lives of property and equipment; the recoverability of long-lived assets; clinical trial accruals; and the assumptions used in estimating the fair value of stock-based compensation expense. These assumptions are more fully described in Note 3 – Revenue, Note 4 – Debt, Note 6 – Fair Value of Financial Instruments, Note 7 – Commitments and Contingencies and Note 9 – Stock-based Compensation. 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, 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, the Chief Executive Officer 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 and are subject to federally insured limits or limits set by the Securities Investor Protection Corporation. The Company holds its 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 condensed 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 on amounts in excess of federally insured limits due to the financial position of the depository institutions in which these deposits are held. The Company’s deposits were primarily held in Silicon Valley Bank prior to its closure by regulators, however, the Company was able to regain full access to all its deposits and subsequently moved these to a different financial institution.
The Company is also subject to credit risk related to its trade accounts receivable from product sales. Its customers are located in the United States and consist of wholesale distributors, retail pharmacies, and a mail-order specialty pharmacy. The Company extends credit to its customers in the normal course of business after evaluating their overall financial condition and evaluates the collectability of its accounts receivable by periodically reviewing the age of the receivables, the financial condition of its customers and its past collection experience. Historically, the Company has not experienced any credit losses. As of September 30, 2023 and December 31, 2022, based on the evaluation of these factors, the Company did not record an allowance for doubtful accounts.
| 11 |
Phexxi
is distributed primarily through three major distributors and a mail-order pharmacy, which receive service fees calculated as a percentage
of the gross sales, and fee per units shipped, respectively. These entities are not obligated to purchase any set number of units and
distribute Phexxi on demand as orders are received. For the three and nine months ended September 30, 2023, the Company’s three
largest customers combined made up approximately
Changes in Presentation
Certain reclassifications have been made to the consolidated statements of operations for the three and nine months ended September 30, 2022 for consistency with the presentation of the consolidated statements of operations for the three and nine months ended September 30, 2023. There has been no effect on the Company’s financial position or stockholders’ deficit as of December 31, 2022 or results of operations for the three or nine months ended September 30, 2022.
Significant Accounting Policies
There have been no changes to the significant accounting policies that were described in Note 2 – Summary of Significant Accounting Policies of the 2022 Audited Financial Statements in the Company’s Annual Report.
Cash, Cash Equivalents and Restricted Cash
Cash
and cash equivalents consist of readily available cash in checking accounts and money market funds. Restricted cash consists of cash
held in monthly time deposit accounts and letters of credit, which are collateral for the Company’s credit cards and fleet leases,
as described in Note 7 – Commitments and Contingencies. During the nine months ended September 30, 2023, the letters of
credit of $
The following table provides a reconciliation of cash, cash equivalents and restricted cash, reported within the condensed consolidated statements of cash flows (in thousands):
| Nine months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Restricted cash included in other noncurrent assets | ||||||||
| Total cash, cash equivalents and restricted cash presented in the condensed consolidated statements of cash flows | $ | $ | ||||||
Basic net income (loss) per common share is calculated by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. The net income (loss) available to common stockholders is adjusted for amounts in accumulated deficit related to the down round feature triggered for certain financial instruments. Such adjustment was $ million in both the three and nine months ended September 30, 2023. Diluted net loss per share is computed by dividing the net loss 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 the period presented below, which are summarized in the table below. Common shares were calculated for the convertible preferred stock and the convertible debt using the if-converted method.
| 12 |
| Nine months ended September 30, 2022 | ||||
| Unvested restricted common stock subject to repurchase | ||||
| Common stock to be purchased under the 2019 ESPP | ||||
| Options to purchase common stock | ||||
| Warrants to purchase common stock | ||||
| Purchase rights to purchase common stock | ||||
| Convertible debt | ||||
| Total | ||||
| Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Numerator: | ||||||||
| Net income attributable to common stockholders | $ | $ | ||||||
| Adjustments: | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Change in fair value of purchase rights | ||||||||
| Noncash interest expense on convertible debt, net of tax | ||||||||
| Gain on extinguishment of convertible debt | ( | ) | ||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | ) | ||||
| Denominator: | ||||||||
| Weighted average shares used to compute net income (loss) attributable to common stockholder, basic | ||||||||
| Add: | ||||||||
| Pro forma adjustments to reflect assumed conversion of convertible debt | ||||||||
| Pro forma adjustments to reflect assumed exercise of outstanding warrants and purchase rights | ||||||||
| Pro forma adjustments to reflect assumed exercise of outstanding options and shares issuable under the ESPP | ||||||||
| Pro forma adjustments to reflect the assumed conversion of Series E-1 Convertible Preferred Shares | ||||||||
| Weighted average shares used to compute net income (loss) attributable to common stockholder, diluted | ||||||||
| Net income (loss) per share attributable to common stockholders, diluted | $ | $ | ( | ) | ||||
The following table sets forth the computation of weighted average common shares outstanding for diluted net loss per share for the nine months ended September 30, 2023.
| Nine months ended September 30, | ||||
| 2023 | ||||
| Numerator: | ||||
| Net income attributable to common stockholders | $ | |||
| Adjustments: | ||||
| Change in fair value of purchase rights | ||||
| Noncash interest expense on convertible debt, net of tax | ||||
| Net income attributable to common stockholders | $ | |||
| Denominator: | ||||
| Weighted average shares used to compute net loss attributable to common stockholder, basic | ||||
| Add: | ||||
| Pro forma adjustments to reflect assumed conversion of convertible debt | ||||
| Pro forma adjustments to reflect assumed exercise of outstanding warrants and purchase rights | ||||
| Pro forma adjustments to reflect the assumed conversion of Series E-1 Convertible Preferred Shares | ||||
| Weighted average shares used to compute net loss attributable to common stockholder, diluted | ||||
| Net loss per share attributable to common stockholders, diluted | $ | |||
Recently Adopted Accounting Pronouncements
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (ASU No. 2022-02). This is an amendment to ASU 2016-13, where it eliminates the accounting guidance for troubled debt restructuring by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. ASU No. 2022-02 was effective for the Company beginning January 1, 2023 since the Company adopted ASU 2016-13 on January 1, 2020. The adoption of this new standard did not have a material impact on the Company’s condensed consolidated financial statements.
3. Revenue
The Company recognizes revenue from the sale of Phexxi in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (ASC 606). The provisions of ASC 606 require the following steps to determine revenue recognition: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
In
accordance with ASC 606, the Company recognizes revenue when its performance obligation is satisfied by transferring control of the product
to a customer. In accordance with the Company’s contracts with customers, control of the product is transferred upon the conveyance
of title, which occurs when the product is sold to and received by a customer. The Company’s customers are located in the United
States and consist of wholesale distributors, retail pharmacies, and a mail-order specialty pharmacy. Payment terms typically range from
| 13 |
The amount of revenue recognized by the Company is equal to the amount of consideration that is expected to be received from the sale of product to its customers. Revenue is only recognized when the performance obligation is satisfied. To determine whether a significant reversal will occur in future periods, the Company assesses both the likelihood and magnitude of any such potential reversal of revenue.
Phexxi is sold to customers at the wholesale acquisition cost (WAC), or in some cases at a discount to WAC. However, the Company records product revenue net of reserves for applicable variable consideration. These types of variable consideration reduce revenue and include the following:
| ● | Distribution services fees | |
| ● | Prompt pay and other discounts | |
| ● | Product returns | |
| ● | Chargebacks | |
| ● | Rebates | |
| ● | Patient support programs, including our co-pay programs |
An estimate for variable consideration is made with each sale and is recorded in conjunction with the revenue being recognized. To calculate the variable consideration, the Company uses the expected value method. If the estimated amount is payable to a customer, it is recorded as a reduction to accounts receivable. If the estimated amount is payable to an entity other than a customer, it is recorded as a current liability. An estimated amount of variable consideration may differ from the actual amount. At each balance sheet date, these provisions are analyzed and adjustments are made if necessary. Any adjustments made to these provisions would also affect net product revenue and earnings.
In accordance with ASC 606, the Company must make significant judgments to determine the estimate for certain variable consideration. For example, the Company must estimate the percentage of end-users that will obtain the product through public insurance such as Medicaid or through private commercial insurance. To determine these estimates, the Company relies on historical sales data showing the amount of various end-user consumer types, inventory reports from the wholesale distributors and mail-order specialty pharmacy, and other relevant data reports.
The specific considerations that the Company uses in estimating these amounts related to variable consideration are as follows:
Distribution services fees – The Company pays distribution service fees to its wholesale distributors and mail-order specialty pharmacy. These fees are a contractually fixed percentage of WAC and are calculated at the time of sale based on the purchase amount. The Company considers these fees to be separate from the customer’s purchase of the product and, therefore, they are recorded in other current liabilities on the condensed consolidated balance sheets.
Prompt pay and other discounts – The Company incentivizes its customers to pay their invoices on time through prompt pay discounts. These discounts are an industry standard practice, and the Company offers a prompt pay discount to each wholesale distributor and retail pharmacy customer. The specific prompt pay terms vary by customer and are contractually fixed. Prompt pay discounts are typically taken by the Company’s customers, so an estimate of the discount is recorded at the time of sale based on the purchase amount. Prompt pay discount estimates are recorded as contra trade accounts receivable on the condensed consolidated balance sheets.
The Company may also give other discounts to its customers to incentivize purchases and promote customer loyalty. The terms of such discounts may vary by customer. These discounts reduce gross product revenue at the time the revenue is recognized.
Chargebacks – Certain government entities and covered entities (e.g., Veterans Administration, 340B covered entities) are able to purchase Phexxi at a price discounted below WAC. The difference between the government or covered entity purchase price and the wholesale distributor purchase price of WAC will be charged back to the Company. The Company estimates the amount of each chargeback channel based on the expected number of claims in each channel and related chargeback that is associated with the revenue being recognized for product that remains in the distribution channel at the end of each reporting period. Estimated chargebacks are recorded as contra trade accounts receivable on the condensed consolidated balance sheets.
| 14 |
Rebates – The Company is subject to mandatory discount obligations under the Medicaid and Tricare programs. The rebate amounts for these programs are determined by statutory requirements or contractual arrangements. Rebates are owed after the product has been dispensed to an end user and the Company has been invoiced. Rebates for Medicaid and Tricare are typically invoiced in arrears. The Company estimates the amount of rebates based on the expected number of claims and related cost that is associated with the revenue being recognized for product that remains in the distribution channel at the end of each reporting period. Rebate estimates are recorded as other current liabilities on the condensed consolidated balance sheets.
Patient support programs – One type of patient support program the Company offers is a co-pay program to commercially insured patients whose insurance requires a co-pay to be made when filling their prescription. This is a voluntary program that is intended to provide financial assistance to patients meeting certain eligibility requirements. The Company estimates the amount of financial assistance for these programs based on the expected number of claims and related cost that is associated with the revenue being recognized for product that remains in the distribution channel at the end of each reporting period. Patient support programs estimates are recorded as other current liabilities on the condensed consolidated balance sheets.
Product returns – Customers have the right to return product that is within six months or less of the labeled expiration date or that is past the expiration date by no more than six months. Phexxi was commercially launched in September 2020 with a 30-month shelf life. The shelf life increased to 48 months in June 2022. The Company uses historical sales and return data to estimate future product returns. Product return estimates are recorded as other current liabilities on the condensed consolidated balance sheets.
As
of September 30, 2023 and December 31, 2022, the variable considerations discussed above were recorded in the condensed consolidated
balance sheets and consisted of $
4. Debt
Convertible Notes
Baker Bros. Notes
On
April 23, 2020, the Company entered into a Securities Purchase and Security Agreement (the Baker Bros. Purchase Agreement) with certain
affiliates of Baker Bros. Advisors LP, as purchasers (the Baker Purchasers), and Baker Bros. Advisors LP, as designated agent, pursuant
to which the Company agreed to issue and sell to the Baker Purchasers (i) convertible senior secured promissory notes (the Baker Notes)
in an aggregate principal amount of up to $
At
the initial closing date of April 24, 2020 (the Baker Initial Closing), the Company issued and sold Baker Notes with an aggregate principal
amount of $
Following
the Baker Initial Closing, the Baker Purchasers had an option to purchase from the Company up to $
On
June 5, 2020 (the Exercise Date), the Baker Purchasers exercised the Baker Purchase Rights. At the second closing date of June 9, 2020
(the Baker Second Closing), the Baker Purchasers acquired the remaining Baker Notes with an aggregate principal amount of $
| 15 |
The
Baker Notes have a
term, with no pre-payment ability during the first
The
Baker Notes were callable by the Company on
On
November 20, 2021, the Company entered into the first amendment to the Baker Bros. Purchase Agreement (the First Baker Amendment), in
which each Baker Purchaser had the right to convert all or any portion of the Baker Notes into common stock at a conversion price equal
to the lesser of (a) $
The
First Baker Amendment also extended, effective upon the Company’s achievement of the Financing Threshold, the affirmative covenant
to achieve $
On
March 21, 2022, the Company entered into the second amendment to the Baker Bros. Purchase Agreement (the Second Baker Amendment), which
granted each Baker Purchaser the right to convert all or any portion of the Baker Notes into common stock at a conversion price equal
to the lesser of (a) $
| 16 |
On
September 15, 2022, the Company entered into the third amendment to the Baker Bros. Purchase Agreement (the Third Baker Amendment), pursuant
to which the conversion price was amended to equal to $
On
December 19, 2022, the Company entered into the First Amendment to the Forbearance Agreement (the Amendment) effective as of December
15, 2022 to amend certain provisions of the Forbearance Agreement dated September
15, 2022. The Amendment revised the Forbearance Agreement to (i) amend the Fifth Recital Clause to clarify that the
Purchasers consent to any additional indebtedness pari passu, but not senior to that of the Purchasers, in an amount not to exceed
$
On
March 7, 2023, Baker Bros. Advisors, LP (the Designated Agent) provided a Notice of Event of Default and Reservation of Rights (the Notice
of Default) relating to the Baker Bros. Purchase Agreement. The Notice of Default claimed that the Company failed to maintain the “Required
Reserve Amount” as required by the Third Baker Amendment. The Designated Agent, at the direction of the Baker Purchasers, accelerated
repayment of the outstanding balance payable. As a result, approximately $
On September 8, 2023, the Company entered into the Fourth Amendment to the Baker Bros. Purchase Agreement (the Fourth Baker Amendment) with the Baker Purchasers. The Fourth Amendment amends certain provisions within the Baker Bros. Purchase Agreement including:
| (i) | the rescission of the Notice of Default delivered to the Company on March 7, 2023 and waiving the Events of Default named therein; | |
| (ii) | the waiver of any and all other Events of Default existing as of the Fourth Amendment date; | |
| (iii) | the removal of the conversion feature into shares of Company common stock, including the removal of any requirement to reserve shares of common stock for conversion of the Baker Notes as well as any registration rights related thereto; | |
| (iv) | the clarification that for the sole purpose of enabling an ex-U.S. license agreement for such assets, any Patents, Trademarks or Copyrights acquired after the Effective Date shall be excluded from the definition of Collateral; and, | |
| (v) | the removal of the
requirement for the Company to obtain $ |
The
current outstanding balance of the Baker Notes will continue to accrue interest at
| 17 |
The Fourth Amendment also granted the Company the ability to repurchase the principal amount and accrued and unpaid interest of the Baker Notes for up to a five-year period for the one-time Repurchase Price designated below:
| Date of Notes’ Repurchase | Repurchase Price | |
| On or prior to September 8, 2024 | $ | |
| September 9, 2024-September 8, 2025 | $ | |
| September 9, 2025-September 8, 2026 | $ | |
| September 9, 2026-September 8, 2027 | $ | |
| September 9, 2027-September 8, 2028 | $ |
The Company evaluated whether any of the Embedded Features required bifurcation as a separate component. The Company elected the fair value option (FVO) under ASC 825, Financial Instruments (ASC 825), as the Baker Notes are qualified financial instruments and are, in whole, classified as liabilities. Under the FVO, the Company recognized the debt instrument at fair value, inclusive of the Embedded Features with changes in fair value related to changes in the Company’s credit risk being recognized as a component of accumulated other comprehensive income in the condensed consolidated balance sheets. All other changes in fair value were recognized in the condensed consolidated statements of operations.
Due
to the execution of the Fourth Baker Amendment, the Company reviewed the Baker Notes in accordance with Topics ASC 470, Debt (ASC
470). Because the Baker Notes were recorded under the FVO, the Fourth Amendment was outside the scope of ASC 470-60 and as such
did not qualify as a troubled debt restructuring (TDR). The Baker Notes were evaluated in accordance with ASC 470 and were determined
to have failed certain qualitative factors to qualify as a modification and, therefore, were accounted for as an extinguishment. The
Company removed the fair value of the old Baker Notes of $
As
of September 30, 2023, the Baker Notes are recorded at fair value in the condensed consolidated balance sheet as short-term
convertible notes payable with a total balance of $
| 18 |
Adjuvant Notes
On
October 14, 2020, the Company entered into a Securities Purchase Agreement (the Adjuvant Purchase Agreement) with Adjuvant Global Health
Technology Fund, L.P., and Adjuvant Global Health Technology Fund DE, L.P. (together, the Adjuvant Purchasers), pursuant to which the
Company sold unsecured convertible promissory notes (the Adjuvant Notes) in aggregate principal amount of $
The
Adjuvant Notes have a term and, in connection with certain Company change of control transactions, may be prepaid at the option
of the Company or will become payable on the date of the consummation of a change of control transaction at the option of the Adjuvant
Purchasers. The Adjuvant Notes have interest accruing at
Interest expense for the Adjuvant Notes for the three and nine months ended September 30, 2023 and 2022 consisted of the following (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Coupon interest | $ | $ | $ | $ | ||||||||||||
| Amortization of issuance costs | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The
Adjuvant Notes are convertible, subject to customary
On
April 4, 2022, the Company entered into the first amendment to the Adjuvant Purchase Agreement (the Adjuvant Amendment). The Adjuvant
Amendment extended the affirmative covenant to achieve $
The
Adjuvant Notes contain various customary affirmative and negative covenants agreed to by the Company. On September 12, 2022, the Company
was in default of the Adjuvant Notes due to the failure to achieve cumulative net sales of Phexxi of $
| 19 |
On
September 15, 2022, the Company also entered into the second amendment to the Adjuvant Purchase Agreement (the Second Adjuvant Amendment),
pursuant to which the conversion price per share was reduced to $
The
Adjuvant Notes are accounted for in accordance with authoritative guidance for convertible debt instruments and are classified as
current liabilities in the condensed consolidated balance sheets. The aggregate proceeds of $
Due
to the execution of the Adjuvant Forbearance and the Second Adjuvant Amendment, the Company reviewed the Adjuvant Notes in
accordance with Topics ASC 470. The Company concluded that although changes in the structure of the debt met certain
qualitative factors to qualify as a TDR, the effective interest rate post changes was greater than the original effective interest
rate and, therefore, failed the quantitative test to be a TDR. The Adjuvant Notes were evaluated in accordance with ASC 470 and were
determined to have failed certain qualitative factors to qualify as a modification and, therefore, were accounted for as an
extinguishment. The Company removed the old debt from its financial records and recorded the new, revised debt and concurrently
recognized a gain of approximately $
As
of September 30, 2023, the Adjuvant Notes are recorded in the condensed consolidated balance sheet as short-term convertible notes
payable with a total balance of $
As
of September 30, 2023, and assuming the current conversion price of $
Term Notes
January and March 2022 Notes
On
January 13, 2022, the Company entered into a Securities Purchase Agreement (the January 2022 Purchase Agreement) with institutional investors
(the January 2022 Purchasers) pursuant to which the Company agreed to sell in a registered direct offering (i) unsecured
| 20 |
On
March 1, 2022, the Company entered into a Securities Purchase Agreement (the March 2022 Purchase Agreement) with institutional investors
(the March 2022 Purchasers) pursuant to which the Company agreed to sell in a registered direct offering (i) unsecured
The
January and March 2022 Notes carried an interest rate of
Pursuant to the terms of the January and March 2022 Purchase Agreements, the Company agreed to certain restrictions on effecting variable rate transactions so long as the January and March 2022 Notes were outstanding. Also, pursuant to the terms of the January and March 2022 Purchase Agreements, the January and March 2022 Purchasers had certain rights to participate in subsequent issuances of the Company’s securities, subject to certain exceptions.
On May 4, 2022, the January and March 2022 Notes were exchanged pursuant to the May 2022 Exchange, as defined below.
May 2022 Notes
On
May 4, 2022, the Company entered into amendment and exchange agreements (the May 2022 Exchange) with the holder of issued and outstanding
Series B-2 and C Preferred Stock, Seven Knots, and the January and March 2022 Notes Purchasers (collectively, the May 2022 Notes Purchasers),
pursuant to which they agreed to exchange all of the January and March 2022 Notes, shares of Series B-2 Convertible Preferred Stock,
shares of Series C Convertible Preferred Stock, and shares of the Company’s common stock for (i) new
The
May 2022 Notes are substantially similar to the January and March 2022 Notes except that (i) the maturity date of the May 2022 Notes
was August 1, 2022 and (ii) the holders of the May 2022 Notes may require the Company to redeem or exchange up to
The
May 2022 Public Offering qualified as the Qualified Underwritten Offering and, in connection with the May 2022 Public Offering, the holders
of the May 2022 Notes waived certain of their preemptive and redemption rights and the Company redeemed $
The
May 2022 Notes contain various customary affirmative and negative covenants to which the Company agreed. The May 2022 Notes also include
other customary events of default, which include the suspension of trading of shares of the Company’s common stock on the NASDAQ
Capital Market for a period of more than
| 21 |
On
September 15, 2022, the Company entered into exchange agreements with each of the May 2022 Notes Purchasers (the May 2022 Notes Exchange
Agreements), pursuant to which the May 2022 Notes Purchasers agreed to exchange all outstanding balance of the May Notes as of September
15, 2022, using the aforementioned higher interest rate and redemption premium, for purchase rights (the May Note Purchase Rights) to
receive
The Company evaluated the May 2022 Notes and determined that in accordance with ASC 470 the notes should be accounted for as a modification of the January and March 2022 Notes. The Company further evaluated the May 2022 Notes to determine if any embedded components qualified as a derivative requiring bifurcation in accordance with ASC 815. The Company determined that the embedded put options and interest rate increase feature would all require bifurcation and separate accounting. Therefore, the Company elected to use the fair value option under ASC 825 for the May 2022 Notes inclusive of the embedded features.
The Company evaluated the May 2022 Warrants and determined that, in accordance with ASC 815, the warrants should be recorded at fair value and classified as a derivative liability in the condensed consolidated balance sheet. Both the May 2022 Notes and Warrants are marked-to-market at each reporting date before the exchange as described above.
December 2022 and February, March, April, July, August, and September 2023 Notes
The
Company entered into eight similar Securities Purchase Agreements (SPAs) between December 2022 and September 2023 with certain
investors. Each of the agreements were materially similar. The variable details of each SPA, such as the principal amount of each
note offering, net proceeds, and maturity date are outlined in the table below. Pursuant to each SPA, the Company agreed to sell in
a registered direct offering (i) unsecured
The
Notes interest rates are subject to increase to
The Company evaluated the Notes in accordance with ASC 480 and determined that the Notes were all liability instruments at issuance. The applicable Notes were then evaluated in accordance with the requirements of ASC 825 and the Company concluded that they were not precluded from electing the fair value option for the applicable Notes.
The Company also evaluated the Warrants in accordance with ASC 480 and determined that the Warrants issued before the Reverse Stock Split in May 2023 (i.e. the December 2022 Notes, the February 2023 Notes, the March 2023 Notes, and the April 2023 Notes) were required to be recorded as liabilities at fair value in the Company’s condensed consolidated balance sheets as of December 31, 2022 and March 31, 2023. The applicable Notes were marked-to-market at each reporting date with changes in fair value recognized in the condensed consolidated statement of operations, unless the change is concluded to be related to changes in the Company’s credit rating, in which case the change was recognized as a component of accumulated other comprehensive income in the condensed consolidated balance sheets. As a result of the Reverse Stock Split, the Company had sufficient shares available for issuance to cover the potential exercises; therefore, the Warrants that were previously classified as liabilities were marked-to-market and reclassified to equity in May 2023. For the Warrants issued after the Reverse Stock Split (i.e. the July 2023 Notes, August 2023 Notes, and September 2023 Notes), the Company determined they were required to be recorded in equity.
| 22 |
Summary of Senior Subordinated Notes and Warrants (December 2022 to September 2023):
| Conversion Price | ||||||||||||||||||||||||||||||||||||||
| Notes | Principal at issuance (in thousands) | Net Proceeds before issuance costs (in thousands) | Warrants (common stock) | Preferred Shares | Maturity Date | At Issuance | At 12/31/2022 | At 3/31/2023 | At 6/30/2023 | At 9/30/2023 | ||||||||||||||||||||||||||||
| December 2022 Notes | $ | $ | - Series D | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| February 2023 Notes(1) | - | $ | N/A | $ | $ | $ | ||||||||||||||||||||||||||||||||
| March 2023 Notes | - | $ | N/A | $ | $ | $ | ||||||||||||||||||||||||||||||||
| March 2023 Notes(2) | - | $ | N/A | $ | $ | $ | ||||||||||||||||||||||||||||||||
| April 2023 Notes | - | $ | N/A | N/A | $ | $ | ||||||||||||||||||||||||||||||||
| July 2023 Notes | - | $ | N/A | N/A | N/A | $ | ||||||||||||||||||||||||||||||||
| August 2023 Notes | - | $ | N/A | N/A | N/A | $ | ||||||||||||||||||||||||||||||||
| September 2023 Notes(3) | - | $ | N/A | N/A | N/A | $ | ||||||||||||||||||||||||||||||||
| Total Offerings | $ | $ | ||||||||||||||||||||||||||||||||||||
| (1) | |
| (2) | |
| (3) |
Please see Note 6 – Fair Value of Financial Instruments for discussion regarding the current fair value of the notes referenced above and Note 8 – Stockholders’ Deficit regarding the conversion of some of the notes referenced above to Series E-1 Shares.
5. Balance Sheet Details
Inventories
Inventories consist of the following (in thousands) for the period indicated:
| As of | ||||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Raw Materials (1) | $ | $ | ||||||
| Work in process (2) | ||||||||
| Finished Goods (3) | ||||||||
| Total (4) | $ | $ | ||||||
| (1) | |
| (2) | |
| (3) |
| (4) |
| 23 |
Prepaid and Other Current Assets
Prepaid and other current assets consist of the following (in thousands):
| As of | ||||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Insurance | $ | $ | ||||||
| Receivable for September 2023 Notes proceeds | ||||||||
| Research and development related costs | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
Property and Equipment, Net
Property and equipment, net, consists of the following (in thousands):
| As of | ||||||||||
| Useful Life | September 30, 2023 | December 31, 2022 | ||||||||
| Research equipment | $ | $ | ||||||||
| Computer equipment and software | ||||||||||
| Office furniture | ||||||||||
| Leasehold improvements | ||||||||||
| Construction in-process | - | |||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Total, net | $ | $ | ||||||||
Depreciation and amortization expense for property and equipment is disclosed in the condensed consolidated statements of cash flows.
Accrued Expenses
Accrued expenses consist of the following (in thousands):
| As of | ||||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Clinical trial related costs | $ | $ | ||||||
| Selling and marketing related costs | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
6. Fair Value of Financial Instruments
Fair Value of Financial Assets
The fair values of the Company’s assets, including money market funds, investments in marketable fixed income debt securities classified as cash and cash equivalents measured on a recurring basis as of December 31, 2022, are summarized in the following tables (in thousands). There are no such instruments as of September 30, 2023.
| As of | ||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (level 2) | Significant Unobservable Inputs (Level 3) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||
| Money market funds (1) | $ | $ | $ | $ | $ | |||||||||||||||
| Total assets | $ | $ | $ | $ | $ | |||||||||||||||
| (1) |
| 24 |
Fair Value of Financial Liabilities
The following tables summarize the Company’s convertible debt instruments as of September 30, 2023 and December 31, 2022, respectively (in thousands):
| Fair Value | ||||||||||||||||||||||||
| As of September 30, 2023 | Principal Amount | Unamortized Issuance Costs | Accrued Interest | Net Carrying Amount | Amount | Leveling | ||||||||||||||||||
| Baker Notes(1)(2) | $ | $ | $ | $ | $ | Level 3 | ||||||||||||||||||
| Adjuvant Notes(3)(4) | ( | ) | N/A | |||||||||||||||||||||
| December 2022 Notes(1) | Level 3 | |||||||||||||||||||||||
| February 2023 Notes (1) | Level 3 | |||||||||||||||||||||||
| March 2023 Notes (1) | Level 3 | |||||||||||||||||||||||
| April 2023 Notes (1) | Level 3 | |||||||||||||||||||||||
| July 2023 Notes (1) | Level 3 | |||||||||||||||||||||||
| August 2023 Notes (1) | Level 3 | |||||||||||||||||||||||
| September 2023 Notes (1) | Level 3 | |||||||||||||||||||||||
| 24 |
| Fair Value | ||||||||||||||||||||||||||||||||
| As of December 31, 2022 | Principal Amount | Unamortized Issuance Costs | Accrued Interest | Redemption Amount | Amount Exchanged | Net Carrying Amount | Amount | Leveling | ||||||||||||||||||||||||
| Baker Notes(1)(2) | $ | $ | $ | $ | $ | $ | $ | Level 3 | ||||||||||||||||||||||||
| Adjuvant Notes(3)(4) | ( | ) | N/A | |||||||||||||||||||||||||||||
| May 2022 Notes(1) | ( | ) | N/A | |||||||||||||||||||||||||||||
| December 2022 Notes (1) | Level 3 | |||||||||||||||||||||||||||||||
| (1) |
| (2) |
| (3) |
| (4) |
| 25 |
The following tables summarize the Company’s derivative liabilities as of September 30, 2023 and December 31, 2022 as discussed in Note 8 - Stockholders’ Deficit (in thousands):
| Fair Value | ||||||||||
| September 30, 2023 (2) | December 31, 2022(1) | Leveling | ||||||||
| April and June 2020 Baker Warrants | $ | N/A | $ | Level 3 | ||||||
| May 2022 Public Offering Warrants | N/A | Level 3 | ||||||||
| June 2022 Baker Warrants | N/A | Level 3 | ||||||||
| December 2022 Warrants | N/A | Level 3 | ||||||||
| Purchase rights | N/A | Level 3 | ||||||||
| Total Derivative Liabilities | $ | $ | ||||||||
| (1) | |
| (2) |
Change in Fair Value of Level 3 Financial Liabilities
The following tables summarize the changes in Level 3 financial liabilities related to Term Notes, Baker Notes and December 2022 Notes, and February, March, April, July, August, and September 2023 Notes measured at fair value on a recurring basis for the three and nine months ended September 30, 2023 (in thousands).
| Baker First Closing Notes | Baker Second Closing Notes | Baker Notes- Fourth Amendment | Total Offerings (Note 4) | Total | ||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at issuance | ||||||||||||||||||||
| Debt repayment | ( | ) | ( | ) | ||||||||||||||||
| Extinguishment | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Change in fair value presented in the Condensed Consolidated Statements of Comprehensive Operations | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Baker First Closing Notes | Baker Second Closing Notes | Baker Notes- Fourth Amendment | Total Offerings (Note 4) | Total | ||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at issuance | ||||||||||||||||||||
| Debt repayment | ( | ) | ( | ) | ||||||||||||||||
| Extinguishment | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Change in fair value presented in the Condensed Consolidated Statements of Comprehensive Operations | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| 26 |
The following tables summarize the changes in Level 3 financial liabilities related to the January 2022 Notes, the March 2022 Notes, the May 2022 Notes, and the Baker Notes measured at fair value on a recurring basis for the three and nine months ended September 30, 2022 (in thousands):
| Term Notes - May 2022 Notes | Baker First Closing Notes | Baker Second Closing Notes | Baker Notes Total | |||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ||||||||||||
| Change in fair value presented in the Condensed Consolidated Statements of Operations | ||||||||||||||||
| Change in fair value presented in the Condensed Consolidated Statements of Comprehensive Operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Exchange of notes (noncash) | ( | ) | ||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ||||||||||||
| Term Notes - January 2022 Notes | Term Notes - March 2022 Notes | Term Notes - May 2022 Notes | Term Notes Total | Baker First Closing Notes | Baker Second Closing Notes | Baker Notes Total | ||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Balance at issuance | ||||||||||||||||||||||||||||
| Debt repayment | ( | ) | ( | ) | ||||||||||||||||||||||||
| Change in fair value presented in the Condensed Consolidated Statements of Operations | | |||||||||||||||||||||||||||
| Change in fair value presented in the Condensed Consolidated Statements of Comprehensive Operations | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| May 2022 exchange transaction | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| 27 |
The following tables summarize the changes in Level 3 financial liabilities related to derivative liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2023 (in thousands). There was no such activity for the three months ended September 30, 2023.
| April and June 2020 Baker Warrants | May 2022 Public Offering Common Warrants | June 2022 Baker Warrants | December 2022 Warrants | February and March 2023 Warrants | Purchase Rights | Derivative Liabilities Total | ||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Balance at issuance | ||||||||||||||||||||||||||||
| Exercises | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Change in fair value presented in the Condensed Consolidated Statements of Operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Reclassified to equity | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
The following tables summarize the changes in Level 3 financial liabilities related to derivative liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2022 (in thousands):
| Derivative Liability - January 2022 Warrants | Derivative Liability - March 2022 Warrants | Derivative Liability - May 2022 Warrants | May 2022 Public Offering Common Warrants | June 2022 Baker Warrants | Purchase Rights | Derivative Liabilities Total | ||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Balance at issuance | ||||||||||||||||||||||||||||
| Exercises | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Change in fair value presented in the Condensed Consolidated Statements of Operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | |||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| 28 |
| Derivative Liability - Convertible Preferred Stock Conversion Feature | Derivative Liability - January 2022 Warrants | Derivative Liability - March 2022 Warrants | Derivative Liability - May 2022 Warrants | May 2022 Public Offering Common Warrants | May 2022 Public Offering Pre-Funded Warrants | June 2022 Baker Warrants | Purchase Rights | Derivative Liabilities Total | ||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Balance at issuance | ||||||||||||||||||||||||||||||||||||
| Exercises | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Change in fair value presented in the Condensed Consolidated Statements of Operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Conversion of series B-2 convertible preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| May 2022 exchange transaction | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Valuation Methodology
Through
June 30, 2022, the fair value of the Baker Notes issued, and the change in fair value of the Baker Notes at the reporting date, were
determined using a Monte Carlo simulation-based model. The Monte Carlo simulation was used to take into account several embedded features
and factors, including the future value of our common stock, a potential change of control event, the probability of meeting certain
debt covenants, the maturity term of the Baker Notes, the probability of an event of voluntary conversion of the Baker Notes, the probability
of the failure to meet the affirmative covenant to achieve $
The fair value of the Baker Notes is subject to uncertainty due to the assumptions that are used in the Monte Carlo simulation-based model. These factors include but are not limited to the future value of the Company’s common stock, the probability and timing of a potential change of control event, the probability of meeting certain debt covenants, the probability of an event of voluntary conversion of the Baker Notes, exercise of the put right, and exercise of the Company’s call right. The fair value of the Baker Notes is sensitive to these estimated inputs made by management that are used in the calculation.
From the third quarter of 2022 through the second quarter of 2023, the fair value of the Baker Notes issued as described in Note 4 - Debt, and subsequent changes in fair value recorded at each reporting date, was determined by estimating the fair value of the Market Value of Invested Capital (“MVIC”) of the Company. This was estimated using forms of the cost and market approaches. In the Cost approach, an adjusted net asset value method was used to determine the net recoverable value of the Company, including an estimate of the fair of the Company’s intellectual property. The estimated fair value of the Company’s intellectual property was valued using a relief from royalty method which required management to make significant estimates and assumptions related to forecasts of future revenue, and the selection of the royalty and discount rates. The guideline public company method served as another valuation indicator. In this form of the Market approach, comparable market revenue multiples were elected and applied to the Company’s forward revenue forecast to ultimately derive a MVIC indication. If the resulting fair value from these approaches was not estimated as greater than the contractual payout, then fair value of the Baker Notes became only the Company MVIC available for distribution to this first lien note holder.
Starting in the third quarter of 2023, the fair value of
the Baker Notes issued as described in Note 4 - Debt is determined using a Monte Carlo simulation-based model. The Monte Carlo
simulation was used to take into account several embedded features and factors, including the exercise of the repurchase right, the Company’s
future revenues, meeting certain debt covenants, the maturity term of the note and dissolution. For the dissolution scenario, the cost
approach, an adjusted net asset value method was used to determine the net recoverable value of the Company, including an estimate of
the fair value of the Company’s intellectual property. The estimated fair value of the Company’s intellectual property was
valued using a relief from royalty method which required management to make significant estimates and assumptions related to forecasts
of future revenue, and the selection of the royalty (
The fair value of the Baker Notes is subject to uncertainty due to the assumptions that are used in the Monte Carlo simulation-based model. These factors include but are not limited to the Company’s future revenue, and the probability and timing of the exercise of the repurchase right. The fair value of the Baker Notes is sensitive to these estimated inputs made by management that are used in the calculation.
| 29 |
January and March 2022 Notes
The fair value of the January and March 2022 Notes issued as described in Note 4 - Debt, and subsequent changes in fair value recorded at each reporting date, was determined using a probability weighted expected return method (PWERM) model. PWERM was used to take into account several factors, including the future value of the Company’s common stock, a potential change of control event, the probability of meeting certain debt covenants, the maturity term of the January and March 2022 Notes, exercise of the put right, and exercise of the Company’s call right.
May 2022 Notes
The fair value of the May 2022 Notes issued as described in Note 4 - Debt, and subsequent changes in fair value recorded at each reporting date, was determined using a PWERM model. PWERM was used to take into account several factors, including the future value of the Company’s common stock, a potential change of control event, the probability of meeting certain debt covenants, the maturity term of the May 2022 Notes, exercise of the put right, and exercise of the Company’s call right.
December 2022 Notes and February, March, April, July, August, and September 2023 Notes
The
fair value of the December 2022 Notes and February, March, April, July, August, and September 2023 Notes issued as described in Note
4 – Debt, were determined using the methods described above in Valuation Methodology, using the residual value of the Company
after the fair value of the Baker Notes. The quarterly valuation for the three months ended September 30, 2023 resulted in an adjustment of $
Purchase Rights
The Adjuvant Purchase Rights and the May Note Purchase Rights (collectively the Purchase Rights) contain certain provisions that are outside the Company’s control under which the holders can force settlement in cash; as such, the Purchase Rights are recorded as derivative liabilities in the condensed consolidated balance sheets. The Purchase Rights are valued using an option pricing model (OPM), like a Black-Scholes Methodology with changes in the fair value being recorded in the condensed consolidated statements of operations. The assumptions used in the OPM are considered level 3 assumptions and include, but are not limited to, the market value of invested capital, the cumulative equity value of the Company as a proxy for the exercise price and the expected term the Purchase Rights will be held prior to exercise and a risk-free interest rate.
Warrants
The warrants contain a provision, under which the holders can force settlement in cash if the Company does not have sufficient shares authorized to satisfy the warrants. As such, the warrants were recorded as derivative liabilities in the condensed consolidated balance sheet as of December 31, 2022. In accordance with ASC 815, warrants previously classified as equity instruments were determined to be liability classified (the Reclassified Warrants) due to the Company having an insufficient number of authorized shares as of December 31, 2022; however, the impacted warrants were reclassified as equity instruments during the second quarter of 2023 as a result of the Reverse Stock Split. The Company will continue to re-evaluate the classification of its warrants at the close of each reporting period to determine their proper balance sheet classification. The warrants are valued using an OPM based on the applicable assumptions, which include the exercise price of the warrants, time to expiration, expected volatility of our peer group, risk-free interest rate, and expected dividends. The assumptions used in the OPM are considered level 3 assumptions and include, but are not limited to, the market value of invested capital, the cumulative equity value of the Company as a proxy for the exercise price, the expected term the warrants will be held prior to exercise and a risk-free interest rate and probability of change of control event. Additionally, as the warrants are re-priced under certain provisions in the agreements; at each re-pricing event, the Company must value the warrants using a Black-Scholes model immediately prior to and immediately following the re-pricing event. The incremental fair value is recorded as an increase to accumulated deficit and additional paid-in-capital, in accordance with ASC 470.
The
Company recorded $
| 30 |
7. Commitments and Contingencies
Operating Leases
Fleet Lease
In
December 2019, the Company and Enterprise FM Trust (the Lessor) entered into a Master Equity Lease Agreement whereby the Company leases
vehicles to be delivered by the Lessor from time to time with various monthly costs depending on whether the vehicles are delivered for
a term of
2020 Lease and the First Amendment
On
October 3, 2019, the Company entered into an office lease for approximately
On
April 14, 2020, the Company entered into the first amendment to the 2020 Lease for an additional
On
March 20 2023, the Company received a notice of default from its landlord for failing to timely pay March 2023 rent, resulting in a breach
under the agreement. As a result, the Company’s letter of credit in the amount of $
2022 Sublease
On
May 27, 2022, the Company entered into a sublease agreement with AMN Healthcare, Inc. (AMN), pursuant to which the Company agreed to
sublease
Supplemental Financial Statement Information
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||||
| Lease Cost (in thousands) | Classification | 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating lease expense | Research and development | $ | $ | $ | $ | |||||||||||||
| Operating lease expense | Selling and marketing | |||||||||||||||||
| Operating lease expense | General and administrative | |||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||
| Lease Term and Discount Rate | September 30, 2023 | December 31, 2022 | ||||||
| Weighted Average Remaining Lease Term (in years) | ||||||||
| Weighted Average Discount Rate | % | % | ||||||
| 31 |
| Maturity of Operating Lease Liabilities (in thousands) | September 30, 2023 | |||
| Remainder of 2023 (3 months) | $ | |||
| Year ending December 31, 2024 | ||||
| Year ending December 31, 2025 | ||||
| Total lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total | $ | |||
| Nine Months Ended September 30, | ||||||||
| Other information (in thousands) | 2023 | 2022 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash outflows in operating leases | $ | $ | ||||||
Other Contractual Commitments
In
November 2019, the Company entered into a supply and manufacturing agreement with a third party to manufacture Phexxi, with potential
to manufacture other product candidates in accordance with all applicable current good manufacturing practice regulations, pursuant to
which the Company has certain minimum purchase commitments based on the forecasted product sales. There were
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.
During the nine months ended September 30, 2023, the Company settled a portion of its trade payables with numerous vendors, which resulted
in a $
In April 2023, the Company received a Paragraph IV certification notice letter (the Padagis Notice Letter) regarding an Abbreviated New Drug Application (“ANDA”) submitted to the FDA by Padagis Israel Pharmaceuticals Inc. (Padagis). The ANDA seeks approval from the FDA to commercially manufacture, use, or sell a generic version of Phexxi® under 21 U.S.C. § 355(j) prior to the expiration of United States Patent Nos. 10,568,855; 11,337,989; and 11,439,610 listed in the FDA’s Orange Book: Approved Drug Products with Therapeutic Equivalence Evaluations (collectively the “Phexxi Patents”). In the Padagis Notice Letter, Padagis claims that the Phexxi Patents are invalid under various grounds.
On June 1, 2023, the Company filed a complaint for patent infringement in Evofem Biosciences, Inc. et al. v. Padagis Israel Pharmaceuticals, et al., in the United States District Court for the District of New Jersey. The case was assigned number 2:23-cv-03003. The complaint alleges that Padagis’ proposed generic version of Phexxi infringes the Phexxi Patents. The relief sought by the Company is a declaration of infringement and an injunction of FDA approval of Padagis’ proposed generic version of Phexxi until expiration of the Phexxi Patents in 2033. Until the earlier of final judgment or the passage of 30 months from the receipt of the Padagis Notice Letter, the FDA is prohibited from approving Padagis’ ANDA to market its proposed generic version of Phexxi. The Company also subsequently filed a substantively identical action in the United States District Court for the District of Delaware, Evofem Biosciences, Inc. et al. v. Padagis Israel Pharmaceuticals, et al., which was assigned number 1:23-cv-00606-UNA.
On August 7, 2023, Padagis filed its Answer and Defenses to Complaint for Patent Infringement and Defendant’s Counterclaims (the “Counterclaim”). In the Counterclaim, Padagis is seeking for the Court to dismiss the Complaint, declare the Patents-in-Suit invalid, a declaration that the filing of Padagis’ ANDA or the manufacture, use, sale, offer for sale or importation of Padagis’ Proposed Product has not, does not and would not infringe any valid claim, if any, of the Patents-in-Suit. Padagis is not seeking monetary damages in its Counterclaim.
| 32 |
On September 18, 2023, Padagis withdrew the Paragraph IV certification in the previously-submitted ANDA and has instead converted to a Paragraph III certification. With the pivot to Paragraph III certification, rather than challenging the Phexxi patents and seeking approval of the ANDA prior to expiration of any of these patents, Padagis is instead now asking the FDA to wait until after all the Phexxi patents expire before issuing final approval of the ANDA; the latest-expiring Phexxi patents do not expire until 2033.
Both companies requested dismissal on September 21, 2023. The case was dismissed on September 22, 2023.
Intellectual Property Rights
In
2014, the Company entered into an amended and restated license agreement (the Rush License Agreement) with Rush University Medical
Center (Rush University) pursuant to which Rush University granted the Company an exclusive, worldwide license of certain patents
and know-how related to its multipurpose vaginal pH modulator technology. For the U.S. patent that the Company licensed from Rush
University, three Orders Granting Interim Extension (OGIEs) were received from the USPTO, extending the expiration of this patent to
March 2024. Pursuant to the Rush License Agreement, the Company is obligated to pay Rush University an earned royalty based upon a
percentage of net sales in the range of mid-single digits until the expiration of this patent. In September 2020, the Company
entered into the first amendment to the Rush License Agreement, pursuant to which the Company is also obligated to pay a minimum
annual royalty amount of $
8. Stockholders’ Deficit
Warrants
In
April and June 2020, pursuant to the Baker Bros. Purchase Agreement, as discussed in Note 4 – Debt, the Company issued warrants
to purchase up to
In
January 2022, pursuant to the January 2022 Securities Purchase Agreement as discussed in Note 4 – Debt, the Company issued
warrants to purchase up to
In
May 2022, pursuant to the exchange agreement as described in Note 4 – Debt, the Company issued common warrants to purchase
up to
In
May 2022, pursuant to the May 2022 Public Offering as described below, the Company issued common warrants to purchase up to
In
June 2022, as required by the Second Baker Amendment, the Company issued the June 2022 Baker Warrants to purchase up to
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In
February, March, April, July, August, and September 2023, pursuant to the 2023 Securities Purchase Agreements as discussed in Note
4 – Debt, the Company issued warrants to purchase up to
As
of September 30, 2023, warrants to purchase up to
| Type of Warrants | Underlying common stock to be Purchased | Exercise Price | Issue Date | Exercise Period | ||||||||||
| Common Warrants | $ | June 11, 2014 | ||||||||||||
| Common Warrants | $ | May 24, 2018 | ||||||||||||
| Common Warrants | $ | April 11, 2019 | ||||||||||||
| Common Warrants | $ | June 10, 2019 | ||||||||||||
| Common Warrants | $ | April 24, 2020 | ||||||||||||
| Common Warrants | $ | June 9, 2020 | ||||||||||||
| Common Warrants | $ | January 13, 2022 | ||||||||||||
| Common Warrants | $ | March 1, 2022 | ||||||||||||
| Common Warrants | $ | May 4, 2022 | ||||||||||||
| Common Warrants | $ | May 24, 2022 | ||||||||||||
| Common Warrants | $ | June 28, 2022 | ||||||||||||
| Common Warrants | $ | December 21, 2022 | ||||||||||||
| Common Warrants | $ | February 17, 2023 | ||||||||||||
| Common Warrants | $ | March 13, 2023 | ||||||||||||
| Common Warrants | $ | March 20, 2023 | ||||||||||||
| Common Warrants | $ | April 5, 2023 | ||||||||||||
| Common Warrants | $ | July 3, 2023 | ||||||||||||
| Common Warrants | $ | August 4, 2023 | ||||||||||||
| Common Warrants | $ | September 27, 2023 | ||||||||||||
| Pre-funded Warrants | $ | September 27, 2023 | ||||||||||||
| Total | ||||||||||||||
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Preferred Stock
Effective December 15, 2021, the Company amended and restated its certificate of incorporation, under which the Company is currently authorized to issue up to shares of total preferred stock, including the authorized convertible preferred stock designated for Series B-1 and B-2, Series C and Series E-1, and nonconvertible and redeemable preferred stock (Series D), par value $ per share.
Convertible and Redeemable Preferred Stock
In October 2021, the Company issued shares of Series B-1 Convertible Preferred Stock, par value $ per share, at a price of $ per share, and shares of Series B-2 Convertible Preferred Stock, par value $ per share, at a price of $ per share to Keystone Capital Partners (Keystone Capital) through a registered direct offering.
The
Series B-1 and B-2 Convertible Preferred Stock were convertible into shares of common stock at any time at a conversion price per share
of the greater of Fixed Conversion Price or Variable Conversion Price as defined. All shares of B-1 Convertible Preferred Stock
were converted in 2021. Pursuant to the terms of the Series B-2 Convertible Preferred Stock, the Fixed Conversion Price was adjusted
during the first quarter of 2022 for certain dilutive issuances. The adjustment period ended on April 25, 2022 and the Fixed Conversion
Price was fixed at $ from the sale of common stock pursuant to the Seven Knots Purchase Agreement. During March and April 2022,
Keystone Capital converted their shares of B-2 Convertible Preferred Stock into shares of the Company’s common stock
at a conversion price of $
On March 24, 2022, the Company, entered into an exchange agreement with the holder of its Series B-2 Convertible Preferred Stock, pursuant to which the holder agreed to exchange shares of the Series B-2 Convertible Preferred Stock in consideration for shares of the Company’s Series C Convertible Preferred Stock, par value $ per share, $ per share stated value. Except with respect to voting provisions, the Series C and Series B-2 Preferred Stock had substantially similar terms.
On
May 4, 2022, pursuant to the May 2022 Exchange, the remaining shares of Series B-2 Convertible Preferred Stock and shares
of Series C Convertible Preferred Stock were exchanged for Senior Subordinated Notes with an aggregate principal amount of $
On
August 7, 2023, the Company filed a Certificate of Designation of Series E-1 Convertible Preferred Stock (Certificate of
Designation), par value $per
share (the Series E-1 Shares). An aggregate of 2,300 shares was authorized. The Series E-1 Shares are convertible into shares of
common stock at a conversion price of $
On
August 7, 2023, certain investors party to the December 2022 Notes and the February 2023 Notes exchanged $
Nonconvertible and Redeemable Preferred Stock
On
December 16, 2022, the Company filed a Certificate of Designation of Series D Non-Convertible Preferred Stock, par value $
per share (the Series D Preferred Shares). An aggregate of
shares was authorized; these shares were not convertible into shares of common stock, had limited voting rights equal to
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Common Stock
Effective September 14, 2023, the Company further amended its amended and restated certificate of incorporation to increase the number of authorized shares of common stock to shares.
Public Offerings
In
May 2022, the Company completed an underwritten public offering (the May 2022 Public Offering), whereby the Company issued shares of common stock and common warrants (the
May Common Stock Warrants) to purchase
Common Stock Purchase Agreement
On
February 15, 2022, the Company entered into a common stock purchase agreement (the Stock Purchase Agreement) with Seven Knots, LLC (Seven
Knots), pursuant to which Seven Knots agreed to purchase from the Company up to $
Sales
of common stock to Seven Knots were subject to customary
Effective May 18, 2022, the Company and Seven Knots elected to terminate the Stock Purchase Agreement without any penalty or additional cost to the Company.
Purchase Rights
On
September 15, 2022, the Company entered into certain exchange agreements with the Adjuvant Purchasers and the May 2022 Notes
Purchasers to exchange, upon request, the Purchase Rights for an aggregate of
Unregistered shares
On
June 8, 2022, the Company entered into an agreement for services with a360 Media, LLC (a360 Media), pursuant to which a360 Media will
provide professional media support and advertising services in exchange for, at a360 Media’s option, either (a) $
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Common Stock Reserved for Future Issuance
Common stock reserved for future issuance is as follows in common equivalent shares as of September 30, 2023:
| Common stock issuable upon the exercise of stock options outstanding | ||||
| Common stock issuable upon the exercise of common stock warrants | ||||
| Common stock available for future issuance under the 2019 ESPP | ||||
| Common stock available for future issuance under the Amended and Restated 2014 Plan | ||||
| Common stock available for future issuance under the Amended Inducement Plan | ||||
| Common stock reserved for the exercise of purchase rights | ||||
| Common stock reserved for the conversion of convertible notes | ||||
| Common stock reserved for the conversion of series E-1 preferred stock | ||||
| Total common stock reserved for future issuance |
Equity Incentive Plans
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Research and development | $ | $ | ||||||||||||||
| Selling and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Stock Options
There were shares of stock options granted during the three and nine months ended September 30, 2023, respectively. As of September 30, 2023, unrecognized stock-based compensation expense for employee stock options was approximately $million, which the Company expects to recognize over a weighted-average remaining period of years, assuming all unvested options become fully vested.
Restricted Stock Awards
There were shares of performance-based RSAs granted in 2023 to the Company’s executive management team.
For performance-based RSAs, (i) the fair value of the award is determined on the grant date; (ii) the Company assesses the probability of achieving each individual milestone associated with the award using reasonable assumptions based on the Company’s operation performance towards each milestone; (iii) the fair value of the shares subject to the milestone is expensed over the implicit service period commencing once management believes the performance criteria is probable of being met; and (iv) the Company reassesses the probability of achieving each individual milestone at each reporting date, and any change in estimate is accounted for through a cumulative adjustment in the period when the change in estimate occurs. Non-performance based RSAs are valued at the fair value on the grant date and the associated expenses will be recognized over the vesting period.
As of September 30, 2023, there was unrecognized noncash stock-based compensation expense related to unvested RSAs.
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Employee Stock Purchase Plan
The
purchase price under the 2019 ESPP is % of the lesser of the fair market value of the common stock on the first or the last business
day of an offering period. The maximum number of shares of common stock that may be purchased by any participant during an offering period
is equal to $
There were no shares of common stock purchased under the 2019 ESPP during the three and nine months ended September 30, 2023 or 2022.
The fair market value of shares to be issued to employees under the 2019 ESPP is estimated using a Black-Scholes option-pricing model at the grant date, which requires the use of subjective and complex assumptions, including (i) the expected stock price volatility, (ii) the calculation of the expected term of the award, (iii) the risk-free interest rate and (iv) the expected dividend yield. The following weighted average assumptions were used in the calculation of fair value of shares under the 2019 ESPP at the grant dates for the three and nine months ended September 30, 2022. No grant date fair value calculation was performed during the three and nine months ended September 30, 2023.
| Three and Nine months ended September 30, | ||||
| 2022 | ||||
| Expected volatility | % | |||
| Risk-free interest rate | % | |||
| Expected dividend yield | % | |||
| Expected term (years) | ||||
10. Subsequent Events
Subsequent events were evaluated through the filing date of this Quarterly Report, November 14, 2023.
Adjuvant Forbearance
In October 2023, the Company received a forbearance from the Adjuvant Purchasers
to forebear the Company’s noncompliance of certain covenant of the Adjuvants Notes due to not having met the $
Settlement of Trade Payables
Subsequent
to September 30, 2023, the Company settled a portion of its trade payables with several vendors. As a result, a $
Employment Agreement
On November 8, 2023, the Company entered into amended employment agreements with Ms. Pelletier and Ms. Zhang. If Ms. Pelletier is terminated other than for cause or Ms. Pelletier resigns for good reason, then pursuant to her amended employment agreement, the Company will pay and provide to Ms. Pelletier: (i) all accrued obligations as of the date of termination, (ii) any accrued but unpaid bonus for the prior fiscal year, (iii) a pro-rated bonus for the year in which the termination occurs as of her termination date, (iv) an amount equal to twenty-four months of her then-current base salary in a lump sum and (v) eighteen months of continuing health benefits coverage, each subject to the conditions outlined in the agreement. In addition, fifty percent (50%) of any unvested and outstanding equity interests Ms. Pelletier may have shall immediately vest and become exercisable, in each case subject to the conditions outlined in her equity agreements. If Ms. Pelletier’s employment is terminated without cause or if Ms. Pelletier resigns for good reason, in each case within three months prior to or twelve months following a change of control, then the Company will pay and provide to Ms. Pelletier: (i) all accrued obligations as of the date of termination, (ii) an amount equal to thirty-six months of her then-current base salary in a lump sum, (iii) any accrued but unpaid bonus for the prior fiscal year, (iv) her target annual bonus for the year in which the termination occurs at the rate in effect immediately prior to such termination multiplied by a factor of 2.0 and (v) twenty-four months of continuing health benefits coverage, each subject to the conditions outlined in the agreement. In addition, any unvested and outstanding equity interests Ms. Pelletier may have shall fully vest and become exercisable, in each case subject to the conditions outlined in her equity agreements.
If Ms. Zhang is terminated other than for cause or resigns for good reason, then the Company will pay and provide to Ms. Zhang: (i) all accrued obligations as of the date of termination, (ii) any accrued but unpaid bonus for the prior fiscal year, (iii) a pro-rated bonus for the year in which the termination occurs as of her termination date, (iv) an amount equal to twelve months of her then current base salary in a lump sum and (v) twelve months of continuing health benefits coverage, each subject to the conditions outlined in her agreement. In addition, fifty percent (50%) of any unvested and outstanding equity interests Ms. Zhang may have shall immediately vest and become exercisable, in each case subject to the conditions outlined in her equity agreements. If Ms. Zhang’s employment is terminated without cause or if she resigns for good reason, in each case within three months prior to or twelve months following a change of control, then the Company will pay and provide to Ms. Zhang: (i) all accrued obligations as of the date of termination, (ii) an amount equal to eighteen months of her then-current base salary in a lump sum, (iii) any accrued but unpaid bonus for the prior fiscal year, (iv) her target annual bonus for the year in which the termination occurs at the rate in effect immediately prior to such termination multiplied by a factor of 1.5 and (v) eighteen months of continuing health benefits coverage, each subject to the conditions outlined in the agreement. In addition, any unvested and outstanding equity interests Ms. Zhang may have shall fully vest and become exercisable subject to the conditions outlined in her equity agreements.
Purchase Rights Exercises
Subsequent
to September 30, 2023, an aggregate of
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The terms “we,” “us,” “our,” “Evofem” or the “Company” refer collectively to Evofem Biosciences, Inc. and its wholly-owned subsidiaries, unless otherwise stated. All information presented in this quarterly report on Form 10-Q (Quarterly Report) is based on our fiscal year. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ending December 31 and the associated quarters, months and periods of those fiscal years.
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report. Some of the information contained in this discussion and analysis is set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, and in our Annual Report on Form 10-K, filed with the SEC, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are a San Diego-based commercial-stage biopharmaceutical company committed to commercializing innovative products to address unmet needs in women’s sexual and reproductive health. Our first commercial product, Phexxi, was approved by the FDA on May 22, 2020. It is the first and only FDA-approved, hormone-free, woman-controlled, on-demand prescription contraceptive gel for women. We commercially launched Phexxi in September 2020 in the United States. We intend to commercialize Phexxi in all other global markets through partnerships or licensing agreements.
Phexxi as a Contraceptive; Commercial Strategies
Our sales force promotes Phexxi directly to obstetrician/gynecologists and their affiliated health professionals, who collectively write the majority of prescriptions for contraceptive products. As of September 30, 2023, our sales force comprises approximately 16 regional sales representatives, three business managers and a VP of sales, supported by a self-guided virtual health care provider (HCP) learning platform. Additionally, we offer women direct access to Phexxi via our telehealth platform. Using the platform, women can directly meet with a board-certified doctor to determine their eligibility for a Phexxi prescription and, if eligible, have the prescription written by the HCP, filled, and mailed directly to them by a third-party pharmacy.
Our comprehensive commercial strategy for Phexxi includes marketing and product awareness campaigns targeting women of reproductive potential in the U.S., including the approximately 23 million women who are not using hormonal contraception and the approximately 18.8 million women who are using a prescription contraceptive, some of whom, particularly pill users, may be ready to move to an FDA-approved, non-invasive hormone-free contraceptive, as well as certain identified target HCP segments. In addition to marketing and product awareness campaigns, our commercial strategy includes payer outreach and execution of our consumer digital and media strategy.
According to our post-commercial launch market research, HCPs indicated they would recommend Phexxi to approximately 60% of patients who are currently using natural contraceptive methods, approximately 58% of patients who are currently using over-the-counter contraceptive products and approximately 26% of patients who are currently using prescription contraception or methods requiring an HCP to perform a procedure. Additional research into the demographics of more than 1,300 women who are using Phexxi revealed that 60% of Phexxi users are between the ages of 18 to 34 years of age. Among the subset of Phexxi users for whom prior contraceptive data is available (n=413), 39% of women who had recently started Phexxi switched over from either an oral contraceptive, hormone patch/ring, or long-acting reversible contraception.
We continue working to increase the number of lives covered and to gain a preferred formulary position for Phexxi. We gained coverage for 32.5 million lives in 2022 and have added 21.3 million lives since December 31, 2022. We currently have 73% coverage within our Commercial and Medicaid books of business, including 19.2 million lives covered at no out-of-pocket cost as of October 5, 2023. This includes women covered under our December 2020 contract award from the U.S. Department of Veterans Affairs, which encompasses the Veteran’s Health Administration (VA), Tricare, Department of Defense, Coast Guard and Indian Health Services. As of September 2023, the Phexxi approved claims rate has reached 82%.
On January 1, 2021, as a result of our participation in the Medicaid National Drug Rebate Program, the U.S. Medicaid population gained access to Phexxi. As of June 30, 2023, Medicaid provides health coverage to approximately 85.6 million members. Approximately 20.2 million of these are women between 19 to 54 years of age.
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Phexxi is classified in the databases and pricing compendia of Medi-Span and First Databank, two major drug information databases that payers can consult for pricing and product information, as the first and only “Vaginal pH Modulator.”
As of January 1, 2023, most insurers and pharmacy benefit managers (PBMs) must provide coverage, with no out-of-pocket costs (e.g., $0 copay) to the subscriber or dependent, for FDA-approved contraceptive products, like Phexxi, prescribed by healthcare providers.
As a result, to comply with these Guidelines, payers are increasingly covering Phexxi by:
| – | Adding Phexxi to formulary (commercial insurers) or preferred drug list (Medicaid) |
| – | Removing the requirement for a Prior Authorization letter from the HCP (commercial insurers) |
| – | Moving Phexxi to $0 copay (commercial insurers) |
In 2022 Evofem developed and introduced a new educational chart for patients and HCPs that details high-level information about birth control methods currently available to women in the U.S., including the vaginal pH modulator. This new educational tool has been extremely well received and has had a positive impact with HCPs and patients alike.
Ex-United States Markets
In markets outside of the United States, we intend to establish regional and/or global partnerships by either sublicensing the commercialization rights or entering into distribution agreements with one or more third parties for the commercialization of Phexxi in that market. We cannot forecast when or if these arrangements will be secured, the structure or potential amount of revenues from these arrangements, whether such revenues would be upfront, triggered by the achievement of milestones or related to future Phexxi sales (assuming approval of Phexxi for commercial sale outside of the United States), or to what degree these arrangements would affect our development plans, future revenues and overall capital requirements.
In October 2021, we submitted the registration for our hormone-free contraceptive vaginal gel to the Mexican Regulatory Agency COFEPRIS (Comisión Federal para la Protección contra Riesgos Sanitarios) (COFEPRIS). We have also submitted marketing applications for Phexxi under the trademark Femidence™ in Nigeria, Ethiopia, and Ghana. These were the first of several strategic regulatory submissions planned under Evofem’s 2020 Global Health Agreement with Adjuvant Capital.
In October 2022, Phexxi was approved in Nigeria as Femidence™. This is the first regulatory approval for the contraceptive vaginal gel outside the U.S.
Research and Development
Phase 3: EVO100 for STI Prevention
Until October 2022, we were evaluating EVO100 for the prevention of urogenital chlamydia and gonorrhea in women. Chlamydia and gonorrhea are among the many bacterial and viral pathogens that require a higher pH environment to thrive. In 2018, the CDC reported that infections with these two sexually transmitted pathogens cost the U.S. healthcare system $1 billion, in aggregate direct and indirect costs. There are no FDA-approved drugs to prevent these sexually transmitted diseases (STIs), and we believe there is a clear need for new prophylactics given the rising incidence and increasing antibiotic resistance of gonorrhea.
The FDA granted Fast Track designation and Qualified Infectious Disease Product (QIDP) designation to EVO100 for the prevention of both chlamydia and gonorrhea in women.
Our Phase 2B/3 trial (AMPREVENCE) achieved its primary and secondary endpoints, demonstrating statistically significant reductions in chlamydia and gonorrhea infections of 50% and 78%, respectively, in women receiving EVO100 vs. placebo. Based on these highly positive clinical outcomes we initiated a Phase 3 clinical trial (EVOGUARD) to evaluate EVO100 for these potential indications in 2020. This randomized, placebo-controlled clinical trial enrolled 1,903 women with a prior chlamydia or gonorrhea infection who were at risk for future infection.
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On October 11, 2022, we reported that EVOGUARD did not meet its primary efficacy endpoint. We believe COVID-19 related changes in clinical site operations, subject behavior and actions including deviations from following the clinical study protocol requirements related to STI acquisition, detection, and prevention contributed to this outcome. The product safety profile was consistent with what has been observed in prior clinical trials, and only two women (0.1% of total) in the study discontinued due to adverse events.
We believe there is a path forward for EVO100 and may in the future conduct a new Phase 3 clinical trial of EVO100 for these potential indications. However, due to financial constraints, we discontinued investment in this clinical program in October 2022.
Phase 2-Ready: EVO200 Vaginal Gel for Recurrent Bacterial Vaginosis
Our investigational candidate for the reduction of recurrent bacterial vaginosis (BV), EVO200 vaginal gel, uses the same proprietary vaginal pH modulator platform as Phexxi. In a Phase 1 dose-finding trial for this indication, the highest dose formulation of the study drug demonstrated reduced vaginal pH for up to seven days following a single administration. The FDA has designated EVO200 as a QIDP for this indication. Due to financial constraints, all further development of EVO200 is on hold.
Pre-clinical: MPT Vaginal Gel for HIV Prevention
In December 2021, we launched a collaboration with Orion Biotechnology Canada Ltd. (Orion) to evaluate the compatibility and stability of Orion’s novel CCR5 antagonist, OB-002, in Phexxi with the goal of developing a Multipurpose Prevention Technology (MPT) product candidate for indications including the prevention of HIV in women. Assuming positive preclinical results, Evofem and Orion will seek government and philanthropic funding for subsequent clinical trials of any resulting MPT vaginal gel product candidate.
Thin Film Project
In February 2020, we contracted with the University of South Australia to explore the development of a vaginally applied thin film as a second-generation vaginal pH modulator product. The lead thin film candidates have been selected, and stability data has been generated with positive results. The project is currently on hold due to financial constraints.
Financial Operations Overview
Net Product Sales
Our revenue recognition is based on unit shipments from our third-party logistics warehouse to our customers, which consist of wholesale distributors, retail pharmacies, and a mail-order specialty pharmacy. We have recognized net product sales in the United States since the commercial launch of Phexxi in September 2020.
Operating Expenses
Cost of Goods Sold
Inventory costs include all purchased materials, direct labor and manufacturing overhead.
We are obligated to pay quarterly royalty payments through March 2024, pursuant to our license agreement with Rush University, in amounts equal to a single-digit percentage of the gross amounts we receive on a quarterly basis less certain deductions incurred in the quarter based on a sliding scale. We are also obligated to pay a minimum annual royalty amount of $0.1 million to the extent these earned royalties do not equal or exceed $0.1 million in any given year. A minimum annual royalty amount of $0.1 million was first required for the annual period commencing on January 1, 2021. These royalty costs were $0.2 million in each of the three-month periods ended September 30, 2023 and 2022, respectively, and $0.4 million and $0.7 million for the nine-month periods ended September 30, 2023 and 2022, respectively, and were included in the cost of goods sold in the condensed consolidated financial statements.
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Research and Development Expenses
Research and development expenses decreased significantly in the three months ended September 30, 2023 compared to the prior year quarter primarily due to the completion of EVOGUARD clinical trial in the fourth quarter of 2022. As previously noted, we have discontinued this program and placed additional programs on hold, and therefore expect a significant reduction in clinical trial expense in 2023 versus 2022 levels.
Our research and development expenses primarily consist of costs associated with the continuous improvements related to Phexxi commercialization efforts. These expenses include:
| ● | continuous improvements of manufacturing and analytical efficiency; | |
| ● | on-going product characterization and process optimization; | |
| ● | evaluation of back-up contract manufacturing organizations to support future commercial forecast and reduce cost of goods sold; | |
| ● | alternative raw material evaluation to secure an uninterrupted supply chain and reduce cost of goods sold; | |
| ● | employee-related expenses, including salaries, benefits, travel and noncash stock-based compensation expense; and | |
| ● | facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and research and other supplies. |
In prior years, research and development expenses also included costs associated with clinical development programs including the now-complete EVOGUARD trial, including:
| ● | costs related to compliance with drug development regulatory requirements; | |
| ● | external development expenses incurred under arrangements with third parties, such as fees paid to clinical research organizations (CROs) relating to our clinical trials; | |
| ● | costs of acquiring and evaluating clinical trial data such as investigator grants, patient screening fees, laboratory work and statistical compilation and analysis, and fees paid to consultants; and, | |
| ● | costs to acquire, develop and manufacture clinical trial materials, including fees paid to contract manufacturers. |
We expense internal and third-party research and development expenses as incurred. The following table summarizes research and development expenses by product candidate (in thousands):
| Three Months Ended September | Nine Months Ended September | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Allocated third-party development expenses: | ||||||||||||||||
| EVO100 for prevention of chlamydia/gonorrhea - Phase 3 (EVOGUARD) | $ | - | $ | 2,811 | $ | (93 | ) | $ | 16,553 | |||||||
| Total allocated third-party development expenses | - | 2,811 | (93 | ) | 16,553 | |||||||||||
| Unallocated internal research and development expenses: | ||||||||||||||||
| Noncash stock-based compensation expenses | 29 | 150 | 99 | 491 | ||||||||||||
| Payroll related expenses | 315 | 607 | 949 | 3,269 | ||||||||||||
| Outside services costs | 167 | 408 | 237 | 1,199 | ||||||||||||
| Other | 103 | 1,231 | 364 | 1,830 | ||||||||||||
| Total unallocated internal research and development expenses | 614 | 2,396 | 1,649 | 6,789 | ||||||||||||
| Total research and development expenses | $ | 614 | $ | 5,207 | $ | 1,556 | $ | 23,342 | ||||||||
Selling and Marketing Expenses
In connection with our overall cost reduction strategy, our selling and marketing expenses decreased significantly in the three months ended September 30, 2023 compared to the prior year quarter due to the downsizing of the sales and marketing team in the fourth quarter of 2022 and first quarter of 2023 and reductions in media and marketing activities related to ongoing Phexxi promotional strategies, including direct to consumer (DTC) and HCP advertising as well as the sample program, and the Phexxi telehealth platform.
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Our selling and marketing expenses consist primarily of Phexxi commercialization costs, the Phexxi telehealth platform, our sample program, training, salaries, benefits, travel, noncash stock-based compensation expense and other related costs for our employees and consultants.
General and Administrative Expenses
Our general and administrative expenses decreased significantly in the three months ended September 30, 2023 compared to the prior year quarter primarily due to decreased professional fees and reduced headcounts.
Our general and administrative expenses consist primarily of salaries, benefits, travel, business development expenses, investor relations expenses, noncash stock-based compensation and other related costs for our employees and consultants performing executive, administrative, finance, legal and human resource functions. Other general and administrative expenses include facility-related costs not otherwise included in research and development or selling and marketing, and professional fees for accounting, auditing, tax and legal fees and other costs associated with obtaining and maintaining our patent portfolio.
Other Income (Expense)
Other income (expense) consists primarily of interest expense and the change in fair value of financial instruments issued in various capital raise transactions. The change in fair value of financial instruments was recognized as a result of mark-to-market adjustments for those financial instruments. In the current quarter and comparison quarter, other income (expense) also includes the applicable gain or loss on debt modification or extinguishment.
Results of Operations
Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 (in thousands):
Net Product Sales
| Three Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Product sales, net | $ | 5,112 | $ | 6,371 | $ | (1,259 | ) | (20 | )% | |||||||
The decrease in product sales, net, was primarily due to lower Phexxi ex-factory unit sales in the current period due to a shift in the timing of restocking orders (as further described below), as well as the absence of marketing and DTC promotion and the 73% sales force reduction since the third quarter of 2022. These factors were offset, in part, by more favorable payer coverage in the current period as well as the impact of the Phexxi wholesaler acquisition cost (WAC) increase that went into effect on October 1, 2022.
The third quarter of 2022 included a high level of restocking orders ahead of the October 2022 Phexxi WAC increase, followed by the near absence of sales in the fourth quarter of 2022. Because the Company elected not to increase the Phexxi WAC in 2023, there was no comparable increase in ex-factory unit sales in the third quarter of 2023. The Company expects a level of net sales in the fourth quarter of 2023 that, when coupled with third quarter 2023 net sales, will exceed net sales for the second half of 2022.
Cost of Goods Sold
| Three Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Cost of goods sold | $ | 1,889 | $ | 1,680 | $ | 209 | 12 | % | ||||||||
The increase in cost of goods sold was primarily due to an increase in an inventory excess and obsolete write-down recorded in the current period. Additionally, several lots were re-packaged to reflect the extended shelf life approved by the FDA in June 2022, which added costs to each re-worked unit.
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Research and Development Expenses
| Three Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Research and development | $ | 614 | $ | 5,207 | $ | (4,593 | ) | (88 | )% | |||||||
The decrease in research and development expenses was primarily due to a $2.5 million decrease in clinical trial costs, outside services, and regulatory related activities associated with EVOGUARD, which was completed in the fourth quarter of 2022. A decrease of $1.2 million related to travel, facilities costs, and other expenses as well as a $0.4 million decrease in personnel costs due to reduced headcount and lower noncash stock-based compensation and $0.5 million in marketing and professional fees that also contributed.
Selling and Marketing Expenses
| Three
Months Ended September 30, |
2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Selling and marketing | $ | 2,985 | $ | 11,948 | $ | (8,963 | ) | (75 | )% | |||||||
The decrease in selling and marketing expenses was primarily due to a $3.4 million decrease in marketing and DTC promotion costs, including media agency and other outside services fees, and a $4.6 million decrease in personnel costs due to reduced headcount and lower noncash stock-based compensation as well as a reduction in facilities, travel and other expenses of $0.9 million.
General and Administrative Expenses
| Three Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| General and administrative | $ | 3,176 | $ | 6,260 | $ | (3,084 | ) | (49 | )% | |||||||
The decrease in general and administrative expenses was primarily due to a $1.3 million decrease in professional services fees related to legal and finance and outside services, a $1.3 million decrease in personnel costs due to reduced headcount and lower noncash stock-based compensation and a decrease of $0.5 million in facilities costs.
Total other income, net
| Three Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Total other income, net | $ | 69,568 | $ | 108,243 | $ | (38,675 | ) | (36 | )% | |||||||
Total other income, net, for the three months ended September 30, 2023 primarily included a $75.3 million gain related to the Baker Fourth Amendment, which was treated as a debt extinguishment, offset in part by a $5.3 million loss on the quarterly valuation of the senior subordinated convertible notes and purchase rights and warrant modifications, and $0.5 million of interest expense related to the Adjuvant Note.
Total other income, net, for the three months ended September 30, 2022 primarily included a $106.9 million gain from the change in fair value of the liability-classified warrants issued in 2022 and a $2.5 million gain on the partial extinguishment of the Adjuvant debt, partially offset by a $0.8 million loss from change in fair value of the May 2022 Notes due to mark-to-market adjustments at the time of the debt extinguishment as part of the September debt restructuring and $0.6 million in interest expense related to the Adjuvant Note.
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Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 (in thousands):
Net Product Sales
| Nine Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Product sales, net | $ | 13,379 | $ | 16,656 | $ | (3,277 | ) | (20 | )% | |||||||
The decrease in product sales, net, was primarily due to lower Phexxi ex-factory unit sales in the current period due to the timing of restocking orders (as previously described), the absence of marketing and DTC promotion and the 73% sales force reduction. Additionally, $1.5 million in product returns was recorded in the nine months ending September 30, 2023. This product was manufactured to meet anticipated demand based on pre-launch, pre-COVID sales forecasting. At the time of manufacture, the product shelf life was 30 months. We succeeded in extending the product shelf life to 48 months in June 2022, but product sold prior to that date could not be relabeled. COVID hindered our ability to access HCPs, fully execute on our commercial strategy and meet forecasted sales levels, resulting in product returns. These factors were offset, in part, by more favorable payer coverage in the current period.
Cost of Goods Sold
| Nine Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Cost of goods sold | $ | 5,558 | $ | 4,031 | $ | 1,527 | 38 | % | ||||||||
The increase in cost of goods sold was primarily due to an increase in write-downs related to an anticipated increase inventory excess and obsolete recorded in the current period. Additionally, several lots were re-packaged in order to comply with the extended shelf life recently approved by the FDA, which resulted in less excess and obsolete inventory but also added costs to each re-worked unit.
Research and Development Expenses
| Nine Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Research and development | $ | 1,556 | $ | 23,342 | $ | (21,786 | ) | (93 | )% | |||||||
The decrease in research and development expenses was primarily due to a $15.5 million decrease in clinical trial costs associated with EVOGUARD, which was completed in the fourth quarter of 2022, a $2.7 million decrease in personnel costs due to reduced headcount and lower noncash stock-based compensation, and a $3.4 million decrease in outside services and facilities costs.
Selling and Marketing Expenses
| Nine Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Selling and marketing | $ | 9,036 | $ | 36,951 | $ | (27,915 | ) | (76 | )% | |||||||
The decrease in selling and marketing expenses was primarily due to a $17.2 million reduction in outside services, facilities and media and marketing costs, a $9.5 million decrease in payroll and related expenses due to lower headcount, and a $1.2 million reduction in travel and other expenses.
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General and Administrative Expenses
| Nine Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| General and administrative | $ | 11,696 | $ | 24,404 | $ | (12,708 | ) | (52 | )% | |||||||
The decrease in general and administrative expenses was primarily due to a $5.9 million decrease in legal, corporate, and financing-related expenses as well as a $5.0 million decrease in personnel costs due to reduced headcount. A reduction of $2.0 million in outside services and a reduction of $0.2 million related to business development expenses also contributed.
Total other income, net
| Nine Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Total other income, net | $ | 69,577 | $ | 3,746 | $ | 65,831 | 1,757 | % | ||||||||
Total other income, net, for the nine months ended September 30, 2023 primarily included a $75.3 million gain related to the Baker Fourth Amendment, which was treated as a debt extinguishment offset in part by a $4.3 million loss on the quarterly valuation of the senior subordinated convertible notes and $1.5 million of interest expense related to the Adjuvant Note.
Total other income, net, for the nine months ended September 30, 2022 primarily included a $86.8 million recorded gain primarily from the change in fair value of the liability-classified warrants issued in 2022 and a $2.5 million gain on the partial extinguishment of the Adjuvant debt, partially offset by a $72.0 million recorded loss on the issuance of warrants, primarily from the June 2022 Baker Warrants, losses of $10.3 million and $2.0 million from the change in fair value of the Baker Notes and May 2022 Notes, respectively, as a result of mark-to-market adjustments, and $1.6 million in interest expense related to the Adjuvant Note.
Liquidity and Capital Resources
Overview
As of September 30, 2023, we had a working capital deficit of $56.4 million and an accumulated deficit of $884.6 million. We have financed our operations to date primarily through the issuance of preferred stock, common stock, warrants, and convertible and term notes; cash received from private placement transactions; and, to a lesser extent, product sales. As of September 30, 2023, we had approximately $0.4 million in restricted cash from the Adjuvant Notes (as defined in Note 4 - Debt). Management believes that the Company’s cash and cash equivalents as of September 30, 2023 are insufficient to fund operations for at least the next 12 months from the date on which this Quarterly Report on Form 10-Q is filed with the SEC.
We have incurred losses and negative cash flows from operating activities since inception. During the nine months ended September 30, 2023, we received gross proceeds, before issuance costs, of approximately $5.3 million, in aggregate, from the sale and issuance of senior subordinated convertible notes and warrants, and $0.2 million from the exercise of common warrants.
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We are focused in 2023 on further improving and increasing Phexxi access and delivering our third consecutive year of Phexxi net sales growth. We expect to continue to restructure our trade payables with extended terms. We have implemented measures, including headcount reductions in November 2022 and March 2023, to better align our cost structure with projected revenues. Compared to the prior year, for 2023, we expect that:
| ● | research and development expenses will decrease significantly primarily due to the completion of EVOGUARD and discontinuation of this and all other clinical programs in October 2022 as well as reductions in headcount; | |
| ● | selling and marketing expenses will decrease significantly due to reductions in media and marketing activities related to ongoing Phexxi promotional strategies as well as reductions in headcount; and | |
| ● | general and administrative expenses will decrease slightly due to reductions in headcount partially offset by increased professional and consulting expenses. |
As mentioned above, all defaults existing in prior quarters and at September 30, 2023 have been resolved as of the filing date.
We currently expect our liquidity resources as of September 30, 2023, together with the net proceeds from the 2023 Offerings (defined below), cost reductions, restructuring of outstanding accounts payable and liquidity tactics to be sufficient to fund our planned operations through the fourth quarter of 2023. As of September 30, 2023, our significant commitments include the Baker Notes, as described in Note 4 - Debt, our fleet leases, and our supply and manufacturing agreement with our Phexxi manufacturer, as described in Note 7 - Commitments and Contingencies. The purpose of these commitments is to further the commercialization of Phexxi. We expect to fund these commitments through debt and equity issuances and product sales.
Management is evaluating different strategies to obtain the required funding for our operations. These strategies may include but are not limited to: public and private placements of equity and/or debt, licensing and/or collaboration arrangements and strategic alternatives with third parties, corporate restructuring, or other potential funding from third parties. Our ability to secure funding is subject to numerous risks and uncertainties, including the impact of geopolitical turmoil related to the ongoing hostilities in Ukraine and economic uncertainty related to rising inflation and disruptions in the global supply chain. As a result, there can be no assurance that these funding efforts will be successful. Our ability to raise additional funds, and the terms on which those funds may be raised, will be dependent, in part, on how successful the commercialization of Phexxi is, the success of our cost reduction and gross-to-net improvement efforts, the accuracy of our estimates regarding cash needed to fund our operations, our ability to comply with the terms of our debt arrangements, and whether we are able to gain revenue traction prior to raising additional funds.
If we are not able to obtain required additional funding when and as needed, through equity financings or other means, or if we are unable to obtain funding on terms favorable to us, the shortfall in funds raised, or such unfavorable terms, will likely have a material adverse effect on our operations and strategic plan for future growth. If we cannot successfully raise the funding necessary to implement our current and ongoing liquidity tactics or as necessary to comply with obligations pursuant to our debt arrangements (including any acceleration of those obligations), we may be forced to make further reductions in spending, expand on our extended payment terms with suppliers, liquidate assets where possible, suspend or curtail planned programs, and/or cease operations entirely. Any of these developments would materially and adversely affect our financial condition and business prospects and could even cause us to be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and, in doing so, we may receive less than the value at which those assets are carried on our consolidated financial statements. Any of these developments would materially and adversely affect the price of our stock and the value of an investment in our stock. As a result, our financial statements include explanatory disclosures expressing substantial doubt about our ability to continue as a going concern.
The opinion of our independent registered public accounting firm on our audited consolidated financial statements as of and for the year ended December 31, 2022 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Future reports on our consolidated financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern. Our unaudited condensed consolidated financial statements as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 included in this Quarterly Report do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue our operations.
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2023 Debt and Equity Financings
As described in Note 4 - Debt, we received gross proceeds of approximately $5.3 million, before issuance costs, from the sale of notes and warrants in seven registered direct offerings in the first three quarters of 2023.
As described in Note 8 - Stockholders’ Deficit, we received approximately $0.2 million in the first three quarters of 2023 from the exercise of common warrants.
2022 Debt and Equity Financings
As described in Note 4 - Debt, we received gross proceeds of approximately $10.0 million, before issuance costs, from the sale of notes and warrants in two registered direct offerings in the first quarter of 2022. These notes were then exchanged for the May 2022 Notes during the May 2022 Exchange transaction, as defined in Note 4 - Debt, which were subsequently exchanged for Purchase Rights during the debt restructuring in September 2022, with a total outstanding balance of $21.8 million immediately prior to restructuring.
As described in Note 8 - Stockholders’ Deficit, we received proceeds of approximately $18.1 million upon the sale and issuance of common stock and warrants from an underwritten public offering, gross proceeds of approximately $7.4 million from the sale and issuance of common stock pursuant to the Stock Purchase Agreement, and $25.2 million from the exercise of common warrants.
Summary Statement of Cash Flows
The following table sets forth a summary of the net cash flow activity for each of the periods set forth below (in thousands):
| Nine Months Ended September 30, | 2023 vs. 2022 | |||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Net cash and restricted cash used in operating activities | $ | (8,798 | ) | $ | (63,879 | ) | $ | 55,081 | (86 | )% | ||||||
| Net cash and restricted cash used in investing activities | (4 | ) | (306 | ) | 302 | (99 | )% | |||||||||
| Net cash and restricted provided by financing activities | 4,436 | 60,439 | (56,003 | ) | (93 | )% | ||||||||||
| Net change in cash and restricted cash | $ | (4,366 | ) | $ | (3,746 | ) | $ | (620 | ) | 17 | % | |||||
Cash Flows from Operating Activities. During the nine months ended September 30, 2023 and 2022, the primary use of cash, cash equivalents and restricted cash was to fund the commercialization of Phexxi and to support general and administrative operations; including the funding of the Phase 3 EVOGUARD trial in the 2022 period.
Cash Flows from Investing Activities. During the nine months ended September 30, 2022, the change in net cash, cash equivalents and restricted cash used in investing activities was primarily due to $0.3 million in purchases of property and equipment.
Cash Flows from Financing Activities. During the nine months ended September 30, 2023, the primary source of cash, cash equivalents and restricted cash was the sale of senior subordinated convertible notes and warrants for proceeds of approximately $5.3 million, in aggregate, before debt issuance costs, which was offset by the $1.0 million upfront payment required under the Baker Fourth Amendment.
During the nine months ended September 30, 2022, the primary source of cash, cash equivalents and restricted cash was provided from the issuance of 181,320 shares of common stock, warrants to purchase 568,000 shares of common stock and pre-funded warrants to purchase 102,680 shares of common stock for net proceeds of $18.1 million; the issuance of 282,518 shares of our common stock for net proceeds of $25.2 million from the exercise of common warrants; and the issuance of 15,714 shares of common stock for gross proceeds of $7.4 million and gross proceeds of $10.0 million from the sale of term notes and warrants.
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Operating and Capital Expenditure Requirements
Our specific future operating and capital expense requirements are difficult to forecast. However, we can anticipate the general types of expenses and areas in which they might occur. We expect operating expenses to be significantly lower in 2023 and 2024 than 2022 levels due to the reasons stated under “Operating Expenses” above.
Contractual Obligations and Commitments
Operating Leases
Operating lease right-of-use assets and lease liabilities were $0.2 million each on September 30, 2023, and were $4.4 million and $5.4 million on December 31, 2022, respectively. See Note 7 - Commitments and Contingencies for more detailed discussions on leases and financial statements information under ASC 842.
Other Contractual Commitments
In November 2019, the Company entered into a supply and manufacturing agreement with a third party to manufacture Phexxi, with potential to manufacture other product candidates in accordance with all applicable current good manufacturing practice regulations. Pursuant to this agreement, the Company has certain minimum purchase commitments, which have not materially changed since December 31, 2022, based on forecasted Phexxi product sales.
Intellectual Property Rights
As described in Note 7 - Commitments and Contingencies, royalty costs owed to Rush University pursuant to the Rush License Agreement were $0.2 million and $0.4 million for the three and nine months ended September 30, 2023, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2022, respectively.
Other Matters
Recently Issued Accounting Pronouncements
For information with respect to recent accounting pronouncements, see Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report.
Critical Accounting Policies
There have not been any material changes to the critical accounting policies disclosed in our Form 10-K for the year ended December 31, 2022.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
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As described in our Annual Report on Form 10-K for the year ended December 31, 2022, we identified material weaknesses in our internal control over financial reporting. As a result of these material weaknesses, our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that our disclosure controls and procedures are not effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Securities and Exchange Act is recorded, processed, summarized, and reported as and when required.
Notwithstanding the conclusion by our CEO and CFO that our Disclosure Controls as of September 30, 2023 were not effective, and notwithstanding the material weaknesses in our internal control over financial reporting described more fully under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, management believes that the condensed consolidated financial statements and related financial information included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows as of the date presented, and for the periods ended on such dates, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Remediation Activities
Management is continuing to evaluate the material weaknesses discussed above and is in the process of implementing its remediation plan, which includes the hiring of additional resources. However, we cannot provide assurance as to when our remediation efforts will be complete and the material weaknesses cannot be considered remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We cannot assure readers that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Internal Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 7 - Commitments and Contingencies to the unaudited condensed consolidated financial statements in this Form 10-Q for any required disclosure.
Item 1A. Risk Factors
Except as described in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, as filed with the SEC on June 16, 2023, in our Quarterly Reporting on Form 10-Q for the quarter ended June 20, 2023, as filed with the SEC on August 14, 2023, and as set forth below, there have not been any material changes to the risk factors disclosed in our Form 10-K for the year ended December 31, 2022, as filed with the SEC on April 27, 2023.
Our strategy relating to potential mergers and acquisitions involves a number of risks and we have a limited history of such activity. Even if an acquisition or merger is completed, it may not produce results as positive as management may have projected.
The Company continues evaluating various opportunities and negotiating to acquire other companies, assets and technologies, and in certain circumstances, may consider transactions wherein the Company may be a target. Mergers and Acquisitions entail numerous risks, including difficulties in the assimilation of operations and products, diversion of management’s attention from other business concerns, amortization of acquired intangible assets and potential loss of key employees post-combination. We have limited experience in assimilating organizations into our operations. Although potential synergy may be achieved by mergers or acquisitions of related technologies and businesses, no assurance can be given as to the Company’s ability to successfully integrate any operations, personnel, services or products in any sort of merger or acquisition. Failure to successfully assimilate could have a material adverse effect on the Company’s business, financial condition and operating results.
Mergers and Acquisitions involve a number of special risks, including:
| ● | failure of the acquired or combined business to achieve expected results; |
| ● | diversion of management’s attention; |
| ● | failure to retain key personnel of the acquired business; |
| ● | additional financing, if necessary and available, could increase leverage, dilute equity, or both; |
| ● | the potential negative effect on our financial statements from the increase in goodwill and other intangibles; |
| ● | the high cost and expenses of completing acquisitions and risks associated with unanticipated events or liabilities. |
These risks could have a material adverse effect on our business, results of operations and financial condition since the values of the securities received or issued at the execution of the acquisition depend on the success of the company/companies involved in any acquisition, merger or similar transaction. In addition, our ability to further expand our operations through acquisitions, mergers or similar transactions may be dependent on our ability to obtain sufficient working capital, either through cash flows generated through operations or financing activities or both. There can be no assurance that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
In the ordinary course, we have been and again may become involved in lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive, time consuming, and unsuccessful.
Competitors or other third parties may infringe our patents or the patents of our licensing partners. We have and may again be required to defend against claims of infringement or otherwise engage in legal action to protect our intellectual property. Any commercial success we may achieve with Phexxi for the prevention of pregnancy may incentivize third parties to challenge or infringe our intellectual property. In addition, our patents or the patents of our licensing partners also may become involved in inventorship, priority or validity disputes. To counter or defend against these claims is expensive and time consuming. In an infringement proceeding, a court may decide a patent owned or in-licensed by us is invalid or unenforceable or may refuse to stop the other party from using the technology at issue on the grounds our owned and in-licensed patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our owned or in-licensed patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. These litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
| Risks Related to Our Financial Condition and Capital Requirements | ||
| ● | We are currently over 90 days past due on a significant amount of vendor obligations. We may not be able to refinance, extend or repay our substantial indebtedness owed to our secured and unsecured lenders, which would have a material adverse effect on our financial condition and ability to continue as a going concern. | |
| ● | We have incurred significant losses and negative cash flows since our inception and anticipate we will continue to incur significant losses and negative cash flow for the foreseeable future. | |
| ● | We must raise significant additional funds to finance our operations and to remain a going concern. If we are unable to raise additional capital when needed or on acceptable terms, we may be forced to delay, reduce and/or eliminate one or more of our business initiatives. | |
| ● | We have not paid our Fiscal Year 2023 or 2024 PDUFA invoice for Phexxi to the FDA and the balance due continues to incur interest, penalties, and may apply retroactively. We cannot submit any new applications or supplements until paid. | |
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| Risks Related to Potential Bankruptcy | ||
| ● | We are subject to risks and uncertainties associated with potential bankruptcy proceedings including a long and protracted restructuring. | |
| ● | Our financial results may be volatile and may not reflect historical trends. | |
| Risks Related to Our Common and Preferred Stock | ||
| ● | Our management has identified material weaknesses in our internal controls and procedures. | |
| ● | Our shares of common stock have been delisted from the NASDAQ Capital Market which has and could further result in, among other things, a decline in the price of our common stock and reduced liquidity for holders of shares of our common stock. | |
| ● | Our stock price is and may continue to be volatile. | |
| ● | There may not be an active, liquid trading market for our equity securities. | |
| ● | Because our common stock is subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock, which adversely affects its liquidity and market price. | |
| ● | Our common stock could be further diluted as the result of the issuance of additional shares of common stock, convertible securities, warrants or options. | |
| ● | We are and may continue to be subject to short selling strategies. | |
| ● | Our business could be negatively affected as a result of the actions of activist stockholders. | |
| ● | We may become a defendant in one or more stockholder derivative or class action litigation(s), and any such future lawsuit(s) may adversely affect our business, financial condition, results of operations and cash flows. | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
As of the filing date, the Company does not have any defaults on any Senior Securities.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index.
EXHIBIT INDEX
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| * | Furnished herewith. This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation by reference language in such filing. |
| † | The financial information of Evofem Biosciences, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 filed on November 14, 2023 formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) Parenthetical Data to the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Operations, (iv) the Condensed Consolidated Statements of Stockholders’ Deficit, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements, is furnished electronically herewith. |
| ^^ | Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplementally a copy of any omitted exhibit or schedule upon request by the SEC. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| EVOFEM BIOSCIENCES, INC. | ||
| Date: November 14, 2023 | By: | /s/ Ivy Zhang |
| Ivy Zhang | ||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
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