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EX-99.2 - EX-99.2 - Evofem Biosciences, Inc. | d521123dex992.htm |
8-K/A - FORM 8-K/A - Evofem Biosciences, Inc. | d521123d8ka.htm |
Exhibit 99.1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Evofem Biosciences, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Evofem Biosciences, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, convertible preferred stock and stockholders deficit, and cash flows, for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations since inception and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Managements plans in regard to alleviate these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
San Diego, CA
February 28, 2018
We have served as the Companys auditor since 2015.
F-1
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In thousands (except share data)
December 31, | ||||||||
2017 | 2016 | |||||||
Assets |
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Current assets: |
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Cash |
$ | 1,211 | $ | 10,937 | ||||
Restricted cash |
490 | 550 | ||||||
Prepaid and other current assets |
653 | 781 | ||||||
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Total current assets |
2,354 | 12,268 | ||||||
Property and equipment, net |
848 | 1,086 | ||||||
Other noncurrent assets |
750 | 1,017 | ||||||
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Total assets |
$ | 3,952 | $ | 14,371 | ||||
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Liabilities, convertible preferred stock and stockholders deficit |
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Current liabilities: |
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Accounts payable |
$ | 8,999 | $ | 2,015 | ||||
Accrued expenses |
12,086 | 5,337 | ||||||
Accrued compensation |
2,392 | 1,617 | ||||||
Series D 2X liquidation preference |
79,870 | 8,030 | ||||||
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Total current liabilities |
103,347 | 16,999 | ||||||
Deferred rent |
114 | 172 | ||||||
Other noncurrent liabilities |
166 | 213 | ||||||
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Total liabilities |
103,627 | 17,384 | ||||||
Commitments and contingencies (Note 6) |
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Convertible preferred stock, $0.001 par value; 57,501,624 and 57,501,604 shares authorized at December 31, 2017 and 2016, respectively: |
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Series A convertible preferred stock, 12,618,279 shares issued and outstanding at December 31, 2017 and 2016 |
23,848 | 23,848 | ||||||
Series B convertible preferred stock, 13,801,318 shares issued and outstanding at December 31, 2017 and 2016 |
43,616 | 43,616 | ||||||
Series C-1 convertible preferred stock, 8,558,686 shares issued and outstanding at December 31, 2017 and 2016 |
34,382 | 34,382 | ||||||
Series C convertible preferred stock, 5,037,784 shares issued and outstanding at December 31, 2017 and 2016 |
19,469 | 19,469 | ||||||
Series D redeemable convertible preferred stock, 80 shares issued and outstanding at December 31, 2017; 60 shares issued and outstanding at December 31, 2016 |
68,556 | 56,757 | ||||||
Stockholders deficit: |
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Common stock, $0.001 par value; 157,836,540 shares authorized at December 31, 2017 and 2016; 81,119,014 shares issued and outstanding at December 31, 2017 and 2016 |
81 | 81 | ||||||
Additional paid-in capital |
17,650 | 20,806 | ||||||
Accumulated deficit |
(307,277 | ) | (201,972 | ) | ||||
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Total stockholders deficit |
(289,546 | ) | (181,085 | ) | ||||
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Total liabilities, convertible preferred stock and stockholders deficit |
$ | 3,952 | $ | 14,371 | ||||
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See accompanying notes to the consolidated financial statements.
F-2
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands (except share and per share data)
Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
Operating expenses: |
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Research and development |
$ | 23,539 | $ | 14,855 | ||||
Abandoned initial public offering costs |
| 4,705 | ||||||
General and administrative |
12,148 | 15,083 | ||||||
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Total operating expenses |
35,687 | 34,643 | ||||||
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Loss from operations |
(35,687 | ) | (34,643 | ) | ||||
Other income (expense): |
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Interest income |
128 | 77 | ||||||
Other (expense) income, net |
(46 | ) | 38 | |||||
Loss on issuance of Series D redeemable convertible preferred stock |
(8,522 | ) | (26,635 | ) | ||||
Loss on extinguishment of related-party note payable |
| (6,651 | ) | |||||
Change in fair value of Series D 2X liquidation preference |
(61,175 | ) | (543 | ) | ||||
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Total other expense, net |
(69,615 | ) | (33,714 | ) | ||||
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Loss from continuing operations before income tax |
(105,302 | ) | (68,357 | ) | ||||
Income tax (expense) benefit |
(3 | ) | 613 | |||||
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Loss from continuing operations |
(105,305 | ) | (67,744 | ) | ||||
Discontinued operations: |
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Income from discontinued operations, net of income tax |
| 80 | ||||||
Gain on sale of discontinued operations, net of income tax |
| 997 | ||||||
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Net gain on sale of discontinued operations |
| 1,077 | ||||||
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Net loss |
(105,305 | ) | (66,667 | ) | ||||
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Accretion of Series D redeemable convertible preferred stock dividends |
(4,017 | ) | (1,144 | ) | ||||
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Net loss attributable to common stockholders |
$ | (109,322 | ) | $ | (67,811 | ) | ||
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Net loss per share attributable to common stockholders, basic and diluted |
$ | (1.43 | ) | $ | (0.89 | ) | ||
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Weighted-average shares used to compute net loss attributable to common stockholders, basic and diluted |
76,359,923 | 76,551,211 | ||||||
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See accompanying notes to consolidated financial statements.
F-3
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS DEFICIT
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 Deficit |
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Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2015 |
12,768,492 | $ | 23,848 | 13,965,612 | $ | 43,616 | 8,660,572 | $ | 34,382 | 5,037,784 | $ | 19,469 | | $ | | 76,610,860 | $ | 76 | $ | 15,524 | $ | (135,305 | ) | $ | (119,705 | ) | ||||||||||||||||||||||||||||||||||
Issuance of Series D redeemable convertible preferred stock at fair value upon conversion and cancellation of related-party note payable |
| | | | | | | | 10 | 9,790 | | | 5,000 | | 5,000 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of Series D redeemable convertible preferred stock at fair value for cash, net of issuance costs of $186 |
| | | | | | | | 50 | 45,823 | | | | | | |||||||||||||||||||||||||||||||||||||||||||||
Cancellation of shares formerly held by EvoMed |
(150,213 | ) | | (164,294 | ) | | (101,886 | ) | | | | | | (250,937 | ) | | | | | |||||||||||||||||||||||||||||||||||||||||
Accretion of Series D redeemable convertible preferred stock dividends |
| | | | | | | | | 1,144 | | | (1,144 | ) | | (1,144 | ) | |||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted common stock |
| | | | | | | | | | 4,759,091 | 5 | (5 | ) | | | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
| | | | | | | | | | | | 1,431 | | 1,431 | |||||||||||||||||||||||||||||||||||||||||||||
Net loss |
| | | | | | | | | | | | | (66,667 | ) | (66,667 | ) | |||||||||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2016 |
12,618,279 | 23,848 | 13,801,318 | 43,616 | 8,558,686 | 34,382 | 5,037,784 | 19,469 | 60 | 56,757 | 81,119,014 | 81 | 20,806 | (201,972 | ) | (181,085 | ) | |||||||||||||||||||||||||||||||||||||||||||
Issuance of Series D redeemable convertible preferred stock at fair value for cash, net of issuance costs of $75 |
| | | | | | | | 20 | 7,782 | | | | | | |||||||||||||||||||||||||||||||||||||||||||||
Accretion of Series D redeemable convertible preferred stock dividends |
| | | | | | | | | 4,017 | | | (4,017 | ) | | (4,017 | ) | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
| | | | | | | | | | | | 861 | | 861 | |||||||||||||||||||||||||||||||||||||||||||||
Net loss |
| | | | | | | | | | | | | (105,305 | ) | (105,305 | ) | |||||||||||||||||||||||||||||||||||||||||||
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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 | ) | ||||||||||||||||||||||||||||||||||
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See accompanying notes to consolidated financial statements.
F-4
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities from continuing operations: |
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Net loss |
$ | (105,305 | ) | $ | (66,667 | ) | ||
Gain on sale of discontinued operations |
| (1,077 | ) | |||||
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Net loss from continuing operations |
(105,305 | ) | (67,744 | ) | ||||
Adjustments to reconcile net loss from continuing operations to net cash and restricted cash used in operating activities from continuing operations: |
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Loss on issuance of Series D redeemable convertible preferred stock |
8,522 | 26,635 | ||||||
Loss on extinguishment of related-party note payable |
| 6,651 | ||||||
Abandoned initial public offering costs |
| 4,705 | ||||||
Tax benefit |
| (615 | ) | |||||
Change in fair value of Series D 2X liquidation preference |
61,175 | 543 | ||||||
Stock-based compensation |
861 | 1,431 | ||||||
Depreciation and amortization |
244 | 92 | ||||||
Deferred rent |
(30 | ) | (17 | ) | ||||
Changes in operating assets and liabilities from continuing operations: |
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Prepaid and other assets |
145 | (153 | ) | |||||
Accounts payable |
7,052 | 105 | ||||||
Accrued expenses and other liabilities |
7,319 | 3,321 | ||||||
Accrued compensation |
775 | 629 | ||||||
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Net cash and restricted cash used in operating activities from continuing operations |
(19,242 | ) | (24,417 | ) | ||||
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Cash flows from investing activities from continuing operations: |
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Purchases of property and equipment |
(6 | ) | (498 | ) | ||||
Proceeds from sale of Softcup line of business |
250 | | ||||||
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Net cash and restricted cash provided by (used in) investing activities from continuing operations |
244 | (498 | ) | |||||
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Cash flows from financing activities from continuing operations: |
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Payments on advances from related parties, including note payable |
| (4,787 | ) | |||||
Proceeds from issuance of Series D redeemable convertible preferred stock, net of issuance costs |
9,925 | 24,814 | ||||||
Cash paid for offering costs |
(713 | ) | (1,966 | ) | ||||
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Net cash and restricted cash provided by financing activities from continuing operations |
9,212 | 18,061 | ||||||
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Net cash and restricted cash used in continuing operations |
(9,786 | ) | (6,854 | ) | ||||
Net cash and restricted cash provided by discontinued operating activities |
| 619 | ||||||
Net cash and restricted cash provided by discontinued investing activities |
| 600 | ||||||
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Net change in cash and restricted cash |
(9,786 | ) | (5,635 | ) | ||||
Cash and restricted cash, beginning of period |
11,487 | 17,122 | ||||||
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Cash and restricted cash, end of period |
$ | 1,701 | $ | 11,487 | ||||
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Supplemental cash flow information: |
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Cash paid for interest |
$ | 15 | $ | 73 | ||||
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Cash paid for taxes |
$ | 3 | $ | 2 | ||||
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Supplemental disclosure of noncash investing and financing activities: |
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Tenant improvement allowances paid by landlord |
$ | | $ | 162 | ||||
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Conversion of related-party note payable into Series D redeemable convertible preferred stock |
$ | | $ | 5,000 | ||||
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Forgiveness of note payable by related-party |
$ | | $ | 5,000 | ||||
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Issuance of restricted stock awards |
$ | | $ | 5 | ||||
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Deferred offering costs included in accounts payable and accrued expenses |
$ | 137 | $ | 850 | ||||
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Issuance of Series D 2X liquidation preference |
$ | 10,665 | $ | 7,487 | ||||
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See accompanying notes to consolidated financial statements.
F-5
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Description of Business and Basis of Presentation |
Description of Business
Evofem Biosciences, Inc., formerly Evofem Holdings, Inc. (Evofem Biosciences) is a San Diego-based clinical-stage biotechnology company committed to improving the health and well-being of women throughout the world by addressing womens unmet medical needs through the discovery, development and commercialization of innovative, next-generation womens healthcare products. Evofem Biosciences utilizes its multipurpose prevention technology (MPT) in two vaginal gel product candidates that are being developed for multiple indications, including contraception, sexually transmitted infections (STIs) and bacterial vaginosi (BV). Evofem Biosciences 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/3 trial for the prevention of urogenital chlamydia and gonorrhea. In addition, Evofem Biosciences recently completed a Phase 1 trial of the Companys MPT vaginal gel product candidate for the reduction of recurrent BV and is currently designing a Phase 2b/3 trial for this indication.
Evofem Biosciences was incorporated in the state of Delaware in July 2015. Evofem Biosciences 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 Biosciences and 1% of the outstanding partnership interests held by Evofem Limited, LLC (collectively, the Company or Management). Evofem Limited, LLC and Evofem Ltd. are currently inactive.
On January 3, 2018, Evofem Biosciences amended its amended and restated certificate of incorporation to increase the authorized number of shares of its common stock from 157,836,540 authorized shares to 380,338,164 authorized shares and to change its name from Evofem Biosciences, Inc. to Evofem Biosciences Operations, Inc. (Evofem Operations), each effective as of January 3, 2018.
On January 17, 2018, Evofem Operations, completed an asset acquisition with Neothetics, Inc. (Neothetics) in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of October 17, 2017, (the Merger Agreement) by and among Neothetics, Nobelli Merger Sub, Inc., a wholly-owned subsidiary of Neothetics (Merger Sub), and Evofem Operations, pursuant to which Merger Sub merged with and into Evofem Operations, with Evofem Operations surviving as a wholly-owned subsidiary of Neothetics (the Merger). On January 17, 2018, in connection with the Merger, Neothetics filed a certificate of amendment to its amended and restated certificate of incorporation to affect a 6:1 reverse stock split of its common stock (Reverse Stock Split), cause Neothetics not to be governed by Section 203 of the Delaware General Corporation Law (DGCL) and change its name from Neothetics, Inc. to Evofem Biosciences, Inc.
Functional Currency
The functional currency of the Companys wholly-owned subsidiaries, EP and Evofem Ltd, is the United States Dollar. Accordingly, historical exchange rates are used to revalue nonmonetary assets and liabilities and current exchange rates are used to revalue monetary assets and liabilities at each reporting date. For transactions not denominated in the United States Dollar, costs and expenses are recorded at exchange rates that approximate the rates in effect on the transaction date. Transaction gains and losses generated from the revaluation of monetary assets and liabilities denominated in currencies other than the functional currency of the subsidiary are included in other income (expense) in the consolidated statements of operations.
Consolidation
The Companys consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP). All intercompany accounts and transactions have been eliminated in consolidation.
Risks, Uncertainties and Going Concern
The Companys principal operations have been related to research and development, including development of Amphora, raising capital, recruiting management and building a corporate infrastructure. The Company has incurred operating losses and negative cash flows from operating activities since inception. As of December 31, 2017, the Company had cash (unrestricted) of $1.2 million, a working capital deficit of $101.0 million and an accumulated deficit of $307.3 million. The Company anticipates it will continue to incur net losses into the foreseeable future.
F-6
In August 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements Going Concern (ASU No. 2014-15), which requires management of public and private companies to evaluate whether there are conditions or events that raise substantial doubt about the entitys ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable) and, if so, disclose that fact. Management is required to make this evaluation for both annual and interim reporting periods and is required to evaluate and disclose whether its plans alleviate that doubt. The Company adopted ASU No. 2014-15 in December 2016, as required by the ASU. The adoption of ASU No. 2014-15 resulted in increased disclosures, as per below, and had no quantitative impact on the Companys consolidated financial statements.
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 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. Managements plans to meet its short- and long-term operating cash flow requirements include obtaining additional funding.
In August and November 2017, as more fully described in Note 8 Convertible Preferred Stock to these consolidated financial statements, the Company sold an aggregate of 20 shares of Series D redeemable convertible preferred stock for net proceeds of $9.9 million. The uncertainties associated with the Companys ability to (i) obtain additional equity financing on terms that are favorable to the Company, (ii) enter into collaborative agreements with strategic partners and (iii) succeed in its future operations, raise substantial doubt about the Companys ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue its operations. If the Company is not able to obtain the required funding, through private equity financing or other means, or is not able to obtain funding on terms that are favorable to the Company, it 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 the Companys liquidity, financial condition and business prospects and the Company may have to cease operations.
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, pre-clinical and clinical trial accruals, the measurement of the Series D 2X Liquidation Preference, assumptions used in estimating the fair value of stock-based compensation expense and other contingencies. The Companys 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 10 Equity Incentive Plan, 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.
F-7
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and restricted cash. Deposits in the Companys 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 and restricted cash balances due to the financial position of the depository institutions in which these deposits are held.
Cash and Restricted Cash
As of December 31, 2017 and 2016 cash consists of readily available cash in checking accounts. Restricted cash consists of cash held in monthly time deposit accounts, which are collateral for the Companys credit card and facility lease.
The following table provides a reconciliation of cash and restricted cash, reported within the consolidated statements of cash flows as of December 31, (in thousands):
2017 | 2016 | |||||||
Cash |
$ | 1,211 | $ | 10,937 | ||||
Restricted cash |
490 | 550 | ||||||
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Total cash and restricted cash presented in the consolidated statements of cash flows |
$ | 1,701 | $ | 11,487 | ||||
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Fair Value of Financial Instruments
The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which to transact and the market-based risk. The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis.
The valuation of assets and liabilities are subject to fair value measurements using a three-tiered approach and fair value measurement is classified and disclosed by the Company in one of the following three categories:
Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; | |
Level 2: | Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; | |
Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity). |
The carrying amounts reported in the consolidated balance sheets for cash, restricted cash, accounts payable, accrued expenses and accrued compensation approximate their fair values due to their short-term nature. As of December 31, 2017 and 2016, based on the borrowing rate currently available to the Company for loans with similar terms, which is considered a Level 2 input, the Company believes the fair value of the Flex Note approximates its carrying value. See Note 3 Discontinued Operations for a description of the Flex Note received as consideration for the sale of the Softcup line of business.
Property and Equipment
Property and equipment generally consist of research equipment, computer equipment and software and office furniture, and are recorded at cost and depreciated over the estimated useful lives of the assets (generally three to five years) using the straight-line method. Leasehold improvements are stated at cost and are amortized on a straight-line basis over the lesser of the remaining term of the related lease or the estimated useful lives of the assets. Repairs and maintenance costs are charged to expense as incurred and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the consolidated balance sheets and any resulting gain or loss is reflected in the consolidated statements of operations in the period realized.
F-8
Impairment of Long-lived Assets
The Company reviews property and equipment for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset or asset group are less than its carrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset or asset group exceeds its fair value. While the Companys current and historical operating losses and negative cash flows are possible indicators of impairment, management believes that future cash flows to be generated by these assets support the carrying value of its long-lived assets and, accordingly, did not recognize any impairment losses during the years ended December 31, 2017 and 2016.
Clinical Trial Accruals
As part of the process of preparing the Companys financial statements, the Company is required to estimate expenses resulting from its obligations under contracts with vendors, clinical research organizations (CROs) and consultants and under clinical site agreements relating to conducting its 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.
The Companys objective is to reflect the appropriate clinical trial expenses in its financial statements by recording those expenses in the period in which services are performed and efforts are expended. The Company accounts 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. Management determines 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, the Company adjusts the clinical expense recognition if actual results differ from its estimates. The Company makes estimates of accrued expenses as of each balance sheet date based on the facts and circumstances known at that time. The Companys clinical trial accruals are partially dependent upon accurate reporting by CROs and other third-party vendors. Although the Company does not expect its estimates to differ materially from actual amounts incurred, the Companys 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 period. For the years ended December 31, 2017 and 2016 there were no material adjustments to the Companys prior period estimates of accrued expenses for clinical trials.
Series D 2X Liquidation Preference
In July 2016, the Company entered into a Series D redeemable convertible preferred stock (Series D) purchase agreement (Series D SPA), as amended, with Woodford Investment Management LLP (WIM), one of the Companys existing investors. The terms of the Series D financing are described under the Series D Redeemable Convertible Preferred Stock discussion in Note 8 Convertible Preferred Stock. Under the terms of the Series D SPA, in a liquidation transaction the Companys Series D redeemable convertible preferred stock participates, prior and in preference to the other series of convertible preferred stock and common stock, at a rate of two times its initial investment, plus accrued and unpaid dividends (the Series D 2X Liquidation Preference). The Company determined the Series D 2X Liquidation Preference represented an embedded derivative, which required bifurcation and separate liability accounting and was initially recorded at fair value. The Companys accounting for the Series D 2X Liquidation Preference is described in Note 5 Fair Value of Financial Instruments. Changes in the fair value of the Series D 2X Liquidation Preference are recognized as increases in or decreases to the change in fair value of Series D 2X Liquidation Preference, a component of other income (expense) in the consolidated statements of operations.
The Series D 2X Liquidation Preference will be marked-to-market until the earlier of (i) the automatic conversion into either preferred stock or common stock in a financing in which gross proceeds to the Company are greater than or equal to $45.0 million, (ii) the optional conversion into either preferred stock or common stock in a financing in which gross proceeds to the Company are less than $45.0 million, (iii) its redemption or (iv) upon a change in control event. Upon the occurrence of one of these events, the final change in fair value of the Series D 2X Liquidation Preference will be recognized within change in fair value of Series D 2X Liquidation Preference in the consolidated statements of operations and the Series D 2X Liquidation Preference liability will be reclassified to additional paid-in capital in the consolidated balance sheets.
The Companys Merger (see Note 14 Subsequent Events for details of the Merger with Neothetics, Inc.), which is considered a liquidation event, will result in the Series D 2X Liquidation Preference being marked-to-market as of the closing date of the Merger with the resulting change in fair value being recognized in the Companys consolidated statements of operations and the Series D 2X liquidation preferences being reclassified to additional paid-in capital in the consolidated balance sheets.
F-9
Convertible Preferred Stock
The Companys Series A, Series B, Series C-1, Series C convertible preferred stock and Series D redeemable convertible preferred stock are classified as temporary equity instead of stockholders deficit in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities, as the shares are conditionally redeemable at the holders option and upon certain change in control events that are outside the Companys control, including liquidation, sale, or transfer of control of the Company. Upon such change in control events, holders of the Series A, Series B, Series C-1, Series C convertible preferred stock and Series D redeemable convertible preferred stock can cause its redemption.
Research and Development
Research and development (R&D) expenses include the costs associated with the Companys R&D activities, including, but not limited to, payroll and personnel-related expenses, stock-based compensation expense, materials, laboratory supplies, clinical studies and outside services. R&D costs are expensed as incurred, except when accounting for nonrefundable advance payments for goods or services not yet received. These payments, if any, are capitalized at the time of payment and expensed as the related goods are delivered or the services are performed.
Abandoned Initial Public Offering Costs
During 2015, the Company initiated an initial public offering of its common stock (IPO) on the alternative investment market of the London Stock Exchange and recorded deferred IPO offering costs of $3.4 million as of December 31, 2015. Prior to March 2016, the Company recorded an additional $1.3 million in deferred IPO offering costs. In March 2016, the Company abandoned its efforts to raise capital through an IPO on the alternative investment market and recognized expense of $4.7 million in aggregate IPO costs. These costs included direct costs related to the abandoned transaction and are separately disclosed in the consolidated statements of operations for the year ended December 31, 2016.
Patent Expenses
The Company expenses all costs incurred relating to patent applications (including direct application fees, and the legal and consulting expenses related to making such applications) and such costs are included in general and administrative expenses in the consolidated statements of operations.
Stock-based Compensation
Stock-based compensation expense for equity instruments issued to employees and nonemployee members of the Companys board of directors is measured based on estimating the fair value of each stock option on the date of grant using the Black-Scholes-Merton option-pricing model (the BSM). Equity instruments issued to nonemployees are valued using the BSM and are subject to revaluation as the underlying equity instruments vest.
Expensing
The following table summarizes the Companys stock option expensing policies for employees and nonemployees:
Employees |
Nonemployee (Consultant) | |||
Service only condition |
Straight-line | Re-value through the performance commitment date | ||
Performance criterion is probable of being met: | ||||
Service criterion is complete |
Recognize the grant date fair value of the award(s) once the performance criterion is considered probable of occurrence | Re-value the award(s) once the performance criterion is considered probable of occurrence and recognize expense for the then fair value of the award(s) | ||
Service criterion is not complete |
Expense using an accelerated multiple-option approach (1) over the remaining requisite service period | Same as for employees, except the award will be marked-to-market through the performance commitment date. | ||
Performance criterion is not probable of being met and: | ||||
Is not tied to the successful completion of an initial public offering of the Companys common stock (IPO) |
No expense recognition is required until the performance criterion is considered probable at which point expense is recognized using an accelerated multiple-option approach | Same as for employees, except the award will be marked-to-market through the performance commitment date | ||
Is tied to the successful completion of an IPO by the Company |
Upon closing of an IPO by the Company, recognize the grant date fair value of the award(s) | Same as for employees, except expense is recognized based upon the fair value of the Companys common stock sold in the IPO |
(1) | The accelerated multiple-option approach results in compensation expense being recognized for each separately vesting tranche of the award as though the award was in substance multiple awards and, therefore, results in accelerated expense recognition during the earlier vesting periods. |
F-10
Determining Fair Value of Stock Options
The fair value of the shares of the Companys common stock underlying its stock-based awards is estimated on each grant date by the Companys board of directors. To determine the fair value of the common stock underlying option grants, the Companys board of directors considers, among other things, valuations of the Companys 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 its common stock, the Companys board of directors exercises reasonable judgment and considers a number of objective and subjective factors to determine the best estimate of the fair value of the Companys common stock, including the Companys stage of development; progress of the Companys R&D efforts; the Companys operating and financial performance, including levels of available capital resources; the rights, preferences and privileges of the Companys convertible preferred stock relative to those of its common stock; sales of the Companys convertible preferred stock; the valuation of publicly traded companies in its industry, equity market conditions affecting comparable public companies and the lack of marketability of the Companys common stock. The Company obtains valuations on at least an annual basis or when it determines that 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 its stock-based awards.
For purposes of re-measuring the Companys consultant stock options, the Company had valuations performed as of each interim reporting period, which result in concluded fair values for the Companys common stock underlying the stock options. The Company utilized these concluded fair values to recognize estimated consultant stock-based compensation expense using the BSM at each reporting date.
Forfeitures
The Company early adopted ASU No. 2016-09 Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU No. 2016-09). ASU No. 2016-09 simplified the accounting for employee share-based compensation including the accounting for (i) income taxes, (ii) forfeitures, and (iii) statutory tax withholding, as well as classification in the statement of cash flows. ASU No. 2016-09 allowed the Company to make a one-time policy election to record forfeitures when they occur. As the Companys consolidated financial statements had not previously been made available for issuance, the Company retroactively adopted ASU No. 2016-09. The Companys adoption of ASU No. 2016-09 had no impact on the Companys financial position or results of operations. The Company has had no stock option exercises and, therefore, the simplification of statutory tax withholding requirements and the related changes in the statement of cash flows will be applied prospectively.
Performance-based Awards
In September and October 2016, the Company issued restricted stock awards (RSAs) to members of management and a restricted stock unit (RSU) to the chairman of the Companys board of directors that are subject to both a time-based vesting restriction as well as a performance criterion (successful completion of an IPO by the Company). See Restricted Stock Awards discussion in Note 9 Stockholders Deficit for terms of the RSAs. See the Consulting Agreements discussion in Note 7 Related-party Transactions and the Restricted Stock Units discussion in Note 10 Equity Incentive Plan for terms of the RSU. For these RSAs and the RSU, the Company determined the performance criterion (completion of an IPO by the Company) could be met after the requisite service period is completed. Effective January 1, 2016, the Company adopted ASU No. 2016-12 Compensation Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU No. 2016-12). The Company had no prior history of issuing stock options, RSAs or RSUs with both a time-based vesting restriction and a performance condition and, therefore, the adoption of ASU No. 2016-12 had no impact on the Companys consolidated financial position or results of operations.
For performance-based RSAs (i) the fair value of the award is determined on the grant date, (ii) the Company assesses 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, which for an IPO is the IPO effective date.
F-11
Income Taxes
The accounting guidance for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities based on the technical merits of the position.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.
Net Loss Per Share
Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, potentially dilutive securities are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.
Potentially dilutive securities excluded from the calculation of diluted net loss per share are as follows:
2017 | 2016 | |||||||
Convertible preferred stock |
40,016,067 | 40,016,067 | ||||||
Series D redeemable convertible preferred stock |
80 | 60 | ||||||
Unvested restricted common stock subject to repurchase |
4,759,091 | 4,759,091 | ||||||
Unvested restricted stock units |
100,000 | 100,000 | ||||||
Options to purchase common stock |
6,244,095 | 6,341,939 | ||||||
|
|
|
|
|||||
Total |
51,119,333 | 51,217,157 | ||||||
|
|
|
|
Comprehensive Loss
Comprehensive loss includes all changes in equity during a period from nonowner sources. For each of the years ended December 31, 2017 and 2016, comprehensive loss is composed of net loss, as the Company had no transactions from nonowner sources.
Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU No. 2017-01), to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. As permitted under ASU No. 2017-01, the Company early adopted ASU No 2017-01 effective January 1, 2017. The adoption of ASU No. 2017-01 did not have a material impact on the Companys financial position or results of operations.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued 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. ASU No. 2014-09 will be effective for the Company beginning January 1, 2018. Although early adoption is permitted, the Company does not plan to early adopt ASU No. 2014-09. The Company plans to adopt ASU No. 2014-09 using the full retrospective approach, which will not have an impact on the Companys financial position or results of operations as the Company is pre-revenue and does not anticipate generating revenue prior to the Companys required adoption date.
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
F-12
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. ASU No. 2016-02 will be effective for the Company beginning January 1, 2019. The Companys 2015 Lease (See Note 6 Commitments and Contingencies for details of the 2015 Lease) is due to expire in 2020 and will be subject to the provisions of ASU No. 2016-02, however, the Company has not yet assessed the impact of this new standard on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, CompensationStock 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 is effective for us beginning January 1, 2018. The Company does not expect the adoption of ASU No. 2017-09 to have a material impact on the Companys financial position or results of operations.
3. | Discontinued Operations |
In June 2016, the Companys 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 and is payable each January 1, including accrued and unpaid interest, beginning in 2017 through the Maturity Date.
The Flex Note is secured by the Softcup assets and has been recorded at present value, or approximately $1.3 million, as of the effective date. The Companys incremental borrowing rate and the stated interest rate of the Flex Note are materially consistent.
The Softcup sale constitutes the sale of a business in accordance with the authoritative guidance and as of June 30, 2016, the Softcup sale met the criteria to be classified as held for sale and, therefore, a discontinued operation. After a short transition period (less than 30 days), the Company no longer has any continuing involvement with Softcup, as such the Companys consolidated statements of operations and consolidated statements of cash flows exclude from continuing operations Softcup revenue, related costs and the gain on the Softcup sale.
The following table presents major classes of line items constituting gain on sale of discontinued operations for the year ended December 31, 2016 (in thousands):
Revenue |
$ | 1,183 | ||
Cost of goods sold |
(906 | ) | ||
Sales and marketing expenses |
(150 | ) | ||
|
|
|||
Pretax gain on discontinued operations related to major classes of pretax gain |
127 | |||
Pretax gain on sale of discontinued operations |
1,565 | |||
|
|
|||
Total pretax gain on sale of discontinued operations |
1,692 | |||
Income tax expense |
(615 | ) | ||
|
|
|||
Net gain on sale of discontinued operations |
$ | 1,077 | ||
|
|
4. | Balance Sheet Details |
Prepaid and Other Current Assets
Prepaid and other current assets consist of the following as of December 31 (in thousands):
2017 | 2016 | |||||||
Flex note receivable |
$ | 250 | $ | 250 | ||||
Clinical supplies |
119 | 178 | ||||||
Insurance |
96 | 101 | ||||||
Rent |
63 | 61 | ||||||
Research and development costs |
30 | 51 | ||||||
Other |
95 | 140 | ||||||
|
|
|
|
|||||
Total |
$ | 653 | $ | 781 | ||||
|
|
|
|
F-13
Property and Equipment, Net
Property and equipment, net, consists of the following, as of December 31 (in thousands):
Useful Life | 2017 | 2016 | ||||||||||
Research equipment |
5 years | $ | 639 | $ | 125 | |||||||
Computer equipment and software |
3 years | 6 | 6 | |||||||||
Office furniture |
5 years | 205 | 205 | |||||||||
Leasehold improvements |
5 years or less | 340 | 340 | |||||||||
Construction in-process |
| | 508 | |||||||||
|
|
|
|
|||||||||
1,190 | 1,184 | |||||||||||
Less: accumulated depreciation and amortization |
(342 | ) | (98 | ) | ||||||||
|
|
|
|
|||||||||
Total, net |
$ | 848 | $ | 1,086 | ||||||||
|
|
|
|
Depreciation expense was $0.2 million and $0.1 million for the years ended December 31, 2017 and 2016, respectively.
Other Noncurrent Assets
Other noncurrent assets consist of the following, as of December 31 (in thousands):
2017 | 2016 | |||||||
Flex note receivable, net of current portion |
$ | 750 | $ | 1,000 | ||||
Deposits |
| 17 | ||||||
|
|
|
|
|||||
Total |
$ | 750 | $ | 1,017 | ||||
|
|
|
|
Accrued Expenses
Accrued expenses consist of the following, as of December 31 (in thousands):
2017 | 2016 | |||||||
Clinical studies |
$ | 8,789 | $ | 564 | ||||
Sublicense fees |
2,000 | 3,010 | ||||||
Deferred offering costs |
135 | 780 | ||||||
Board of directors fees and related expenses |
247 | 139 | ||||||
Legal and other professional fees |
727 | 543 | ||||||
Other |
188 | 301 | ||||||
|
|
|
|
|||||
Total |
$ | 12,086 | $ | 5,337 | ||||
|
|
|
|
5. | Fair Value of Financial Instruments |
At December 31, 2017 and 2016 the Company had no financial assets and no Level 1 and Level 2 financial liabilities measured on a recurring basis. At December 31, 2017 and 2016 the Company had no financial assets or liabilities measured on a nonrecurring basis.
The fair value of the Companys Level 3 financial liabilities measured on a recurring basis at December 31 is summarized in the following table (in thousands):
Level 3 Financial Liabilities |
||||||||
2017 | 2016 | |||||||
Series D 2X liquidation preference |
$ | 79,870 | $ | 8,030 | ||||
|
|
|
|
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.
F-14
The following table summarizes the changes in Level 3 financial liabilities measured at fair value on a recurring basis for the two years ended December 31, 2017 (in thousands):
Series D 2X Liquidation Preference |
||||
Balance at December 31, 2015 |
$ | | ||
Issuance of Series D 2X liquidation preference |
7,487 | |||
Change in fair value of Series D 2X liquidation preference |
543 | |||
|
|
|||
Balance at December 31, 2016 |
$ | 8,030 | ||
Issuance of Series D 2X liquidation preference |
10,665 | |||
Change in fair value of Series D 2X liquidation preference |
61,175 | |||
|
|
|||
Balance at December 31, 2017 |
$ | 79,870 | ||
|
|
Series D 2X Liquidation Preference
As described in the Series D 2X Liquidation Preference discussion in Note 2 Summary of Significant Accounting Policies, the Companys 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.
To determine the fair value of the Companys Series D 2X Liquidation Preference, the Company utilized a hybrid valuation model that considered the probability of achieving certain exit scenarios, the entitys 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 valuation resulted in a concluded fair value of the Series D 2X Liquidation Preference as of July 18, 2016, the original issuance date, of $7.6 million.
In December 2016, upon the final closing of the Series D, the Company determined the issuance of the new shares of Series D had a favorable impact on the overall fair value of the derivative liability at issuance of $0.1 million due to (i) an increased number of shares outstanding as of December 31, 2016, (ii) changes in the Companys forecast and (iii) changes in the timing of exit scenarios that resulted in a decreased enterprise value. Management recorded the $0.1 million as a reduction of the overall Series D 2X Liquidation Preference liability. As such, for the year ended December 31, 2016 the issuance of the Series D 2X Liquidation Preference was recorded as $7.5 million.
To determine the fair value of the Companys Series D 2X Liquidation Preference associated with the August and November 2017 issuances of 15 shares and 5 shares, respectively, of Series D in connection with the Series D Amendment (see the Series D Amendment discussion in Note 8 Convertible Preferred Stock), the Company utilized a hybrid valuation model that considers the probability of achieving certain exit scenarios, the Companys 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 valuations resulted in a concluded fair value of the Series D 2X Liquidation Preference at issuance of $2.8 million and $7.9 million for the 15 and 5 shares, respectively, of Series D in connection with the Series D Amendment.
The estimated change in fair value of the Series D 2X Liquidation Preference liability for the years ended December 31, 2017 and 2016 was $61.2 million and $0.5 million, respectively.
6. | Commitments and Contingencies |
Operating Leases
In November 2009, Evofem Inc. 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, Evofem Inc. shared this office space with Cosmederm Biosciences, Inc. (Cosmederm) when Evofem Inc. assigned its rights and obligations under the UTC Lease to Cosmederm; an entity under common control at the time of the assignment. Effective March 1, 2015, Cosmederm took over the payments under the UTC Lease, however: (i) Evofem Inc. continued to provide supplemental financial support under the UTC Lease and (ii) was still legally responsible for the lease in the event of default by Cosmederm. In March 2016, the UTC Lease was amended to reduce the rentable square footage under the lease at which time the Company agreed to pay a portion of an early termination fee of approximately $0.1 million directly to Cosmederm, which was recognized in general and administrative expenses in the consolidated statements of operations. Effective February 27, 2017, Evofem Inc. entered into a lease termination agreement (the UTC Lease Termination), with Cosmederm and the landlord for the UTC Lease. In exchange for being relieved of all further obligations under the UTC Lease, Cosmederm agreed to (i) pay an early termination fee of approximately $0.1 million (the Early Termination Fee) and (ii) surrender the security deposit of $17,000. In March 2017, Evofem Inc. paid $55,000 of the Early Termination Fee directly to Cosmederm and derecognized the security deposit receivable from the landlord and payable to Cosmederm. Upon execution of the UTC Lease Termination, the Company was relieved of all obligations under the UTC Lease.
F-15
Effective February 1, 2015, the Company entered into a sublease for office space under a noncancelable lease agreement that expires in March 2020 (the 2015 Lease). 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 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. In July 2016, the Company received approximately $0.2 million from the landlord as reimbursement for costs incurred by the Company for leasehold improvements. As of December 31, 2017 and 2016, restricted cash maintained as collateral for the Companys Deposit was $0.4 million for both years.
Concurrent with the execution of the 2015 Lease, the Company entered a sublease with WomanCare Global Trading, Inc. (WCGT) whereby WCGT agreed to sublease approximately 25% (subject to annual adjustment), as amended, of the Companys office space (the WCG Sublease). The Company remains the primary obligor under the WCG Sublease and records all sublease income as a reduction of rent expense in the consolidated statements of operations. WCGT paid an initial security deposit of approximately $0.3 million (the WCG Security Deposit). During months 13 through 58 of the 2015 Lease term, subject to certain restrictions, approximately $2,500 of the WCG Security Deposit is creditable against monthly rent payments through November 2019 and approximately $33,000 of the WCG Security Deposit is creditable against rent payments each month between December 2019 and March 2020. As of each December 31, 2017 and 2016, the WCG Security Deposit totaled approximately $0.2 million of which approximately $30,000 and $0.2 million is included in accrued expenses and other noncurrent liabilities, respectively, in the consolidated balance sheets. During the years ended December 31, 2017 and 2016 sublease payments received from WCGT totaled approximately $0.2 million and $0.4 million, respectively.
Rent expense for the years ended December 31, 2017 and 2016 was $0.5 million and $0.4 million, 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 consolidated balance sheets. The current portion of deferred rent is included in accrued expenses in the consolidated balance sheets.
As of December 31, 2017, 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 ended December 31, 2018 |
$ | 748 | $ | (187 | ) | $ | 561 | |||||
Year ended December 31, 2019 |
777 | (194 | ) | 583 | ||||||||
Year ended December 31, 2020 |
201 | (50 | ) | 151 | ||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 1,726 | $ | (431 | ) | $ | 1,295 | |||||
|
|
|
|
|
|
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 December 31, 2017 and 2016 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 Companys business.
Intellectual Property Rights
In 2014, the Company entered into an amended and restated license agreement with Rush University (the Rush License Agreement) pursuant to which Rush University granted Evofem Inc. an exclusive, worldwide license of certain patents and know-how, related to its MPT vaginal gel authorizing the Company 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.
F-16
In October 2015, ENA and EP entered into separate sublicense agreements (the Sublicenses) with WomanCare Global Trading CIC (WCGCIC) for a contraceptive vaginal ring. In August 2016, ENA, EP and WCGCIC entered into a side letter to modify the timing of the 2016 and 2017 payments due under the Sublicenses. On an aggregate basis, consideration under the Sublicenses consisted of (i) payments or potential payments to the licensor of (a) an upfront payment of $10.0 million, (b) potential regulatory and commercial milestone payments up to $32.0 million, (c) potential royalty payments on net product sales and (d) potential royalty payments on net sales of an equivalent generic product and (ii) $5.0 million in annual sublicense fees through October 1, 2019 to WCGCIC. In December 2016, under the terms of the Sublicenses, ENA and EP provided 90-days written notice of termination of the Sublicenses to WCGCIC, which period concluded on March 28, 2017.
During the year ended December 31, 2016, the Company recognized sublicense fees of $6.0 million, which are included in R&D expenses in the consolidated statements of operations. As of December 31, 2017 and 2016, the Company had accrued sublicense fees of approximately $2.0 million and $3.0 million, respectively, which are included in accrued expenses in the consolidated balance sheets. ENA and EP are responsible for making interest payments to WCGCIC for unpaid sublicense fees. During the years ended December 31, 2017 and 2016, accrued interest expense on unpaid sublicense fees totaled $77,000 and $15,000, respectively. See Note 7 Related-party Transactions for a summary of the Companys transactions with WCGCIC and WomanCare Global International (WCGI) and related entities. During 2017, the Company paid the 2016 accrued interest of $15,000.
7. Related-party Transactions
Consulting Agreements
In August 2013, the Company entered into a consulting agreement (the 2013 Consulting Agreement) with Joe Pike, one of the Companys founders and then chairman of the Companys board of directors. Consideration under the 2013 Consulting Agreement was amended in January 2014 and January 2015. Pursuant to the 2013 Consulting Agreement, as amended, Mr. Pike provided consulting services with respect to management advisory services as requested from time to time. The 2013 Consulting Agreement, as amended, provided for monthly compensation of approximately $29,000. In November 2015, Mr. Pike resigned as chairman of the Companys board of directors. On September 14, 2016, the 2013 Consulting Agreement was terminated and included (i) a waiver by Mr. Pike for approximately $0.2 million in consulting fees and (ii) a termination fee of approximately $0.4 million, which included approximately $0.3 million for tax liabilities incurred from a reorganization of the Company during 2015 ((the 2015 Reorganization)
(see Founder Transactions below for additional information). During the year ended December 31, 2017, no compensation was paid to Mr. Pike. During the year ended December 31, 2016, compensation paid to Mr. Pike totaled $0.4 million.
Effective April 1, 2016, the Company entered into a one-year consulting agreement (the 2016 Consulting Agreement) with Thomas Lynch, the chairman of the Companys 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 agreement, Mr. Lynch (i) receives compensation of approximately $0.4 million, of which approximately $0.1 million relates to his board service, (ii) received a stock option for the purchase of 150,000 shares of the Companys common stock with an exercise price of $1.19 per share and (iii) was issued a restricted stock unit for the rights to 100,000 shares of the Companys common stock (RSU), subject to a restricted stock unit agreement dated October 13, 2016. The stock option vests over a one-year period, through March 1, 2017, and an aggregate of 150,000 shares were vested as of December 31, 2017. The restricted units were expected to vest the later of March 1, 2017 or the completion of an IPO by the Company, however, upon closing of the Companys Merger, as more fully described in Note 14 Subsequent Events, Mr. Lynch agreed to cancel his restricted stock units. As of December 31, 2016, accrued compensation, excluding board fees, owed to Mr. Lynch under his 2016 Consulting Agreement totaled approximately $0.3 million which was paid to Mr. Lynch in 2017. See Restricted Stock Units discussion in Note 10 Equity Incentive Plan for the accounting treatment for Mr. Lynchs RSU.
In August 2017, the Company 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 the Companys common stock which vests quarterly through March 31, 2018. As of December 31, 2017, the Companys board of directors had not determined the exercise price of Mr. Lynchs option, and as such the option remained unissued. During the year ended December 31, 2017, compensation paid to Mr. Lynch under the 2017 Consulting Agreement was $0.1 million and accrued compensation owed to Mr. Lynch totaled approximately $0.4 million, of which approximately $0.3 million relates to a bonus earned by Mr. Lynch during 2017.
Founder Transactions
The Companys 2015 Reorganization created tax liabilities of approximately $0.4 million on an aggregate basis for two of the Companys founders, Mr. Pike and Thomas Darden. In March 2016, the Companys board of directors authorized the Company to issue a one-time bonus to each of the founders to cover their tax liabilities. As described under Consulting Agreements, above, Mr. Pike received approximately $0.3 million, which was included as part of his $0.4 million termination fee associated with the 2013 Consulting Agreement. As of December 31, 2016, Mr. Dardens fee of approximately $0.1 million had not been paid and was included in accrued expenses in the consolidated balance sheets. During the year ended December 31, 2017, compensation paid to Mr. Darden totaled approximately $0.1 million.
F-17
Affiliate Transactions
Prior to the Companys 2015 Reorganization, Evofem Inc. and Cosmederm were wholly-owned subsidiaries of EvoMed. From October 2015 until the completion of the Companys Series D financing, the Company and Cosmederm remained entities under common control due to significant common ownership interests. As of July 18, 2016, the Company and Cosmederm were no longer affiliated.
Cosmederm Lease
As more fully described in Operating Leases in Note 6 Commitments and Contingencies, although the Company and Cosmederm were no longer considered entities under common control the Company remained legally responsible under the UTC Lease in the event of default by Cosmederm. During each of the years ended December 31, 2017 and 2016, Evofem Inc. contributed approximately $0.1 million towards the UTC Lease. The UTC Lease was terminated in March 2017. These amounts are recognized in general and administrative expenses and are included in rent expense in the consolidated statements of operations.
Cosmederm Note
During 2015, the Company and Cosmederm entered a promissory note in favor of Cosmederm (the Cosmederm Note) for an aggregate principal amount of $15.0 million, as amended. The interest rate on the Cosmederm Note was at the applicable federal rate as published by the Internal Revenue Service (AFR). Principal and accrued interest were due in a single lump sum payment upon maturity, August 28, 2016; however, the note allowed for early repayment. During the year ended December 31, 2016, Evofem Inc. made principal and accrued interest payments of approximately $4.8 million.
In July 2016 and in conjunction with the Companys Series D financing, (i) the Company and Cosmederm amended the Cosmederm Note which (a) reduced the principal amount of the Cosmederm Note to the then outstanding principal balance of $10.0 million and (b) extended the maturity date to August 28, 2018 (the Amended Cosmederm Note) and (ii) Cosmederm assigned the Amended Cosmederm Note to WIM, a stockholder in both companies prior to the assignment. As a condition to closing the Companys Series D, WIM immediately converted $5.0 million of the Amended Cosmederm Note into 10 shares of the Companys Series D and cancelled the remaining $5.0 million (the Debt Cancellation).
The Company evaluated both the Amended Cosmederm Note and the Debt Cancellation in accordance with the authoritative guidance for troubled debt restructurings and debt extinguishments. The Company concluded that while the reduction in the principal borrowing capacity and the extension of the maturity date are indicators of a troubled debt restructuring (TDR), the Amended Cosmederm Note did not result in a TDR. Rather, the amended terms were a modification, since (i) Cosmederm did not grant the Company any concessions, (ii) the Company did not provide any equity interest or transfer any assets to Cosmederm in anticipation of the Amended Cosmederm Note, (iii) Evofem Inc. had paid down the principal balance from $15.0 million to $10.0 million and repaid all the accrued interest through the effective date of the Amended Cosmederm Note, and (iv) the extension of the maturity date was provided in anticipation of the assignment to WIM.
The Company determined that the Debt Cancellation was the result of a TDR as (i) the Company had limited cash resources and (ii) the original terms of the Cosmederm Note did not provide for conversion to equity. Since the Debt Cancellation was between related parties, the $5.0 million gain was determined to be a capital contribution and was recorded as additional paid-in capital in the Companys consolidated balance sheets.
As of December 31, 2017 and 2016, the Company had no receivables from or payable to Cosmederm. The following table summarizes payments and expenses related to the Companys transactions with Cosmederm as of and for the years ended December 31 (in thousands):
2017 | 2016 | |||||||
Payments (including principal and interest on the Cosmederm Note) |
$ | | $ | 4,976 | ||||
UTC Lease expenses |
$ | 55 | $ | 109 | ||||
Interest expense |
$ | | $ | 49 |
EvoMed Debt
Through October 30, 2015, EvoMed had been funding Evofem Inc.s operations through intercompany debt (the EvoMed Debt). The EvoMed Debt was not formalized in a promissory note; however, EvoMed had no expectation of being repaid in cash and the EvoMed Debt accrued interest at the AFR. As of October 30, 2015, the EvoMed Debt balance was approximately $34.4 million, including accrued interest. During 2015, Evofem Inc. made no principal or accrued interest payments to EvoMed.
F-18
As part of the 2015 Reorganization, Evofem Inc. and EvoMed entered into a stock purchase agreement for the issuance of 8,660,572 shares of Evofem Inc.s Series C-1 convertible preferred stock (Evofem Inc.s Series C-1) at $3.97 per share. As consideration for the Evofem Inc.s Series C-1 shares, EvoMed agreed to cancel the EvoMed Debt. The Company evaluated the cancellation of the EvoMed Debt in accordance with the authoritative guidance for TDRs and debt extinguishments and concluded that due to the related party relationship and the 2015 Reorganization, the cancellation of the EvoMed Debt was a debt extinguishment. The Company determined the reacquisition price of the EvoMed Debt equaled the EvoMed Debt balance of $34.4 million, which was also the approximate fair value of the Evofem Inc.s Series C-1 shares.
Transactions with WCGI and Related Entities (collectively WCG entities)
Overview
In 2009, Saundra Pelletier founded WomanCare Global International, a non-profit organization registered in England and Wales (WCGI) and became WCGIs chief executive officer. In February 2013, the Company and WCGI formed an alliance (the WCGI Alliance) and Ms. Pelletier also became the Companys chief executive officer. Concurrent with the forming of the WCGI Alliance, the Company 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 Company 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, the Company and WCGT, a WCGI subsidiary, entered into a sublease for office space and (ii) in October 2015, (a) the Company through its wholly-owned subsidiaries entered into two sublicense agreements, whereby the Company 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 consolidated statements of operations.
In early 2015, the Company became the corporate sponsor of WCGIs Then Who Will educational campaign. During each of the years ended December 31, 2017 and 2016, corporate support payments to vendors performing services for the Then Who Will campaign on behalf of WCGI totaled approximately $0.3 million, which are included in general and administrative expenses in the consolidated statements of operations.
Effective January 2016, the Company and WCGI entered into a shared-services agreement (the SSA), which replaced the prior service agreement. Under the terms of the SSA, the Company and WCGI cross charge the other companys 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. As of December 31, 2017 and 2016, net shared-services due to the Company totaled approximately $13,000 and $26,000, respectively. Through December 31, 2016, Ms. Pelletier was being paid directly by each WCGI and the Company. As of January 1, 2017, Ms. Pelletier is no longer paid directly by WCGI and is subject to the Companys SSA. During the years ended December 31, 2017 and 2016 services provided under the SSA on behalf of WCGI totaled approximately $0.8 million and $0.4 million, respectively.
The following table summarizes receivables, payables, payments and expenses related to the Companys transactions with WCGI related entities as of and for the years ended December 31 (in thousands):
2017 | 2016 | |||||||
Receivables |
$ | 17 | $ | 30 | ||||
Payables |
$ | 2,077 | $ | 3,012 | ||||
Payments |
$ | 1,026 | $ | 3,230 | ||||
Operating expenses |
$ | 12 | $ | 6,183 | ||||
Interest expense |
$ | 77 | $ | 15 |
Transactions with WCG Cares
In 2013, WCG Cares (WCG), a 501(c)(3) nonprofit organization was incorporated under the laws of the State of California. In February 2017, Ms. Pelletier was elected President and CEO of WCG by the board of directors. In November 2017, Ms. Pelletier was elected Chairperson of the board of directors of WCG and resigned as President and CEO.
In August 2017, the Company agreed to provide WCG with $0.1 million in funding, which was paid to WCG in October 2017, to support the Women Deliver Young Leaders program (Ms. Pelletier joined the board of directors of Women Deliver in 2013 and in May 2017 was appointed as the Chair). The Company also agreed to be a corporate sponsor of WCGs U.S. education campaign, the Tryst Network, which officially launched in February 2018. As of December 31, 2017, accrued Tryst-related costs totaled $0.2 million.
F-19
Variable Interest Entity Considerations
Due to a shared CEO and numerous agreements between the Company and WCGI and the Company and WCG, management reviewed its relationship with both WCGI and its affiliates and WCG in accordance with the authoritative guidance for variable interest entities within Accounting Standards Codification (ASC) 810 Consolidation. The Company concluded that due to WCGIs and WCGs 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.
8. Convertible Preferred Stock
The designated, issued and outstanding shares of convertible preferred stock, by series, as of December 31, 2017 are 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 are 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 includes accrued and unpaid dividends of $5.2 million as of December 31, 2017. |
(3) | Proceeds, net of issuance costs, include $35.0 million in cash, $5.0 million from the conversion of the Amended Cosmederm Note less issuance costs of approximately $0.3 million. Excludes the Series D 2X Liquidation Preference net issuance price of $18.2 million, the loss on the issuance of Series D redeemable convertible preferred stock 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. |
The designated, issued and outstanding shares of convertible preferred stock, by series, as of December 31, 2016 are 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) |
60 | $ | 500,000 | 60 | 61,144 | 29,814 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
57,501,604 | 40,016,127 | $ | 184,299 | $ | 151,129 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | The Series D shares are 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 includes accrued and unpaid dividends of $1.1 million as of December 31, 2016. |
(3) | Proceeds, net of issuance costs, include $25.0 million in cash and $5.0 million from the conversion of the Amended Cosmederm Note less issuance costs of approximately $0.2 million. Excludes the Series D 2X Liquidation Preference net issuance price of $7.5 million, the loss on the issuance of Series D redeemable convertible preferred stock of $26.6 million, loss on extinguishment of related-party note payable of $6.7 million and accrued Series D dividends of $1.1 million. |
F-20
Series D Redeemable Convertible Preferred Stock
As noted in the Series D 2X Liquidation Preference discussion in Note 2 Summary of Significant Accounting Policies, the Company entered a Series D SPA with WIM. The Series D SPA authorized the issuance and sale of an aggregate of 60 shares of Series D, which was sold in two closings 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.
In July 2016, the Company completed the initial closing of the Series D and issued 31 shares for gross proceeds of $15.5 million and 10 shares upon conversion of $5.0 million in related-party debt from the Amended Cosmederm Note (see Cosmederm Note in Note 7 Related-party Transactions for discussion regarding the conversion of the Amended Cosmederm Note). Due to the existence of the (i) Series D 2X Liquidation Preference, (ii) the Companys financial position at the time of the initial closing and (iii) the existence of the Warrant Rights, the Company determined the Series D financing was not the result of an arms-length transaction. The Company had an external valuation completed as of July 18, 2016, which resulted in a concluded fair value per share, inclusive of the Warrant Rights and the Series D 2X Liquidation Preference, of approximately $1.2 million, or an aggregate fair value for the 41 Series D shares of $47.8 million. As described in Series D 2X Liquidation Preference discussion in Note 5 Fair Value of Financial Instruments, the Company estimated the fair value of the Series D 2X Liquidation Preference to be $7.6 million upon issuance, which was allocated to the Series D 2X Liquidation Preference liability. The Company recorded the remaining estimated fair value of the Series D or approximately $40.2 million, less issuance costs, to the Series D redeemable convertible preferred stock within temporary equity in the consolidated balance sheets. As the Company did not identify any unstated rights and/or privileges associated with the Series D, the aggregate loss on issuance of $27.3 million was recognized within the consolidated statements of operations and was allocated between the loss on extinguishment of related-party note payable from the EvoMed Debt extinguishment and loss on the issuance of Series D redeemable convertible preferred stock within other income (expense) in the consolidated statements of operations. The loss on extinguishment of related-party note payable recognized was $6.7 million and the net loss on the issuance of Series D redeemable convertible preferred stock was $20.6 million.
In December 2016, the Company completed the final closing under the Series D SPA of its Series D and issued 19 shares for net proceeds of $9.5 million. The Company had an external valuation completed as of December 31, 2016, which resulted in a concluded fair value per share, inclusive of the Warrant Rights and the Series D 2X Liquidation Preference, of approximately $0.8 million, or an aggregate fair value for the 19 Series D shares of $15.5 million. As described in Series D 2X Liquidation Preference in Note 5 Fair Value of Financial Instruments, the Company determined the issuance of the 19 shares had a favorable impact on the overall fair value of the Series D 2X Liquidation Preference at issuance of approximately $0.1 million. The Company recorded the estimated fair value of the Series D of approximately $15.6 million, less issuance costs, to the Series D redeemable convertible preferred stock within temporary equity in the consolidated balance sheets. The Company recognized the difference of $6.0 million between the fair value and the issuance price of the Series D redeemable convertible preferred stock as a loss on the issuance of Series D redeemable convertible preferred stock within other income (expense) in the consolidated statements of operations.
Series D Amendment
In July 2017, the Company amended its certificate of incorporation to increase the number of authorized preferred stock for issuance related to its Series D shares, from 60 shares to 80 shares. In addition, the Company and WIM amended the Series D SPA to allow for (i) an increase in the number of shares of Series D to purchase capital stock of the Company issuable from an aggregate of $30.0 million (60 shares) to $40.0 million (80 shares) and (ii) provide for the Company to have the right to request additional investments from the existing holders of Series D. In August and November 2017, the Company issued additional Warrant Rights and 15 shares and 5 shares, respectively, of Series D for net proceeds of $7.4 million and $2.5 million, respectively. The Warrant Rights were issued with the same terms, rights and privileges as the previous Warrant Rights.
The Company had an external valuation completed as of August 2, 2017, which resulted in a concluded fair value per share, inclusive of the Warrant Rights and the Series D 2X Liquidation Preference, of approximately $0.9 million, or an aggregate fair value for the 15 Series D shares of $13.2 million. As described in Series D 2X Liquidation Preference discussion in Note 5 Fair Value of Financial Instruments, the Company estimated the fair value of the Series D 2X Liquidation Preference associated with the August 2, 2017 issuance of Series D shares to be $2.8 million upon issuance, which was allocated to the Series D 2X Liquidation Preference liability. The Company recorded the remaining estimated fair value of the Series D or approximately $10.4 million, less issuance costs, to the Series D redeemable convertible preferred stock within temporary equity in the consolidated balance sheets. As the Company did not identify any unstated rights and/or privileges associated with the Series D, the aggregate loss on issuance of $5.7 million was recognized within loss on the issuance of the Series D redeemable convertible preferred stock within other (expense) income in the consolidated statements of operations.
The Company had an external valuation completed as of November 7, 2017, which resulted in a concluded fair value per share, inclusive of the Warrant Rights and the Series D 2X Liquidation Preference, of approximately $1.1 million, or an aggregate fair value for the 5 Series D shares of $5.3 million. As described in Series D 2X Liquidation Preference discussion in Note 5 Fair Value of Financial Instruments, the Company estimated the fair value of the Series D 2X Liquidation Preference associated with the November 7, 2017 issuance of Series D shares to be $7.9 million upon issuance, which was allocated to the Series D 2X Liquidation
F-21
Preference liability. The Company recorded the difference in estimated fair value of the Series D or approximately $2.6 million, less issuance costs, to the Series D redeemable convertible preferred stock within temporary equity in the consolidated balance sheets. As the Company did not identify any unstated rights and/or privileges associated with the Series D, the aggregate loss on issuance of $2.8 million was recognized within loss on the issuance of the Series D redeemable convertible preferred stock within other (expense) income in the consolidated statements of operations.
Liquidation
The holders of the Series D are paid prior and in preference to the holders of the other series of convertible preferred stock, with the holders of the Series C convertible preferred stock participating next. The holders of the Series C-1, Series B and Series A participate pro rata and prior and in preference to the holders of common stock.
The following table summarizes the preferred stock preferences in connection with the issuance of the Series D as of December 31, 2017:
Dividend Rate(1) |
Conversion Rate |
Liquidation Preference Per Share |
||||||||||
Series D |
12.0 | % | 1:2 | (2) | $ | 1,000,000 | (3) | |||||
Series C |
* | 1:1 | $ | 3.97 | ||||||||
Series C-1 |
* | 1:1 | $ | 3.97 | ||||||||
Series B |
* | 1:1 | $ | 3.2222 | ||||||||
Series A |
* | 1:1 | $ | 1.9579445 |
(1) | Series D dividends accrue whether or not declared and are payable upon (i) conversion, (ii) redemption or (iii) liquidation. Dividends on all other series of convertible preferred stock are payable when and as declared by the Companys board of directors and are subordinate to the Series D dividends. As of December 31, 2017 and 2016, no dividends have been paid or declared. |
(2) | Represents the rate at which the Series D will convert in the next equity financing, rather than the conversion rate into common stock. |
(3) | The Series D Liquidation Preference per share is equal to the sum of two times the issuance price per share of $500,000, plus accrued and unpaid dividends. |
Dividends
Dividends on the Series D are payable (i) upon conversion, (ii) redemption or (iii) liquidation. As such, although the Companys board of directors has not declared dividends, the Company accrues dividends on the Series D stock. As of December 31, 2017 and 2016, the Companys accrued and unpaid Series D dividends total $5.2 million and $1.1 million, respectively. Through December 31, 2017, the Companys board of directors has not declared dividends on the other series of preferred stock or common stock and, therefore, the Company has not recorded an accrual for dividends payable related to the Series A, Series B, Series C-1, Series C stock or common stock.
Voting Rights
The preferred stockholders have voting rights equal to the number of common stock shares they would own upon conversion of their convertible preferred stock provided, however, if at any one time either Woodford Equity Income Fund (WEIF), a WIM affiliate, or Invesco Perpetual UK Investment Series Investment Company with Variable Capital (IPUK) individually own stock constituting more than nineteen and one-half percent (19.5%) of the total voting capital, then the stock held by each WEIF and IPUK shall be limited, in the aggregate, to 19.5% of the total votes each on an as converted basis. As of December 31, 2017, both WEIF and IPUK individually owned more than 19.5% of the Companys voting stock in the aggregate and, therefore, each of their voting percentages is limited to 19.5% of the total voting capital. Upon closing of the Companys Merger, as more fully described in Note 14 Subsequent Events, IPUK will no longer be subject to voting restrictions.
Redemption
At any time on or after July 18, 2018, the holders of at least a majority of the then outstanding Series D redeemable convertible preferred stock may deliver to the Company a written instrument requesting redemption of the Series D redeemable convertible preferred stock. The Series D is redeemable in a lump sum at the original issuance price of $500,000 per share plus accrued and unpaid dividends. As of December 31, 2017, the total aggregate redemption amount was $45.2 million.
F-22
Warrant Rights
The Warrant Rights will convert into a warrant to purchase up to that number of equity securities to be issued in the next equity financing 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 will 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, the Company has not completed a next equity financing and, therefore, the Warrant Rights remain outstanding.
The Company 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 it will become exercisable at issuance there was de minimis value associated with the Warrant Rights and, therefore, the Company has not recorded a warrant liability for the Warrant Rights as of December 31, 2017. At each reporting period, the Company continues to evaluate the fair value of the Warrant Rights and when the Warrant Rights are settled or are determined to have value to WIM, the Company will record the fair value in its consolidated financial statements. As described in Note 14 Subsequent Events, upon completion of the Merger, the Warrant Rights were assumed by Neothetics and amended to become warrants for the purchase of Neothetics common stock.
9. Stockholders Deficit
Common Stock
As of December 31, 2017, and 2016, the Company has 157,836,540 shares of common stock authorized, of which 81,119,014 shares were issued and outstanding. The holder of each share of common stock shall have one vote for each share held.
Phantom Appreciation Rights Agreement and Retired Shares
In February 2013, EvoMed and Ms. Pelletier entered into a phantom appreciation rights agreement (PARA), under the terms of which upon certain triggering events Ms. Pelletier had the right to receive cash, equity securities or other property (the PARA Award). In November 2015, EvoMed began to dissolve its operations and distributed the majority of its stock held in Evofem Biosciences. EvoMed held back certain shares expected to be distributed under the PARA with Ms. Pelletier (the Phantom Shares).
In August 2016, EvoMed assigned its rights in the PARA and transferred the Phantom Shares to the Company. In October 2016, the Company and Ms. Pelletier entered into a phantom rights termination agreement (PRTA) under which her rights to the PARA Award were cancelled and the Company immediately retired the Phantom Shares. The retired Phantom Shares consisted of: 150,213 shares of Series A convertible preferred stock; 164,294 shares of Series B convertible preferred stock; 101,886 shares of Series C-1 convertible preferred stock and 250,937 shares of common stock. The cancelled Phantom Shares (i) are not held in treasury, (ii) are considered unissued and (iii) reduced the number of shares outstanding, however, did not result in the reduction of the number of authorized shares.
As consideration for entering the PRTA, Ms. Pelletier received a restricted stock award for 1,459,091 shares of the Companys common stock (the Replacement RSA). Vesting of this Replacement RSA is contingent upon the completion of an IPO by the Company. Since both the PARA Award and the Replacement RSA are subject to the completion of an IPO by the Company and completion of an IPO is not considered probable until it has occurred, no expense was recognized as of the issuance date or modification date. Upon completion of an IPO by the Company, the Company expects to recognize stock-based compensation expense of $1.8 million, which is included in the $5.9 million unrecognized stock-based compensation expense for restricted stock awards, noted below under the Restricted Stock Awards discussion. Upon closing of the Companys Merger, as more fully described in Note 14 Subsequent Events, Ms. Pelletier agreed to cancel her restricted stock awards.
Restricted Stock Awards
In September 2016, under its 2012 Equity Incentive Plan, the Company issued an aggregate of 4,759,091 shares of restricted stock to members of management (the RSAs), including the Replacement RSA. RSAs for 3,300,000 shares of the Companys common stock, which vest the later of (i) the second anniversary of the award date or (ii) the successful completion of an IPO by the Company. If the Company completes its IPO prior to the second anniversary of the award date, one-third of the shares subject to the RSAs will vest upon closing of such IPO by the Company. Recipients of RSAs have no rights as a stockholder including the right to dividends until vesting has occurred. The fair value per share of the Companys common stock on the date of issuance was $1.25 per share. The members of management received the shares outright with no cost per share. As noted in Note 2 Summary of Significant Accounting Policies and the discussion in Phantom Appreciation Rights Agreements and Retired Shares above, since the vesting of the RSAs is tied to an IPO of the Company, the Company will not recognize stock-based compensation expense until completion of an IPO by the Company. As such, as of December 31, 2017 and 2016, unrecognized stock-based compensation expense for the restricted stock awards was approximately $5.9 million. Upon closing of the Companys Merger, as more fully described in Note 14 Subsequent Events, the members of management agreed to cancel their restricted stock awards.
F-23
No restricted shares were issued, cancelled or vested during the year ended December 31, 2017.
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance is as follows in common equivalent shares as of December 31, 2017:
Conversion of Series A, Series B, Series C-1 and Series C convertible preferred stock |
40,016,067 | |||
Rights to common stock units subject to completion of an IPO by the Company |
100,000 | |||
Common stock options issued and outstanding |
6,244,095 | |||
Common stock options available for future grant |
2,896,814 | |||
|
|
|||
Total common stock reserved for future issuance (1) |
49,256,976 | |||
|
|
(1) | Excludes (i) shares issuable upon conversion of Series D in the next equity financing at a 50% discount to the issuance price and (ii) shares issuable upon exercise of the Warrant Rights. |
10. Equity Incentive Plan
In September 2012, the Company adopted the 2012 Equity Incentive Plan (the 2012 Plan) which provides for the issuance of restricted common stock, restricted common units, or nonqualified and incentive common stock options to its employees, members of the Companys board of 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 employees 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. The total number of shares reserved for issuance under the 2012 Plan is 14,000,000 shares and as of December 31, 2017, 2,896,814 shares remain available for future grant.
The following table summarizes share option activity for the year ended December 31, 2017:
Options | Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term (In Years) |
Aggregate Intrinsic Value (1) |
|||||||||||||
Outstanding as of December 31, 2016 |
6,341,939 | $ | 1.47 | |||||||||||||
Granted |
309,000 | $ | 1.11 | |||||||||||||
Exercised |
| $ | | |||||||||||||
Forfeited |
(406,844 | ) | $ | 1.51 | ||||||||||||
|
|
|||||||||||||||
Outstanding as of December 31, 2017 |
6,244,095 | $ | 1.45 | 7.8 | $ | | ||||||||||
|
|
|||||||||||||||
Options exercisable as of December 31, 2017 |
4,279,070 | $ | 1.58 | 7.3 | $ | | ||||||||||
|
|
|||||||||||||||
Options vested and expected to vest as of December 31, 2017 |
6,244,095 | $ | 1.45 | 7.8 | $ | | ||||||||||
|
|
(1) | As of December 31, 2017, the fair value of the Companys common shares as determined by its board of directors was $0.31 per share. |
The following table summarizes certain information regarding stock options for the years ended December 31, (in thousands, except per share data):
2017 | 2016 | |||||||
Weighted-average grant date fair value per share of options granted during the period |
$ | 0.83 | $ | 0.92 | ||||
Cash received from options exercised during the period |
$ | | $ | | ||||
Intrinsic value of options exercised during the period |
$ | | $ | |
Summary of Assumptions
The fair value of stock-based payments for stock options granted to employees, nonemployee directors and consultants was estimated on the date of grant using the BSM based on the following weighted-average assumptions for the years ended December 31:
2017 | 2016 | |||||||
Expected volatility |
90.9 | % | 89.8 | % | ||||
Risk-free interest rate |
2.2 | % | 1.3 | % | ||||
Expected dividend yield |
0.0 | % | 0.0 | % | ||||
Expected term (years) |
5.9 | 5.8 |
F-24
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.
The following table summarizes stock-based compensation expense related to stock options for the years ended December 31, included in the consolidated statements of operations as follows (in thousands):
2017 | 2016 | |||||||
Research and development |
$ | 184 | $ | 218 | ||||
General and administrative |
677 | 1,213 | ||||||
|
|
|
|
|||||
Total |
$ | 861 | $ | 1,431 | ||||
|
|
|
|
As of December 31, 2017, unrecognized stock-based compensation expense for employee stock options was approximately $1.7 million, which the Company expects to recognize over a weighted-average remaining period of 2.1 years, assuming all unvested options become fully vested.
Restricted Stock Units
In October 2016, as previously described in Note 7 Related-party Transactions, the Company issued a RSU for the right to 100,000 shares of the Companys common stock. The RSU is subject to both a time-based vesting restriction and a performance criterion (successful completion of an IPO by the Company) and becomes fully vested the later of March 1, 2017 or the completion of an IPO by the Company. The fair value per share of the Companys common stock on the date of issuance was $1.25 per share. The RSU was issued outright at no cost to the holder to exercise his right. As of December 31, 2016, (i) no rights were cancelled, (ii) 25,000 RSUs were unvested and (iii) 75,000 RSUs were vested, contingent upon the completion of an IPO by the Company. The Company will continue to re-value the RSU until completion of an IPO by the Company. As of December 31, 2017, the fair value of the RSU was approximately $31,000 and 100,000 RSUs were vested, contingent upon the completion of an IPO by the Company. Upon closing of the Companys Merger, as more fully described in Note 14 Subsequent Events, Mr. Lynch agreed to cancel his restricted stock units.
Recipients of RSUs have no rights as a stockholder including the right to dividend equivalent units until vesting has occurred.
11. Employee Benefits
The Company has a defined contribution 401(k) plan for all qualifying employees. Employees are eligible to participate in the plan beginning on the first day of the month following their three-month anniversary of employment. Under the terms of the plan, employees may make voluntary contributions as a percent of their compensation. The Company makes a safe-harbor contribution of three percent (3.0%) of each employees gross earnings, subject to Internal Revenue Service limitations. In each of the years ended December 31, 2017 and 2016, the Company made safe-harbor contributions of approximately $0.1 million.
12. Income Taxes
The Company is subject to taxation in the U.S., United Kingdom and various states jurisdictions. Tax years since the Companys inception remain open to examination by the major taxing jurisdictions to which the Company is subject. The Companys consolidated pretax loss from continuing operations for the years ended December 31 were generated by domestic and foreign operations as follows (in thousands):
2017 | 2016 | |||||||
United States |
$ | (105,222 | ) | $ | (65,863 | ) | ||
Foreign |
(80 | ) | (2,494 | ) | ||||
|
|
|
|
|||||
Total |
$ | (105,302 | ) | $ | (68,357 | ) | ||
|
|
|
|
F-25
Income tax (provision) benefit from continuing operations for the years ended December 31 consists of the following (in thousands):
2017 | 2016 | |||||||
United States |
$ | | $ | | ||||
State |
(3 | ) | 554 | |||||
Foreign |
| 59 | ||||||
|
|
|
|
|||||
Total current tax (provision) benefit |
(3 | ) | 613 | |||||
|
|
|
|
|||||
Total deferred tax (provision) benefit |
| | ||||||
|
|
|
|
|||||
Total |
$ | (3 | ) | $ | 613 | |||
|
|
|
|
The reconciliation between the Companys effective tax rate on loss from continuing operations and the statutory tax rate for the years ended December 31 is as follows:
2017 | 2016 | |||||||
Statutory rate |
34.00 | % | 34.00 | % | ||||
State income tax, net of federal benefit |
(0.34 | )% | 1.19 | % | ||||
Nondeductible expenses |
(0.46 | )% | (0.01 | )% | ||||
Equity-based expenses |
(22.68 | )% | (17.34 | )% | ||||
Return to provision |
0.19 | % | | % | ||||
Tax credits |
1.35 | % | 1.52 | % | ||||
Uncertain tax positions |
(0.34 | )% | (0.38 | )% | ||||
Foreign rate differential |
(0.03 | )% | (1.24 | )% | ||||
Rate adjustment |
(22.26 | )% | 0.12 | % | ||||
Change in valuation allowance |
10.57 | % | (16.96 | )% | ||||
|
|
|
|
|||||
Provision (benefit) for income taxes |
| % | 0.90 | % | ||||
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Companys net deferred tax assets arising from its taxable subsidiaries consisted of the following components as of December 31 (in thousands):
2017 | 2016 | |||||||
Deferred tax assets: |
||||||||
Net loss carryforwards |
$ | 42,281 | $ | 49,905 | ||||
Fixed assets and intangibles |
89 | 3,964 | ||||||
Research and development credits |
3,808 | 2,661 | ||||||
Stock-based compensation |
1,394 | 2,294 | ||||||
Other |
846 | 728 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
48,418 | 59,552 | ||||||
|
|
|
|
|||||
Less: valuation allowance |
(48,418 | ) | (59,552 | ) | ||||
|
|
|
|
|||||
Net deferred tax assets |
$ | | $ | | ||||
|
|
|
|
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will be realized. Generally, the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on historical performance and future expectations, management has determined a valuation allowance is needed in respect to its ending deferred tax assets. As of December 31, 2017 and 2016, the valuation allowances against deferred tax assets totaled $48.4 million and $59.6 million, respectively, or a change of $11.1 million.
F-26
As of December 31, 2017, the Company had net operating loss (NOL) carryforwards for federal income tax purposes of approximately $172.7 million, which will begin to expire in 2029 if not utilized. As of December 31, 2017, the Company had NOL carryforwards in various states of approximately $104.6 million. The state carryforwards have varying expiration dates beginning in 2029. The Company has foreign NOLs of $0.6 million that do not expire.
As of December 31, 2016, the Company has federal and state R&D tax credit carryforwards of approximately $2.9 million and $1.0 million, respectively. As of December 31, 2017, the Company has federal and state R&D tax credit carryforwards of approximately $4.1 million and $1.2 million, respectively. The federal R&D tax credits begin to expire in 2031, unless utilized, and the state credits do not expire.
The following table summarized the activity related to the Companys gross unrecognized tax benefits as of December 31 (in thousands):
2017 | 2016 | |||||||
Balance at the beginning of the year |
$ | 970 | $ | 663 | ||||
Adjustments related to prior year tax positions |
(5 | ) | | |||||
Increases related to current year tax positions |
370 | 307 | ||||||
Decreases due to statute of limitation expiration |
| | ||||||
|
|
|
|
|||||
Balance at end of year |
$ | 1,335 | $ | 970 | ||||
|
|
|
|
The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits, and uncertain income tax positions must meet a more likely than not recognition threshold to be recognized. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of operations. There were no accrued interest and penalties associated with unrecognized tax benefits of December 31, 2017. The Company does not anticipate a significant change in its uncertain tax benefits over the next 12 months.
Management believes it is more likely than not that all significant tax positions taken to date would be sustained by the relevant taxing authorities. Furthermore, the Company has not recognized any tax benefits to date because the Company has established a full valuation allowance for its deferred tax assets due to uncertainties as to their ultimate realization.
Pursuant to Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Companys NOLs and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50.0% occurs within a three-year period. The Company has not completed an IRC Section 382/383 analysis regarding the limitation of NOLs and R&D credit carryforwards; due to the complexity and cost associated with such a study and the fact that there may be additional such ownership changes in the future. The Company does not expect this analysis to be completed within the next 12 months and as a result, the Company does not expect the unrecognized tax benefits will change within 12 months of this reporting date. Due to the existence of the valuation allowances, future changes in the Companys unrecognized tax benefits will not impact the Companys effective tax rate. If the Company has experienced an ownership change at any time since itss formation, utilization of the NOLs or R&D tax credit carryforwards would be subject to an annual limitation under Section 382 of the IRC, which is determined by first multiplying the value of the Companys stock at the time of the ownership change by the applicable long-term tax-exempt rate and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOLs or R&D tax credit carryforwards before utilization.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to (i) reducing the U.S. federal tax rate from 35% to 21%, (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, (iii) generally eliminating the U.S. federal income tax on dividends from foreign subsidiaries, (iv) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations, (v) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized, (vi) creating the base erosion anti-abuse tax, a new minimum tax, (vii) creating a new limitation on deductible interest expense, and (viii) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. Consequently, the Company has recorded a decrease related to its deferred tax assets of approximately $18.4 million, with a corresponding net adjustment to the valuation allowance for the year ended December 31, 2017.
The Deemed Repatriation Transition Tax (Transition Tax) is a tax on previously untaxed accumulated and current earnings and profits (E&P) of the Companys foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Due to losses of the Companys foreign subsidiaries, the Company has not recorded an obligation for the Transition Tax.
F-27
The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs U.S. shareholder. GILTI is the excess of the shareholders net CFC tested income over the net deemed tangible income return, which is currently defined as the excess of (1) 10% of the aggregate of the U.S. shareholders pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-testedincome. Due to current losses of the Companys foreign subsidiaries, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI.
The Company must assess whether valuation allowances assessments are affected by various aspects of the Tax Act (e.g., deemed repatriation of deferred foreign income, GILTI inclusions). Since the Company has recorded no amounts related to certain portions of the Tax Act, no changes to the valuation allowance have been recorded.
13. Selected Quarterly Financial Data (unaudited)
The following table contains quarterly financial information for 2017 and 2016. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair statement of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Year Ended December 31, 2017 |
||||||||||||||||
Total operating expense |
$ | 4,913 | $ | 6,358 | $ | 9,070 | $ | 15,346 | ||||||||
Other expense |
353 | 154 | 64,961 | 4,147 | ||||||||||||
Net loss |
(5,269 | ) | (6,512 | ) | (74,031 | ) | (19,493 | ) | ||||||||
Net loss attributable to common stockholders |
(6,157 | ) | (7,410 | ) | (75,084 | ) | (20,671 | ) | ||||||||
Net loss per share attributable to common stockholders, basic and diluted |
(0.08 | ) | (0.10 | ) | (0.98 | ) | (0.27 | ) | ||||||||
Year Ended December 31, 2016 |
||||||||||||||||
Total operating expense |
$ | 13,280 | $ | 6,997 | $ | 7,043 | $ | 7,323 | ||||||||
Other income (expense) |
6 | 42 | (27,497 | ) | (6,265 | ) | ||||||||||
Net loss |
(13,243 | ) | (6,860 | ) | (32,975 | ) | (13,589 | ) | ||||||||
Net loss attributable to common stockholders |
(13,243 | ) | (6,860 | ) | (33,474 | ) | (14,234 | ) | ||||||||
Net loss per share attributable to common stockholders, basic and diluted |
(0.17 | ) | (0.09 | ) | (0.44 | ) | (0.19 | ) |
14. Subsequent Events
On January 3, 2018, the Company changed its name to Evofem Biosciences Operations, Inc. (Evofem Operations) and increased its authorized common stock from 157,836,540 to 380,338,164 shares. No changes were made to the Companys authorized preferred stock.
On January 17, 2018, immediately prior to the closing of the Merger, the Company issued to funds affiliated with Invesco Asset Management warrants for the purchase up to an aggregate of 155,081,982 shares of the Companys common stock, which were net exercised on a cashless basis for 154,593,455 shares of the Companys common stock. The shares of common stock of the Company issued upon net exercise of the Invesco Warrants were converted into the right to receive shares of common stock of Neothetics at the common stock exchange ratio described below.
On January 17, 2018, pursuant to the terms of the Merger Agreement, Nobelli Merger Sub, Inc., and Evofem Operations affected the Merger, resulting in Evofem Operations surviving as a wholly-owned subsidiary of Neothetics, Inc. (Neothetics). Immediately following the Merger, Neothetics changed its corporate name to Evofem Biosciences, Inc. Upon completion of the Merger:
| The Companys restricted stock units and restricted stock awards were cancelled; |
| Each share of the Companys capital stock (other than the Companys Series D stock), including its Series A, Series B, Series C-1 and Series C convertible preferred stock that converted to common stock, was exchanged for approximately 0.1540 shares of the Neothetics common stock and each share of the Companys Series D stock was exchanged for approximately 515,924 shares of Neothetics common stock; |
F-28
| In accordance with the securities purchase agreement between Neothetics, the Company and Invesco Asset Management, Evofem Biosciences (formerly Neothetics) issued and sold an aggregate of $20.0 million of its common stock; |
| Neothetics assumed the Companys 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 multiplied by the number of shares of the Companys common stock issuable upon exercise of the option to purchase shares of the Companys common stock; |
| Neothetics affected a 6:1 reverse stock split; |
| The Companys Series D Warrant Rights were assumed by Neothetics and replaced with warrants for the purchase of 2,000,000 shares of Evofem Biosciences, formerly Neothetics, common stock, otherwise referred to as the WIM Warrant. The WIM Warrant 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. The WIM Warrant will have an exercise price per share equal to the average closing sale prices of Evofem Biosciences, formerly Neothetics common stock as quoted on the NASDAQ Capital Market for the 30-consecutive trading days commencing January 18, 2018; |
| Upon completion of the Merger, previously existing stockholder and voting agreements by and between the Company and certain of its stockholders and itself were terminated; and, |
| Evofem Biosciences, formerly Neothetics, and WIM entered a voting agreement, whereby WIM caused each CF Woodford Equity Income Fund (WEIF), Woodford Omnis Income & Growth and Woodford Patient Capital Trust Plc (individually a Fund) to deliver to Evofem Biosciences a duly executed proxy. If at any one time a Fund individually owns stock in excess of 19.5% of the then issued and outstanding voting stock of Evofem Biosciences, then the stock held by each Fund shall be limited, in the aggregate, to 19.5% of the total votes. As of the close of the Merger, WEIF individually owned more than 19.5% of the Companys voting stock in the aggregate and, therefore, WEIFs voting percentage is limited to 19.5% of the total voting capital. |
F-29