09/05/2024 | Press release | Distributed by Public on 09/05/2024 07:23
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value and share data)
As of | ||||||||
June 30, 2024 |
December 31, 2023 |
|||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | - | $ | - | ||||
Restricted cash | 692 | 580 | ||||||
Trade accounts receivable, net | 4,617 | 5,738 | ||||||
Inventories | 1,060 | 1,697 | ||||||
Prepaid and other current assets | 845 | 1,195 | ||||||
Total current assets | 7,214 | 9,210 | ||||||
Property and equipment, net | 1,187 | 1,203 | ||||||
Operating lease right-of-use assets | 114 | 106 | ||||||
Other noncurrent assets | 36 | 35 | ||||||
Total assets | $ | 8,551 | $ | 10,554 | ||||
Liabilities, convertible and redeemable preferred stock and stockholders' deficit | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 16,033 | $ | 17,020 | ||||
Notes - carried at fair value (Note 4) | 13,239 | 14,731 | ||||||
Convertible notes - Adjuvant (Note 4) | 29,646 | 28,537 | ||||||
Short-term debt (Note 4) | 397 | - | ||||||
Accrued expenses | 4,752 | 4,227 | ||||||
Accrued compensation | 3,280 | 2,609 | ||||||
Operating lease liabilities-current | 113 | 97 | ||||||
Derivative liabilities | 942 | 1,926 | ||||||
Other current liabilities | 3,776 | 3,316 | ||||||
Other current liabilities - related party | 1,000 | - | ||||||
Total current liabilities | 73,178 | 72,463 | ||||||
Operating lease liabilities- noncurrent | 1 | 8 | ||||||
Total liabilities | 73,179 | 72,471 | ||||||
Commitments and contingencies (Note 7) | - | - | ||||||
Convertible and redeemable preferred stock, $0.0001 par value, Senior to common stock | ||||||||
Series E-1 and F-1 convertible preferred stock, 2,300 and 95,000 shares authorized; 1,968 and 1,874 shares of E-1 issued and outstanding as of June 30, 2024 and December 31, 2023, respectively; 22,280 shares of F-1 issued and outstanding at each of June 30, 2024 and December 31, 2023 | 4,687 | 4,593 | ||||||
Stockholders' deficit: | ||||||||
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of June 30, 2024 and December 31, 2023 | - | - | ||||||
Common Stock, $0.0001 par value; 3,000,000,000 shares authorized; 82,828,686 and 20,007,799 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively | 8 | 2 | ||||||
Additional paid-in capital | 823,709 | 823,036 | ||||||
Accumulated other comprehensive loss | (781 | ) | (849 | ) | ||||
Accumulated deficit | (892,251 | ) | (888,699 | ) | ||||
Total stockholders' deficit | (69,315 | ) | (66,510 | ) | ||||
Total liabilities, convertible and redeemable preferred stock and stockholders' deficit | $ | 8,551 | $ | 10,554 |
See accompanying notes to the condensed consolidated financial statements (unaudited).
-1-
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||||||
Product sales, net | $ | 4,160 | $ | 2,458 | $ | 7,763 | $ | 8,267 | ||||||||
Operating Expenses: | ||||||||||||||||
Cost of goods sold | 769 | 2,293 | 1,453 | 3,669 | ||||||||||||
Research and development | 270 | 402 | 864 | 942 | ||||||||||||
Selling and marketing | 2,243 | 2,197 | 4,588 | 6,051 | ||||||||||||
General and administrative | 2,267 | 4,902 | 5,091 | 8,520 | ||||||||||||
Total operating expenses | 5,549 | 9,794 | 11,996 | 19,182 | ||||||||||||
Loss from operations | (1,389 | ) | (7,336 | ) | (4,233 | ) | (10,915 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest income | 6 | 8 | 10 | 26 | ||||||||||||
Other expense, net | (558 | ) | (1,127 | ) | (1,174 | ) | (1,445 | ) | ||||||||
Loss on issuance of financial instruments | (25 | ) | (27 | ) | (3,300 | ) | (111 | ) | ||||||||
Gain on debt extinguishment | - | - | 1, 120 | - | ||||||||||||
Change in fair value of financial instruments | 3,325 | (73 | ) | 4,127 | 1,539 | |||||||||||
Total other income (expense), net | 2,748 | (1,219 | ) | 783 | 9 | |||||||||||
Income (loss) before income tax | 1,359 | (8,555 | ) | (3,450 | ) | (10,906 | ) | |||||||||
Income tax expense | (8 | ) | (3 | ) | (8 | ) | (6 | ) | ||||||||
Net income (loss) | 1,351 | (8,558 | ) | (3,458 | ) | (10,912 | ) | |||||||||
Convertible preferred stock deemed dividends | (47 | ) | - | (94 | ) | - | ||||||||||
Net income (loss) attributable to common stockholders | $ | 1,304 | $ | (8,558 | ) | $ | (3,552 | ) | $ | (10,912 | ) | |||||
Net income (loss) per share attributable to common stockholders: | ||||||||||||||||
Basic (Note 2) | $ | 0.02 | $ | (5.43 | ) | $ | (0.07 | ) | $ | (6.60 | ) | |||||
Diluted (Note 2) | $ | (0.00 | ) | $ | (5.43 | ) | $ | (0.07 | ) | $ | (6.60 | ) | ||||
Weighted-average shares used to compute net income (loss) per share attributable to common shareholders: | ||||||||||||||||
Basic | 66,773,313 | 1,576,158 | 48,983,853 | 1,654,026 | ||||||||||||
Diluted | 1,613,722,212 | 1,576,158 | 48,983,853 | 1,654,026 |
See accompanying notes to condensed consolidated financial statements (unaudited).
-2-
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||||||
Net income (loss) | $ | 1,351 | $ | (8,558 | ) | $ | (3,458 | ) | $ | (10,912 | ) | |||||
Other comprehensive income: | ||||||||||||||||
Change in fair value of financial instruments attributed to credit risk change (Note 4) | (256 | ) | 8,368 | 68 | 23,828 | |||||||||||
Comprehensive income (loss) | $ | 1,095 | $ | (190 | ) | $ | (3,390 | ) | $ | 12,916 |
See accompanying notes to condensed consolidated financial statements (unaudited).
-3-
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE AND REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(Unaudited)
(In thousands, except share data)
Series E-1 Convertible and Redeemable Preferred Stock | Series F-1 Convertible and Redeemable Preferred Stock | Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders' | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Income (Loss) | Deficit | Deficit | |||||||||||||||||||||||||||||||
Balance as of January 1, 2024 | 1,874 | $ | 1,874 | 22,280 | $ | 2,719 | 20,007,799 | $ | 2 | $ | 823,036 | $ | (849 | ) | $ | (888,699 | ) | $ | (66,510 | ) | ||||||||||||||||||||
Issuance of common stock upon exercise of warrants | - | - | - | - | 246,153 | - | 15 | - | - | 15 | ||||||||||||||||||||||||||||||
Issuance of common stock upon noncash exercise of purchase rights | - | - | - | - | 17,725,000 | 2 | 87 | - | - | 89 | ||||||||||||||||||||||||||||||
Issuance of common stock upon conversion of notes | - | - | - | - | 10,731,443 | 1 | 34 | - | - | 35 | ||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | 237 | - | - | 237 | ||||||||||||||||||||||||||||||
Change in fair value of financial instruments attributed to credit risk change (Note 4) | - | - | - | - | - | - | - | 324 | - | 324 | ||||||||||||||||||||||||||||||
Series E-1 shares dividends | 47 | 47 | - | - | - | - | - | - | (47 | ) | (47 | ) | ||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | (4,809 | ) | (4,809 | ) | ||||||||||||||||||||||||||||
Balance as of March 31, 2024 | 1,921 | $ | 1,921 | 22,280 | $ | 2,719 | 48,710,395 | $ | 5 | $ | 823,409 | $ | (525 | ) | $ | (893,555 | ) | $ | (70,666 | ) | ||||||||||||||||||||
Issuance of common stock upon noncash exercise of purchase rights | - | - | - | - | 24,350,000 | 2 | 66 | - | - | 68 | ||||||||||||||||||||||||||||||
Issuance of common stock upon conversion of notes | - | - | - | - | 9,768,291 | 1 | 15 | - | - | 16 | ||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | 219 | - | - | 219 | ||||||||||||||||||||||||||||||
Change in fair value of financial instruments attributed to credit risk change (see Note 4) | - | - | - | - | - | - | - | (256 | ) | - | (256 | ) | ||||||||||||||||||||||||||||
Series E-1 Shares dividends | 47 | 47 | - | - | - | - | - | - | (47 | ) | (47 | ) | ||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | - | 1,351 | 1,351 | ||||||||||||||||||||||||||||||
Balance as of June 30, 2024 | 1,968 | $ | 1,968 | 22,280 | $ | 2,719 | 82,828,686 | $ | 8 | $ | 823,709 | $ | (781 | ) | $ | (892,251 | ) | $ | (69,315 | ) |
Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Income | Deficit | Deficit | |||||||||||||||||||
Balance as of January 1, 2023 | 984,786 | $ | - | $ | 817,367 | $ | 49,527 | $ | (938,694 | ) | $ | (71,800 | ) | |||||||||||
Issuance of common stock upon cash exercise of warrants | 24,200 | - | 67 | - | - | 67 | ||||||||||||||||||
Issuance of common stock upon noncash exercise of Purchase Rights (Note 4) | 718,704 | - | 180 | - | - | 180 | ||||||||||||||||||
Issuance of SSNs (Note 4) | - | - | 1,629 | - | - | 1,629 | ||||||||||||||||||
Change in fair value of financial instruments attributed to credit risk change (Note 4) | - | - | - | 15,460 | - | 15,460 | ||||||||||||||||||
Stock-based compensation | - | - | 417 | - | - | 417 | ||||||||||||||||||
Net loss | - | - | - | - | (2,354 | ) | (2,354 | ) | ||||||||||||||||
Balance as of March 31, 2023 | 1,727,690 | $ | - | $ | 819,660 | $ | 64,987 | $ | (941,048 | ) | $ | (56,401 | ) | |||||||||||
Issuance of common stock upon cash exercise of warrants | 122,729 | - | 101 | - | - | 101 | ||||||||||||||||||
Issuance of common stock upon noncash exercise of Purchase Rights (Note 4) | 673,820 | - | 6 | - | - | 6 | ||||||||||||||||||
Noncash reclassification of liability-classified derivatives to equity | - | - | 53 | - | - | 53 | ||||||||||||||||||
Issuance of SSNs (Note 4) | - | - | 499 | - | - | 499 | ||||||||||||||||||
Stock-based compensation | - | - | 268 | - | - | 268 | ||||||||||||||||||
Change in fair value of financial instruments attributed to credit risk change (Note 4) | - | - | - | 8,368 | - | 8,368 | ||||||||||||||||||
Net loss | - | - | - | - | (8,558 | ) | (8,558 | ) | ||||||||||||||||
Balance as of June 30, 2023 | 2,524,239 | $ | - | $ | 820,587 | $ | 73,355 | $ | (949,606 | ) | $ | (55,664 | ) |
See accompanying notes to condensed consolidated financial statements (unaudited).
-4-
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six months ended June 30, |
||||||||
2024 | 2023 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (3,458 | ) | $ | (10,912 | ) | ||
Adjustments to reconcile net loss to net cash, cash equivalents and restricted cash used in operating activities: | ||||||||
Loss on issuance of financial instruments | 3,300 | 111 | ||||||
Change in fair value of financial instruments | (4,127 | ) | (1,539 | ) | ||||
Gain on debt extinguishment | (1,120 | ) | - | |||||
Stock-based compensation | 456 | 685 | ||||||
Depreciation | 19 | 418 | ||||||
Noncash interest expense | 1,109 | 1,134 | ||||||
Noncash right-of-use asset amortization | 82 | 1,208 | ||||||
Net gain on lease termination | - | (459 | ) | |||||
Net loss on disposal of property and equipment | 11 | 1,858 | ||||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable | 1,121 | (4,072 | ) | |||||
Inventories | 637 | 1,705 | ||||||
Prepaid and other assets | 349 | 2,435 | ||||||
Accounts payable | (987 | ) | 2,167 | |||||
Accrued expenses and other liabilities | 1,000 | 840 | ||||||
Accrued compensation | 671 | (625 | ) | |||||
Operating lease liabilities | (81 | ) | (1,388 | ) | ||||
Net cash and restricted cash used in operating activities | (1,018 | ) | (6,434 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (14 | ) | (4 | ) | ||||
Net cash and restricted cash used in investing activities | (14 | ) | (4 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock - exercise of warrants | - | 160 | ||||||
Borrowings under term notes | - | 2,138 | ||||||
Proceeds from reinstatement of Merger Agreement - Related Party | 1,000 | - | ||||||
Borrowings under short-term debt | 397 | - | ||||||
Payments under notes carried at fair value | (253 | ) | - | |||||
Net cash and restricted cash provided by financing activities | 1,144 | 2,298 | ||||||
Net change in cash, cash equivalents and restricted cash | 112 | (4,140 | ) | |||||
Cash, cash equivalents and restricted cash, beginning of period | 580 | 4,776 | ||||||
Cash, cash equivalents and restricted cash, end of period | $ | 692 | $ | 636 | ||||
Supplemental disclosure of noncash investing and financing activities: | ||||||||
Issuance of common stock upon exercise of purchase rights | 157 | 186 | ||||||
Series E-1 shares deemed dividends | 94 | - | ||||||
Issuance of common stock upon conversion of notes | 51 | - | ||||||
Issuance of common stock upon exercise of warrants | 15 | - | ||||||
Purchases of property and equipment included in accounts payable and accrued expenses | 78 | - |
See accompanying notes to condensed consolidated financial statements (unaudited).
-5-
EVOFEM BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Basis of Presentation
Description of Business
Evofem is a San Diego-based biopharmaceutical company focused on commercializing innovative products to address unmet needs in women's sexual and reproductive health.
The Company's first commercial product, Phexxi® (lactic acid, citric acid, and potassium bitartrate) vaginal gel (Phexxi), was approved by the U.S. Food and Drug Administration (FDA) on May 22, 2020, and is the first and only FDA-approved, hormone-free, woman-controlled, on-demand prescription contraceptive gel. The Company commercially launched Phexxi in September 2020 and has grown net sales in each successive year. Phexxi net product sales were $16.8 million in 2022 and increased to $18.2 million in 2023.
On December 11, 2023, the Company entered into an Agreement and Plan of Merger, as amended, (the Merger Agreement) with Aditxt, Inc., a Delaware corporation (Aditxt) and Adifem, Inc. (f/k/a Adicure, Inc.), a Delaware corporation and a wholly-owned Subsidiary of Aditxt (Merger Sub), respectively, (collectively, the Parties), pursuant to which, and on the terms and subject to the conditions thereof, the Merger Sub is expected to merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Aditxt (the Merger). As discussed in Note 10 - Subsequent Events, the Parties entered into an amended and restated the Merger Agreement (the A&R Merger Agreement) in July 2024 and are working toward closing in late 2024.
Basis of Presentation and Principles of Consolidation
The Company prepared the unaudited interim condensed consolidated financial statements included in this Quarterly Report in accordance with accounting principles generally accepted (GAAP) in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission (SEC) related to quarterly reports on Form 10-Q.
The Company's financial statements are presented on a consolidated basis, which include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim condensed consolidated financial statements do not include all information and disclosures required by GAAP for annual audited financial statements and should be read in conjunction with the Company's condensed consolidated financial statements and notes thereto for the year ended December 31, 2023 included in its Annual Report on Form 10-K as filed with the SEC on March 27, 2024 (the 2023 Audited Financial Statements).
The unaudited interim condensed consolidated financial statements included in this report have been prepared on the same basis as the Company's audited consolidated financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations, cash flows, and statements of convertible and redeemable preferred stock and stockholders' deficit for the periods presented. The results for the three and six months ended June 30, 2024 are not necessarily indicative of the results expected for the full year. The condensed consolidated balance sheet as of December 31, 2023 was derived from the 2023 Audited Financial Statements.
-6-
Risks, Uncertainties and Going Concern
Any disruptions in the commercialization of Phexxi and/or its supply chain could have a material adverse effect on the Company's business, results of operations and financial condition.
The condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities, in the normal course of business, and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of this uncertainty.
The Company's principal operations are related to the commercialization of Phexxi and, following its acquisition in July 2024, SOLOSEC. Additional activities have included raising capital, identifying alternative manufacturing to lower Phexxi cost of goods sold (COGS), seeking ex-U.S. licensing partners and product in-licensing/acquisition opportunities to add non-dilutive capital to the balance sheet, and establishing and maintaining a corporate infrastructure to support a commercial product. The Company has incurred operating losses and negative cash flows from operating activities since inception. As of June 30, 2024, the Company had a working capital deficit of $66.0 million and an accumulated deficit of $892.3 million.
Since October 3, 2022, the Company's common stock has traded on the OTC Venture Market (the OTCQB) of the OTC Markets Group, Inc., a centralized electronic quotation service for over-the-counter securities, under the symbol "EVFM." The OTCQB imposes, among other requirements, a minimum $0.01 per share bid price requirement (the Bid Price Requirement) for continued inclusion on the OTCQB. The closing bid price for the Company's common stock must remain at or above $0.01 per share to comply with the Bid Price Requirement for continued listing. As of August 8, 2024, the closing price was $0.01.
Management's plans to meet its cash flow needs in the next 12 months include generating recurring product revenue from Phexxi and SOLOSEC, restructuring its current payables, and obtaining additional funding through means such as the issuance of its capital stock, non-dilutive financings, or through collaborations or partnerships with other companies, including license agreements for Phexxi in the U.S. or foreign markets, SOLOSEC in foreign markets, or other potential business combinations.
The Company anticipates it will continue to incur net losses for the foreseeable future. According to management estimates, liquidity resources as of June 30, 2024 were not sufficient to maintain the Company's cash flow needs for the twelve months from the date of issuance of these condensed consolidated financial statements.
If the Company is not able to obtain the required funding through a significant increase in revenue, equity or debt financings, license agreements for Phexxi and/or SOLOSEC, or other means, or is unable to obtain funding on terms favorable to the Company, or if there is another event of default affecting the notes payable, there will be a material adverse effect on commercialization operations and the Company's ability to execute its strategic development plan for future growth. If the Company cannot successfully raise additional funding and implement its strategic development plan, the Company may be forced to make further reductions in spending, including spending in connection with its commercialization activities, extend payment terms with suppliers, liquidate assets where possible at a potentially lower amount than as recorded in the condensed consolidated financial statements, suspend or curtail planned operations, or cease operations entirely. Any of these could materially and adversely affect the Company's liquidity, financial condition and business prospects, and the Company would not be able to continue as a going concern. The Company has concluded that these circumstances and the uncertainties associated with the Company's ability to obtain additional equity or debt financing on terms that are favorable to the Company, or at all, and otherwise succeed in its future operations raise substantial doubt about the Company's ability to continue as a going concern.
-7-
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the notes thereto.
Significant estimates affecting amounts reported or disclosed in the condensed consolidated financial statements include, but are not limited to: the assumptions used in measuring the revenue gross-to-net variable consideration items; the trade accounts receivable credit loss reserve estimate; the assumptions used in estimating the fair value of convertible notes, preferred stock, warrants and purchase rights issued; the assumptions used in the valuation of inventory; the useful lives of property and equipment; the recoverability of long-lived assets; and the valuation of deferred tax assets. These assumptions are more fully described in Note 3 - Revenue, Note 4 - Debt, Note 6 - Fair Value of Financial Instruments, Note 7 - Commitments and Contingencies, and Note 9 - Stock-based Compensation. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances and adjusts when facts and circumstances dictate. The estimates are the basis for making judgments about the carrying values of assets, liabilities and recorded expenses that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results may materially differ from those estimates or assumptions.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, the Chief Executive Officer of the Company, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. Deposits in the Company's checking, time deposit and investment accounts are maintained in federally insured financial institutions and are subject to federally insured limits or limits set by Securities Investor Protection Corporation. 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 condensed consolidated balance sheets.
The Company has not experienced any losses in such accounts and believes it is not exposed to significant concentrations of credit risk on its cash, cash equivalents and restricted cash balances on amounts in excess of federally insured limits due to the financial position of the depository institutions in which these deposits are held.
The Company is also subject to credit risk related to its trade accounts receivable from product sales. Its customers are located in the U.S. and consist of wholesale distributors, retail pharmacies, and mail-order specialty pharmacies. The Company extends credit to its customers in the normal course of business after evaluating their overall financial condition and evaluates the collectability of its accounts receivable by periodically reviewing the age of the receivables, the financial condition of its customers, and its past collection experience. Historically, the Company has not experienced any credit losses. As of June 30, 2024, based on the evaluation of these factors the Company did not record a reserve for expected credit loss.
Products are distributed primarily through three major distributors and mail-order pharmacies, who receive service fees calculated as a percentage of the gross sales, and a fee-per-unit shipped, respectively. These entities are not obligated to purchase any set number of units. They distribute products on demand as orders are received.
For the three and six months ended June 30, 2024, the Company's three largest customers combined made up approximately 75% and 79% of its gross product sales, respectively. For the three and six months ended June 30, 2023, the Company's three largest customers combined made up approximately 81% and 84% of its gross product sales, respectively. As of June 30, 2024 and December 31, 2023, the Company's three largest customers combined made up 82% and 87%, respectively, of its trade accounts receivable balance.
-8-
Significant Accounting Policies
There have been no changes to the significant accounting policies that were described in Note 2 - Summary of Significant Accounting Policies of the 2023 Audited Financial Statements in the Company's Annual Report.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of readily available cash in checking accounts and money market funds. Restricted cash consists of cash held in monthly time deposit accounts and letters of credit as described in Note 7- Commitments and Contingencies. During the six months ended June 30, 2023, the letters of credit of $0.3 million for the Company's fleet leases were released. Upon receipt of a notice of default from its landlord on March 20, 2023, for failing to pay March 2023 rent timely resulting in a breach under the office lease agreement, the Company's letter of credit in the amount of $0.8 million in restricted cash was recovered by the landlord.
Additionally, the remaining funds of the $25.0 million received from the issuance of Adjuvant Notes (as defined below) in the fourth quarter of 2020 are classified as restricted cash since the Company is contractually obligated to use these funds for specific purposes.
For the six months ended June 30, 2023 and 2024, the Company's cash, cash equivalents, and restricted cash reported within the condensed consolidated statements of cash flows include restricted cash only.
Net Income (Loss) Per Share
Basic net income (loss) per share attributable to common stockholders is calculated by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. The net income (loss) available to common stockholders is adjusted for amounts in accumulated deficit related to the deemed dividends triggered for certain financial instruments. Such adjustment was immaterial and zero in the three and six months ended June 30, 2024 and 2023, respectively. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, potentially dilutive securities are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive; therefore, basic and diluted net loss per share were the same for the six months ended June 30, 2024 as well as for the three and six months ended June 30, 2023. Potentially dilutive securities excluded from the calculation of diluted net loss per share are summarized in the table below. Common shares were calculated for the convertible preferred stock and the convertible debt using the if-converted method.
Six months ended June 30, | ||||||||
2024 | 2023 | |||||||
Options to purchase common stock | 3,713 | 4,268 | ||||||
Warrants to purchase common stock | 20,807,539 | 3,642,343 | ||||||
Purchase rights to purchase common stock | 1,546,948,899 | 28,783,233 | ||||||
Convertible debt | 2,528,800,006 | 158,575,812 | ||||||
Series E-1 and F-1 preferred stock | 1,574,554,784 | - | ||||||
Total | 5,671,114,941 | 191,005,656 |
(1) | The potentially dilutive securities in the table above include all potentially dilutive securities that are not included in the diluted EPS as per U.S. GAAP, whereas the total common stock reserved for future issuance in Note 8 - Convertible and Redeemable Preferred Stock and Stockholders' Deficit includes the shares that must legally be reserved based on the applicable instruments' agreements. |
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The following table sets forth the computation of net income attributable to common shareholders, weighted average common shares outstanding for diluted net income per share, and diluted net income per share attributable to common shareholders for the three months ended June 30, 2024 (in thousands, except share and per share amounts).
Three Months Ended June 30, |
||||
2024 | ||||
Numerator: | ||||
Net income attributable to common stockholders | $ | 1,304 | ||
Adjustments: | ||||
Change in fair value of purchase rights | (3,300 | ) | ||
Net loss attributable to common stockholders | $ | (1,996 | ) | |
Denominator: | ||||
Weighted average shares used to compute net income attributable to common stockholder, basic | 66,773,313 | |||
Add: | ||||
Pro forma adjustments to reflect assumed exercise of outstanding purchase rights | 1,546,948,899 | |||
Weighted average shares used to compute net loss attributable to common stockholder, diluted | 1,613,722,212 | |||
Net income per share attributable to common stockholders, diluted | $ | (0.00 | ) |
Recently Adopted Accounting Pronouncements open to update
No significant new standards were adopted during the six months ended June 30, 2024.
Recently Issued Accounting Pronouncements - Not Yet Adopted
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standards setting bodies that are adopted as of the specified effective date.
In October 2023, the FASB issued ASU No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative, designed to clarify or improve disclosure and presentation requirements on a variety of topics and align the requirements in the FASB Accounting Standards Codification (ASC) with the SEC regulations. This guidance is effective for the Company no later than June 30, 2027. The Company will adopt ASU No. 2023-06 by complying with the various disclosure requirements but does not expect the requirements to have a material impact on the consolidated financial statements.
In November 2023, the FASB issued ASU No. 2023-07, Improvements to Reportable Segment Disclosures, designed to improve financial reporting by requiring disclosure of incremental segment information to enable investors to develop more decision-useful financial analyses. ASU No. 2023-07 will be effective for the Company beginning with the annual filing for the period ended December 31, 2024 and will require retroactive application to comparison periods presented. For Companies that have only one reportable segment (such as the Company), all the requirements of ASU No. 2023-07 will be required to be disclosed regarding the one reportable segment. The Company is still evaluating the impact of ASU No. 2023-07 on the consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes: Improvements to Income Tax Disclosures addressing income tax disclosures, requiring entities to annually disclose specific categories in the rate reconciliation and provide additional information for certain reconciling items and categories. ASU No. 2023-09 will be effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company will adopt ASU No. 2023-09 by adding the required disclosures for the December 31, 2024 Annual Report.
The Company does not believe the impact of any other recently issued standards and any issued but not yet effective standards will have a material impact on its condensed consolidated financial statements upon adoption.
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3. Revenue
The Company recognizes revenue from the sale of Phexxi and will recognize future revenue from SOLOSEC in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606). The provisions of ASC 606 require the following steps to determine revenue recognition: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
In accordance with ASC 606, the Company recognizes revenue when its performance obligation is satisfied by transferring control of the product to a customer. In accordance with the Company's contracts with customers, control of the product is transferred upon the conveyance of title, which occurs when the product is sold to and received by a customer. The Company's customers are located in the U.S. and consist of wholesale distributors, retail pharmacies, and mail-order specialty pharmacies. Payment terms typically range from 31 to 66 days, include prompt pay discounts, and vary by customer. Trade accounts receivable due to the Company from contracts with its customers are stated separately in the condensed consolidated balance sheets, net of various allowances as described in the Trade Accounts Receivable policy in Note 2 - Summary of Significant Accounting Policies to the 2023 Audited Financial Statements.
The amount of revenue recognized by the Company is equal to the amount of consideration that is expected to be received from the sale of product to its customers. Revenue is only recognized when the performance obligation is satisfied. To determine whether a significant reversal will occur in future periods, the Company assesses both the likelihood and magnitude of any such potential reversal of revenue.
Products are sold to customers at the wholesale acquisition cost (WAC) or, in some cases, at a discount to WAC. However, the Company records product revenue net of reserves for applicable variable consideration. These types of variable consideration reduce revenue and include the following:
● | Distribution services fees | |
● | Prompt pay and other discounts | |
● | Product returns | |
● | Chargebacks | |
● | Rebates | |
● | Patient support programs, including our co-pay programs |
An estimate for variable consideration is made with each sale and is recorded in conjunction with the revenue being recognized. To calculate the variable consideration, the Company uses the expected value method and the estimated amounts are recorded as a reduction to accounts receivable or as a current liability based on the nature of the allowance and the terms of the related arrangements. An estimated amount of variable consideration may differ from the actual amount. At each balance sheet date, these provisions are analyzed and adjustments are made if necessary. Any adjustments made to these provisions would also affect net product revenue and earnings.
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In accordance with ASC 606, the Company must make significant judgments to determine the estimate for certain variable consideration. For example, the Company must estimate the percentage of end-users that will obtain the product through public insurance, such as Medicaid, versus private commercial insurance. To determine these estimates, the Company relies on historical sales data showing the amount of various end-user consumer types, inventory reports from the wholesale distributors and mail-order specialty pharmacies, and other relevant data reports.
The specific considerations that the Company uses in estimating these amounts related to variable consideration are as follows:
Distribution services fees - The Company pays distribution service fees to its wholesale distributors and mail-order specialty pharmacies. These fees are a contractually fixed percentage of WAC and are calculated at the time of sale based on the purchase amount. The Company considers these fees to be separate from the customer's purchase of the product and, therefore, they are recorded in other current liabilities on the condensed consolidated balance sheets.
Prompt pay and other discounts - The Company incentivizes its customers to pay their invoices on time through prompt pay discounts. These discounts are an industry standard practice, and the Company offers a prompt pay discount to each wholesale distributor and retail pharmacy customer. The specific prompt pay terms vary by customer and are contractually fixed. Prompt pay discounts are typically taken by the Company's customers, so an estimate of the discount is recorded at the time of sale based on the purchase amount. Prompt pay discount estimates are recorded as contra trade accounts receivable on the condensed consolidated balance sheets.
The Company may also give other discounts to its customers to incentivize purchases and promote customer loyalty. The terms of such discounts may vary by customer. These discounts reduce gross product revenue at the time the revenue is recognized.
Chargebacks - Certain government entities and covered entities (e.g., Veterans Administration, 340B covered entities, group purchasing organizations) are able to purchase products at a price discounted below WAC. The difference between the government or covered entity purchase price and the wholesale distributor purchase price of WAC will be charged back to the Company. The Company estimates the amount of each chargeback channel based on the expected number of claims in each channel and related chargeback that is associated with the revenue being recognized for product that remains in the distribution channel at the end of each reporting period. Estimated chargebacks are recorded as contra trade accounts receivable on the condensed consolidated balance sheets.
Rebates - The Company is subject to mandatory discount obligations under the Medicaid and Tricare programs. The rebate amounts for these programs are determined by statutory requirements or contractual arrangements. Rebates are owed after the product has been dispensed to an end user and the Company has been invoiced. Rebates for Medicaid and Tricare are typically invoiced in arrears. The Company estimates the amount of rebates based on the expected number of claims and related cost that is associated with the revenue being recognized for product that remains in the distribution channel at the end of each reporting period. Rebate estimates are recorded as other current liabilities on the condensed consolidated balance sheets.
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Patient support programs - The Company voluntarily offers a co-pay program to provide financial assistance to patients meeting certain eligibility requirements. The Company estimates the amount of financial assistance for these programs based on the expected number of claims and related cost associated with the revenue being recognized for product that remains in the distribution channel at the end of each reporting period. Patient support programs estimates are recorded as other current liabilities on the condensed consolidated balance sheets.
Product returns - Customers have the right to return product that is within six months or less of the labeled expiration date or that is past the expiration date by no more than twelve months. Phexxi was commercially launched in September 2020 with a 30-month shelf life. The shelf life increased to 48 months in June 2022. The Company uses historical sales and return data to estimate future product returns. Product return estimates are recorded as other current liabilities on the condensed consolidated balance sheets.
The variable considerations discussed above were recorded in the condensed consolidated balance sheets and consisted of $0.1 million and $0.3 million in contra trade accounts receivable as of June 30, 2024 and December 31, 2023, respectively and $3.6 million and $3.2 million in other current liabilities as of June 30, 2024 and December 31, 2023, respectively.
4. Debt
Convertible Notes
Baker Bros. Notes (temporarily owned by Aditxt from December 11, 2023 through February 26, 2024)
On April 23, 2020, the Company entered into a Securities Purchase and Security Agreement (the Baker Bros. Purchase Agreement) with certain affiliates of Baker Bros. Advisors LP, as purchasers (the Baker Purchasers), and Baker Bros. Advisors LP, as designated agent, pursuant to which the Company agreed to issue and sell to the Baker Purchasers (i) convertible senior secured promissory notes (the Baker Notes) in an aggregate principal amount of up to $25.0 million and (ii) warrants to purchase shares of common stock (the Baker Warrants) in a private placement, which closed in two closings (April 24, 2020, the Baker Initial Closing, and June 9, 2020, the Baker Second Closing) As a result of the two closings, the Company issued and sold Baker Notes with an aggregate principal amount of $25.0 million and Baker Warrants exercisable for 2,731 shares of common stock. Upon the completion of the underwritten public offering in June 2020, the exercise price of the Baker Warrants was $4,575 per share. The Baker Warrants have a five-year term with a cashless exercise provision and are immediately exercisable at any time from their respective issuance date.
The Baker Notes have a five-year term, with no pre-payment ability during the first three years. Interest on the unpaid principal balance of the Baker Notes (the Baker Outstanding Balance) accrues at 10.0% per annum, with interest accrued during the first year from the two respective closing dates recognized as payment-in-kind. The effective interest rate for the period was 10.0%. Accrued interest beyond the first year of the respective closing dates is to be paid in arrears on a quarterly basis in cash or recognized as payment-in-kind, at the direction of the Baker Purchasers. As discussed below, with the amendment to the Baker Bros. Purchase Agreement, interest payments were paid in-kind. Interest pertaining to the Baker Notes for the three and six months ended June 30, 2024 was approximately $2.6 million and $5.1 million, respectively, which was added to the outstanding principal balance. Interest pertaining to the Baker Notes for the three and six months ended June 30, 2023 was approximately $2.4 million and $3.8 million, respectively, which was added to the outstanding principal balance. The Company accounts for the Baker Notes under the fair value method as described below and, therefore, the interest associated with the Baker Notes is included in the fair value determination.
The Baker Notes were callable by the Company on 10 days' written notice beginning on the third anniversary of the initial closing date of April 24, 2020 at a call price equal to 100% of the Baker Outstanding Balance plus accrued and unpaid interest if the Company's common stock as measured using a 30-day volume weighted average price (VWAP) was greater than the benchmark price of $9,356.25 as stated in the Baker Bros. Purchase Agreement, or 110% of the Baker Outstanding Balance plus accrued and unpaid interest if the VWAP was less than such benchmark price. The Baker Purchasers also had the option to require the Company to repurchase all or any portion of the Baker Notes in cash upon the occurrence of certain events. In a repurchase event, as defined in the Baker Bros. Purchase Agreement, the repurchase price will equal 110% of the Baker Outstanding Balance plus accrued and unpaid interest. In the event of default or the Company's change of control, the repurchase price would equal to the sum of (x) three times of the Baker Outstanding Balance plus (y) the aggregate value of future interest that would have accrued. The Baker Notes were convertible at any time at the option of the Baker Purchasers at the conversion price of $4,575 per share prior to the First and Second Baker Amendments (as defined below).
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On November 20, 2021, the Company entered into the first amendment to the Baker Bros. Purchase Agreement (the First Baker Amendment), in which each Baker Purchaser had the right to convert all or any portion of the Baker Notes into common stock at a conversion price equal to the lesser of (a) $4,575 and (b) 115% of the lowest price per share of common stock (or, as applicable with respect to any equity securities convertible into common stock, 115% of the applicable conversion price) sold in one or more equity financings until the Company has met a qualified financing threshold defined as one or more equity financings resulting in aggregate gross proceeds to the Company of at least $50 million (the Financing Threshold).
The First Baker Amendment also extended, effective upon the Company's achievement of the Financing Threshold, the affirmative covenant to achieve $100.0 million in cumulative net sales of Phexxi by June 30, 2022 to June 30, 2023. Additionally per the First Baker Amendment, if the Company were to issue warrants to purchase capital stock of the Company (or other similar consideration) in any equity financing that closed on or prior to the date on which the Company met the Financing Threshold, the Company was required to issue to the Baker Purchasers an equivalent coverage of warrants (or other similar consideration) on the same terms as if the Baker Purchasers had participated in the financing in an amount equal to the then outstanding principal of Baker Notes held by the Baker Purchasers. In satisfaction of this requirement and in connection with the closing of the May 2022 Public Offering, the Company issued warrants to purchase 582,886 shares of the Company's common stock at an exercise price of $93.75 per share to the Baker Purchasers (the June 2022 Baker Warrants). As required by the terms of the First Baker Amendment, the June 2022 Baker Warrants have substantially the same terms as the warrants issued in the May 2022 Public Offering. Refer to Note 8 - Convertible and Redeemable Preferred Stock and Stockholders' Deficit for further information. The exercise price of the initial Baker Warrants and the June 2022 Baker Warrants was reset multiple times as a result of various Notes issuances in accordance with the agreement. The exercise price was $0.0154 per share as of June 30, 2024.
On March 21, 2022, the Company entered into the second amendment to the Baker Bros. Purchase Agreement (the Second Baker Amendment), which granted each Baker Purchaser the right to convert all or any portion of the Baker Notes into common stock at a conversion price equal to the lesser of (a) $725.81 or (b) 100% of the lowest price per share of common stock (or as applicable with respect to any equity securities convertible into common stock, 100% of the applicable conversion price) sold in any equity financing until the Company (i) met the qualified financing threshold by June 30, 2022, defined as a single underwritten financing resulting in aggregate gross proceeds to the Company of at least $20 million (Qualified Financing Threshold) and (ii) disclosed top-line results from the EVOGUARD clinical trial (the Clinical Trial Milestone) on or before October 31, 2022. The Second Baker Amendment also provided that the exercise price of the Baker Warrants will equal the conversion price of the Baker Notes. The Company met the Qualified Financing Threshold upon the closing of the May 2022 Public Offering, and as of September 30, 2022, the conversion price and exercise price of the Baker Warrants was reset to $93.75. The Company achieved the Clinical Trial Milestone in October 2022. Also, with the achievement of the Qualified Financing Threshold and the Clinical Trial Milestone, the affirmative covenant to achieve $100.0 million in cumulative net sales of Phexxi was extended to June 30, 2023, which was subsequently waived via the Baker Fourth Amendment as discussed below.
On September 15, 2022, the Company entered into the third amendment to the Baker Bros. Purchase Agreement (the Third Baker Amendment), pursuant to which the conversion price was amended to $26.25, subject to adjustment for certain dilutive Company equity issuance adjustments for a two-year period; an interest make-whole payment due in certain circumstances was removed; and certain change of control and liquidation payment amounts were reduced from three times the outstanding amounts of the Baker Notes to two times the outstanding amounts. In addition, the Third Baker Amendment provided that the Company may make future interest payments to the Baker Purchasers in kind or in cash, at the Company's option. On the same day, the Company also entered into a Secured Creditor Forbearance Agreement with the Baker Purchasers (Baker Forbearance Agreement), according to which the Baker Purchasers agreed to forebear the defaults that existed at that time.
On December 19, 2022, the Company entered into the First Amendment to the Forbearance Agreement (the Amendment) effective as of December 15, 2022 to amend certain provisions of the Forbearance Agreement dated September 15, 2022. The Amendment revised the Forbearance Agreement to (i) amend the Fifth Recital Clause to clarify that the Purchasers consent to any additional indebtedness pari passu, but not senior to that of the Purchasers, in an amount not to exceed $5.0 million, and (ii) strike and entirely replace Section 4 to clarify the terms of the Purchasers' consent to Interim Financing (as defined therein). No other revisions were made to the Forbearance Agreement.
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On March 7, 2023, Baker Bros. Advisors, LP (the Designated Agent) provided a Notice of Event of Default and Reservation of Rights (the Notice of Default) relating to the Baker Bros. Purchase Agreement. The Notice of Default claimed that the Company failed to maintain the "Required Reserve Amount" as required by the Third Baker Amendment. The Designated Agent, at the direction of the Baker Purchasers, accelerated repayment of the outstanding balance payable. As a result, approximately $92.7 million, representing two times the sum of the outstanding balance and all accrued and unpaid interest thereon and all other amounts due under the Baker Bros. Purchase Agreement and other documents, was due and payable within three business days of receipt of the Notice of Default. In addition, the Company did not meet the $100.0 million cumulative net sales threshold by June 30, 2023 and as such was in default as of that date. As discussed below, all existing defaults were cured upon the signing of the Fourth Baker Amendment.
On September 8, 2023, the Company entered into the Fourth Amendment to the Baker Bros. Purchase Agreement (the Fourth Baker Amendment) with the Baker Purchasers. The Fourth Amendment amends certain provisions within the Baker Bros. Purchase Agreement including:
(i) | the rescission of the Notice of Default delivered to the Company on March 7, 2023 and waiver of the Events of Default named therein; | |
(ii) | the waiver of any and all other Events of Default existing as of the Fourth Amendment date; | |
(iii) | the removal of the conversion feature into shares of Company common stock, including the removal of any requirement to reserve shares of common stock for conversion of the Baker Notes as well as any registration rights related thereto; | |
(iv) | the clarification that for the sole purpose of enabling ex-U.S. license agreements for such assets, any Patents, Trademarks or Copyrights acquired after the Effective Date shall be excluded from the definition of Collateral; and, | |
(v) | the removal of the requirement for the Company to achieve $100 million in cumulative net Phexxi sales in the specified timeframe. |
The outstanding balance of the Baker Notes will continue to accrue interest at 10% per annum and, in the event of a default in the agreement or a failure to pay the Repurchase Price (as defined below) on or before September 8, 2028 (the Maturity Date), the Baker Purchasers may collect on the full principal amount then outstanding.
The Company paid the required $1.0 million upfront payment in September 2023, and is required to make quarterly cash payments based upon a percentage of the Company's global net product revenue. The cash payments will be determined based upon the quarterly global net revenue of Phexxi according to the table below.
Quarterly global net revenue | Quarterly cash payment | |
≤ $5.0 million | 3% of such global net revenues | |
>$5.0 million and ≤ $7.0 million |
3% on net revenue ≤ $5.0 million; 4% on the net revenue over $5.0 million |
|
Greater than $7.0 million |
3% on the net revenue ≤ $5.0 million; 4% on the net revenue over $5.0 million and up to $7.0 million; 5% on net revenue over $7.0 million |
The cash payments were payable beginning in the fourth quarter of 2023 and have been timely paid.
Regardless of the percentage paid, the quarterly cash payment amounts, along with the $1.0 million upfront payment, will be deducted from the Repurchase Price as Applicable Reductions.
The Fourth Amendment also granted the Company the ability to repurchase the principal amount and accrued and unpaid interest of the Baker Notes for up to a five-year period for the one-time Repurchase Price designated below:
Date of Notes' Repurchase | Repurchase Price | |
On or prior to September 8, 2024 | $14,000,000 (less Applicable Reductions) | |
September 9, 2024-September 8, 2025 | $16,750,000 (less Applicable Reductions) | |
September 9, 2025-September 8, 2026 | $19,500,000 (less Applicable Reductions) | |
September 9, 2026-September 8, 2027 | $22,250,000 (less Applicable Reductions) | |
September 9, 2027-September 8, 2028 | $25,000,000 (less Applicable Reductions) |
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The Company evaluated whether any of the Embedded Features required bifurcation as a separate component. The Company elected the fair value option (FVO) under ASC 825, Financial Instruments (ASC 825), as the Baker Notes are qualified financial instruments and are, in whole, classified as liabilities. Under the FVO, the Company recognized the debt instrument at fair value, inclusive of the Embedded Features, with changes in fair value related to changes in the Company's credit risk being recognized as a component of accumulated other comprehensive loss in the condensed consolidated balance sheets. All other changes in fair value were recognized in the condensed consolidated statements of operations.
Due to the execution of the Fourth Baker Amendment, the Company reviewed the Baker Notes in accordance with ASC 470, Debt (ASC 470). Because the Baker Notes were recorded under the FVO, the Fourth Amendment was outside the scope of ASC 470-60 and as such did not qualify as a troubled debt restructuring (TDR). The Baker Notes were evaluated in accordance with ASC 470 and were determined to have failed certain qualitative factors to qualify as a modification and, therefore, were accounted for as an extinguishment. The Company removed the fair value of the old Baker Notes of $15.6 million and the related accumulated other comprehensive income of $73.2 million as of the date of extinguishment and recorded the fair value of the new Baker Notes, as measured on the date of the Baker Fourth Amendment as $12.5 million, and recognized a gain of approximately $75.3 million within the condensed consolidated statements of operations, in the gain (loss) on issuance of financial instruments line item, upon extinguishment in the year ended December 31, 2023. The gain included recognizing $73.2 million that had previously been a component of other comprehensive income as part of the prior quarterly revaluations using the valuation methods discussed in Note 6 - Fair Value of Financial Instruments.
As part of the consideration for the Merger, on December 11, 2023, the Baker Purchasers signed an agreement to assign the Baker Notes to Aditxt (the December Assignment Agreement). Upon this December Assignment Agreement, Aditxt assumed all terms under the Baker Notes, with Aditxt becoming the new senior secured debtholder of the Company, governed by the requirements under the Fourth Baker Amendment. The Baker Notes were re-assigned back to the Baker Purchasers on February 26, 2024 (the February Assignment Agreement).
Due to the execution of the February Assignment Agreement, the Company reviewed the Baker Notes in accordance with ASC 470. The Baker Notes, having been effectively terminated, were extinguished on February 26, 2024, resulting in removing the fair value of the old Baker Notes of $13.5 million. The newly re-assigned Baker Notes were subsequently recorded at fair value using the valuation methods discussed in Note 6 - Fair Value of Financial Instruments.
As of June 30, 2024, the Baker Notes are recorded at fair value in the condensed consolidated balance sheet as short-term Notes - carried at fair value with a total fair value of $12.3 million, and the total outstanding balance including principal and accrued interest is $104.3 million. During the three and six months ended June 30, 2024, the Company paid a total of $0.3 million in required cash payments as described above.
On July 23, 2024, the Baker Purchasers assigned the Baker Notes to Future Pak, LLC, as discussed in Note 10 - Subsequent Events.
Adjuvant Notes
On October 14, 2020, the Company entered into a Securities Purchase Agreement (the Adjuvant Purchase Agreement) with Adjuvant Global Health Technology Fund, L.P., and Adjuvant Global Health Technology Fund DE, L.P. (together, the Adjuvant Purchasers), pursuant to which the Company sold unsecured convertible promissory notes (the Adjuvant Notes) in aggregate principal amount of $25.0 million.
The Adjuvant Notes have a five-year term, and in connection with certain Company change of control transactions, the Adjuvant Notes may be prepaid at the option of the Company or will become payable on the date of the consummation of a change of control transaction at the option of the Adjuvant Purchasers. The Adjuvant Notes accrue interest at 7.5% per annum on a quarterly basis in arrears to the outstanding balance of the Adjuvant Notes and are recognized as payment-in-kind. The effective interest rate for the six months ended June 30, 2024 was 8.8%.
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Interest expense for the Adjuvant Notes consist of the following, and is included in other income (expense), net on the condensed consolidated statements of operations for the three and six months ended June 30, 2024 and 2023 (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||||||
Coupon interest | $ | 546 | $ | 507 | $ | 1,081 | $ | 1,004 | ||||||||
Amortization of issuance costs | - | 60 | 28 | 128 | ||||||||||||
Total | $ | 546 | $ | 567 | $ | 1,109 | $ | 1,132 |
The Adjuvant Notes are convertible, subject to customary 4.99% and 19.99% beneficial ownership limitations, into shares of the Company's common stock, par value $0.0001 per share, at any time at the option of the Adjuvant Purchasers at a conversion price of $6,843.75 per share. In connection with certain Company change of control transactions, the Adjuvant Notes may be prepaid at the option of the Company or will become payable at the option of the Adjuvant Purchasers. To the extent not previously prepaid or converted, the Adjuvant Notes were originally automatically convertible into shares of the Company's common stock at a conversion price of $6,843.75 per share immediately following the earliest of the time at which the (i) 30-day value-weighted average price of the Company's common stock was $18,750 per share, or (ii) the Company achieved cumulative net sales of $100.0 million, provided such net sales were achieved prior to July 1, 2022.
On April 4, 2022, the Company entered into the first amendment to the Adjuvant Purchase Agreement (the Adjuvant Amendment). The Adjuvant Amendment extended the affirmative covenant to achieve $100.0 million in cumulative net sales of Phexxi by June 30, 2022 to June 30, 2023. The Adjuvant Amendment also provided for an adjustment to the conversion price of the Adjuvant Notes such that the conversion price (the Conversion Price) for these Notes, effective as of the May 2023 reverse stock split, will now be the lesser of (i) $678.49 and (ii) 100% of the lowest price per share of common stock (or with respect to securities convertible into common stock, 100% of the applicable conversion price) sold in any equity financing until the Company has met the Qualified Financing Threshold. Effective as of the Company's achievement of the Qualified Financing Threshold, the automatic conversion provisions in the Agreement were further amended to provide that the Adjuvant Notes will automatically convert into shares of the Company's common stock at the Conversion Price immediately following the earliest of the time at which the (i) 30-day value-weighted average price of the Company's common stock is $18,750 per share, or (ii) the Company achieves cumulative net sales of Phexxi of $100.0 million, provided such net sales were achieved prior to July 1, 2023.
The Adjuvant Notes contain various customary affirmative and negative covenants agreed to by the Company. On September 12, 2022, the Company was in default of the Adjuvant Notes due to the default with the Baker Notes under the cross-default provision. On September 15, 2022, the Company entered into a Forbearance Agreement (the Adjuvant Forbearance Agreement) with the Adjuvant Purchasers, pursuant to which the Adjuvant Purchasers agreed to forbear from exercising any of their rights and remedies during the Forbearance Period as defined in therein, but solely with respect to the specified events of default provided under the Adjuvant Forbearance Agreement.
On September 15, 2022, the Company also entered into the second amendment to the Adjuvant Purchase Agreement (the Second Adjuvant Amendment), pursuant to which the conversion price per share was reduced to $26.25, subject to adjustment for certain dilutive Company equity issuance adjustments for a two-year period. In addition, the Company entered into an exchange agreement, pursuant to which the Adjuvant Purchasers agreed to exchange 10% of the outstanding amount of the Adjuvant Notes as of September 15, 2022 (or $2.9 million) for rights to receive 109,842 shares of common stock (the Adjuvant Purchase Rights). The number of shares for each Adjuvant Purchase Right was initially fixed, but is subject to certain customary adjustments, and, until the second anniversary of issuance (i.e., October 14, 2022), adjustments for certain dilutive Company equity issuances. Refer to Note 8 - Convertible and Redeemable Preferred Stock and Stockholders' Deficit for discussion regarding additional issuances of purchase rights under this provision. The Adjuvant Purchase Rights expire on June 28, 2027 and do not have an exercise price per share and, therefore, will not result in cash proceeds to the Company. As of June 30, 2024, all Adjuvant Purchase Rights remain outstanding. The conversion price of the Adjuvant Notes was reset during the quarter and was $0.0154 as of June 30, 2024. Assuming this conversion price per share, the Adjuvant Notes could be converted into 1,925,093,273 shares of common stock.
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The Adjuvant Notes are accounted for in accordance with authoritative guidance for convertible debt instruments and are classified as current liabilities in the condensed consolidated balance sheets. The aggregate proceeds of $25.0 million were initially classified as restricted cash for financial reporting purposes due to contractual stipulations that specify the types of expenses the money can be spent on and how it must be allocated. The conversion feature was required to be bifurcated as an embedded derivative because the Company did not have a sufficient number of shares reserved upon conversion as of March 31, 2023; however, the fair value of such feature was immaterial as of such date. As of June 30, 2023, the Company had a sufficient number of shares reserved and the conversion feature was reclassified to stockholders' deficit in accordance with ASC 815, Derivatives and Hedging (ASC 815) at that time. See Note 6 - Fair Value of Financial Instruments for a description of the accounting treatment for the Adjuvant Purchase Rights.
The Company was in default of the Adjuvant Notes as of September 30, 2023, due to the failure to meet the cumulative net sales requirement. However, Adjuvant forbore such default in October 2023 and therefore the Company is no longer in default.
As of June 30, 2024, the Adjuvant Notes are recorded in the condensed consolidated balance sheet as short-term convertible notes payable with a total balance of $29.6 million. The balance is comprised of $22.5 million in principal, net of unamortized debt issuance costs, and $7.1 million in accrued interest. As of December 31, 2023, the Adjuvant Notes were recorded in the condensed consolidated balance sheet as short-term convertible notes payable with a total balance of $28.5 million. The balance was comprised of $22.5 million in principal, net of unamortized debt issuance costs, and $6.1 million in accrued interest.
Term Notes
December 2022 and February, March, April, July, August, and September 2023 Notes (SSNs)
The Company entered into eight Securities Purchase Agreements (SPAs) between December 2022 and September 2023 with certain investors. Each of the agreements was materially similar. The variable details of each SPA, such as the principal amount of each note offering, net proceeds, and maturity date, are outlined in the table below. Pursuant to each SPA, the Company agreed to sell in a registered direct offering (i) unsecured 8.0% senior subordinated notes with the maturity dates and aggregate issue prices (ii) warrants to purchase the listed number of shares of the Company's common stock, $0.0001 par value per share (including prefunded common stock Warrants as a part of the September 2023 SPA) and (iii) Series D Preferred Stock (the Preferred Shares; December 2022 SPA only) (collectively, the Senior Subordinated Notes, or SSNs). The SSNs had net proceeds to the Company from, and are convertible at, the amounts listed below.
The SSNs' interest rates are subject to increase to 12% upon an event of default and the SSNs have no Company right to prepayment prior to maturity; however, the Company has the option to redeem the respective SSNs at a redemption premium of 32.5%. The Purchasers can also require the Company to redeem their respective SSNs a) at the respective premium rate tied to the occurrence of certain subsequent transactions, and b) in the event of subsequent placements (as defined). Also, pursuant to the terms of the SPAs, Purchasers have certain rights to participate in subsequent issuances of the Company's securities, subject to certain exceptions. Additionally, the conversion rate and warrant strike price are subject to adjustment upon the issuance of other securities (as defined) below the stated conversion rate and strike price at issuance. The strike prices adjusted as discussed in the table below.
The Company evaluated the SSNs in accordance with ASC 480 and determined that the Notes were all liability instruments at issuance. The applicable SSNs were then evaluated in accordance with the requirements of ASC 825 and the Company concluded that they were not precluded from electing the fair value option for the applicable SSNs.
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The Company also evaluated the Warrants in accordance with ASC 480 and determined that the Warrants issued before the Reverse Stock Split in May 2023 were required to be recorded as liabilities at fair value in the Company's condensed consolidated balance sheets. The applicable SSNs were marked-to-market at each reporting date with changes in fair value recognized in the condensed consolidated statement of operations, unless the change is concluded to be related to changes in the Company's credit rating, in which case the change was recognized as a component of accumulated other comprehensive loss in the condensed consolidated balance sheets. As a result of the Reverse Stock Split, the Company had sufficient shares available for issuance to cover the potential exercises; therefore, the Warrants that were previously classified as liabilities were marked-to-market and reclassified to equity in May 2023. For the Warrants issued after the Reverse Stock Split, the Company determined they were required to be recorded in equity.
On December 21, 2023, warrants to purchase up to 9,972,074 shares of the Company's common stock were exchanged for 613 shares of the Company's series F-1 convertible and redeemable preferred stock (Series F-1 Shares, as defined below). The Series F-1 Shares, some of which were also issued based on the partial value of certain purchase rights, as described above, were immediately exchanged to Aditxt series A-1 preferred stock and 22,280 Series F-1 Shares were outstanding as of December 31, 2023 and June 30, 2024 and held by Aditxt. The Series F-1 Shares are to be cancelled upon the consummation of the Merger.
Summary of SSNs and Warrants at Issuance (December 2022 to September 2023):
Principal At | Net Proceeds Before | Conversion Price | ||||||||||||||||||||||||||||||||||||||||
Notes | Issuance (in Thousands) |
Issuance Costs (in Thousands) |
Common Warrants |
Preferred Shares | Maturity Date | At Issuance | At 6/30/2023 | At 9/30/2023 | At 12/31/2023 | At 3/31/2024 | At 6/30/2024 | |||||||||||||||||||||||||||||||
December 2022 Notes | $ | 2,308 | $ | 1,500 | 369,230 | 70 - Series D | 12/21/2025 | $ | 6.25 | $ | 0.8125 | $ | 0.0845 | $ | 0.0615 | $ | 0.0158 | $ | 0.0154 | |||||||||||||||||||||||
February 2023 Notes(1) | 1,385 | 900 | 653,538 | - | 2/17/2026 | $ | 2.50 | $ | 0.8125 | $ | 0.0845 | $ | 0.0615 | $ | 0.0158 | $ | 0.0154 | |||||||||||||||||||||||||
March 2023 Notes | 600 | 390 | 240,000 | - | 3/17/2026 | $ | 2.50 | $ | 0.8125 | $ | 0.0845 | $ | 0.0615 | $ | 0.0158 | $ | 0.0154 | |||||||||||||||||||||||||
March 2023 Notes(2) | 538 | 350 | 258,584 | - | 3/20/2026 | $ | 2.50 | $ | 0.8125 | $ | 0.0845 | $ | 0.0615 | $ | 0.0158 | $ | 0.0154 | |||||||||||||||||||||||||
April 2023 Notes | 769 | 500 | 615,384 | - | 3/6/2026 | $ | 1.25 | $ | 0.8125 | $ | 0.0845 | $ | 0.0615 | $ | 0.0158 | $ | 0.0154 | |||||||||||||||||||||||||
July 2023 Notes | 1,500 | 975 | 1,200,000 | - | 3/6/2026 | $ | 1.25 | N/A | $ | 0.0845 | $ | 0.0615 | $ | 0.0158 | $ | 0.0154 | ||||||||||||||||||||||||||
August 2023 Notes | 1,000 | 650 | 799,999 | - | 8/4/2026 | $ | 1.25 | N/A | $ | 0.0845 | $ | 0.0615 | $ | 0.0158 | $ | 0.0154 | ||||||||||||||||||||||||||
September 2023 Notes(3) | 2,885 | 1,875 | 26,997,041 | - | 9/26/2026 | $ | 0.13 | N/A | $ | 0.13 | $ | 0.0615 | $ | 0.0158 | $ | 0.0154 | ||||||||||||||||||||||||||
Total Offerings | $ | 10,985 | $ | 7,140 | 31,133,776 |
(1) | Warrants include 99,692 issued to the placement agent. |
(2) | Warrants include 43,200 issued to the placement agent. |
(3) | Warrants include 22,189,349 common warrants at $0.13 per share and 4,807,692 pre-funded warrants exercisable at $0.001 per share. |
Short-term Debt
Insurance Premium Finance Agreement
In June 2024, the Company entered into an insurance premium finance agreement with First Insurance Funding (FIF) to finance a portion of its current policy year's Directors and Officers (D&O) and general insurance policies. The total amount financed was $0.4 million at an annual interest rate of 8.57%. The Company will make nine equal payments, commencing in July 2024. The Company recorded the total financed amount as a Short-term debt on the Condensed Consolidated Balance Sheet. The interest expense, included in Other income (expense), net, in the Condensed Consolidated Statement of Operations, was immaterial for the three and six months ended June 30, 2024.
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5. Balance Sheet Details
Inventories
Inventories consist of the following (in thousands) for the period indicated:
June 30, 2024 |
December 31, 2023 |
|||||||
Raw materials (1) | $ | 430 | $ | 520 | ||||
Work in process | 354 | 386 | ||||||
Finished goods (1) | 276 | 791 | ||||||
Total | $ | 1,060 | $ | 1,697 |
(1) | The raw materials and finished goods balances include a combined estimated reserve on obsolescence and excess inventory which might not be sold prior to expiration of $0.3 million as of both June 30, 2024 and December 31, 2023. These estimates are based upon assumptions about future manufacturing needs and gross sales of Phexxi. Inventory associated with the additional write-down of $1.3 million recorded during the year ended December 31, 2023, was disposed and no longer in the inventory balance as of December 31, 2023. |
Prepaid and Other Current Assets
Prepaid and other current assets consist of the following (in thousands):
June 30, 2024 |
December 31, 2023 |
|||||||
Insurance | $ | 488 | $ | 777 | ||||
Research & development | 13 | 13 | ||||||
Other | 344 | 405 | ||||||
Total | $ | 845 | $ | 1,195 |
Property and Equipment, Net
Property and equipment, net, consists of the following (in thousands):
Useful Life |
June 30, 2024 |
December 31, 2023 |
||||||||||
Research equipment | 5 years | $ | 585 | $ | 586 | |||||||
Computer equipment and software | 3 years | 145 | 647 | |||||||||
Construction in-process | - | 1,146 | 1,156 | |||||||||
1,876 | 2,389 | |||||||||||
Less: accumulated depreciation | (689 | ) | (1,186 | ) | ||||||||
Total, net | $ | 1,187 | $ | 1,203 |
Depreciation expense for property and equipment was immaterial in both the three and six months ended June 30, 2024. Depreciation expense for property and equipment was $0.2 million and $0.4 million in the three and six months ended June 30, 2023, respectively.
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Accrued Expenses
Accrued expenses consist of the following (in thousands):
June 30, 2024 |
December 31, 2023 |
|||||||
Clinical trial related costs | $ | 2,498 | $ | 2,498 | ||||
Accrued royalty | 1,522 | 1,146 | ||||||
Other | 732 | 583 | ||||||
Total | $ | 4,752 | $ | 4,227 |
6. Fair Value of Financial Instruments
Fair Value of Financial Liabilities
The following tables summarize the Company's convertible debt instruments as of June 30, 2024 and December 31, 2023, respectively (in thousands):
Principal | Unamortized | Accrued | Net Carrying | Fair Value | ||||||||||||||||||
As of June 30, 2024 | Amount | Issuance Costs | Interest | Amount | Amount | Leveling | ||||||||||||||||
Baker Notes(1)(2) | $ | 104,315 | $ | - | $ | - | $ | 104,315 | $ | 12,280 | Level 3 | |||||||||||
Adjuvant Notes(3) | 22,500 | - | 7,146 | 29,646 | N/A | N/A | ||||||||||||||||
December 2022 Notes(1) | 935 | - | - | 935 | 96 | Level 3 | ||||||||||||||||
February 2023 Notes (1) | 942 | - | - | 942 | 97 | Level 3 | ||||||||||||||||
March 2023 Notes (1) | 1,161 | - | - | 1,161 | 120 | Level 3 | ||||||||||||||||
April 2023 Notes (1) | 849 | - | - | 849 | 88 | Level 3 | ||||||||||||||||
July 2023 Notes (1) | 1,271 | - | - | 1,271 | 131 | Level 3 | ||||||||||||||||
August 2023 Notes (1) | 1,075 | - | - | 1,075 | 111 | Level 3 | ||||||||||||||||
September 2023 Notes (1) | 3,064 | - | - | 3,064 | 316 | Level 3 | ||||||||||||||||
Totals | $ | 136,112 | $ | - | $ | 7,146 | $ | 143,258 | $ | 13,239 | N/A |
Principal | Unamortized | Accrued | Net Carrying | Fair Value | ||||||||||||||||||
As of December 31, 2023 | Amount | Issuance Costs | Interest | Amount | Amount | Leveling | ||||||||||||||||
Baker Notes(1)(2) | $ | 99,460 | $ | - | $ | - | $ | 99,460 | $ | 13,510 | Level 3 | |||||||||||
Adjuvant Notes(3) | 22,500 | (27 | ) | 6,064 | 28,537 | N/A | N/A | |||||||||||||||
December 2022 Notes(1) | 940 | - | - | 940 | 118 | Level 3 | ||||||||||||||||
February 2023 Notes (1) | 905 | - | - | 905 | 118 | Level 3 | ||||||||||||||||
March 2023 Notes (1) | 1,204 | - | - | 1,204 | 157 | Level 3 | ||||||||||||||||
April 2023 Notes (1) | 816 | - | - | 816 | 106 | Level 3 | ||||||||||||||||
July 2023 Notes (1) | 1,534 | - | - | 1,534 | 202 | Level 3 | ||||||||||||||||
August 2023 Notes (1) | 1,033 | - | - | 1,033 | 136 | Level 3 | ||||||||||||||||
September 2023 Notes (1) | 2,945 | - | - | 2,945 | 384 | Level 3 | ||||||||||||||||
Totals | $ | 131,337 | $ | (27 | ) | $ | 6,064 | $ | 137,374 | $ | 14,731 | N/A |
(1) | These liabilities are/were carried at fair value in the condensed consolidated balance sheets. As such, the principal and accrued interest was included in the determination of fair value. The related debt issuance costs were expensed. |
(2) | The Baker Notes principal amount includes $19.5 million and $13.7 million of interest paid in-kind as of June 30, 2024, and December 31, 2023, respectively. |
(3) | The Adjuvant Notes are recorded in the condensed consolidated balance sheets at their net carrying amount which includes principal and accrued interest, net of unamortized issuance costs. |
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The following tables summarize the Company's derivative liabilities as of June 30, 2024 and December 31, 2023 as discussed in Note 8 - Convertible and Redeemable Preferred Stock and Stockholders' Deficit (in thousands):
Fair Value | ||||||||||
June 30, 2024 |
December 31, 2023 |
Leveling | ||||||||
Purchase rights | $ | 942 | $ | 1,926 | Level 3 | |||||
Total derivative liabilities | $ | 942 | $ | 1,926 |
Change in Fair Value of Level 3 Financial Liabilities
The following table summarizes the changes in Level 3 financial liabilities related to Baker Notes and SSNs measured at fair value on a recurring basis for the three and six months ended June 30, 2024 (in thousands):
Baker Notes (Assigned to Aditxt; reassigned back to Baker; Note 4) | Total SSNs (Note 4) | Total | ||||||||||
Balance at March 31, 2024 | $ | 12,260 | $ | 992 | $ | 13,252 | ||||||
Extinguishment/Conversion | - | (16 | ) | (16 | ) | |||||||
Payments | (253 | ) | - | (253 | ) | |||||||
Change in fair value presented in the Condensed Consolidated Statements of Comprehensive Income (Loss) | 273 | (17 | ) | 256 | ||||||||
Balance at June 30, 2024 | $ | 12,280 | $ | 959 | $ | 13,239 |
Baker Notes | Total SSNs (Note 4) | Total | ||||||||||
Balance at December 31, 2023 | $ | 13,510 | $ | 1,221 | $ | 14,731 | ||||||
Balance at issuance | 12,390 | - | 12,390 | |||||||||
Extinguishment/Conversion | (13,510 | ) | (51 | ) | (13,561 | ) | ||||||
Payments | (253 | ) | - | (253 | ) | |||||||
Change in fair value presented in the Condensed Consolidated Statements of Comprehensive Income (Loss) | 143 | (211 | ) | (68 | ) | |||||||
Balance at June 30, 2024 | $ | 12,280 | $ | 959 | $ | 13,239 |
The following table summarizes the changes in Level 3 financial liabilities related to Baker Notes and SSNs measured at fair value on a recurring basis for the three and six months ended June 30, 2023 (in thousands):
Baker Notes | Total SSNs (Note 4) | Total | ||||||||||
Balance at March 31, 2023 | $ | 23,800 | $ | 7 | $ | 23,807 | ||||||
Balance at issuance | - | 1 | 1 | |||||||||
Change in fair value presented in the Condensed Consolidated Statements of Operations | - | 160 | 160 | |||||||||
Change in fair value presented in the Condensed Consolidated Statements of Comprehensive Income (Loss) | (8,200 | ) | (168 | ) | (8,368 | ) | ||||||
Balance at June 30, 2023 | $ | 15,600 | $ | - | $ | 15,600 |
Baker Notes | Total SSNs (Note 4) | Total | ||||||||||
Balance at December 31, 2022 | $ | 39,260 | $ | 156 | $ | 39,416 | ||||||
Balance at issuance | - | 12 | 12 | |||||||||
Change in fair value presented in the Condensed Consolidated Statements of Comprehensive Income (Loss) | (23,660 | ) | (168 | ) | (23,828 | ) | ||||||
Balance at June 30, 2023 | $ | 15,600 | $ | - | $ | 15,600 |
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The following table summarizes the changes in Level 3 financial liabilities related to derivative liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2024 (in thousands):
Purchase Rights | Derivative Liabilities Total | |||||||
Balance at March 31, 2024 | $ | 4,310 | $ | 4,310 | ||||
Balance at issuance | 25 | 25 | ||||||
Exercises | (68 | ) | (68 | ) | ||||
Change in fair value presented in the Condensed Consolidated Statements of Operations | (3,325 | ) | (3,325 | ) | ||||
Balance at June 30, 2024 | $ | 942 | $ | 942 |
Purchase Rights | Derivative Liabilities Total | |||||||
Balance at December 31, 2023 | $ | 1,926 | $ | 1,926 | ||||
Balance at issuance | 3,300 | 3,300 | ||||||
Exercises | (157 | ) | (157 | ) | ||||
Change in fair value presented in the Condensed Consolidated Statements of Operations | (4,127 | ) | (4,127 | ) | ||||
Balance at June 30, 2024 | $ | 942 | $ | 942 |
The following table summarizes the changes in Level 3 financial liabilities related to derivative liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2023 (in thousands):
May 2022 Public Offering Common Warrants | June 2022 Baker Warrants | December 2022 Warrants | February and March 2023 Warrants | Purchase Rights | Derivative Liabilities Total | |||||||||||||||||||
Balance at March 31, 2023 | $ | 6 | $ | 3 | $ | 1 | $ | 6 | $ | 106 | $ | 122 | ||||||||||||
Balance at issuance | - | - | - | - | 26 | 26 | ||||||||||||||||||
Exercises | (1 | ) | - | - | - | (6 | ) | (7 | ) | |||||||||||||||
Change in fair value presented in the Condensed Consolidated Statements of Operations | (4 | ) | (2 | ) | (1 | ) | (4 | ) | (73 | ) | (84 | ) | ||||||||||||
Reclassified to equity | (1 | ) | (1 | ) | - | (2 | ) | (53 | ) | (57 | ) | |||||||||||||
Balance at June 30, 2023 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
April and June 2020 Baker Warrants | May 2022 Public Offering Common Warrants | June 2022 Baker Warrants | December 2022 Warrants | February and March 2023 Warrants | Purchase Rights | Derivative Liabilities Total | ||||||||||||||||||||||
Balance at December 31, 2022 | $ | 1 | $ | 303 | $ | 170 | $ | 107 | $ | - | $ | 1,095 | $ | 1,676 | ||||||||||||||
Balance at issuance | - | - | - | - | 6 | 105 | 111 | |||||||||||||||||||||
Exercises | - | (7 | ) | - | - | - | (186 | ) | (193 | ) | ||||||||||||||||||
Change in fair value presented in the Condensed Consolidated Statements of Operations | (1 | ) | (295 | ) | (169 | ) | (107 | ) | (6 | ) | (961 | ) | (1,539 | ) | ||||||||||||||
Reclassified to equity | - | (1 | ) | (1 | ) | - | (53 | ) | (55 | ) | ||||||||||||||||||
Balance at June 30, 2023 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
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Valuation Methodology
From the third quarter of 2022 through the second quarter of 2023, the fair value of the Baker Notes issued, as described in Note 4 - Debt, and subsequent changes in fair value recorded at each reporting date, was determined by estimating the fair value of the Market Value of Invested Capital (MVIC) of the Company. This was estimated using forms of the cost and market approaches. In the Cost approach, an adjusted net asset value method was used to determine the net recoverable value of the Company, including an estimate of the fair of the Company's intellectual property. The estimated fair value of the Company's intellectual property was valued using a relief from royalty method which required management to make significant estimates and assumptions related to forecasts of future revenue, and the selection of the royalty and discount rates. The guideline public company method served as another valuation indicator. In this form of the Market approach, comparable market revenue multiples were selected and applied to the Company's forward revenue forecast to ultimately derive a MVIC indication. If the resulting fair value from these approaches was not estimated as greater than the contractual payout, the fair value of the Baker Notes became only the Company MVIC available for distribution to this first lien note holder.
Starting in the third quarter of 2023, the fair value of the Baker Notes, issued as described in Note 4 - Debt is determined using a Monte Carlo simulation-based model. The Monte Carlo simulation was used to take into account several embedded features and factors, including the exercise of the repurchase right, the Company's future revenues, meeting certain debt covenants, the maturity term of the note and dissolution. For the dissolution scenario, the cost approach, an adjusted net asset value method was used to determine the net recoverable value of the Company, including an estimate of the fair value of the Company's intellectual property. The estimated fair value of the Company's intellectual property was valued using a relief from royalty method which required management to make significant estimates and assumptions related to forecasts of future revenue, and the selection of the royalty (5.0%) and discount (15.0%) rates.
The fair value of the Baker Notes is subject to uncertainty due to the assumptions that are used in the Monte Carlo simulation-based model. These factors include but are not limited to the Company's future revenue, and the probability and timing of the exercise of the repurchase right. The fair value of the Baker Notes is sensitive to these estimated inputs made by management that are used in the calculation.
SSNs
The fair values of the SSNs issued, as described in Note 4 - Debt, were determined using the methods described above in Valuation Methodology using the residual value of the Company after the fair value of the Baker Notes. The quarterly valuation adjustments for the three and six months ended June 30, 2024 were respectively recorded as an immaterial and a $0.2 million change in fair value of financial instruments attributed to credit risk change in the condensed consolidated comprehensive statement of operations. The quarterly valuation adjustments for the three months ended June 30, 2023 were recorded as a $0.2 million change in fair value of financial instruments in the condensed consolidated statement of operations and a $0.2 million change in fair value of financial instruments attributed to credit risk change in the condensed consolidated comprehensive statement of operations. The quarterly valuation adjustments for the six months ended June 30, 2023 were recorded as a $0.2 million change in fair value of financial instruments attributed to credit risk change in the condensed consolidated comprehensive statement of operations.
Purchase Rights
The Adjuvant Purchase Rights and the May Note Purchase Rights (collectively Purchase Rights) are recorded as derivative liabilities in the condensed consolidated balance sheets. The Purchase Rights are valued using an OPM, like a Black-Scholes Methodology with changes in the fair value being recorded in the condensed consolidated statements of operations. The assumptions used in the OPM are considered level 3 assumptions and include, but are not limited to, the market value of invested capital, the cumulative equity value of the Company as a proxy for the exercise price and the expected term the Purchase Rights will be held prior to exercise and a risk-free interest rate.
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Warrants
Warrants previously classified as liabilities were reclassified as equity instruments during the second quarter of 2023 as a result of the Reverse Stock Split. The Company will continue to re-evaluate the classification of its warrants at the close of each reporting period to determine their proper balance sheet classification. The warrants are valued using an OPM based on the applicable assumptions, which include the exercise price of the warrants, time to expiration, expected volatility of our peer group, risk-free interest rate, and expected dividends. The assumptions used in the OPM are considered level 3 assumptions and include, but are not limited to, the market value of invested capital, the cumulative equity value of the Company as a proxy for the exercise price, the expected term the warrants will be held prior to exercise, a risk-free interest rate, and probability of change of control event. Additionally, because the warrants are re-priced under certain provisions in the agreements, at each re-pricing event the Company must value the warrants using a Black-Scholes model immediately prior to and immediately following the re-pricing event. The incremental fair value is recorded as an increase to accumulated deficit and additional paid-in-capital, in accordance with ASC 470.
7. Commitments and Contingencies
Operating Leases
Fleet Lease
In December 2019, the Company and Enterprise FM Trust (the Lessor) entered into a Master Equity Lease Agreement whereby the Company leases vehicles to be delivered by the Lessor from time to time with various monthly costs depending on whether the vehicles are delivered for a term of 24 or 36 months, commencing on each corresponding delivery date. The leased vehicles are for use by eligible employees of the Company's commercial operations team. As of June 30, 2024, there were a total of 19 leased vehicles. The Company maintained a letter of credit as collateral in favor of the Lessor of $0.3 million included in restricted cash, which was released by the Lessor during the first quarter of 2023. The Company determined that the leased vehicles are accounted for as operating leases under ASC 842, Leases (ASC 842).
In September 2022, the Company extended the lease term for an additional 12 months for the vehicles with a term of 24 months. In May and June 2024, the Company again extended the lease term for an additional 12 months for vehicles with initial terms of 24 months. In both instances, the Company determined that such extensions are accounted for as modifications, for which the Company reassessed the lease classification and the incremental borrowing rate on the modification dates and accounted for accordingly.
2020 Lease and the First Amendment
On October 3, 2019, the Company entered into an office lease for approximately 24,474 square feet (the High Bluff Premises) pursuant to a non-cancelable lease agreement (the 2020 Lease). The 2020 Lease commenced on April 1, 2020 with an expiry of September 30, 2025, unless terminated earlier in accordance with its terms. The Company provided the landlord with a $0.8 million security deposit in the form of a letter of credit for the High Bluff Premises.
On April 14, 2020, the Company entered into the first amendment to the 2020 Lease for an additional 8,816 rentable square feet of the same office location (the Expansion Premises), which commenced on September 1, 2020 with an expiry of September 30, 2025. The Company provided an additional $0.05 million in a letter of credit for the Expansion Premises.
On March 20, 2023, the Company received a notice of default from its landlord for failing to timely pay March 2023 rent, resulting in a breach under the agreement. As a result, the Company's letter of credit in the amount of $0.8 million, in restricted cash, was recovered by the landlord. In June 2023, the Company reached a settlement with the landlord. As a result of such settlement, the Company reversed its associated remaining ROU assets of $3.3 million and lease liabilities of $4.2 million and recognized a gain of $0.2 million.
-25-
2022 Sublease
On May 27, 2022, the Company entered into a sublease agreement with AMN Healthcare, Inc. (AMN), pursuant to which the Company agreed to sublease 16,637 rentable square feet of the High Bluff Premises to AMN for a term commencing on June 15, 2022 and ending coterminous with the 2020 Lease on September 30, 2025, in exchange for the sum of approximately $0.1 million per month, subject to an annual 3.5% increase each year. Gross sublease income was zero for the three and six months ended June 30, 2024 and $0.3 million for the three and six months ended June 30, 2023. The sublease was terminated along with the settlement of the 2020 Lease in June 2023.
Supplemental Financial Statement Information
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
Lease Cost (in thousands) | Classification | 2024 | 2023 | 2024 | 2023 | |||||||||||||
Operating lease expense | Research and development | $ | 1 | $ | 59 | $ | 2 | $ | 125 | |||||||||
Operating lease expense | Selling and marketing | 43 | 88 | 95 | 247 | |||||||||||||
Operating lease expense | General and administrative | 2 | 103 | 5 | 334 | |||||||||||||
Total | $ | 46 | $ | 250 | $ | 102 | $ | 706 |
Lease Term and Discount Rate |
June 30, 2024 |
December 31, 2023 |
||||||
Weighted Average Remaining Lease Term (in years) | 0.92 | 0.75 | ||||||
Weighted Average Discount Rate | 12 | % | 12 | % |
Maturity of Operating Lease Liabilities (in thousands) | June 30, 2024 | |||
Remainder of 2024 (6 months) | $ | 66 | ||
Year ending December 31, 2025 | 55 | |||
Total lease payments | 121 | |||
Less imputed interest | (7 | ) | ||
Total | $ | 114 |
Six Months Ended June 30, | ||||||||
Other information (in thousands) | 2024 | 2023 | ||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash outflows in operating leases | $ | 140 | $ | 1,427 |
Other Contractual Commitments
In November 2019, the Company entered into a supply and manufacturing agreement with a third-party to manufacture Phexxi, with potential to manufacture other product candidates, in accordance with all applicable current good manufacturing practice regulations. There was approximately $0.3 million in purchases under the supply and manufacturing agreement for the three and six months ended June 30, 2024, and no such purchases during the three and six months ended June 30, 2023.
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Contingencies
From time to time the Company may be involved in various lawsuits, legal proceedings, or claims that arise in the ordinary course of business. During the year ended December 31, 2023, the Company settled a portion of its trade payables with numerous vendors, which resulted in a $2.1 million reduction in trade payables. As of June 30, 2024, there were no other claims or actions pending against the Company which management believes have a probable, or reasonably possible, probability of an unfavorable outcome. However, the Company may receive trade payable demand letters from its vendors that could lead to potential litigation. As of June 30, 2024, approximately 92% of our trade payables were greater than 90 days past due.
On December 14, 2020, a trademark dispute captioned TherapeuticsMD, Inc. v Evofem Biosciences, Inc., was filed in the U.S. District Court for the Southern District of Florida against the Company, alleging trademark infringement of certain trademarks owned by TherapeuticsMD under federal and state law (Case No. 9:20-cv-82296). On July 18, 2022, the Company settled the lawsuit with TherapeuticsMD, with certain requirements which are required to be performed by July 2024, including changing the name of Phexxi. The Company is currently working on how to resolve this issue.
Intellectual Property Rights
In 2014, the Company entered into an amended and restated license agreement (the Rush License Agreement) with Rush University Medical Center (Rush University) pursuant to which Rush University granted the Company an exclusive, worldwide license of certain patents and know-how related to its multipurpose vaginal pH modulator technology. For the U.S. patent that the Company licensed from Rush University, multiple Orders Granting Interim Extension (OGIEs) have been received from the United States Patent and Trademark Office (USPTO), currently extending the expiration of this patent to March 2025. Pursuant to the Rush License Agreement, the Company is obligated to pay Rush University an earned royalty based upon a percentage of net sales in the range of mid-single digits until the expiration of this patent. In September 2020, the Company entered into the first amendment to the Rush License Agreement, pursuant to which the Company is also obligated to pay a minimum annual royalty amount of $0.1 million to the extent the earned royalties do not equal or exceed $0.1 million commencing January 1, 2021. Such royalty costs, included in cost of goods sold, were $0.2 million and $0.4 million for the three and six months ended June 30, 2024, respectively, and $0.2 million and $0.3 million for the three and six months ended June 30, 2023, respectively. As of June 30, 2024 and December 31, 2023, approximately $1.5 million and $1.1 million were included in accrued expenses in the condensed consolidated balance sheets.
8. Convertible and Redeemable Preferred Stock and Stockholders' Deficit
Warrants
In April and June 2020, pursuant to the Baker Bros. Purchase Agreement, as discussed in Note 4 - Debt, the Company issued warrants to purchase up to 2,732 shares of common stock in a private placement at an exercise price of $4,575 per share. The Second Baker Amendment provides that the exercise price of the Baker Warrants will equal the conversion price of the Baker Notes. The exercise price of the Baker warrants was $0.0154 per share as of June 30, 2024.
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In May 2022, the Company completed an underwritten public offering (the May 2022 Public Offering) which included the issuance of common warrants to purchase 362,640 shares of common stock at a price to the public of $93.75 and the issuance of common warrants to purchase 205,360 shares of common stock at a price to the public of $93.63 (the May 2022 Common Stock Warrants). The May 2022 Common Stock Warrants were exercisable beginning on May 24, 2022 and have a five-year term. Due to features in the May 2022 Common Stock Warrants, including dilution adjustments requiring strike price resets, there are 894,194 May 2022 Common Stock Warrants outstanding as of June 30, 2024 at an exercise price of $0.0154.
In June 2022, as required by the Second Baker Amendment, the Company issued the June 2022 Baker Warrants to purchase up to 582,886 shares of the Company's common stock, $0.0001 par value per share. The June 2022 Baker Warrants have an exercise price of $93.75 per share and a five-year term and were exercisable beginning June 28, 2022. The June 2022 Baker Warrants also contain customary 4.99% and 19.99% limitations on exercise provisions. The exercise price and number of shares issuable upon exercise of the June 2022 Baker Warrants is subject to adjustment for certain dilutive issuances, stock splits and similar recapitalization transactions. The exercise price of these warrants had reset to $0.0154 per share as of June 30, 2024.
In February, March, April, July, August, and September 2023, pursuant to the SSNs as discussed in Note 4 - Debt, the Company issued warrants to purchase up to 1,152,122 shares of the Company's common stock at an exercise price of $2.50 per share, up to 2,615,383 shares of the Company's common stock at an exercise price of $1.25 per share and up to 22,189,349 shares of the Company's common stock at an exercise price of $0.13 per share. The exercise price of these warrants reset to $0.0154 per share as of June 30, 2024.
On December 21, 2023, warrants to purchase up to 9,972,074 shares of the Company's common stock were exchanged for 613 shares of the Company's Series F-1 Shares.
As of June 30, 2024, warrants to purchase up to 20,807,539 shares of the Company's common stock remain outstanding at a weighted average exercise price of $2.42 per share. In accordance with ASC 815, certain warrants previously classified as equity instruments were determined to be liability classified (the Reclassified Warrants) due to the Company having an insufficient number of authorized shares as of December 31, 2022; however, the impacted warrants were reclassified back to as equity instruments during the second quarter of 2023 as a result of the May 2023 Reverse Stock Split. During the first quarter of 2024, the Company obtained waivers from a majority of the convertible instrument holders, removing the requirement for shares to be reserved for conversion of their instruments, which will prevent the instruments from needing to be liability classified due to an insufficient number of authorized shares going forward. The Company will continue to re-evaluate the classification of its warrants at the close of each reporting period to determine the proper balance sheet classification for them. These warrants are summarized below:
Type of Warrants | Underlying common stock to be Purchased | Exercise Price | Issue Date | Exercise Period | ||||||||
Common Warrants | 451 | $ | 14,062.50 | May 24, 2018 | May 24, 2018 to May 24 2025 | |||||||
Common Warrants | 888 | $ | 11,962.50 | April 11, 2019 | October 11, 2019 to April 11, 2026 | |||||||
Common Warrants | 1,480 | $ | 11,962.50 | June 10, 2019 | December 10, 2019 to June 10, 2026 | |||||||
Common Warrants | 1,639 | $ | 0.0154 | April 24, 2020 | April 24, 2020 to April 24, 2025 | |||||||
Common Warrants | 1,092 | $ | 0.0154 | June 9, 2020 | June 9, 2020 to June 9, 2025 | |||||||
Common Warrants | 8,003 | $ | 735.00 | January 13, 2022 | March 1, 2022 to March 1, 2027 | |||||||
Common Warrants | 8,303 | $ | 897.56 | March 1, 2022 | March 1, 2022 to March 1, 2027 | |||||||
Common Warrants | 6,666 | $ | 309.56 | May 4, 2022 | May 4, 2022 to May 4, 2027 | |||||||
Common Warrants | 894,194 | $ | 0.0154 | May 24, 2022 | May 24, 2022 to May 24, 2027 | |||||||
Common Warrants | 582,886 | $ | 0.0154 | June 28, 2022 | May 24, 2022 to June 28, 2027 | |||||||
Common Warrants | 49,227 | $ | 0.0154 | December 21, 2022 | December 21, 2022 to December 21, 2027 | |||||||
Common Warrants | 130,461 | $ | 0.0154 | February 17, 2023 | February 17, 2023 to February 17, 2028 | |||||||
Common Warrants | 258,584 | $ | 0.0154 | March 20, 2023 | March 20, 2023 to March 20, 2028 | |||||||
Common Warrants | 369,231 | $ | 0.0154 | April 5, 2023 | April 5, 2023 to April 5, 2028 | |||||||
Common Warrants | 349,463 | $ | 0.0154 | July 3, 2023 | July 3, 2023 to July 3, 2028 | |||||||
Common Warrants | 615,384 | $ | 0.0154 | August 4, 2023 | August 4, 2023 to August 4, 2028 | |||||||
Common Warrants | 12,721,893 | $ | 0.0154 | September 27, 2023 | September 27, 2023 to September 27, 2028 | |||||||
Prefunded Common Warrants | 4,807,694 | $ | 0.0010 | September 27, 2023 | September 27, 2023 to September 27, 2028 | |||||||
Total | 20,807,539 |
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Preferred Stock
Effective December 15, 2021, the Company amended and restated its certificate of incorporation, under which the Company is currently authorized to issue up to 5,000,000 shares of total preferred stock, including the authorized convertible and redeemable preferred stock designated for Series B-1 and B-2, Series C, Series E-1, and Series F-1, and nonconvertible and redeemable preferred stock (Series D), par value $0.0001 per share.
Convertible and Redeemable Preferred Stock
On August 7, 2023, the Company filed a Certificate of Designation of Series E-1 Convertible Preferred Stock (E-1 Certificate of Designation), par value $0.0001 per share (the Series E-1 Shares). An aggregate of 2,300 shares was authorized. The Series E-1 Shares are convertible into shares of common stock at a conversion price of $0.40 per share and are both a) counted toward quorum on the basis of and b) have voting rights equal to the number of shares of common stock into which the Series E-1 Shares are then convertible. The Series E-1 Shares are senior to all common stock with respect to preferences as to dividends, distributions and payments upon a dissolution event. In the event of a liquidation event, the Series E-1 Shares are entitled to receive an amount per share equal to the Black Scholes Value as of the liquidation event plus the greater of 125% of the conversion amount (as defined in the Certificate of Designation) and the amount the holder of the Series E-1 Shares would receive if the shares were converted into common stock immediately prior to the liquidation event. If the funds available for liquidation are insufficient to pay the full amount due to the holders of the Series E-1 Shares, each holder will receive a percentage payout. The Series E-1 Shares are entitled to dividends at a rate of 10% per annum or 12% upon a triggering event. Dividends are payable in shares of common stock and may, at the Company's election, be capitalized and added to the principal monthly. The Series E-1 Shares also have a provision that allows them to be converted to common stock at a conversion rate equal to the Alternate Conversion Price (as defined in the E-1 Certificate of Designation) times the number of shares subject to conversion times the 25% redemption premium in the event of a Triggering Event (as defined in the E-1 Certificate of Designation) such as in a liquidation event. The Series E-1 Shares are mandatorily redeemable in the event of bankruptcy.
On August 7, 2023, certain investors party to the December 2022 Notes and the February 2023 Notes exchanged $1.8 million total in principal and accrued interest under the outstanding convertible promissory notes for 1,800 shares of Series E-1 Shares (the August 2023 Preferred Stock Transaction). Per the E-1 Certificate of Designation, the conversion rate can also be adjusted in several future circumstances, such as on certain dates after the exchange date and upon the issuance of additional convertible securities with a lower conversion rate or in the instance of a Triggering Event. As such, the conversion price as of June 30, 2024 was adjusted to $0.0154 per share. The Series E-1 Shares are classified as mezzanine equity within the condensed consolidated balance sheets in accordance with ASC 480 because of a fixed 25% redemption premium upon a Triggering Event and no mandatory redemption feature. During the year ended December 31, 2023, $1.8 million was recorded as an increase to additional paid-in-capital for the preferred shares in the condensed consolidated statement of convertible and redeemable preferred stock and stockholders' deficit related to the August 2023 Preferred Stock Transaction. For the three and six months ended June 30, 2024, an immaterial and $0.1 million deemed dividend was recorded as an increase to the number of Series E-1 Shares outstanding.
On December 11, 2023, the Company filed a Certificate of Designation of Series F-1 Convertible Preferred Stock (F-1 Certificate of Designation), par value $0.0001 per share (the Series F-1 Shares). An aggregate of 95,000 shares was authorized. The Series F-1 Shares are convertible into shares of common stock at a conversion price of $0.0635 per share and do not have the right to vote on any matters presented to the holders of the Company's common stock. The Series F-1 Shares are senior to all common stock and subordinate to the Series E-1 Shares with respect to preferences as to distributions and payments upon a dissolution event. In the event of a liquidation event, the Series F-1 Shares are entitled to receive an amount per share equal to the Black Scholes Value as of the liquidation event plus the greater of 125% of the conversion amount (as defined in the F-1 Certificate of Designation) and the amount the holder of the Series F-1 Shares would receive if the shares were converted into common stock immediately prior to the liquidation event. If the funds available for liquidation are insufficient to pay the full amount due to the holders of the Series F-1 Shares, each holder will receive a percentage payout. The Series F-1 Shares are not entitled to dividends. The Series F-1 Shares also have a provision that allows them to be converted to common stock at a conversion rate equal to the Alternate Conversion Price (as defined in the F-1 Certificate of Designation) times the number of shares subject to conversion times the 25% redemption premium in the event of a Triggering Event (as defined in the F-1 Certificate of Designation) such as in a liquidation event. The Series F-1 Shares are mandatorily redeemable in the event of bankruptcy. In June 2024, the Required Holders, as defined in the F-1 Certificate of Designation, approved an amended and restated certificate of designation (the Amended F-1 Certificate of Designation) to the Company's certificate of designation designating the rights, preferences and limitations of the Company's Series F-1 Shares. The Amended F-1 Certificate of Designation provides for the removal of the conversion price adjustment provisions previously included and changed the conversion price to $0.0154.
On December 21, 2023, the Company issued a total of 22,280 Series F-1 Shares to certain investors, including 613 shares exchanged for warrants to purchase up to 9,972,074 shares of the Company's common stock and 21,667 shares to exchange a partial value of the outstanding purchase rights. The holders of the Series F-1 Shares immediately exchanged their Series F-1 Shares into Aditxt's Series A-1 preferred stock and, as a result, Aditxt currently holds all 22,280 outstanding Series F-1 Shares. The Series F-1 Shares are to be cancelled upon the consummation of the Merger.
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Nonconvertible and Redeemable Preferred Stock
On December 16, 2022, the Company filed a Certificate of Designation of Series D Non-Convertible Preferred Stock (the D Certificate of Designation), par value $0.0001 per share (the Series D Preferred Shares). An aggregate of 70 shares was authorized; these shares were not convertible into shares of common stock, had limited voting rights equal to 1% of the total voting power of the then-outstanding shares of common stock entitled to vote, were not entitled to dividends, and were required to be redeemed by the Company once its shareholders approved a reverse split, as described in the D Certificate of Designation. All 70 shares of the Series D Preferred were subsequently issued in connection with the December 2022 Securities Purchase Agreement as discussed in Note 4 - Debt. The Series D Preferred Shares were redeemed in July 2023.
Common Stock
Effective September 14, 2023, the Company further amended its amended and restated certificate of incorporation to increase the number of authorized shares of common stock to 3,000,000,000 shares.
Purchase Rights
On September 15, 2022, the Company entered into certain exchange agreements with the Adjuvant Purchasers and the May 2022 Notes Purchasers to exchange, upon request, the Purchase Rights for an aggregate of 942,080 shares of the Company's common stock. The number of right shares for each Purchase Right was initially fixed at issuance, but subject to certain customary adjustments for certain dilutive Company equity issuances until the second anniversary of issuance. These Purchase Rights expire on June 28, 2027. Refer to Note 6 - Fair Value of Financial Instruments for the accounting treatment of the Purchase Rights.
In 2023, the Company signed an additional agreement with the holders of the Purchase Rights which fixed the total aggregate value of the Purchase Rights at $24.7 million, to be paid in a variable number of shares based on the then current exercise price. On December 21, 2023, the Company issued 21,667 of the Series F-1 Shares in exchange for a partial value of certain purchase rights, as described above.
In connection with the SSNs issuances, during the three and six months ended June 30, 2024, the number of outstanding Purchase Rights increased by 16,303,657 and 1,161,636,815, respectively and 15,218,227 and 24,966,856, respectively during the three and six months ended June 30, 2023, due to the reset of their exercise price. This was recorded as a loss on issuance of financial instruments in an immaterial amount in the condensed consolidated statements of operations for each period. The exercise price will be further adjusted if any other convertible instruments have price resets.
During the three months ended June 30, 2024, the Company issued 24,350,000 shares of common stock upon the exercise of certain Purchase Rights. As of June 30, 2024, Purchase Rights of 1,546,948,899 shares of the Company's common stock remained outstanding.
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Common Stock Reserved for Future Issuance
Common stock reserved for future issuance is as follows in common equivalent shares as of June 30, 2024:
Common stock issuable upon the exercise of stock options outstanding | 3,713 | |||
Common stock issuable upon the exercise of common stock warrants | 10,598,201 | |||
Common stock available for future issuance under the 2019 ESPP | 509 | |||
Common stock available for future issuance under the Amended and Restated 2014 Plan | 5,823 | |||
Common stock available for future issuance under the Amended Inducement Plan | 609 | |||
Common stock reserved for the exercise of purchase rights | 741,490,642 | |||
Common stock reserved for the conversion of convertible notes | 155,468,037 | |||
Common stock reserved for the conversion of series E-1 preferred stock | 37,770,024 | |||
Total common stock reserved for future issuance | 945,337,558 |
(1) | The potentially dilutive securities in Note 2 - Summary of Significant Accounting Policies includes all potentially dilutive securities that are not included in the diluted EPS as per U.S. GAAP, whereas the total common stock reserved for future issuance in the table above includes the shares that must legally be reserved based on the applicable instruments' agreements. |
9. Stock-based Compensation
Equity Incentive Plans
The following table summarizes stock-based compensation expense related to stock options granted to employees, non-employee directors and consultants included in the condensed consolidated statements of operations as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||||||
Research and development | $ | 10 | $ | 29 | $ | 26 | $ | 69 | ||||||||
Selling and marketing | 24 | 47 | 59 | 104 | ||||||||||||
General and administrative | 185 | 192 | 371 | 512 | ||||||||||||
Total | $ | 219 | $ | 268 | $ | 456 | $ | 685 |
Stock Options
There were no stock options granted during the three or six months ended June 30, 2024 or 2023. As of June 30, 2024, unrecognized stock-based compensation expense for employee stock options was approximately $0.6 million, which the Company expects to recognize over a weighted-average remaining period of 1.2 years, assuming all unvested options become fully vested.
Employee Stock Purchase Plan
The purchase price under the 2019 ESPP is 85% of the lesser of the fair market value of the common stock on the first or the last business day of an offering period. The maximum number of shares of common stock that may be purchased by any participant during an offering period is equal to $25,000 divided by the fair market value of the common stock on the first business day of an offering period. In October 2022, the Board suspended future offering periods.
Restricted Stock Awards
There were no shares of performance-based RSAs granted to the Company's executive management team in any period presented.
For performance-based RSAs, (i) the fair value of the award is determined on the grant date; (ii) the Company assesses the probability of achieving each individual milestone associated with the award using reasonable assumptions based on the Company's operation performance towards each milestone; (iii) the fair value of the shares subject to the milestone is expensed over the implicit service period commencing once management believes the performance criteria is probable of being met; and (iv) the Company reassesses the probability of achieving each individual milestone at each reporting date, and any change in estimate is accounted for through a cumulative adjustment in the period when the change in estimate occurs. Non-performance based RSAs are valued at the fair value on the grant date and the associated expenses will be recognized over the vesting period.
As of June 30, 2024, there was no unrecognized noncash stock-based compensation expense related to unvested RSAs.
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10. Subsequent Events
Baker Notes Assignment
On July 23, 2024, the Company consented to the transfer of ownership of the Company's senior secured notes from Baker Brothers Life Sciences, L.P., a Delaware limited partnership, 667, L.P., a Delaware limited partnership and Baker Bros. Advisors, LP, a Delaware limited partnership to the successor Future Pak, LLC, a Michigan limited liability company (the Assignee).
The terms of the senior secured notes were not changed in connection with the assignment from Baker to the Assignee.
Issuance of Series F-1 Preferred Shares to Aditxt
The Company issued a total of 1,000 shares of its Series F-1 Preferred Shares to Aditxt for an aggregate purchase price of $1.0 million in July and August 2024, as per the A&R Merger Agreement.
The powers, preferences, rights, qualifications, limitations and restrictions applicable to the F-1 Preferred Stock are set forth in the F-1 Preferred Stock certificate of designation, as filed with the US Securities and Exchange Commission (the Commission) in that Current Report on Form 8-K dated on December 12, 2023.
In connection with the closing of the above, the Company entered into a Registration Rights Agreement (the Registration Rights Agreement) with Aditxt, which provides that the Company will register the resale the shares of Company common stock issuable upon conversion of the F-1 Preferred Shares. The Company is required to prepare and file a registration statement on Form S-3 with the Commission no later than the 300th calendar day following the signing date for the Purchase Agreement and to use its commercially reasonable efforts to have the registration statement declared effective by the Commission within 90 days of the filing of such registration statement, subject to certain exceptions and specified penalties if timely effectiveness is not achieved.
The Company has also agreed to, among other things, indemnify Aditxt, its officers, directors, agents, partners, members, managers, stockholders, affiliates, investment advisers and employees of each of them under the registration statement from certain liabilities and pay all fees and expenses (excluding any underwriting discounts and selling commissions) incident to the Company's obligations under the Registration Rights Agreement.
License and Supply Agreement
On July 17, 2024, Evofem entered into a License and Supply Agreement with Pharma 1 Drug Store, LLC, for the exclusive commercialization rights for Phexxi in certain countries in the Middle East (the Territory), including the United Arab Emirates (UAE), Kuwait, Saudi Arabia, and Qatar. Pharma 1 is responsible for obtaining and maintaining any regulatory approvals required to market and sell Phexxi and will handle all aspects of distribution, sales and marketing, pharmacovigilance and all other commercial functions related to Phexxi in the Territory, assuming regulatory approvals.
Under the License Agreement, Pharma 1 shall create a Development Plan (as defined in the License Agreement) to pursue all reasonable actions necessary to obtain governmental approval of (i) Phexxi and (ii) any related formulation of the Company's licensed technology whether now existing or subsequently developed (the Product) in the Territory. Furthermore, subject to the terms and conditions of the License Agreement, the Company granted to Pharma 1 an exclusive, royalty-free, sublicensable license to the Product to advertise, promote, distribute for commercial sale, offer for sale, sell, and import for commercial sale the Licensed Product in the Territory. Within three months from the Effective Date, Pharma 1 must file the regulatory dossier for the Product with the UAE. Within twelve months of the Effective Date, Pharma 1 must place an order for sufficient quantities of the Product to support commercial launch of the Product in the UAE. Within eighteen months after the last governmental approval of the Product, Pharma 1 must seek governmental approval of the Product in a different country/state in the Territory.
As consideration for the License Agreement, Pharma 1 has agreed to pay the Company the cost to manufacture the Product, plus a fee, and has agreed to maintain an inventory of the Product reasonably sufficient to satisfy at least four months' worth of its requirements at all times for the duration of the Term.
The License Agreement contains customary representations, warranties and indemnities of the Company and Pharma 1 relating to the Product
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Asset Purchase Agreement
On July 14, 2024, Evofem entered into an Asset Purchase Agreement (the SOLOSEC Agreement), with Lupin, Inc. (Lupin) to expand its women's health product portfolio with the acquisition of all of the global rights and title to Lupin's SOLOSEC® (secnidazole) 2g oral granules. This FDA-approved single-dose oral antibiotic provides a complete course of therapy for the treatment of bacterial vaginosis (BV) and trichomoniasis. Evofem intends to re-launch SOLOSEC to OB/GYNs and allied healthcare providers through its existing U.S. sales force. The Company also assumed all of Lupin's rights, title and obligations under that certain Omnibus Acquisition Agreement, dated May 1, 2017 by and among Lupin, Saker Merger Sub LLC, a Delaware limited liability company, Symbiomix Therapeutics, LLC, a Delaware limited liability company, and Shareholder Representative Services LLC, a Colorado limited liability company (the OAA). As consideration for entering into the Asset Agreement, the Company paid Lupin a one-time upfront payment and will pay sales-based payments once annual net sales reach a certain threshold and a one-time milestone payment when cumulative net sales reach a certain threshold. The Company also assumed the OAA Liabilities, excluding Seller OAA Contributions.
Amended and Restated Plan of Merger
On July 12, 2024, the Company, Aditxt, and the Merger Sub entered into an Amended and Restated Merger Agreement (the A&R Merger Agreement). The A&R Merger Agreement amends and restates in its entirely the Agreement and Plan of Merger (as amended January 10, 2024, January 30, 2024, February 29, 2024, and May 2, 2024 (collectively, the Original Merger Agreement). Except as described below, the terms and provisions of the A&R Merger Agreement are consistent with the terms and provision of the Original Merger Agreement.
As consideration for the Merger, the Parent will (i) pay to Common Stockholders an amount equal to $1.8 million less an amount equal to the product of (x) the number of Dissenting Shares represented by Company Common Stock and (y) the Common Exchange Ratio (as defined in the A&R Merger Agreement) (the Common Consideration).
Additionally, each share of the Company's Series E-1 Shares issued and outstanding as of the Effective Time (as defined in the A&R Merger Agreement) shall automatically be converted into the right to receive from Aditxt one share of Parent Preferred Stock (the Preferred Merger Consideration, and together with the Common Consideration the Merger Consideration).
At the Effective Time of the Merger:
(i) | the Company Convertible Note Holders will enter into an Exchange Agreement, pursuant to which these Note Holders will exchange the value of their then-outstanding Company Convertible Notes and purchase rights for an aggregate of not more than 88,161 shares of Parent Preferred Stock. | |
(ii) | each stock option of the Company (Options) that was outstanding and unexercised immediately prior to the Effective Time will be cancelled without the right to receive any consideration. | |
(iii) | all shares of Company Common Stock or Company Preferred Stock held by Parent or Merger Sub or by any wholly-owned Subsidiary thereof shall be automatically cancelled and retired and shall cease to exist, and no consideration shall be delivered or deliverable in exchange therefor; |
Further, Aditxt agreed to, on or prior to: (a) July 12, 2024, purchase 500 shares of the Company's Series F-1 Preferred Shares for an aggregate purchase price of $0.5 million (the July Purchase) (b) August 9, 2024, purchase an additional 500 shares of F-1 Preferred Shares for an aggregate purchase price of $0.5 million (the August Purchase), (c) the earlier of August 30, 2024 or within five business days of the closing of a public offering by Aditxt resulting in aggregate net proceeds to Aditxt of no less than $20.0 million, purchase an additional 2,000 shares of F-1 Preferred Shares for an aggregate purchase price of $2.0 million; and (d) September 30, 2024, purchase an additional 1,000 shares of F-1 Preferred Stock at an aggregate purchase price of $1.0 million. The July Purchase and subsequent August Purchase of 500 shares of the Company's Series F-1 Preferred Shares in each respective purchase were completed as scheduled.
The A&R Merger Agreement is subject to certain closing conditions and contains customary representations, warranties and covenants and indemnifications provisions.
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The consummation of the Merger is conditioned upon, among other things: (i) the Company Shareholder approval shall having been obtained in accordance with applicable Law; (ii) no governmental entity having jurisdiction over any party shall have issue any order, decree, ruling injunction or other action that is in effect restraining the Merger; (iii) a voting agreement shall have been executed and delivered by the parties thereto; (iv) all Company preferred stock shall have been converted to Company common stock except for the Unconverted Company Preferred Stock (as defined by the A&R Merger Agreement); (v) the Company shall have received agreements from all of the holders of the Company's warrants, duly executed, containing waivers with respect to any fundamental transaction, change in control or other similar rights that such warrant holders may have under any such Company warrants and exchange such Company warrants as they hold for an aggregate of not more than 930,336 shares of Parent Preferred Stock (as defined in the A&R Merger Agreement); (vi) the Company shall have cashed out any other warrant holder who has not provided a warrant holder agreement, provided, however, that the aggregate amount of such cash out for any and all other warrant holders who have not provided a warrant holder agreement shall not exceed $0.15 million; (vii) the Company shall have obtained waivers from holders of Company convertible notes of the original principal amount thereof with respect to any fundamental transaction rights such Company convertible note holders may have under any such Company convertible notes, including any right to vote, consent or otherwise approve or veto any of the transaction contemplated by this A&R Merger Agreement; (viii) Aditxt shall have received sufficient financing to satisfy its payment obligations under the A&R Merger Agreement (ix) the requisite stockholder approval shall have been obtained by Aditxt at a special meeting of its stockholders to approve the Parent Stock Issuance (as defined in the A&R Merger Agreement) (x) Aditxt shall have received a compliance certificate from the Company certifying Company complied with all reps and warranties in the A&R Merger Agreement; (xi) Aditxt shall have received waivers from the parties to the agreements listed in Section 7.2(f) of the A&R Merger Agreement Parent Disclosure Letter of the issuance of securities in a "Variable Rate Transaction" (as such term in defined in such agreements); (xii) Parent shall have received a certificate certifying that no interest in the Company is a U.S. real property interest, as required under U.S. treasury regulation section 1.897-2(h) and 1.1445-3(c); (xiii) Aditxt shall have paid, in full, the Repurchase Price, as defined in that certain Securities Purchase and Security Agreement, dated as of April 23, 2020, as amended by that First Amendment to the Securities Purchase and Security Agreement, dated as of November 20, 2021, that Second Amendment to the Securities Purchase and Security Agreement, dated as of March 21, 2022, that Third Amendment to Securities Purchase and Security Agreement dated as of September 15, 2022, and that Fourth Amendment to Securities Purchase and Security Agreement, dated as of September 8, 2023, by and among the Company, Baker Brothers Life Sciences, L.P., 667, L.P. and Bakers Bros. Advisors LP (xv) there shall be no more than 4,141,434 dissenting shares that are Company common stock or 98 dissenting shares that are Company preferred stock (xiv) Company shall have received from Aditxt a compliance certificate certifying that Parent has complied with all representations and warranties, (xv) that Aditxt shall be incompliance with stockholders' equity requirements in Nasdaq listing rule 5550(b)(1).
The Company will prepare and file a proxy statement with the U.S. SEC and, subject to certain exceptions, the Company's Board of Directors will recommend that the A&R Merger Agreement be adopted by the Company's stockholders at a special meeting of the Company's stockholders (the Company Board Recommendation). However, subject to the satisfaction of certain terms and conditions, the Company and the Board, as applicable, are permitted to take certain actions which may, as more fully described in the A&R Merger Agreement, include changing the Company Board Recommendation and entering into a definitive agreement with respect to a Company Change of Recommendation (as defined in the A&R Merger Agreement) if the Company Board or any committee thereof determines in good faith, after consultation with the Company's outside legal and financial advisors and after taking into account relevant legal, financial, regulatory, estimated timing of consummation and other aspects of such proposal that the Company Board considers in good faith and the Person or group making such proposal, would, if consummated in accordance with its terms, result in a transaction more favorable to the Company Shareholders than the Merger. If the Company has a Company Change of Recommendation, the Company must provide Aditxt with a ten (10) calendar day written notice thereof and negotiate with Aditxt in good faith to provide a competing offer.
The Board has (i) determined that the A&R Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable and in the best interests of the Company and its stockholders, and declared it advisable for the Company to enter into the A&R Merger Agreement, (ii) approved and declared advisable the execution and delivery by the Company of the A&R Merger Agreement, the performance by the Company of its covenants and agreements contained in the A&R Merger Agreement and the consummation of the Merger and the other transactions contemplated by the A&R Merger Agreement upon the terms and subject to the conditions contained therein, (iii) directed that the adoption of the A&R Merger Agreement be submitted to a vote at a meeting of the Company stockholders and (iv) resolved, subject to the terms and conditions set forth in the Merger Agreement, to recommend that the Company stockholders adopt the Merger Agreement.
Warrants and Purchase Rights Exercises and Notes Conversions
Subsequent to June 30, 2024, 17,500,000 Purchase Rights were exercised in cashless transactions for an equivalent number of shares of common stock.
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