0001618835-18-000061.txt : 20180802 0001618835-18-000061.hdr.sgml : 20180802 20180802063255 ACCESSION NUMBER: 0001618835-18-000061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 71 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180802 DATE AS OF CHANGE: 20180802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Evofem Biosciences, Inc. CENTRAL INDEX KEY: 0001618835 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 208527075 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36754 FILM NUMBER: 18986541 BUSINESS ADDRESS: STREET 1: 12400 HIGH BLUFF DRIVE STREET 2: SUITE 600 CITY: SAN DIEGO STATE: CA ZIP: 92130 BUSINESS PHONE: (858) 550-1900 MAIL ADDRESS: STREET 1: 12400 HIGH BLUFF DRIVE STREET 2: SUITE 600 CITY: SAN DIEGO STATE: CA ZIP: 92130 FORMER COMPANY: FORMER CONFORMED NAME: Neothetics, Inc. DATE OF NAME CHANGE: 20140905 10-Q 1 evfm-630201810xq.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________
 
FORM 10-Q
  _____________________________________________________
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to                
Commission File Number: 001-36754
  _____________________________________________________
  EVOFEM BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
 ___________________________________________________ 
Delaware
(State or other jurisdiction
of incorporation)
 
20-8527075
(IRS Employer
Identification No.)
12400 High Bluff Drive, Suite 600
San Diego, CA 92130
(Address of Principal Executive Offices)
 
92130
(Zip Code)
Registrant’s telephone number, including area code: (858) 550-1900
Not applicable.
(Former name or former address, if changed since last report.)
 _____________________________________________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  
 
Accelerated filer  
Non-accelerated filer (Do not check if a smaller reporting company)
 
Smaller reporting company x 
 
 
Emerging growth company x 

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

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

The number of shares of the registrant’s common stock, $0.0001 par value, outstanding as of July 30, 2018 was 25,804,625.



Table of Contents

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




FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q (Quarterly Report) contains forward-looking statements that involve substantial risks and uncertainties. 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,” “predict,” “poise,” “project,” “potential,” “suggest,” “should,” “strategy,” “target,” “will,” “would,” and similar expressions or phrases, or the negative of those expressions or phrases, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Although we believe we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on our projections of the future that are subject to known and unknown risks and uncertainties and other factors that may cause our actual results, level of activity, performance or achievements expressed or implied by these forward-looking statements, to differ. These forward-looking statements include, among other things, statements about:
 l
 
 
our projected financial position and estimated cash burn rate;
 l
 
 
our estimates regarding expenses, future revenues and capital requirements;
 l
 
 
our ability to continue as a going concern;
 l
 
 
our need to raise substantial additional capital to fund our operations;
 l
 
 
our ability to develop our lead product candidate, Amphora (L-lactic acid, citric acid, and potassium bitartrate), as a contraceptive;
 l
 
 
the success, cost and timing of our clinical trials;
 l
 
 
our dependence on third parties in the conduct of our clinical trials;
 l
 
 
our ability to obtain the necessary regulatory approvals to market and commercialize Amphora, our bacterial vaginosis (BV) product candidate and any other product candidate we may seek to develop;
 l
 
 
the potential for changes to current regulatory mandates requiring health insurance plans to cover the United
States Food and Drug Administration (the FDA)-cleared or approved contraceptive products without cost sharing, our ability to obtain third-party payer coverage and adequate reimbursement, and our reliance on the willingness of patients to pay out-of-pocket absent full or partial third-party payer reimbursement; and
 l
 
 
our ability to expand our organization to accommodate potential growth and our ability to retain and attract key personnel.
Our current product candidates are undergoing clinical development and have not been approved by the FDA or the European Commission. These product candidates have not been, nor may they ever be, approved by any regulatory agency or competent authority nor marketed anywhere in the world.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. All forward-looking statements are qualified in their entirety by this cautionary statement. You should read this Quarterly Report and the documents that we have filed as exhibits to this Quarterly Report and incorporated by reference herein completely and with the understanding that our actual future results may be materially different from the plans, intentions and expectations disclosed in the forward-looking statements we make. You should also carefully read the risk factors described under Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 as filed with the SEC on May 14, 2018 and are advised to consult any further disclosures we make on related subjects in our subsequent Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, press releases and our website. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. The forward-looking statements contained in this Quarterly Report are made as of the date of this Quarterly Report, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

1



PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
  
(Unaudited)
(In thousands, except par value and share data)
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
22,788

 
$
1,211

Restricted cash
554

 
490

Prepaid and other current assets
1,133

 
653

Total current assets
24,475

 
2,354

Property and equipment, net
717

 
848

Other noncurrent assets
977

 
750

Total assets
$
26,169

 
$
3,952

Liabilities, convertible preferred stock and stockholders’ equity (deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,998

 
$
8,999

Accrued expenses
11,104

 
12,086

Accrued compensation
1,738

 
2,392

Series D 2X liquidation preference

 
79,870

Total current liabilities
20,840

 
103,347

Deferred rent
71

 
114

Other noncurrent liabilities

 
166

Total liabilities
20,911

 
103,627

Commitments and contingencies (Note 6)

 

Preferred stock, $0.0001 par value; 5,000,000 and 57,501,624 shares authorized at June 30, 2018 and December 31, 2017, respectively:
 
 
 
Series A convertible preferred stock, no shares issued and outstanding at June 30, 2018, and 12,618,279 shares issued and outstanding at December 31, 2017

 
23,848

Series B convertible preferred stock, no shares issued and outstanding at June 30, 2018, and 13,801,318 shares issued and outstanding at December 31, 2017

 
43,616

Series C-1 convertible preferred stock, no shares issued and outstanding at June 30, 2018, and 8,558,686 shares issued and outstanding at December 31, 2017

 
34,382

Series C convertible preferred stock, no shares issued and outstanding at June 30, 2018, and 5,037,784 shares issued and outstanding at December 31, 2017

 
19,469

Series D redeemable convertible preferred stock, no shares issued and outstanding at June 30, 2018, and 80 shares issued and outstanding at December 31, 2017

 
68,556

Stockholders’ equity (deficit):
 
 
 
Common stock, $0.0001 par value; 300,000,000 and 4,051,137 shares authorized at June 30, 2018 and December 31, 2017, respectively; 25,199,511 and 2,082,053 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
3

 
81

Additional paid-in capital
404,989

 
17,650

 Accumulated deficit
(399,734
)
 
(307,277
)
Total stockholders’ equity (deficit)
5,258

 
(289,546
)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)
$
26,169

 
$
3,952

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

2


EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
(Unaudited)
(In thousands, except share and per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Operating expenses:
 
 
 
 
 
 
 
Research and development
$
11,833

 
$
4,078

 
$
23,792

 
$
6,060

General and administrative
11,409

 
2,280

 
20,436

 
5,211

Total operating expenses
23,242

 
6,358

 
44,228

 
11,271

Loss from operations
(23,242
)
 
(6,358
)
 
(44,228
)
 
(11,271
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
32

 
32

 
62

 
63

Other (expense) income, net
(32
)
 
64

 
(82
)
 
30

Loss on issuance of warrants

 

 
(47,920
)
 

Change in fair value of Series D 2X liquidation preference

 
(250
)
 
(130
)
 
(600
)
Total other expense, net

 
(154
)
 
(48,070
)
 
(507
)
Loss before income tax
(23,242
)
 
(6,512
)
 
(92,298
)
 
(11,778
)
Income tax expense
(2
)
 

 
(2
)
 
(3
)
Net loss
(23,244
)
 
(6,512
)
 
(92,300
)
 
(11,781
)
Accretion of Series D redeemable convertible preferred stock dividends

 
(897
)
 
(66
)
 
(1,785
)
Net loss attributable to common stockholders
$
(23,244
)
 
$
(7,409
)
 
$
(92,366
)
 
$
(13,566
)
Net loss per share attributable to common stockholders, basic and diluted
$
(1.11
)
 
$
(3.78
)
 
$
(5.15
)
 
$
(6.92
)
Weighted-average shares used to compute net loss attributable to common stockholders, basic and diluted
20,868,554

 
1,959,904

 
17,937,788

 
1,959,904

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

3


EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
(In thousands, except share data)
 
Series A
Convertible
Preferred Stock
 
Series B
Convertible
Preferred Stock
 
Series C-1
Convertible
Preferred Stock
 
Series C
Convertible
Preferred Stock
 
Series D
Redeemable Convertible Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Equity (Deficit)
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Balance at December 31, 2017
12,618,279

 
$
23,848

 
13,801,318

 
$
43,616

 
8,558,686

 
$
34,382

 
5,037,784

 
$
19,469

 
80

 
$
68,556

 
81,119,014

 
$
81

 
$
17,650

 
$
(307,277
)
 
$
(289,546
)
Conversion of convertible preferred stock into Private Evofem common stock (par value $0.001), excluding Series D (see Note 8)
(12,618,279
)
 
(23,848
)
 
(13,801,318
)
 
(43,616
)
 
(8,558,686
)
 
(34,382
)
 
(5,037,784
)
 
(19,469
)
 

 

 
40,016,067

 
40

 
121,275

 

 
121,315

Cancellation of restricted stock awards (see Note 11)

 

 

 

 

 

 

 

 

 

 
(4,759,091
)
 
(5
)
 
5

 

 

Issuance of Private Evofem common stock (par value $0.001) upon cashless exercise of Invesco Warrants (see Note 10)

 

 

 

 

 

 

 

 

 

 
154,593,455

 
155

 
47,765

 

 
47,920

Exchange of 270,969,445 Private Evofem common stock (par value $0.001) for 6,955,456 shares of Neothetics' common stock (par value $0.0001) (see Note 3)

 

 

 

 

 

 

 

 

 

 
(264,013,989
)
 
(270
)
 
270

 

 

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

 

 

 

 

 

 

 

 

 
66

 

 

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

 

 

 

 

 

 

 

 
(80
)
 
(5,226
)
 
6,878,989

 
1

 
5,225

 

 
5,226

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

 

 

 

 

 

 

 

 

 

 

 

 
80,000

 

 
80,000

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

 

 

 

 

 

 

 

 

 
(49,334
)
 

 

 
49,334

 

 
49,334

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

 

 

 

 

 

 

 

 

 
(14,062
)
 
3

 

 
14,062

 

 
14,062

Private placement of common stock (see Note 3)

 

 

 

 

 

 

 

 

 

 
1,614,289

 

 
20,000

 

 
20,000

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

 

 

 

 

 

 

 

 

 

 
2,308,430

 

 
1,946

 

 
1,946

Issuance of common stock, pre-funded warrants and common warrants in connection with the Offering, net of underwriting discounts, commissions and offering costs (see Note 9)

 

 

 

 

 

 

 

 

 

 
7,436,171

 
1

 
36,130

 

 
36,131

Issuance of common stock - exercise of stock options

 

 

 

 

 

 

 

 

 

 
6,173

 

 
42

 

 
42

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 
11,351

 

 
11,351

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 
(92,300
)
 
(92,300
)
Balance at June 30, 2018

 
$

 

 
$

 

 
$

 

 
$

 

 
$

 
25,199,511

 
$
3

 
$
404,989

 
$
(399,734
)
 
$
5,258

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

4


EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

 
Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(92,300
)
 
$
(11,781
)
Adjustments to reconcile net loss to net cash, cash equivalents and restricted cash used in operating activities:
 
 
 
Loss on issuance of warrants
47,920

 

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

 
600

Stock-based compensation
11,351

 
431

Depreciation and amortization
131

 
113

Changes in operating assets and liabilities:
 
 
 
Prepaid and other assets
(465
)
 
55

Accounts payable
(1,757
)
 
958

Accrued expenses and other liabilities
(1,249
)
 
151

Accrued compensation
(879
)
 
(58
)
        Deferred rent, net of current portion
(207
)
 
(11
)
Net cash, cash equivalents and restricted cash used in operating activities
(37,325
)
 
(9,542
)
Cash flows from investing activities:
 
 
 
Proceeds from sale of Softcup line of business
250

 
250

Cash acquired in connection with the Merger
1,900

 

Net cash, cash equivalents and restricted cash provided by investing activities
2,150

 
250

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock - private placement
20,000

 

Proceeds from issuance of common stock, pre-funded warrants and common warrants in connection with the Offering, net of underwriting discounts and commissions
37,542

 

Proceeds from issuance of common stock - exercise of stock options
42

 

Payment of cash dividends for Series D redeemable convertible preferred stock
(157
)
 

Cash paid for offering costs
(611
)
 
(648
)
Net cash, cash equivalents and restricted cash provided by (used in) financing activities
56,816

 
(648
)
Net change in cash, cash equivalents and restricted cash
21,641

 
(9,940
)
Cash, cash equivalents and restricted cash, beginning of period
1,701

 
11,487

Cash, cash equivalents and restricted cash, end of period
$
23,342

 
$
1,547

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Net assets acquired in connection with the Merger
$
46

 
$

Public offering costs included in accounts payable and accrued expenses
$
800

 
$
26

Conversion of convertible preferred stock into common stock (excluding Series D)
$
121,315

 
$

Conversion of Series D redeemable convertible preferred stock into common stock
$
68,622

 
$

Redemption of Series D 2X liquidation preference upon conversion of Series D redeemable convertible preferred stock into common stock
$
80,000

 
$

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


5


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

On January 17, 2018, Neothetics, Inc., a Delaware corporation, now known as Evofem Biosciences, Inc. (the Company), completed its merger with privately-held Evofem Biosciences Operations, Inc. (Private Evofem), or the Merger; in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated October 17, 2017 (the Merger Agreement), whereby Nobelli Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Neothetics, merged with and into Private Evofem, with Private Evofem surviving as Neothetics’ wholly-owned subsidiary.
        
In connection with the Merger, Neothetics filed a certificate of amendment to the amended and restated certificate of incorporation to, among other things, affect a 6:1 reverse stock split of its common stock (the Reverse Stock Split) and change its name from “Neothetics, Inc.” to “Evofem Biosciences, Inc.” Both the name change and the Reverse Stock Split were effective on January 17, 2018 (the Closing Date). Shares of the Company's common stock commenced trading on The Nasdaq Capital Market under the ticker symbol “EVFM” as of January 18, 2018. See discussions of the transactions in connection with the Merger at Note 3- Merger Transactions.

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

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

Description of Business
Evofem is a San Diego-based clinical-stage biopharmaceutical company committed to developing and commercializing innovative products to address unmet needs in women’s sexual and reproductive health. Evofem leverages its proprietary Multi-purpose Prevention Technology (MPT) vaginal gel to develop product candidates for multiple indications, including contraception, sexually transmitted infections (STIs), and recurrent bacterial vaginosis (BV).
Evofem's MPT vaginal gel technology is an acid-buffering vaginal gel with bioadhesive properties, designed to maintain an optimal vaginal pH of 3.5 to 4.5. This vaginal pH range is inhospitable to spermatozoa, as well as certain viral and bacterial pathogens associated with STIs, and it is integral to the survival of healthy bacteria in the vagina.
Evofem’s lead product candidate, Amphora® (L-lactic Acid, citric acid, and potassium bitartrate) is a hormone-free, on demand, woman-controlled vaginal gel currently in a Phase 3 clinical trial as a contraceptive and in a Phase 2b trial for the prevention of urogenital chlamydia and gonorrhea in women. Evofem’s pipeline also includes an MPT vaginal gel product candidate for the reduction of recurrent BV.  The Company is planning a Phase 2b clinical trial in this indication, building on favorable results of a recently-completed a Phase 1 trial.   

Basis of Presentation and Principles and Consolidation

Since Private Evofem was determined to be the accounting acquirer in connection with the Merger, it recorded Neothetics’ assets and liabilities at fair value as of the Closing Date. Therefore, for periods prior to the Merger, the condensed consolidated financial statements were prepared on a stand-alone basis for Private Evofem and did not include the combined entities' financial position. Subsequent to the Merger, the condensed consolidated financial statements as of and for the six months ended June 30, 2018 included Neothetics' assets and liabilities.
 

6


The Company prepared the unaudited interim condensed consolidated financial statements included in this Quarterly Report in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information and the rules and regulations of the Securities and Exchange Commission (SEC) related to quarterly reports on Form 10-Q.

The Company’s financial statements are presented on a consolidated basis, which include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim condensed consolidated financial statements do not include all information and disclosures required by GAAP for annual audited financial statements and should be read in conjunction with the Private Evofem’s consolidated financial statements and notes thereto for the year ended December 31, 2017 included in its Current Report on Form 8-K/A as filed with the SEC on April 6, 2018 (the 2017 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 statement of convertible preferred stock and stockholders' equity (deficit) for the periods presented. The results for the three and six months ended June 30, 2018 are not necessarily indicative of the results expected for the full year. The condensed consolidated balance sheet as of December 31, 2017 was derived from the 2017 Audited Financial Statements.
Risks, Uncertainties and Going Concern
The Company’s principal operations have been related to research and development, including development of the Company's lead product candidate, Amphora, as well as raising capital, recruiting personnel and establishing a corporate infrastructure. The Company has incurred operating losses and negative cash flows from operating activities since inception. As described in Note 9- Public Offering, the Company received net proceeds of approximately $37.5 million, net of the underwriting discounts and commissions, but before deducting the estimated offering costs, from a public offering which closed on May 24, 2018. As of June 30, 2018, the Company had cash and cash equivalents of $22.8 million, working capital of $3.6 million and an accumulated deficit of $399.7 million. The Company anticipates it will continue to incur net losses into the foreseeable future.
The Company is subject to risks common to other life science companies in the development stage including, but not limited to, uncertainty of product development and commercialization, lack of marketing and sales history, development by its competitors of new technological innovations, dependence on key personnel, market acceptance of products, product liability, protection of proprietary technology, ability to raise additional financing, and compliance with U.S. Food and Drug Administration (FDA) and other government regulations. If the Company does not successfully commercialize any product candidates, it will be unable to generate recurring product revenue or achieve profitability. Management’s plans to meet its short- and long-term operating cash flow requirements include obtaining additional funding.

The Company anticipates it will continue to incur net losses for the foreseeable future and incur additional costs associated with being a public company. Research and development expenses are expected to increase for the foreseeable future due to the Company's ongoing confirmatory Phase 3 clinical trial for Amphora for the prevention of pregnancy, the ongoing Phase 2b clinical trial for prevention of chlamydia and gonorrhea, and planned clinical trials for the BV product candidate. According to management estimates, liquidity resources as of June 30, 2018 are not sufficient to maintain its planned level of operations for the next 12 months.

In addition, the uncertainties associated with the Company's ability to (i) obtain additional equity financing on terms that are favorable to Evofem, (ii) enter into collaborative agreements with strategic partners and (iii) succeed in the future operations, raise substantial doubt about the Company's ability to continue as a going concern. The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities, in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of this uncertainty.

If the Company is not able to obtain the required funding in the near term, through equity financings or other means, or is unable to obtain funding on terms favorable to the Company, this will have a material adverse effect on its operations and strategic development plan for future growth. If the Company cannot successfully raise additional funding and implement its strategic development plan, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these could materially and adversely affect its liquidity, financial condition and business prospects and the Company would not be able to continue as a going concern. If the Company is unable to continue as a going concern, it may have to liquidate its assets and may receive less than the value at which those assets are carried on the financial statements. The Company may obtain additional financing in the future through the issuance of its common stock from other equity or debt financings or through collaborations or partnerships with other companies.

7



2.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the notes thereto.
On an ongoing basis, Management evaluates its estimates related to, but not limited to, the useful lives of property and equipment, the recoverability of long-lived assets, preclinical and clinical trial accruals, the measurement of the Series D 2X liquidation preference, assumptions used in estimating the fair value of warrants issued in connection with the Merger and common warrants in connection with a public offering closed on May 24, 2018 as more described in Note 9- Public Offering, assumptions used in estimating the fair value of stock-based compensation expense and other contingencies. The Company’s assumptions regarding the measurement of the Series D 2X liquidation preference and stock-based compensation are more fully described in Note 5 — Fair Value of Financial Instruments and Note 11 — Stock-based Compensation, respectively. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances and adjusts when facts and circumstances dictate. The estimates are the basis for making judgments about the carrying values of assets and liabilities and recorded expenses that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results may materially differ from those estimates or assumptions.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment.

Concentrations of Credit Risk

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

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

Significant Accounting Policies

The Company's significant accounting policies are more fully described in Note 2 to the 2017 Audited Financial Statements. There have been no changes to the significant accounting policies during the first six months of fiscal year 2018.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consists of readily available cash in checking and money market accounts. Restricted cash consists of cash held in monthly time deposit accounts, which are collateral for the Company’s credit cards and facility leases.
The following table provides a reconciliation of cash, cash equivalents and restricted cash, reported within the condensed consolidated statements of cash flows (in thousands): 
 
Six Months Ended June 30,
 
2018
 
2017
Cash and cash equivalents
$
22,788

 
$
1,027

Restricted cash
554

 
520

Total cash, cash equivalents and restricted cash presented in the condensed consolidated statements of cash flows
$
23,342

 
$
1,547

Net Loss Per Share
Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive

8


securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, potentially dilutive securities are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented. Potentially dilutive securities excluded from the calculation of diluted net loss per share are summarized in the table below. For the three and six months ended June 30, 2017, the shares in the table have been adjusted to reflect the conversion of Series A, B, C-1, and C convertible preferred stock and Series D redeemable convertible preferred stock (Series D) into common stock as fully described in Note 8- Convertible Preferred Stock, and the Reverse Stock Split. 
 
Three and Six Months Ended June 30,
 
2018
 
2017
Convertible preferred stock

 
1,027,079

Series D redeemable convertible preferred stock

 
5,159,240

Unvested restricted common stock subject to repurchase

 
122,149

Unvested restricted stock units

 
2,566

Options to purchase common stock
3,573,640

 
160,363

Warrants to purchase common stock
4,775,886

 

Total
8,349,526

 
6,471,397

Recently Adopted Accounting Pronouncements

The Company qualifies as an “emerging growth company” (EGC) pursuant to the provisions of the Jumpstart Our Business Startups (JOBS) Act. Section 7(a)(2)(B) of the Securities Act of 1933, as amended, permits EGCs to defer compliance with new or revised accounting standards until non-issuers are required to comply with such standards. However, the Company elected not to take advantage of the extended transition period for implementation of new or revised financial accounting standards, and as a result, the Company will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU No. 2014-09), which amends the existing accounting standards for revenue recognition. ASU No. 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. The new standard as amended by ASU No. 2015-14, ASU No. 2016-10 and ASU No. 2016-12 was effective for the Company beginning January 1, 2018. The Company adopted the new standard using the full retrospective approach, which did not have an impact on the Company’s financial position or results of operations as the Company is pre-revenue and does not anticipate generating any significant revenue prior to 2020.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (ASU No. 2017-09), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU No. 2017-09 was effective for the Company beginning January 1, 2018. The adoption of this new standard did not have a material impact on the Company’s financial position or results of operations.
Recently Issued Accounting Pronouncements — Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU No. 2016-02), which changes the presentation of assets and liabilities relating to leases. The core principle of ASU No. 2016-02 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The new standard as amended by ASU No. 2018-01, ASU No. 2018-10 and ASU No. 2018-11 will be effective for the Company beginning January 1, 2019. The Company’s sublease for office space under a noncancelable lease agreement entered into effective January 30, 2015 (the 2015 Lease) as a lessee and sublease with WomanCare Global Trading, Inc. (the WCG Sublease) as a lessor will both expire in 2020 (see Note 6 — Commitments and Contingencies for more details) and be subject to the provisions of this new standard. While the Company continues to evaluate the impact of this new standard as a lessee and a sublessor on its consolidated financial statements, the Company currently expects the primary impact will be to record right-of-use assets and lease liabilities for the 2015 Lease as a lessee and rent receivable for the WCG Sublease as a lessor in the consolidated balance sheets.

9


In June 2018, the FASB issued ASU No. 2018-07, Compensation- Stock Compensation (Topic 718) (ASU No. 2018-07), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees that are currently covered under Accounting Standards Codification (ASC) 505-50, Equity-Equity-Based Payments to Non-employees. ASU No. 2018-07 will be effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements.

3.    Merger Transactions

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

The following transactions were completed with the Merger and recorded by the Company:

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

Converted each share of Private Evofem’s capital stock including its Series A convertible preferred stock, Series B convertible preferred stock, Series C-1 convertible preferred stock and Series C convertible preferred stock into Private Evofem's common stock on a one-for-one basis for an aggregate of 40,016,067 shares. Upon such conversion, reclassified the net proceeds from Private Evofem’s issuance of these preferred stocks to common stock at Private Evofem’s par value and additional paid-in capital, net of par value;

Cancelled 4,759,091 shares of Private Evofem’s unvested restricted common stock at Private Evofem’s par value on a pre-split basis;

Issued warrants for the purchase up to an aggregate of 155,081,982 shares of Private Evofem's common stock to funds affiliated with Invesco Ltd. (the Invesco Warrants), which were immediately net exercised on a cashless basis for 154,593,455 shares of Private Evofem's common stock;

Exchanged 270,969,445 shares of Private Evofem's common stock for 41,732,794 shares of Neothetics’ common stock on a pre-split basis at the common stock exchange ratio of 0.1540, subject to adjustment for the Reverse Stock Split
(or 6,955,456 shares on a post-split basis). These shares, together with the shares converted from the 80 shares of Private Evofem Series D discussed below, accounted for an aggregate 87% ownership in Neothetics upon closing of the Merger;

Converted 80 shares of Private Evofem’s Series D into 41,273,941 shares of Neothetics' common stock on a pre-split basis (or 6,878,989 on a post-split basis), including:

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

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

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

iv. Recording cash dividends between January 6, 2018 and the Closing Date, which was paid upon closing of the Merger to Woodford Investment Management Ltd (WIM).

Sold 1,614,289 shares of the Company's common stock in a private placement for gross proceeds of $20.0 million;
Neothetics affected the Reverse Stock Split, and thus the Company adjusted common stock and additional paid-in capital associated with shares issued in connection with the Merger due to the 6:1 reverse stock split; and

10


Neothetics assumed Private Evofem's 2012 Equity Incentive Plan and each outstanding stock option issued thereunder was converted into the right to purchase the number of shares of Neothetics' common stock equal to approximately 0.1540, subject to adjustment for the Reverse Stock Split, multiplied by the number of shares of Private Evofem’s common stock issuable upon exercise of the option to purchase shares of Private Evofem’s common stock.

4.    Balance Sheet Details
Prepaid and Other Current Assets
Prepaid and other current assets consist of the following (in thousands): 
 
June 30, 2018

 
December 31, 2017

Flex note receivable (1)
$
250

 
$
250

Other receivable from related parties
155

 
17

Clinical supplies
90

 
119

Insurance
270

 
96

Rent
63

 
63

Research and development costs
138

 
30

Other
167

 
78

Total
$
1,133

 
$
653

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

The Flex Note is secured by the Softcup assets and has been recorded at present value. The Company’s incremental borrowing rate and the stated interest rate of the Flex Note are materially consistent.
Property and Equipment, Net
Property and equipment, net, consists of the following (in thousands):
 
Useful Life
 
June 30, 2018

 
December 31, 2017

Research equipment
5 years
 
$
639

 
$
639

Computer equipment and software
3 years
 
6

 
6

Office furniture
5 years
 
205

 
205

Leasehold improvements
5 years or less
 
340

 
340

 
 
 
1,190

 
1,190

Less: accumulated depreciation and amortization
 
 
(473
)
 
(342
)
Total, net
 
 
$
717

 
$
848

Depreciation expense was $65,000 for both the three months ended June 30, 2018 and 2017, and $0.1 million for both the six months ended June 30, 2018 and 2017.
Other Noncurrent Assets
Other noncurrent assets consist of the following (in thousands):
 
June 30, 2018

 
December 31, 2017

Flex note receivable, net of current portion
$
500

 
$
750

Prepaid Directors & Officers insurance
477

 

Total
$
977

 
$
750


11


Accrued Expenses
Accrued expenses consist of the following (in thousands):
 
June 30, 2018

 
December 31, 2017

Clinical studies
$
9,227

 
$
8,789

Sublicense fees
1,117

 
2,000

Public offering costs
176

 
135

Board of directors’ fees and related expenses
50

 
247

Legal and other professional fees
239

 
727

Other
295

 
188

Total
$
11,104

 
$
12,086

 

5.    Fair Value of Financial Instruments
The fair values of the Company’s assets and liabilities, including the money market fund and Series D 2X liquidation preference, measured on a recurring basis are summarized in the following tables, as applicable (in thousands):  
 
June 30, 2018
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Money market fund (1)
$
62

 
$
62

 
$

 
$

Total assets
$
62

 
$
62

 
$

 
$

_______________________
(1) Included as a component of cash and cash equivalents on the accompany condensed consolidated balance sheet.

 
December 31, 2017
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Series D 2X liquidation preference
$
(79,870
)
 
$

 
$

 
$
(79,870
)
Total liabilities
$
(79,870
)
 
$

 
$

 
$
(79,870
)

Series D 2X liquidation preference is stated at fair value and is considered a Level 3 input because the fair value measurement is based, in part, on significant inputs not observed in the market. The Company determined the fair value of Series D 2X liquidation preference as described below.
The following table summarizes the changes in Level 3 financial liabilities measured at fair value on a recurring basis for the six months ended June 30, 2018 (in thousands). There were no activities for the three months ended June 30, 2018.
 
Series D 2X Liquidation Preference Liability
Balance at December 31, 2017
$
79,870

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

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

Series D 2X Liquidation Preference
As described in the Note 2 to the 2017 Audited Financial Statements, the Company’s issuance of Series D resulted in the identification of an embedded derivative that required bifurcation and liability accounting at fair value. See the Series D Redeemable Convertible Preferred Stock discussion in Note 8 — Convertible Preferred Stock for the terms of the Series D.
In connection with the Merger, Private Evofem converted 80 shares of Series D into Neothetics' common stock. To determine the final fair value of the Series D 2X liquidation preference, the Company utilized a hybrid valuation model that considers the probability of achieving certain exit scenarios, the Company’s cost of capital, the estimated period the Series D

12


2X liquidation preference would be outstanding, consideration received for the instrument with the Series D 2X liquidation preference and at what price and changes, if any, in the fair value of the underlying instrument to the Series D 2X liquidation preference. At December 31, 2017, the most significant assumption was the probability of occurrence, which was concluded to be high, and as a result the fair value as of December 31, 2017 approximated the final redemption value. The valuations resulted in a concluded fair value of the Series D 2X liquidation preference of $80.0 million as of the Closing Date, which was reclassified from a Series D 2X liquidation preference to additional paid-in capital upon the conversion into Neothetics' common stock.
The change in fair value of the Series D 2X liquidation preference for the three months ended June 30, 2017 was $0.2 million, and $0.1 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively. There was no such change for the three months ended June 30, 2018 as the Series D was converted into common stock in connection with the Merger.

6.    Commitments and Contingencies
Operating Leases
           
In November 2009, Private Evofem entered into a lease for office space under a noncancelable lease agreement that
expired in March 2017 (the UTC Lease), as amended. Through January 2015, Private Evofem shared this office space with Cosmederm Biosciences, Inc. (Cosmederm) when Private Evofem assigned its rights and obligations under the UTC Lease to Cosmederm. Effective February 27, 2017, Private Evofem entered into a lease termination agreement (the UTC Lease Termination) with Cosmederm and the landlord for the UTC Lease. In March 2017, Private Evofem paid $55,000 of an early termination fee directly to Cosmederm who remitted the fee to the landlord, and derecognized the security deposit receivable from the landlord and payable to Cosmederm. Upon execution of the UTC Lease Termination, Private Evofem was relieved of all obligations under the UTC Lease.
 
Effective January 30, 2015, Private Evofem entered into the 2015 Lease that expires in March 2020. The sublease provides for two renewal periods of five years each, but the sub-lessor is not expected to renew its lease. In lieu of paying a security deposit directly to the sub-lessor, the Company maintains a time deposit in favor of the sub-lessor (the Deposit), which is included in restricted cash in the condensed consolidated balance sheets. During months 13 through 58 of the 2015 Lease term, subject to certain restrictions, approximately $5,000 of the Deposit may be released each month through November 2019 and approximately $66,000 of the Deposit may be released each month between December 2019 and March 2020. As of June 30, 2018 and December 31, 2017, restricted cash maintained as collateral for the Company’s Deposit was $0.4 million for both periods.
Concurrent with the execution of the 2015 Lease, Private Evofem entered into the WCG Sublease with WomanCare Global Trading, Inc. (WCGT) whereby WCGT agreed to sublease approximately 25% (subject to annual adjustment), as amended, of the Company’s office space. The Company remains the primary obligor under the WCG Sublease and records all sublease income as a reduction of rent expense in the condensed consolidated statements of operations. WCGT paid an initial security deposit of approximately $0.3 million (the WCG Security Deposit). Effective April 1, 2018, the WCG Sublease was reassigned from WCGT to WCG Cares, whereby WCG Cares agreed to pay the Company 20% of the overall lease payment under the 2015 Lease. All terms and conditions remain the same as the original WCG Sublease. As of December 31, 2017, the WCG Security Deposit totaled approximately $0.2 million, which was included in accrued expenses and other noncurrent liabilities in the condensed consolidated balance sheet and was repaid to WCGT in June 2018. There were $40,000 and $57,000 of sublease payments received from WCGT during the three months ended June 30, 2018 and 2017, respectively, and $40,000 and $85,000 of sublease payments received during the six months ended June 30, 2018 and 2017, respectively.

On January 20, 2015, Neothetics entered into a non-cancelable operating lease with LJ Gateway Office LLC (LJ Gateway Lease) for its facilities, which expires in March 2020. In connection with the LJ Gateway Lease, Neothetics issued a stand-by letter of credit in lieu of a security deposit. On January 31, 2017, Neothetics entered into an Eleventh Amendment to the LJ Gateway Lease (the Lease Amendment), which provided Neothetics with additional office space located at Suite No. 250. Concurrent with the Lease Amendment, Neothetics entered into a sublease providing for the sublease of additional office space (Suite 270). Upon the occurrence of the sublessee retaining possession of the original premises in February 2017, the sublessee received rent abatement for months one, three, and four as well as a discount of 50% off the base rent for months five through nine. The sublessee paid Neothetics a base rent of $27,768 for the second month’s rent and $30,317 security deposit. The base rent will increase by three percent on each annual anniversary. The Company has recorded the rental income collected or accrued under the sublease as a reduction of rent expense. As of June 30, 2018 and December 31, 2017, restricted cash maintained as collateral for LJ Gateway Lease's security deposit was $0.1 million.

In December 2017, Neothetics entered into the Twelfth Amendment to the LJ Gateway Lease, whereby upon the mutual execution and delivery of a new lease between LJ Gateway Office LLC’s affiliate and the sublessee and upon the occurrence of the sublessee vacating their subleased space, LJ Gateway Office LLC and Neothetics agreed that the LJ Gateway Lease with

13


respect to the Suite 270 office space shall be terminated. In June 2018, the LJ Gateway Lease was terminated. Upon termination, the Company repaid the sublessee $30,317 security deposit.
Rent expense was $0.1 million and $0.2 million for the three months ended June 30, 2018 and 2017, respectively, and $0.3 million and $0.4 million for the six months ended June 30, 2018 and 2017, respectively. Rent expense is recognized on a straight-line basis over the term of the lease. Accordingly, rent expense recognized in excess of rent paid is accounted for as deferred rent in the condensed consolidated balance sheets, of which the current portion is included in accrued expenses in the condensed consolidated balance sheets.
As of June 30, 2018, future minimum lease commitments under the above mentioned operating leases, together with sublease income, are as follows (in thousands): 
 
Operating
Leases
 
Sublease
Income
 
Net
Year ending December 31, 2018
$
374

 
$
(75
)
 
$
299

Year ending December 31, 2019
777

 
(155
)
 
622

Year ending December 31, 2020
201

 
(40
)
 
161

Total
$
1,352

 
$
(270
)
 
$
1,082

Contingencies
From time to time the Company may be involved in various lawsuits, legal proceedings or claims that arise in the ordinary course of business. There were no claims or actions pending against the Company as of June 30, 2018 and December 31, 2017, which Management believes would have, individually or in the aggregate, a material adverse effect on its business, liquidity, financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm the Company’s business.
Intellectual Property Rights
In 2014, Private Evofem entered into an amended and restated license agreement with Rush University (the Rush License Agreement) pursuant to which Rush University granted Private Evofem an exclusive, worldwide license of certain patents and know-how, related to its MPT vaginal gel authorizing Private Evofem to make, distribute and commercialize products and processes for any and all therapeutic, prophylactic and/or diagnostic uses, including, without limitation, use for female vaginal health and/or contraception.
The Company may be obligated to pay an earned royalty based upon a percentage of net sales in the range of mid-single digits. Commencing on January 1 of year three after a product has received regulatory approval and has been introduced to market, the Company may become obligated to pay minimum annual royalties, to the extent the earned royalty or sublicensing fees, as applicable, do not exceed the minimum annual royalties.
In October 2015, the Company's subsidiaries, ENA and EP entered into separate sublicense agreements (the Sublicenses) with WomanCare Global Trading CIC (WCGCIC) for a contraceptive vaginal ring. In August 2016, ENA, EP and WCGCIC entered into a side letter to modify the timing of the 2016 and 2017 payments due under the Sublicenses. On an aggregate basis, consideration under the Sublicenses consisted of (i) payments or potential payments to the licensor of (a) an upfront payment of $10.0 million, (b) potential regulatory and commercial milestone payments up to $32.0 million, (c) potential royalty payments on net product sales and (d) potential royalty payments on net sales of an equivalent generic product and (ii) $5.0 million in annual sublicense fees through October 1, 2019 to WCGCIC. In December 2016, under the terms of the Sublicenses, ENA and EP provided 90-days written notice of termination of the Sublicenses to WCGCIC, which period concluded on March 28, 2017.
As of June 30, 2018 and December 31, 2017, the Company had accrued sublicense fees of approximately $1.1 million and $2.0 million, respectively, which are included in accrued expenses in the condensed consolidated balance sheets. The Company is responsible for making interest payments to WomanCare Global International (WCGI) for unpaid sublicense fees. As of June 30, 2018 and December 31, 2017, accrued interest expense on unpaid sublicense fees totaled $0.1 million for both periods. See Note 7 – Related-party Transactions for a summary of the Company’s transactions with WCGCIC and WCGI and related entities.

14




7.    Related-party Transactions
Consulting Agreements
Effective April 1, 2016, Private Evofem entered into a one-year consulting agreement (the 2016 Consulting Agreement) with Thomas Lynch, the chairman of the Company’s board of directors. Pursuant to the 2016 Consulting Agreement, Mr. Lynch provides consulting services with respect to investor relations and business development activities as requested from time to time. Pursuant to the 2016 Consulting Agreement, Mr. Lynch (i) received compensation of approximately $0.4 million, including $0.1 million related to his board services, (ii) received a stock option for the purchase of 150,000 shares of the Private Evofem's common stock with an exercise price of $1.19 per share on a pre-split basis, which vest over a one-year period through March 1, 2017 and (iii) was issued a restricted stock unit for the rights to 100,000 shares of the Private Evofem’s common stock (RSU) on a pre-split basis. Upon completion of the Merger, Mr. Lynch’s vested stock option was converted into an option to purchase up to 3,850 shares of the Company’s common stock with an exercise price of $46.36 per share. In addition upon closing of the Merger, Mr. Lynch agreed to cancel all of his unvested restricted stock units received pursuant to the 2016 Consulting Agreement. See Restricted Stock Units discussion in Note 11 — Stock-based Compensation for the accounting treatment for Mr. Lynch’s restricted stock units granted in 2016.
In August 2017, Private Evofem and Mr. Lynch entered into a two-year consulting agreement (the 2017 Consulting Agreement), which was effective as of April 1, 2017. This 2017 Consulting Agreement provides for (i) annual compensation of $0.4 million, including $0.1 million related to his board services and (ii) a stock option for the purchase of 250,000 shares of Private Evofem’s common stock on a pre-split basis that vests quarterly through March 31, 2018, which remained unissued at the time of the Merger. On March 12, 2018, the Company issued a stock option for the purchase of 225,000 shares of the Company's common stock in lieu of the unissued stock option pursuant to the 2017 Consulting Agreement, of which 125,000 vested on the grant date and the remaining shares shall vest in a series of twelve successive equal monthly installments upon completion of each additional month of service measured from April 1, 2018. The option was awarded in connection with Mr. Lynch's consulting services for the Company for the fiscal years 2016 to 2018. This option was granted under the Amended and Restated 2014 Plan, which was approved at the Company’s annual meeting held on May 8, 2018. See “Contingent Options” discussion in Note 11 - Stock-based Compensation.
Consulting fees incurred under the 2016 and 2017 Consulting Agreements were approximately $70,000 for both the three months ended June 30, 2018 and 2017, and $0.1 million for both the six months ended June 30, 2018 and 2017. As of June 30, 2018, there was no accrued compensation owed to Mr. Lynch.
Transactions with WCGI and Related Entities (collectively WCG entities)
In 2009, Saundra Pelletier founded WomanCare Global International, a non-profit organization registered in England and Wales (WCGI) and became WCGI’s chief executive officer. In February 2013, Private Evofem and WCGI formed an alliance (the WCGI Alliance) and Ms. Pelletier also became Private Evofem’s chief executive officer. Concurrent with the forming of the WCGI Alliance, Private Evofem and WCGI entered into (i) a service agreement to which the companies shared resources and employees and (ii) a three-year grant agreement under which the Private Evofem provided funding of $4.0 million per year to WCGI.
As more fully described in Note 6 — Commitments and Contingencies, (i) effective in February 2015, Private Evofem and WCGT, a WCGI subsidiary, entered into a sublease for office space, which was terminated and reassigned to WCG Cares effective April 1, 2018, and (ii) in October 2015, (a) Private Evofem, through its wholly-owned subsidiaries, entered into two sublicense agreements whereby Private Evofem was responsible for paying $5.0 million in annual sublicense fees, net of amounts paid under the grant agreement during 2015, to WCGCIC, also a WCGI affiliate, and (b) the service and grant agreements were cancelled. Sublicense fees are included in research and development expenses in the condensed consolidated statements of operations.
In early 2015, Private Evofem became the corporate sponsor of WCGI’s “Then Who Will” educational campaign, which ended in late 2017. During the three and six months ended June 30, 2017, corporate support payments to vendors performing services for the “Then Who Will” campaign on behalf of WCGI totaled approximately $0.1 million and $0.2 million, respectively, which were included in general and administrative expenses in the condensed consolidated statements of operations. There were no such payments during the three and six months ended June 30, 2018.
Effective January 2016, Private Evofem and WCGI entered into a shared-services agreement (the SSA), which replaced the prior service agreement. Under the terms of the SSA, Private Evofem and WCGI cross charge the other company’s services provided by each entity on behalf of the other. The SSA also allows for netting of due to and due from shared-services fees. Through December 31, 2016, Ms. Pelletier was being paid directly by each WCGI and Private Evofem. As of January 1, 2017,

15


Ms. Pelletier was no longer paid directly by WCGI and was subject to Private Evofem’s SSA. Services provided under the SSA on behalf of WCGI totaled approximately $0.2 million for the three months ended June 30, 2017, and $0.1 million and $0.5 million for the six months ended June 30, 2018 and 2017, respectively. There were no such services provided for the three months ended June 30, 2018. As of June 30, 2018 and December 31, 2017, net shared-services due to the Company totaled zero and approximately $13,000, respectively.
The following table summarizes receivables, payables, payments and expenses related to the Company’s transactions with WCGI related entities as of and for the six months ended June 30, 2018 and 2017, respectively (in thousands): 
 
2018
 
2017
Receivables
$

 
$
79

Payables
$
1,252

 
$
2,021

Payments
$
883

 
$
1,018

Operating and Interest expense
$
59

 
$
26

Transactions with WCG Cares
In 2013, WCG Cares, a 501(c)(3) nonprofit organization was incorporated under the laws of the State of California. Its primary purpose is to directly engage in and/or fund the development and implementation of programs that promote reproductive health, education, research and increased access to high-quality, innovative and affordable reproductive healthcare and healthcare products around the world. Since May 2018, Ms. Pelletier has served as a director of the Board of WCG Cares, and she served as the Chair of the Board of WCG Cares from November 2017 to May 2018 and as the Chief Executive Officer and President of WGC Cares from 2013 to November 2017. Mr. Justin J. File also served as WCG Cares' Chief Financial Officer from November 2017 to May 2018. Dr. Kelly Culwell has served as WCG Cares' Chief Medical Officer since November 2017. See shared-services agreement discussion below.
      
The Company agreed to be a corporate sponsor of WCG Cares’ U.S. education campaign, the Tryst Network, which officially launched in February 2018. The Company paid WCG Cares a one-time payment of $0.3 million in March 2018 in connection with this corporate sponsorship of the Tryst Network. During the second quarter of 2018, the Company ceased being the corporate sponsor of the Tryst Network. As of June 30, 2018 and December 31, 2017, accrued Tryst-related costs totaled zero and $0.2 million, respectively.

In March 2018, the Company and WCG Cares entered a shared-services agreement (the Cares Shared Services Agreement). Under the terms of the Cares Shared Services Agreement, the Company and WCG Cares cross charge services provided by each entity (or its subsidiaries) on behalf of the other. The Cares Shared Services Agreement also allows for netting of due to and due from shared-services fees. As of June 30, 2018, net shared-services due to the Company totaled approximately $37,000.

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

8.    Convertible Preferred Stock
Immediately prior to the Merger, as more fully descried in Note 1- Description of Business and Basis of Presentation, each share of Private Evofem’s capital stock (other than Private Evofem’s Series D), including its Series A convertible preferred stock, Series B convertible preferred stock, Series C-1 convertible preferred stock and Series C convertible preferred stock was converted to Private Evofem's common stock on a one-for-one basis for an aggregate of 40,016,067 shares. Immediately following the Merger, Private Evofem's common stock was then exchanged for approximately 0.1540 shares of Neothetics’ common stock. In addition, each share of Private Evofem’s Series D was converted into approximately 515,924 shares of Neothetics’ common stock for an aggregate of 41,273,941 shares on a pre-split basis. As of June 30, 2018, no shares of convertible preferred stock were issued and outstanding.
Dividends on the Series D were payable (i) upon conversion, (ii) redemption or (iii) liquidation. As such, although the Company’s board of directors has not declared dividends, the Company accrues dividends on the Series D. Upon closing of the Merger, the Company paid cash dividends of $0.2 million for the accrued dividends only for the period of January 6, 2018 to the Closing Date and the accrued and unpaid dividends of $5.2 million as of December 31, 2017 were reclassified to additional paid-in capital upon conversion of 80 shares of Series D into common stock.

16


The designated, issued and outstanding shares of convertible preferred stock, by series, as of December 31, 2017 were as follows (aggregate liquidation amount and proceeds, net of issuance costs, in thousands): 
 
Shares
Designated
 
Original
Issue Price
 
Shares
Issued and
Outstanding
 
Common
Stock
Equivalents (1)
 
Aggregate
Liquidation
Amount
 
Proceeds,
Net of
Issuance
Costs
Series A
12,768,492

 
$
1.9579445

 
12,618,279

 
12,618,279

 
$
24,706

 
$
23,848

Series B
31,034,696

 
$
3.2222

 
13,801,318

 
13,801,318

 
44,471

 
43,616

Series C-1
8,660,572

 
$
3.97

 
8,558,686

 
8,558,686

 
33,978

 
34,382

Series C
5,037,784

 
$
3.97

 
5,037,784

 
5,037,784

 
20,000

 
19,469

Series D (2)(3)
80

 
$
500,000

 
80

 
 
 
85,160

 
39,739

Total
57,501,624

 
 
 
40,016,147

 
 
 
$
208,315

 
$
161,054

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

Private Evofem and Cosmederm entered a promissory note during 2015, which was amended in July 2016 in conjunction with the Private Evofem’s Series D financing (the Amended Cosmederm Note). Cosmederm assigned the Amended Cosmederm Note with the then outstanding principal balance of $10.0 million to WIM. As a condition to closing the Private Evofem’s Series D, WIM immediately converted $5.0 million of the Amended Cosmederm Note into 10 shares of the Private Evofem’s Series D and cancelled the remaining $5.0 million.
Series D
In July 2016, Private Evofem entered into a Series D purchase agreement with WIM, which was subsequently amended in July 2017 to increase the number of authorized preferred stock for issuance (as amended, the Series D SPA). The Series D SPA authorized the issuance and sale of an aggregate of 80 shares of Series D, which was sold at an issuance price per share of $500,000. WIM also received the right to receive warrant shares to be determined in the next equity financing (Warrant Rights). See Warrant Rights discussion below.
Warrant Rights
The Warrant Rights issued in connection with the issuance of Series D in 2016 and 2017 were convertible into warrants to purchase up to that number of equity securities to be issued in the next equity financing of Private Evofem equal to (i) seventy-five percent (75.0)% of the purchase price paid for the Series D (or $30.0 million), divided by (ii) the per share price of the equity securities issued to the new investors in such next equity financing. The exercise price of the warrants will equal the per share price of the equity securities to be issued in the next equity financing and the warrants were to expire seven years from the closing of such next equity financing. The Warrant Rights are inseparable from the Series D. As of December 31, 2017, Private Evofem had not completed a next equity financing and, therefore, the Warrant Rights remained outstanding.
Additionally, Private Evofem determined that since the exercise price of the warrants to be received by WIM is equal to the fair value of the shares for which the warrant would have become exercisable at issuance, there was de minimis value associated with the Warrant Rights and, therefore, Private Evofem did not record a warrant liability for the Warrant Rights as of December 31, 2017.

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


17


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

9.    Public Offering

On May 24, 2018, the Company completed an underwritten public offering (the Offering), whereby the Company issued 7,436,171 shares of common stock at a public offering price of $4.69 per share and pre-funded warrants to purchase 1,063,829 shares of common stock at a public offering price of $4.68 per warrant and an exercise price of $0.01 per share. Each share of common stock and pre-funded warrant was issued together with a common warrant to purchase one-fifth of a share of the Company's common stock at a public offering price of $0.01 per warrant and an exercise price of $7.50 per share. An aggregate of 8,500,000 common warrants were issued in connection with the Offering and are exercisable to purchase an aggregate of 1,700,000 shares of common stock. The common warrants issued to the three funds affiliated with WIM that participated in the Offering were issued as a unit with one share of common stock (an aggregate of three “Unit Shares”). Except with respect to the Unit Shares, the shares of common stock, pre-funded warrants and common warrants are separately transferable. The Company determined that the pre-funded warrants and common warrants are free standing financial instruments and equity classified in accordance with ASC 480- Distinguish Liabilities from Equity.
The Company received net proceeds of approximately $37.5 million, net of the underwriting discounts and commissions, but before deducting the estimated offering costs of $1.4 million. The estimated offering costs were recorded as contra additional-paid in capital in the condensed consolidated balance sheet. The common stock and warrants issued in the Offering were registered pursuant to a registration statement on Form S-1 filed with the SEC on May 16, 2018 and declared effective on May 21, 2018.
On June 26, 2018, the Company issued an additional 912 common warrants to purchase approximately 182 shares of common stock upon an underwriters’ exercise of their overallotment option. The offering price and exercise price were the same as the common warrants issued on May 24, 2018. The net proceeds received from this issuance were immaterial.
The Company intends to use the net proceeds from the Offering to fund its ongoing clinical trials of Amphora vaginal gel for the prevention of pregnancy and for the prevention of urogenital transmission of chlamydia and gonorrhea in women, respectively, as well as for general corporate purposes, funding working capital needs and any necessary capital expenditures.

10.    Stockholders' Equity (Deficit)

Warrants

As of June 30, 2018, warrants to purchase approximately 4,775,886 shares of the Company's common stock remain outstanding at a weighted average exercise price of $6.30 per share. These warrants include:

WIM Warrants to purchase up to 2,000,000 shares of common stock as described in Note 8- Convertible Preferred Stock, which will become exercisable on January 17, 2019 and shall remain exercisable for four years unless there is a completion of an acceleration event as defined by the WIM Warrants agreements;
Warrants to purchase 11,875 shares of common stock that were issued prior to the Merger, which were exercisable as of June 30, 2018 and shall remain exercisable until 2020, 2022 and 2024;
Pre-funded warrants to purchase 1,063,829 shares of common stock in the Offering as described in Note 9- Public Offering, which were exercisable on May 24, 2018 and shall remain exercisable until shares are exercised;
Common warrants to purchase 1,700,000 shares of common stock in the Offering, which were exercisable on May 24, 2018 and shall remain exercisable for seven years; and
Common warrants to purchase approximately 182 shares of common stock upon exercise of the underwriter's overallotment option, which were exercisable on June 26, 2018 and shall remain exercisable for seven years.

Common Stock
Effective January 17, 2018 and in connection with the Merger, the Company amended and restated its certificate of incorporation, under which the Company is authorized to issue up to 300,000,000 shares of common stock, $0.0001 par value per share, and 5,000,000 shares of preferred stock, $0.0001 par value per share.
On January 17, 2018, immediately prior to the closing of the Merger, Private Evofem issued the Invesco Warrants for the purchase up to an aggregate of 155,081,982 shares of the Private Evofem's common stock, par value $0.001 per share, which were immediately net exercised on a cashless basis for 154,593,455 shares of Private Evofem's common stock. These shares of

18


Private Evofem's common stock were then converted into the right to receive shares of Neothetics' common stock upon completion of the Merger at the common stock exchange ratio of 0.1540, subject to adjustment for the Reverse Stock Split. The Company determined that the Invesco Warrants are free standing financial instruments and equity classified in accordance with ASC 480— Distinguish Liabilities from Equity. The Company had an external valuation completed as of January 17, 2018 with a concluded fair value of $47.9 million using the BSM option-pricing model, which was recorded as a loss on the issuance of Invesco Warrants within other income (expense) in the condensed consolidated statement of operations, with corresponding entries to common stock par value for the shares issued and additional paid-in capital in the condensed consolidated balance sheet. See Note 3- Merger Transactions for more descriptions of the transactions completed in connection with the Merger.
On May 24, 2018, the Company issued 7,436,171 shares of common stock upon closing of the Offering as described in Note 9- Public Offering.

At the Market Program
         
On December 1, 2015, Neothetics entered into a Controlled Equity Offering Sales Agreement (Sales Agreement) with Cantor Fitzgerald, as a sales agent pursuant to which Neothetics may offer and sell from time to time, through Cantor Fitzgerald shares of Neothetics' common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. The minimum share price for this Controlled Equity Offering is selected at the discretion of the Company’s board of directors. Through June 30, 2018, no shares of common stock have been sold pursuant to this Sales Agreement.
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance is as follows in common equivalent shares as of June 30, 2018: 
Common stock issuable upon the exercise of stock options outstanding
3,573,640

Common stock issuable upon the exercise of common stock warrants
4,775,886

Common stock available for future issuance under the 2014 ESPP
118,825

Common stock available for future issuance under the Amended and Restated 2014 Plan
1,833,192

Total common stock reserved for future issuance
10,301,543


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

On September 15, 2014, Neothetics' board of directors adopted, and stockholders approved, the Equity Incentive Plan (the 2014 Plan). On March 9, 2018, the Company's board of directors approved, subject to stockholder approval, and recommended its stockholders approve at the annual meeting held on May 8, 2018, the amendment and restatement of the 2014 Plan (the Amended and Restated 2014 Plan), that, among other things, would increase the number of authorized shares under the 2014 Plan from 749,305 to an aggregate of 5,300,000 shares. Such stockholder approval was obtained on May 8, 2018. As of June 30, 2018, there were 1,833,192 shares available to grant under the Amended and Restated 2014 Plan.

Stock Options
The following table summarizes stock-based compensation expense related to stock options granted to employees and non-employee directors included in the condensed consolidated statements of operations as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Research and development
$
2,365

 
$
43

 
$
2,595

 
$
90

General and administrative
8,298

 
169

 
8,756

 
341

Total
$
10,663

 
$
212

 
$
11,351

 
$
431


19



There were 134,375 and 1,283 shares of stock options granted during the three months ended June 30, 2018 and 2017, respectively, and 3,270,405 and 7,928 shares of stock options granted during the six months ended June 30, 2018 and 2017, respectively. The stock options granted in March 2018 to purchase up to an aggregate of 3,136,030 shares of common stock were granted under the Amended and Restated 2014 Plan approved by the Company’s board of directors on March 9, 2018, and were subject to the Company obtaining the requisite stockholder approval (the “Contingent Options”). Such stockholder approval of the Amended and Restated 2014 Plan was obtained on May 8, 2018.
        
In connection with the Merger, all Neothetics' remaining employees were terminated without cause and Neothetics entered into Separation and Release Agreements with these employees. The Separation and Release Agreements entitled employees full acceleration of all unvested stock options granted under the 2014 Plan and extension of the exercise period for all options held by employees to the earlier of (i) the expiration of the stock option pursuant to its terms or (ii) March 31, 2019. The Company applied share-based payment modification accounting in accordance with ASC 718 — Compensation — Stock Compensation and determined the incremental value of the modification to the awards resulting from the extension of the exercise period was $0.2 million.

The Contingent Options were granted with vesting terms that varied from those general terms as described above. A majority of Contingent Options had vested as of June 30, 2018, and as a result a significant amount of stock-based compensation expense was recognized during the three months ended June 30, 2018. As of June 30, 2018, unrecognized stock-based compensation expense for employees, non-employee directors and consultants stock options was approximately $6.4 million, which the Company expects to recognize over a weighted-average remaining period of 1.3 years, assuming all unvested options become fully vested.
Summary of Assumptions
The fair value of stock-based compensation for stock options granted to employees, non-employee directors and consultants was estimated on the date of grant using the BSM option pricing model based on the following weighted-average assumptions for options granted during the three and six months ended June 30, 2018 and 2017.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018

 
2017

 
2018

 
2017

Expected volatility
 
86.8
%
 
90.6
%
 
85.9
%
 
90.9
%
Risk-free interest rate
 
2.8
%
 
1.9
%
 
2.8
%
 
2.2
%
Expected dividend yield
 
%
 
%
 
%
 
%
Expected term (years)
 
5.8

 
6.0

 
5.4

 
5.7

Expected volatility. The expected volatility assumption is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry.
Risk-free interest rate. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of the stock option grants.
Expected dividend yield. The expected dividend yield assumption is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends.
Expected term. The expected term represents the period options are expected to be outstanding. Because the Company does not have historical exercise behavior, it determines the expected term assumption using the practical expedient as provided for under ASC 718 — Compensation — Stock Compensation, which is the midpoint between the requisite service period and the contractual term of the option.
Restricted Stock Awards
In September 2016, under the 2012 Equity Incentive Plan, Private Evofem issued an aggregate of 4,759,091 shares of restricted stock on a pre-split basis to members of management (the RSAs) with vesting terms subject to the completion of an initial public offering (IPO) by Private Evofem. Upon closing of the Merger, as more fully described in Note 1 – Description of Business and Basis of Presentation, the members of management agreed to cancel their restricted stock awards. As a result, all 4,759,091 shares of unvested RSAs on a pre-split basis were cancelled during the three months ended March 31, 2018, and there was no unrecognized stock-based compensation expense related to the RSAs.
Restricted Stock Units

20


In October 2016, as previously described in Note 7 — Related-party Transactions, Private Evofem issued a restricted stock unit for the right to 100,000 shares of Private Evofem’s common stock on a pre-split basis to the chairman of the Company’s board of directors (the RSUs). Upon closing of the Merger, the chairman agreed to cancel his RSUs. As a result, all 100,000 shares of unvested RSUs on a pre-split basis were cancelled during the three months ended March 31, 2018, and there was no unrecognized stock-based compensation expense related to the RSUs.

Employee Stock Purchase Plan

In November 2014, Neothetics adopted the 2014 Employee Stock Purchase Plan (the ESPP), which enables eligible employees to purchase shares of its common stock using their after-tax payroll deductions of up to 15% of their eligible compensation, subject to certain restrictions.

The ESPP initially authorized the issuance of 28,333 shares of common stock pursuant to purchase rights granted to employees. The number of shares of common stock reserved for issuance automatically increased on January 1, 2015 and will continue to increase on each January 1 thereafter through January 1, 2024, by the smaller of (a) 1.0% of the total issued and outstanding shares on the preceding December 31, and (b) a number of shares determined by the board of directors of Neothetics. The ESPP is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the Code).

The fair value of shares issued to employees under the ESPP is estimated using a BSM option-pricing model, which requires the use of subjective and complex assumptions, including (a) the expected stock price volatility, (b) the calculation of the expected term of the award, (c) the risk-free interest rate and (d) the expected dividend yield.
        
Following completion of the Merger, there was no enrollment in the ESPP. During the three and six months ended June 30, 2018 and 2017, there were no shares of common stock purchased under the ESPP.

12. Subsequent Events
On July 2, 2018, under the Amended and Restated 2014 Plan, the Company issued an aggregate of 1,230,399 shares of RSAs to its executive management team, of which, 10,000 shares will vest based on certain performance conditions, 70,000 shares will vest in two equal installments on October 16, 2018 and 2019 upon completion of the grantee's services for the Company, and the remainder were immediately vested on the grant date. The non performance-based RSAs were valued at the fair value on the grant date and the associated expenses were fully recognized on the grant date. For the performance-based RSAs, (i) the fair value of the award was determined on the grant date, (ii) the Company assessed the probability of the individual milestone under the award being achieved and (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. In addition, the Company issued 75,000 shares of RSUs to the chairman of the Company’s board of directors in consideration for certain consulting services provided to the Company in connection with the 2016 Consulting Agreement. The RSUs were fully vested on the grant date.
On July 24, 2018, upon the recommendation by the Compensation Committee, the Board of Directors adopted the Evofem Biosciences, Inc. 2018 Inducement Equity Incentive Plan (the Inducement Plan), pursuant to which the Company reserved 250,000 shares for the issuance of equity awards under the Inducement Plan. The only persons eligible to receive awards under the Inducement Plan are individuals who satisfy the standards for inducement grants under Nasdaq Marketplace Rule 5635(c)(4) - that is, generally, a person not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to the individual's entering into employment with the Company. 
On July 31, 2018, the Compensation Committee, with the authorization of the Board of Directors, approved a total of 1,135,020 shares of stock options to be granted to the Company's employees, non-employee directors and consultants under the Amended and Restated 2014 Plan. In addition, on July 31, 2018, the Compensation Committee, with the authorization of the Board of Directors, approved one-time, discretionary cash bonus awards, or the Discretionary Bonuses, to (i) Saundra Pelletier, our President and Chief Executive Officer, in the approximate net amount of $50,000, (ii) Justin J. File, our Chief Financial Officer, in the approximate net amount of $20,000, (iii) Kelly Culwell, M.D., our Chief Medical Officer, in the approximate net amount of $20,000 and (iv) Russ Barrans, our Chief Commercial Officer, in the approximate net amount of $20,000. The Discretionary Bonuses were paid such that each recipient received the above amounts net of applicable tax withholdings. 

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.

21


         
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the corresponding notes included elsewhere in this Quarterly Report. For additional context with which to understand our financial condition and results of operations, see the audited consolidated financial statements and accompanying notes contained therein as of December 31, 2017 and 2016 and related notes in our Current Report on Form 8-K/A as filed with the SEC on April 6, 2018 (the 2017 Audited Financial Statements). This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 as filed with the SEC on May 14, 2018. Unless otherwise defined in this section, the defined terms in this section have the meanings set forth in the 2017 Audited Financial Statements.

Overview

We are a San Diego-based clinical-stage biopharmaceutical company committed to developing and commercializing innovative products to address unmet needs in women’s sexual and reproductive health. We are currently developing product candidates for contraception, sexually transmitted infections (STIs), and bacterial vaginosis (BV).

Our lead product candidate, Amphora (L-lactic acid, citric acid, and potassium bitartrate) is currently being developed for three potential indications: as a contraceptive, for the prevention of urogenital chlamydia trachomatis infection (chlamydia) in women and for the prevention of urogenital Neisseria gonorrhoeae infection (gonorrhea) in women. Amphora is in a confirmatory Phase 3 clinical trial for contraception and in a Phase 2b clinical trial for prevention of chlamydia and gonorrhea.

Our confirmatory, Phase 3 clinical trial for Amphora as a contraceptive is an open-label, single-arm trial in 1,400 women in the United States. We expect to report top-line results from this trial in late 2018 and, if positive, to resubmit the New Drug Application (NDA) to the United States Food and Drug Administration (FDA) in the first half of 2019. Subject to acceptance and timely approval of the NDA by the FDA, we plan to commercialize Amphora in early 2020.

We are also conducting a Phase 2b clinical trial of Amphora for the prevention of certain STIs in women. The primary endpoint of this trial is prevention of chlamydia and the secondary endpoint is prevention of gonorrhea. We envision our STI program as developing label expansion opportunities to further differentiate Amphora from other contraceptive products in the market.

In addition, our pipeline includes a Multi-purpose Prevention Technology (MPT) vaginal gel product candidate for the treatment of recurrent BV. In a recently completed Phase 1 dose-finding trial for this product candidate, the highest dose formulation of our BV product candidate (5-gram) reduced vaginal pH for up to seven days following a single administration.

Since inception, we have devoted substantially all our efforts on developing product candidates leveraging our MPT vaginal gel technology, including conducting preclinical and clinical trials and providing general and administrative support for these operations. We do not have any approved products and have not generated any revenue from product sales. Although our lead product candidate, Amphora, is in a later stage of clinical development, it has not yet been approved for use as a contraceptive or any other targeted indications. Additionally, Amphora and our BV product candidate are still in early stage clinical development for the prevention of certain STIs and for recurrent BV, respectively. We do not currently expect to generate any significant revenues prior to 2020. To finance our current strategic plans, including the conduct of ongoing and future clinical trials, further research and development and anticipated pre-commercialization activities in 2019, we will require significant additional capital. Assuming we have sufficient liquidity, we will incur significantly higher costs in the foreseeable future.
        
Merger
             
As described in Note 1- Description of Business and Basis of Presentation, on January 17, 2018 (the Closing Date), Neothetics, now known as Evofem Biosciences, Inc., completed its merger with privately-held Evofem Biosciences Operations, Inc. (Private Evofem), or the Merger; in accordance with the terms of the agreement and plan of merger and reorganization, dated October 17, 2017. Since Private Evofem was determined to be the accounting acquirer in connection with the Merger, it recorded Neothetics’ assets and liabilities at fair value as of the Closing Date. To reflect the close of the Merger, we recorded the following items:

Recorded the issuance of 154,593,455 shares of Private Evofem’s common stock upon the cashless exercise of warrants (the Invesco Warrants) issued to funds affiliated with Invesco Ltd., immediately prior to the closing of the Merger and recognized the fair value of the Invesco Warrants upon issuance.

22


Reclassified the net proceeds from Private Evofem’s issuance of an aggregate of 40,016,067 shares of Private Evofem’s convertible preferred stock to common stock and additional paid-in capital, net of par value, upon conversion to Private Evofem common stock immediately prior to the closing of the Merger.
Recognized the exchange of 270,969,445 shares of Private Evofem common stock and 80 shares of Private Evofem Series D redeemable convertible preferred stock (Series D) outstanding immediately prior to the closing of the Merger for 83,006,735 shares of Neothetics’ common stock in exchange for 87% ownership in Neothetics upon closing of the Merger.
Adjusted for the final change in fair value of Private Evofem’s Series D 2X liquidation preference and reclassified the Series D 2X liquidation preference upon conversion of 80 shares of Private Evofem’s Series D to additional paid-in capital.
Recorded the fair value of the warrants issued to funds affiliated with Woodford Investment Management Ltd (WIM) to purchase up to 2,000,000 shares of the Company's common stock (the WIM Warrants) and related capital contribution upon issuance of the WIM Warrants.
Recorded cash dividends between January 6, 2018 and the Closing Date, paid upon closing of the Merger to WIM.
Recorded $20.0 million in proceeds from the sale of our common stock in a private placement completed immediately after the closing of the Merger (the Private Placement).
Adjusted common stock and additional paid-in capital associated with shares issued in the Merger and Private Placement due to the 6:1 reverse stock split.

We historically have funded our operations primarily through sales of our common stock, convertible preferred stock, related-party advances and a note payable from Cosmederm Biosciences, Inc. (a prior related party).

Public Offering

On May 24, 2018, the Company completed an underwritten public offering (the Offering), whereby the Company issued 7,436,171 shares of common stock at a public offering price of $4.69 per share and pre-funded warrants to purchase 1,063,829 shares of common stock at a public offering price of $4.68 per warrant and an exercise price of $0.01 per share. Each share of common stock and pre-funded warrant was issued together with a common warrant to purchase one-fifth of a share of the Company's common stock at a public offering price of $0.01 per warrant and an exercise price of $7.50 per share. An aggregate of 8,500,000 common warrants were issued in connection with the Offering and are exercisable to purchase an aggregate of 1,700,000 shares of common stock.
The Company received net proceeds of approximately $37.5 million, net of the underwriting discounts and commissions, but before deducting the estimated offering costs of $1.4 million.
On June 26, 2018, the Company issued an additional 912 common warrants to purchase approximately 182 shares of common stock upon an underwriters’ exercise of their overallotment option. The offering price and exercise price were the same as the common warrants issued on May 24, 2018. The net proceeds received from this issuance were immaterial.



23



Financial Operations Overview

Revenue

To date, we have not generated any revenue from our lead product candidate, Amphora. We do not expect to generate any revenue from any product candidates we develop unless and until we obtain regulatory approval and commercialize our products or enter into collaborative agreements with third parties. In the future, if Amphora is approved for commercial sale in the United States, we may generate revenue from product sales. Outside of the United States, we expect to out-license commercialization rights to Amphora to global pharmaceutical companies or other qualified potential partners or enter into collaborations for the commercialization and distribution of Amphora, from which we may generate licensing revenue. We do not expect to commercialize Amphora before 2020, if ever.
 
Operating Expenses

Research and development expenses

Our research and development expenses primarily consist of costs associated with the preclinical and clinical development of our product candidates. Our research and development expenses include:
 
 
external development expenses incurred under arrangements with third parties, such as fees paid to contract 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 our scientific advisory board;
 
 
costs to acquire, develop and manufacture clinical trial materials, including fees paid to contract manufacturers;
 
 
payments related to licensed products and technologies;
 
 
costs related to compliance with drug development regulatory requirements;
 
 
employee-related expenses, including salaries, benefits, travel and 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.

We expense internal and third-party research and development as incurred.

The following table summarizes research and development expenses by product candidate (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Allocated third-party development expenses:
 
 
 
 
 
 
 
Amphora, as a contraceptive
$
5,419

  
$
2,783

 
$
14,903

 
$
3,738

Chlamydia/gonorrhea
2,538

  
232

 
3,072

 
253

Bacterial vaginosis
220

  
116

 
431

 
321

Total allocated third-party development expenses
8,177

  
3,131

 
18,406

 
4,312

Unallocated internal research and development expenses:
 
 
 
 
 
 
 
Stock-based compensation expenses
2,365

 
43

 
2,595

 
90

Payroll related expenses
674

 
689

 
1,532

 
1,277

Other
617

 
215

 
1,259

 
381

Total unallocated internal research and development expenses
3,656

  
947

 
5,386

 
1,748

Total research and development expenses
$
11,833

  
$
4,078

 
$
23,792

 
$
6,060


Completion dates and costs for our clinical development programs can vary significantly for each current and any future product candidates and are difficult to predict. Therefore, we cannot estimate with any degree of certainty the aggregate costs we will incur regarding the development of our product candidates. We anticipate we will make determinations as to which

24


programs and product candidates to pursue as well as the most appropriate funding allocations for each program and product candidate on an ongoing basis in response to the results of ongoing and future clinical trials, regulatory developments, and our ongoing assessments as to each current or future product candidates’ commercial potential. We will need to raise substantial additional capital in the future to complete clinical development for our current and future product candidates. We may enter into collaborative agreements in the future to conduct clinical trials and gain regulatory approval of our product candidates, particularly in markets outside of the United States. We cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and overall capital requirements.

The costs of clinical trials may vary significantly over the life of a program owing to the following:
 
 
 
per patient trial costs;
 
 
the number of sites included in the trials;
 
 
the length of time required to enroll eligible patients;
 
 
the number of patients that participate in the trials;
 
 
the number of doses that patients receive;
 
 
potential additional safety monitoring or other studies requested by regulatory agencies;
 
 
the phase of development of the product candidate; and
 
 
the efficacy and safety profile of the product candidate.

General and administrative expenses

Our general and administrative expenses consist primarily of salaries, benefits, travel, business development expense, stock-based compensation expense, and other related costs for our employees and consultants in executive, administrative, finance and human resource functions. Other general and administrative expenses include facility-related costs not otherwise included in research and development and professional fees for accounting, auditing, tax and legal fees, and other costs associated with obtaining and maintaining our patent portfolio, and conducting commercial assessments for our product candidates.

We expect our general and administrative expenses to increase as we hire additional personnel to support the growth of our business and as a result of being a publicly-traded company.

Other Income (Expense)

Other income (expense) consists primarily of loss on issuance of warrants and the change in fair value of the Series D 2X liquidation preference, which for each share of Series D is equal to two times the issuance price per share of Series D, plus accrued and unpaid dividends, and became payable upon the closing of the Merger.

Loss on issuance of warrants was recognized upon issuance of warrants as they were determined as free-standing equity-classified financial instruments. These warrants were the Invesco Warrants issued in connection with the Merger.

The Series D 2X liquidation preference expired at the Closing Date, at which time the final fair value of the Series D 2X liquidation preference was estimated. The final change in fair value of the Series D 2X liquidation preference of $0.1 million was recognized within change in fair value of the Series D 2X liquidation preference within the condensed consolidated statements of operations. Additionally, the Series D 2X liquidation preference was reclassified to additional paid-in capital within the condensed consolidated balance sheets. Prior to the closing of the Merger, the Series D 2X liquidation preference was revalued at each reporting date and changes in fair value were recognized as increases in or decreases to other income (expense).

25



Results of Operations

Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017 (in thousands):
 
Research and development expenses

Three Months Ended June 30,

2018 vs. 2017
 
2018

2017

$ Change
% Change
Research and development
$
11,833

 
$
4,078

 
$
7,755

190
%
 
The overall increase in research and development expenses was primarily due to a $5.3 million increase in clinical trial costs related to our confirmatory Phase 3 clinical trial for Amphora for the prevention of pregnancy and our Phase 2b clinical trial for prevention of chlamydia, both of which commenced enrollment in the second half of 2017, and a $2.3 million increase stock-based compensation associated with the Contingent Options granted in March 2018.
 
General and administrative expenses

Three Months Ended June 30,

2018 vs. 2017
 
2018

2017

$ Change
% Change
General and administrative
$
11,409

 
$
2,280

 
$
9,129

400
%

The overall increase in general and administrative expenses was primarily due to a $8.7 million increase in personnel costs mainly attributable to a $0.5 million increase in salaries and bonus expense from increased headcount and a $8.1 million increase in stock-based compensation associated with the Contingent Options granted in March 2018 as well as options granted to employees and non-employee directors during the second quarter of 2018. In addition, there was a $0.3 million increase in professional fees related to audit and legal fees associated with requirements as a public company. These increases were partially offset by a $0.2 million decrease in public relations and market research related expenses.
 
 Change in fair value of Series D 2X liquidation preference
 
Three Months Ended June 30,
 
2018 vs. 2017
 
2018
 
2017
 
$ Change
% Change
Change in fair value of Series D 2X liquidation preference
$

 
$
(250
)
 
$
250

(100
)%
         
As described in Note 3- Merger Transactions, the Company converted all 80 shares issued and outstanding Series D into Neothetics' common stock in January 2018 and recognized a change in fair value of the Series D 2X liquidation preference upon a final valuation during the three months ended March 31, 2018. Therefore, there was no such change in fair value for the three months ended June 30, 2018.

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017 (in thousands):

Research and development expenses

Six Months Ended June 30,
 
2018 vs. 2017
 
2018
 
2017
 
$ Change
% Change
Research and development
$
23,792

 
$
6,060

 
$
17,732

293
%
 
The overall increase in research and development expenses was primarily due to a $14.4 million increase in clinical trial costs related to our confirmatory Phase 3 clinical trial for Amphora for the prevention of pregnancy and our Phase 2b clinical trial for prevention of chlamydia and gonorrhea, both of which commenced enrollment in the second half of 2017, a $2.3 million increase in stock-based compensation associated with the Contingent Options granted in March 2018, a $0.2 million increase in stock-based compensation associated with a modification to a Neothetics employee's outstanding options, and a $0.4 million increase in costs incurred for outside services associated with clinical trial activities.

General and administrative expenses

Six Months Ended June 30,
 
2018 vs. 2017
 
2018
 
2017
 
$ Change
% Change
General and administrative
$
20,436

 
$
5,211

 
$
15,225

292
%

26



The overall increase in general and administrative expenses was primarily due to a $9.5 million increase in personnel costs, including a $1.0 million increase in salaries and bonus expense from increased headcount and a $8.4 million increase in stock-based compensation related to Contingent Options granted in March 2018 as well as stock options granted to employees and non-employee directors during the second quarter of 2018 ($8.1 million), a modification to Neothetics employees' outstanding options ($0.2 million) and the acceleration of vesting for outstanding options granted to Private Evofem's non-employees directors ($0.1 million). In addition, there was a $4.9 million increase in professional services and personnel costs mainly attributable to the one-time costs associated with the Merger, a $0.5 million increase in costs incurred for various outside services associated with requirements as a public company and a $0.3 million increase in business insurance. These increases were partially offset by a $0.5 million decrease in public relations and market research related expenses.

Loss on issuance of warrants
 
Six Months Ended June 30,
 
2018 vs. 2017
 
2018
 
2017
 
$ Change
% Change
Loss on issuance of warrants
$
(47,920
)
 
$

 
$
(47,920
)
100
%

As described in Note 10- Stockholders' Equity (Deficit), the Company issued the Invesco Warrants immediately prior to the Closing Date in connection with the Merger, with the Company recognizing the fair value of these warrants as a loss on issuance during the six months ended June 30, 2018. No such activity occurred during the six months ended June 30, 2017.
 
Change in fair value of Series D 2X liquidation preference
 
Six Months Ended June 30,
 
2018 vs. 2017
 
2018
 
2017
 
$ Change
% Change
Change in fair value of Series D 2X liquidation preference
$
(130
)
 
$
(600
)
 
$
470

(78
)%
         
As described in Note 5- Fair Value of Financial Instruments, in connection with the Merger the Company recognized a change in fair value of the Series D 2X liquidation preference upon a final valuation before conversion of all 80 shares issued and outstanding Series D into Neothetics' common stock. The valuation model utilized considers the probability of achieving certain exit scenarios, the Company’s cost of capital, the estimated period the Series D 2X liquidation preference would be outstanding, consideration received for the instrument with the Series D 2X liquidation preference and at what price and changes, if any, in the fair value of the underlying instrument to the Series D 2X liquidation preference. The variance in change in fair value represents changes in assumptions in the valuation model.


Liquidity and Capital Resources

Overview
            
We have incurred losses and negative cash flows from operating activities since inception. As fully described in Note 9- Public Offering, the Company received net proceeds of approximately $37.5 million, net of the underwriting discounts and commissions but before deducting the estimated offering costs, from the Offering, which closed on May 24, 2018. As of June 30, 2018, the Company had $22.8 million in cash and cash equivalents, working capital of $3.6 million and an accumulated deficit of $399.7 million.

We anticipate we will continue to incur net losses for the foreseeable future and incur additional costs associated with being a public company. We expect our research and development expenses will increase for the foreseeable future due to our ongoing clinical trials for Amphora for the prevention of pregnancy and for the prevention of chlamydia and gonorrhea. According to management estimates, liquidity resources as of June 30, 2018 are not sufficient to maintain our planned level of operations for the next 12 months. In addition, the uncertainties associated with our ability to (i) obtain additional equity financing on terms that are favorable to us, (ii) enter into collaborative agreements with strategic partners and (iii) succeed in our future operations, raise substantial doubt about our ability to continue as a going concern.

The opinion of our independent registered public accounting firm on our audited financial statements as of and for the years ended December 31, 2017 and 2016 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Future reports on our 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 June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 appearing 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.

27



If we are not able to obtain the required funding in the near term, through equity financings or other means, or are not able to obtain funding on terms favorable to us, it will have a material adverse effect on our operations and strategic development plan for future growth. If we cannot successfully raise additional funding and implement our strategic development plan, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these could materially and adversely affect our liquidity, financial condition and business prospects and we would not be able to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements. We may obtain additional financing in the future through the issuance of our common stock from other equity or debt financings or through collaborations or partnerships with other companies.

At the Market Program
          
On December 1, 2015, the Company entered into a Controlled Equity Offering Sales Agreement (the Sales Agreement) with Cantor Fitzgerald, as a sales agent pursuant to which the Company may offer and sell from time to time, through Cantor Fitzgerald, shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. The minimum share price for any Sales Agreement is selected at the discretion of the Company’s board of directors. No shares of common stock were sold pursuant to this Sales Agreement during the three and six months ended June 30, 2018.

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): 
 
Six Months Ended June 30,
 
2018 vs. 2017
 
2018

2017
 
% Change
Net cash, cash equivalents and restricted cash used in operating activities
$
(37,325
)
 
$
(9,542
)
 
291
 %
Net cash, cash equivalents and restricted cash provided by investing activities
2,150

 
250

 
760
 %
Net cash, cash equivalents and restricted cash provided by (used in) financing activities
56,816

 
(648
)
 
(8,868
)%
Net increase (decrease) in cash, cash equivalents and restricted cash
$
21,641


$
(9,940
)
 
(318
)%

Cash Flows from Operating Activities. Since inception, the primary use of cash, cash equivalents and restricted cash was to fund further development of our lead product candidate, Amphora, as a contraceptive, as well as potential other indications and to support general and administrative operations.

Cash Flows from Investing Activities. Net cash, cash equivalents and restricted cash provided by investing activities for the six months ended June 30, 2018 increased by $1.9 million compared to the same period in 2017 primarily due to cash acquired from Neothetics in connection with the Merger as described in Note 1- Description of Business and Basis of Presentation.

Cash Flows from Financing Activities. During the six months ended June 30, 2018, the primary source of cash, cash equivalents and restricted cash was the sale of 1,614,289 shares of the Company's common stock for gross proceeds of $20.0 million in a private placement transaction, the sale of 7,436,171 shares of common stock, pre-funded warrants to purchase 1,063,829 shares of common stock and common warrants to purchase 1,700,000 shares of common stock for net proceeds of $37.5 million in connection with the Offering, offset by $0.6 million payments of offering costs, and a $0.2 million payment of Series D dividends upon conversion of Series D into Neothetics' common stock. During the six months ended June 30, 2017, net cash, cash equivalents and restricted cash used was for the payments of deferred offering costs associated with our abandoned IPO.

Operating and Capital Expenditure Requirements

Our future capital requirements are difficult to forecast. We expect to incur additional capital expenditures for serialization equipment to be utilized in the manufacturing of Amphora prior to commercialization, but cannot adequately predict the cost of the equipment in the future or other potential capital expenditure requirements, if any.

We expect research and development expenses to increase for the near future as we advance Amphora as a contraceptive and pursue expanded indications for Amphora through additional clinical development programs. In addition, we expect to incur costs as we make improvements to our manufacturing process. The process of conducting preclinical and clinical trials necessary to obtain regulatory approval is costly and time consuming and we may never succeed in achieving regulatory approval for any of our product candidates. The probability of success for each product candidate will be affected by numerous

28


factors, including preclinical data, clinical trial data, competition, manufacturing capability and commercial viability. We are responsible for all research and development costs for our programs.

We expect general and administrative expenses to increase as we hire additional personnel to support commercialization of our product candidates, if any. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with stock exchange listing and SEC requirements, directors' and officers' liability insurance premiums, and investor relations-related expenses.

When we believe regulatory approval of a product candidate appears likely, we expect to incur significant costs as we establish a sales and marketing infrastructure for distribution, promotion and sales of our products.

Off-Balance Sheet Arrangements

As of June 30, 2018 and December 31, 2017, we do not have any off-balance sheet arrangements, as such term is defined under Item 303 of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

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 report.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the applicable periods. Management bases its estimates, assumptions and judgments, on historical experience and on various other factors it believes to be reasonable under the circumstances. Different estimates, assumptions and judgments may change the estimated used in the preparation of our consolidated financial statements, which, in turn, could materially change our results from those reported. Management evaluates its estimates, assumptions and judgments on an ongoing basis. However, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our consolidated statements of operations, liquidity and financial condition. We believe the following critical accounting policies involve significant areas where management applies estimates, assumptions and judgments in the preparation of our consolidated financial statements. See Note 2 to our 2017 Audited Financial Statements for our additional accounting policies.

Clinical Trial Accruals
          
As part of the process of preparing our financial statements, we are required to estimate expenses resulting from our obligations under contracts with vendors, CROs and consultants and under clinical site agreements relating to conducting our clinical trials. The financial terms of these contracts vary and may result in payment flows that do not match the periods over which materials or services are provided under such contracts.

Our objective is to reflect the appropriate clinical trial expenses in our consolidated financial statements by recording those expenses in the period in which services are performed and efforts are expended. We account for these expenses according to the progress of the clinical trial as measured by patient progression and the timing of various aspects of the trial. We determine accrual estimates through financial models and discussions with applicable personnel and outside service providers as to the progress of clinical trials. During a clinical trial, we adjust the clinical expense recognition if actual results differ from estimates. We make estimates of accrued expenses as of each balance sheet date based on the facts and circumstances known at that time. Our clinical trial accruals are partially dependent upon accurate reporting by CROs and other third-party vendors. Although we do not expect estimates to differ materially from actual amounts, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low for any reporting period. For the three and six months ended June 30, 2018 and 2017, there were no material adjustments to our prior period estimates of accrued expenses for clinical trials.

Determining Fair Value of Stock Options
           

29


The fair value of the shares of our common stock underlying stock-based awards are estimated on each grant date by our board of directors. Prior to completion of the Merger, to determine the fair value of the common stock underlying option grants, the board of directors considered, among other things, valuations of our common stock prepared by an unrelated valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Given the absence of a public trading market for our common stock prior to completion of the Merger, the board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including our stage of development; progress of our R&D efforts; our operating and financial performance, including levels of available capital resources; the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; sales of our convertible preferred stock; the valuation of publicly traded companies in our industry, equity market conditions affecting comparable public companies and the lack of marketability of our common stock. We obtained valuations on at least an annual basis or when we determined significant value generating or diminishing internal and/or external events have occurred, which would significantly increase or decrease the fair value of the common stock underlying our stock-based awards. Post-Merger, the fair value of our common stock will be equal to the closing price of our stock.

Series D 2X Liquidation Preference
           
Prior to completion of the Merger, we valued our Series D 2X liquidation preference in accordance with Accounting Standards Codification No. 815 —Derivatives and Hedging, using a PWERM, which is sensitive to changes in assumptions regarding the timing of additional financings, potential exit scenarios and revisions in our financial forecast. Changes in any one of the assumptions could have had a material impact on the fair value of the Series D 2X liquidation preference. Our management used the most reliably available information at each valuation date in determining the fair value of the Series D 2X liquidation preference. Due to the nature of the assumptions and the sensitive nature of the PWERM, management could not reliably provide sensitivity analysis around the impact of changes in assumptions utilized in the PWERM used to estimate the fair value of our Series D 2X liquidation preference.

Fair Value of Series D
             
Prior to completion of the Merger, we valued our Series D using a PWERM, which is sensitive to changes in assumptions regarding the timing of additional financings, potential exit scenarios and revisions in our financial forecast. Changes in any one of the assumptions could have had a material impact on the estimated fair value of the Series D. Our management used the most reliably available information at each issuance of Series D to determine the fair value of the Series D. Due to the nature of the assumptions and the sensitive nature of the PWERM, management could not reliably provide sensitivity analysis around the impact of changes in assumptions utilized in the PWERM used to estimate the fair value of our Series D.

Fair Value of Warrants

The fair value of the WIM and Invesco Warrants issued in connection with the Merger were determined using the BSM option-pricing model based on the applicable assumptions, which include the warrants exercise price, time to expiration, expected volatility of our peer group, risk-free interest rate and expected dividend.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
          
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer has concluded that as of such date, our disclosure controls and procedures were effective.

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.


30


Inherent Limitations of Internal Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we may be involved in various disputes and litigation matters that arise in the ordinary course of business. We are currently not a party to any material legal proceedings.

31


Item 1A. Risk Factors

The risk factors described in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 as filed with the SEC on May 14, 2018 have not materially changed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.


Item 4. Mine Safety Disclosures

Not applicable.


Item 5. Other Information

For a discussion regarding the 2018 Inducement Equity Incentive Plan and the Discretionary Bonuses, please see Note 12 “Subsequent Events” of the Unaudited Condensed Consolidated Financial Statements included in Item 1 of Part I within this Quarterly Report.


32



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
Exhibit
No.
Exhibit Title
Filed
 with this Form 10-Q
Incorporated by Reference
Form
 
File No.
 
Date Filed
4.1
 
S-1
 
333-224958
 
5/16/2018
4.2
 
S-1
 
333-224958
 
5/16/2018
10.1Δ
 
8-K
 
001-36754
 
5/8/2018
10.2Δ
 
8-K
 
001-36754
 
7/3/2018
10.3Δ
 
8-K
 
001-36754
 
7/3/2018
10.4Δ
 
8-K
 
001-36754
 
7/3/2018
10.5Δ
 
8-K
 
001-36754
 
7/3/2018
10.6Δ
 
8-K
 
001-36754
 
7/3/2018
10.7Δ
X
 
 
 
 
 
10.8
X
 
 
 
 
 
31.1
X
 
 
 
 
 
31.2
X
 
 
 
 
 
*32.1
X
 
 
 
 
 
†101.INS
XBRL Instance Document
X
 
 
 
 
 
†101.SCH
XBRL Taxonomy Extension Schema Document
X
 
 
 
 
 
†101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
X
 
 
 
 
 
†101.DEF
XBRL Definition Linkbase Document
X
 
 
 
 
 
†101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
X
 
 
 
 
 
†101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
X
 
 
 
 
 

33


Δ
Management Compensation Plan or arrangement.
*
Furnished herewith. This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and are 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 June 30, 2018 filed on August 2, 2018 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 Convertible Preferred Stock and Stockholders' Equity (Deficit), (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements, is furnished electronically herewith.


  

34


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: August 2, 2018
By:
/s/ Justin J. File

 
 
Justin J. File

 
 
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)




35
EX-10.7 2 evfm-2018inducementequityp.htm EXHIBIT 10.7 Exhibit


Exhibit 10.7
Evofem Biosciences, Inc.
2018 Inducement Equity Incentive Plan
1.ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1    Establishment. The Evofem Biosciences, Inc. 2018 Inducement Equity Incentive Plan (the Plan) was established effective July 24, 2018 (the Effective Date).
1.2    Purpose. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. The Company intends that the Plan be reserved for persons to whom the Company may issue securities without stockholder approval as an inducement pursuant to Listing Rule 5635(c)(4) of the corporate governance rules of the Nasdaq Stock Market. The Plan seeks to achieve this purpose by providing for Awards in the form of Options, Stock Appreciation Rights, Restricted Stock Awards and Restricted Stock Units.
1.3    Term of Plan. The Plan shall continue in effect until its termination by the Committee; provided, however, that all Awards shall be granted, if at all, within ten (10) years from the Effective Date.
2.    DEFINITIONS AND CONSTRUCTION.
2.1    Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:
(a)    Affiliate means (i) a parent entity, other than a Parent Corporation, that directly, or indirectly through one or more intermediary entities, controls the Company or (ii) a subsidiary entity, other than a Subsidiary Corporation, that is controlled by the Company directly or indirectly through one or more intermediary entities. For this purpose, the terms “parent,” “subsidiary,” “control” and “controlled by” shall have the meanings assigned such terms for the purposes of registration of securities on Form S-8 under the Securities Act.
(b)    Award means any Option, Stock Appreciation Right, Restricted Stock Purchase Right, Restricted Stock Bonus, Restricted Stock Unit or Other Stock-Based Award granted under the Plan.
(c)    Award Agreement means a written or electronic agreement between the Company and a Participant setting forth the terms, conditions and restrictions applicable to an Award.
(d)    Board means the Board of Directors of the Company.

1



(e)    Cashless Exercise means a Cashless Exercise as defined in Section 6.3(b)(i).
(f)    Cause means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between a Participant and a Participating Company applicable to an Award, any of the following: (i) the Participant’s theft, dishonesty, willful misconduct, breach of fiduciary duty for personal profit, or falsification of any Participating Company documents or records; (ii) the Participant’s material failure to abide by a Participating Company’s code of conduct or other policies (including, without limitation, policies relating to confidentiality and reasonable workplace conduct); (iii) the Participant’s unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of a Participating Company (including, without limitation, the Participant’s improper use or disclosure of a Participating Company’s confidential or proprietary information); (iv) any intentional act by the Participant which has a material detrimental effect on a Participating Company’s reputation or business; (v) the Participant’s repeated failure to perform any reasonable assigned duties after written notice from a Participating Company of, and a reasonable opportunity to cure, such failure; (vi) any material breach by the Participant of any employment, service, non-disclosure, non-competition, non-solicitation or other similar agreement between the Participant and a Participating Company, which breach is not cured pursuant to the terms of such agreement; or (vii) the Participant’s conviction (including any plea of guilty or nolo contendere) of any criminal act involving fraud, dishonesty, misappropriation or moral turpitude, or which impairs the Participant’s ability to perform his or her duties with a Participating Company.
(g)    Change in Control means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between the Participant and a Participating Company applicable to an Award, the occurrence of any one or a combination of the following:
(i)    any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as such term is defined in Rule 13d‑3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total Fair Market Value or total combined voting power of the Company’s then‑outstanding securities entitled to vote generally in the election of Directors; provided, however, that a Change in Control shall not be deemed to have occurred if such degree of beneficial ownership results from any of the following: (A) an acquisition by any person who on the Effective Date is the beneficial owner of more than fifty percent (50%) of such voting power, (B) any acquisition directly from the Company, including, without limitation, pursuant to or in connection with a public offering of securities, (C) any acquisition by the Company, (D) any acquisition by a trustee or other fiduciary under an employee benefit plan of a Participating Company or (E) any acquisition by an entity owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the voting securities of the Company; or
(ii)    an Ownership Change Event or series of related Ownership Change Events (collectively, a Transaction) in which the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction direct or indirect

2



beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding securities entitled to vote generally in the election of Directors or, in the case of an Ownership Change Event described in Section 2.1(x)(iii), the entity to which the assets of the Company were transferred (the Transferee), as the case may be; or
(iii)    a date specified by the Committee following approval by the stockholders of a plan of complete liquidation or dissolution of the Company;
provided, however, that a Change in Control shall be deemed not to include a transaction described in subsections (i) or (ii) of this Section 2.1(g) in which a majority of the members of the board of directors of the continuing, surviving or successor entity, or parent thereof, immediately after such transaction is comprised of Incumbent Directors.
For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own the Company or the Transferee, as the case may be, either directly or through one or more subsidiary corporations or other business entities. The Committee shall determine whether multiple events described in subsections (i), (ii) and (iii) of this Section 2.1(g) are related and to be treated in the aggregate as a single Change in Control, and its determination shall be final, binding and conclusive.
(h)    Code means the Internal Revenue Code of 1986, as amended, and any applicable regulations and administrative guidelines promulgated thereunder.
(i)    Committee means the Compensation Committee and such other committee or subcommittee of the Board, if any, duly appointed to administer the Plan and having such powers in each instance as shall be specified by the Board.
(j)    Company means Evofem Biosciences, Inc., a Delaware corporation, and any successor corporation thereto.
(k)    Director means a member of the Board.
(l)    Disability means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between the Participant and a Participating Company applicable to an Award, the permanent and total disability of the Participant, within the meaning of Section 22(e)(3) of the Code.
(m)    Dividend Equivalent Right means the right of a Participant, granted at the discretion of the Committee or as otherwise provided by the Plan, to receive a credit for the account of such Participant in an amount equal to the cash dividends paid on one share of Stock for each share of Stock represented by an Award held by such Participant.
(n)    Employee means any person treated as an employee (including an Officer) in the records of a Participating Company. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee

3



and the effective date of such individual’s employment or termination of employment, as the case may be. For purposes of an individual’s rights, if any, under the terms of the Plan as of the time of the Company’s determination of whether or not the individual is an Employee, all such determinations by the Company shall be final, binding and conclusive as to such rights, if any, notwithstanding that the Company or any court of law or governmental agency subsequently makes a contrary determination as to such individual’s status as an Employee.
(o)    Exchange Act means the Securities Exchange Act of 1934, as amended.
(p)    Fair Market Value means, as of any date, the value of a share of Stock or other property as determined by the Committee, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:
(i)    Except as otherwise determined by the Committee, if, on such date, the Stock is listed or quoted on a national or regional securities exchange or quotation system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock as quoted on the national or regional securities exchange or quotation system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or quotation system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded or quoted prior to the relevant date, or such other appropriate day as shall be determined by the Committee, in its discretion.
(ii)    Notwithstanding the foregoing, the Committee may, in its discretion, determine the Fair Market Value of a share of Stock on the basis of the opening, closing, or average of the high and low sale prices of a share of Stock on such date or the preceding trading day, the actual sale price of a share of Stock received by a Participant, any other reasonable basis using actual transactions in the Stock as reported on a national or regional securities exchange or quotation system, or on any other basis consistent with the requirements of Section 409A (including, but not limited to, the determination of Fair Market Value based on the average selling price of the Stock during a specified period that is within thirty (30) days before or thirty (30) days after such date, provided that, with respect to the grant of an Option or SAR, the commitment to grant such Award based on such valuation method must be irrevocable before the beginning of the specified period). The Committee may vary its method of determination of the Fair Market Value as provided in this Section for different purposes under the Plan to the extent consistent with the requirements of Section 409A.
(iii)    If, on such date, the Stock is not listed or quoted on a national or regional securities exchange or quotation system, the Fair Market Value of a share of Stock shall be as determined by the Committee in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse, and in a manner consistent with the requirements of Section 409A.

4



(q)    Incumbent Director means a director who either (i) is a Director as of the Effective Date or (ii) is elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but excluding a director who was elected or nominated in connection with an actual or threatened proxy contest relating to the election of directors of the Company).
(r)    Insider means an Officer, a Director or other person whose transactions in Stock are subject to Section 16 of the Exchange Act.
(s)    Net Exercise means a Net Exercise as defined in Section 6.3(b)(iii).
(t)    Nonstatutory Stock Option means an Option not intended to be (as set forth in the Award Agreement) or which does not qualify as an incentive stock option within the meaning of Section 422(b) of the Code.
(u)    Officer means any person designated by the Board as an officer of the Company.
(v)    Option means a Nonstatutory Stock Option granted pursuant to the Plan.
(w)    Other Stock-Based Award means an Award denominated in shares of Stock and granted pursuant to Section 10.
(x)    Ownership Change Event means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of securities of the Company representing more than fifty percent (50%) of the total combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of Directors; (ii) a merger or consolidation in which the Company is a party; or (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more subsidiaries of the Company).
(y)    Parent Corporation means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.
(z)    Participant means any eligible person who has been granted one or more Awards.
(aa)    Participating Company means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.
(bb)    Participating Company Group means, at any point in time, the Company and all other entities collectively which are then Participating Companies.

5



(cc)    Restricted Stock Award means an Award of a Restricted Stock Bonus or a Restricted Stock Purchase Right.
(dd)    Restricted Stock Bonus means Stock granted to a Participant pursuant to Section 8.
(ee)    Restricted Stock Purchase Right means a right to purchase Stock granted to a Participant pursuant to Section 8.
(ff)    Restricted Stock Unit means a right granted to a Participant pursuant to Section 9 to receive on a future date or the occurrence of a future event a share of Stock or cash in lieu thereof, as determined by the Committee.
(gg)    Rule 16b‑3 means Rule 16b‑3 under the Exchange Act, as amended from time to time, or any successor rule or regulation.
(hh)    SAR or Stock Appreciation Right means a right granted to a Participant pursuant to Section 7 to receive payment, for each share of Stock subject to such Award, of an amount equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the Award over the exercise price thereof.
(ii)    Section 409A means Section 409A of the Code.
(jj)    Section 409A Deferred Compensation means compensation provided pursuant to an Award that constitutes nonqualified deferred compensation within the meaning of Section 409A.
(kk)    Securities Act means the Securities Act of 1933, as amended.
(ll)    Service means a Participant’s employment or service with the Participating Company Group. Unless otherwise provided by the Committee, a Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders Service or a change in the Participating Company for which the Participant renders Service, provided that there is no interruption or termination of the Participant’s Service. Furthermore, a Participant’s Service shall not be deemed to have been interrupted or terminated if the Participant takes any military leave, sick leave, or other bona fide leave of absence approved by the Company. However, unless otherwise provided by the Committee, if any such leave taken by a Participant exceeds ninety (90) days, then on the ninety-first (91st) day following the commencement of such leave the Participant’s Service shall be deemed to have terminated, unless the Participant’s right to return to Service is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, an unpaid leave of absence shall not be treated as Service for purposes of determining vesting under the Participant’s Award Agreement. A Participant’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the business entity for which the Participant performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall

6



determine whether the Participant’s Service has terminated and the effective date of and reason for such termination.
(mm)    Stock means the common stock of the Company, as adjusted from time to time in accordance with Section 4.5.
(nn)    Stock Tender Exercise