FEMASYS INC 10-K

Item 8. Financial Statements. Financial Statements Table of Contents Page Report of Independent Registered Public Accounting Firm ( KPMG LLP , PCAOB 185 ) 75 Balance Sheets at December 31, 2022 and 2021 76-77 Statements of Comprehensive Loss for the Years Ended December 31, 2022 and 2021 78 Statements of Stockholders’ Equity for the Years Ended December 31, 2022 and 2021 79 Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 80 Notes to Financial Statements 81-100 74 Table of Contents KPMG LLP Suite 2000 303 Peachtree Street, N.E. Atlanta, GA 30308-3210 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Femasys Inc.: Opinion on the Financial Statements We have audited the accompanying balance sheets of Femasys Inc. (the Company) as of December 31, 2022 and 2021, the related statements of comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses and negative cash flows from operations and has a net accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2016. Atlanta, Georgia March 30, 2022 75 Table of Contents FEMASYS INC. Balance Sheets Assets December 31, 2022 December 31, 2021 Current assets: Cash and cash equivalents $ 12,961,936 24,783,029 Accounts receivable, net 77,470 84,258 Inventory, net 436,723 208,270 Other current assets 655,362 555,853 Total current assets 14,131,491 25,631,410 Property and equipment, at cost: Leasehold improvements 1,195,637 1,155,332 Office equipment 99,344 99,344 Furniture and fixtures 419,303 424,947 Machinery and equipment 2,572,243 2,261,793 Construction in progress 413,843 379,713 4,700,370 4,321,129 Less accumulated depreciation ( 3,217,319 ) ( 2,722,117 ) Net property and equipment 1,483,051 1,599,012 Long-term assets: Lease right-of-use assets, net 319,557 665,747 Intangible assets, net of accumulated amortization 3,294 25,093 Other long-term assets 958,177 655,418 Total long-term assets 1,281,028 1,346,258 Total assets $ 16,895,570 28,576,680 ( continued ) 76 Table of Contents FEMASYS INC. Balance Sheets Liabilities and Stockholders’ Equity December 31, 2022 December 31, 2021 Current liabilities: Accounts payable $ 510,758 445,522 Accrued expenses 456,714 603,787 Clinical holdback - current portion 45,206 18,947 Note payable – current portion 141,298 181,123 Lease liabilities – current portion 373,833 406,674 Other – current — 36,037 Total current liabilities 1,527,809 1,692,090 Long-term liabilities: Clinical holdback - long-term portion 96,658 149,791 Lease liabilities – long-term portion 28,584 402,417 Total long-term liabilities 125,242 552,208 Total liabilities 1,653,051 2,244,298 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.001 par, 200,000,000 authorized, 11,986,927 shares issued and 11,869,704 outstanding as of December 31, 2022 ; and 11,921,388 shares issued and 11,804,165 outstanding as of December 31, 2021 11,987 11,921 Treasury stock, 117,223 shares ( 60,000 ) ( 60,000 ) Warrants 567,972 702,492 Additional paid-in-capital 108,857,065 108,418,304 Accumulated deficit ( 94,134,505 ) ( 82,740,335 ) Total stockholders’ equity 15,242,519 26,332,382 Total liabilities and stockholders’ equity $ 16,895,570 28,576,680 See accompanying notes to financial statements. 77 Table of Contents FEMASYS INC. Statements of Comprehensive Loss Years ended December 31, 2022 and 2021 December 31, 2022 December 31, 2021 Sales $ 1,206,218 1,179,689 Cost of sales 441,938 370,384 Gross margin 764,280 809,305 Operating expenses: Research and development 5,813,755 4,084,304 Sales and marketing 558,852 208,735 General and administrative 5,430,704 4,262,002 Depreciation and amortization 561,233 591,068 Total operating expenses 12,364,544 9,146,109 Loss from operations ( 11,600,264 ) ( 8,336,804 ) Other income (expense): Interest income, net 228,164 3,768 Other income — 821,515 Interest expense ( 13,464 ) ( 19,226 ) Other expense ( 2,306 ) ( 3,098 ) Total other income 212,394 802,959 Loss before income taxes ( 11,387,870 ) ( 7,533,845 ) Income tax expense 6,300 4,000 Net loss $ ( 11,394,170 ) ( 7,537,845 ) Net loss attributable to common stockholders, basic and diluted $ ( 11,394,170 ) ( 7,537,845 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 0.96 ) ( 1.12 ) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 11,815,019 6,712,028 See accompanying notes to financial statements. 78 Table of Contents FEMASYS INC. Statements of Stockholders’ Equity (Deficit) Series B and Series C Redeemable Convertible Accumulated other Total Preferred stock Common stock Treasury stock Preferred stock Additional comprehensive Accumulated stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Warrants paid-in capital loss, net of tax deficit Equity (Deficit) Balance at December 31, 2020 55,835,833 $ 55,343,686 1,110,347 $ 1,110 117,223 $ ( 60,000 ) 17,210,609 $ 17,211 $ 702,492 $ 22,725,949 $ — $ ( 75,202,490 ) $ ( 51,815,728 ) Issuance of common stock for cash upon exercise of options — — 44,698 45 — — — — — 126,501 — — 126,546 Issuance of common stock in connection with IPO — — 2,650,000 2,650 — — — — — 30,019,707 — — 30,022,357 Automatic conversion of preferred stock in connection with IPO ( 55,835,833 ) ( 55,343,686 ) 8,116,343 8,116 — — ( 17,210,609 ) ( 17,211 ) — 55,352,781 — — 55,343,686 Share-based compensation expense — — — — — — — — — 193,366 — — 193,366 Net loss — — — — — — — — — — — ( 7,537,845 ) ( 7,537,845 ) Balance at December 31, 2021 — — 11,921,388 11,921 117,223 ( 60,000 ) — — 702,492 108,418,304 — ( 82,740,335 ) 26,332,382 Issuance of common stock for cash upon exercise of options — — 9,445 10 — — — — — 16,141 — — 16,151 Issuance of common stock in connection with Employee Stock Purchase Plan — — 4,843 5 — — — — — 3,724 — — 3,729 Issuance of common stock in connection with At-The-Market offering, net of issuance costs of $ 95 — — 51,251 51 — — — — — 59,437 — — 59,488 Share-based compensation expense — — — — — — — — — 224,939 — — 224,939 Expiration of warrant — — — — — — — — ( 134,520 ) 134,520 — — — Net loss — — — — — — — — — — — ( 11,394,170 ) ( 11,394,170 ) Balance at December 31, 2022 — $ — 11,986,927 $ 11,987 117,223 $ ( 60,000 ) — $ — $ 567,972 $ 108,857,065 $ — $ ( 94,134,505 ) $ 15,242,519 See accompanying notes to financial statements. 79 Table of Contents FEMASYS INC. Statements of Cash Flows Years ended December 31, 2022 and 2021 Years ended December 31 2022 2021 Cash flows from operating activities: Net loss $ ( 11,394,170 ) ( 7,537,845 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 539,434 551,092 Amortization 21,799 39,976 Amortization of right-of-use assets 327,907 373,219 Inventory reserve 4,100 540 Share-based compensation expense 224,939 193,366 Loan and accrued interest forgiveness on note payable — ( 821,515 ) Loss on fixed asset disposition 2,285 3,098 Changes in operating assets and liabilities: Accounts receivable 6,788 41,532 Inventory ( 232,553 ) ( 77,432 ) Other assets 295,862 475,993 Accounts payable 65,236 ( 228,811 ) Accrued expenses ( 147,073 ) ( 504,799 ) Lease liabilities ( 383,616 ) ( 413,212 ) Other liabilities ( 62,911 ) ( 25,987 ) Net cash used in operating activities ( 10,731,973 ) ( 7,930,785 ) Cash flows from investing activities: Purchases of furniture and equipment ( 407,475 ) ( 306,868 ) Net cash used in investing activities ( 407,475 ) ( 306,868 ) Cash flows from financing activities: Payments of deferred offering costs 1 ( 232,845 ) ( 1,578,643 ) Proceeds from issuance of common stock 79,463 31,740,046 Repayment of notes payable ( 505,205 ) ( 442,086 ) Payments under lease obligations ( 23,058 ) ( 20,861 ) Net cash (used in) provided by financing activities ( 681,645 ) 29,698,456 Net change in cash and cash equivalents ( 11,821,093 ) 21,460,803 Cash and cash equivalents: Beginning of year 24,783,029 3,322,226 End of year $ 12,961,936 24,783,029 Supplemental cash flow information Cash paid for: Interest $ 13,464 15,865 Income taxes $ 5,050 800 Non-cash investing and financing activities: Conversion of convertible preferred stock to common stock $ — 55,360,897 Commission costs relating to certain proceeds from issuance of common stock $ 1,843 — Prepaid insurance financed with promissory notes $ 141,298 181,123 1 Deferred offering costs includes $ 95 of offering costs charged against certain proceeds from the issuance of common stock. See accompanying notes to financial statements. 80 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 (1) Organization, Nature of Business, and Liquidity Organization and Nature of Business Femasys Inc. (the Company or Femasys) was incorporated in Delaware on February 19, 2004 and is headquartered in Suwanee, Georgia. The Company is a biomedical company focused on transforming women’s healthcare by developing novel solutions and next-generation advancements providing significant clinical impact to address severely underserved areas. The Company’s mission is to provide women with superior minimally-invasive, non-surgical product technologies, accessible in the office, improving patient care and overall health economics. The Company currently operates as one segment with an initial focus on servicing the reproductive health needs for those seeking permanent birth control or solutions for infertility issues. Femasys has an expansive intellectual property portfolio which covers both design and utility patents in the U.S. and significant ex-U.S. markets for each product initiative. Femasys has taken concepts internally conceived and protected through development, including domestic and foreign regulatory approvals, and production, through in-house manufacturing. FemBloc® (FemBloc), the Company’s solution for permanent birth control, is based on the Company’s non-surgical platform technology and we recently completed a validation study under an approved Investigational Device Exemption (IDE) from the U.S. Food and Drug Administration (FDA) and plan to use the study data to support which of the two confirmation tests (ultrasound or radiology) should be studied in a new pivotal trial to support a potential future application for PMA for FemBloc. Results of the small study along with the trial design for the pivotal clinical trial is planned for submission to the FDA in the first quarter of 2023.- FemaSeed® (FemaSeed), a solution which enables directed intrauterine insemination to improve on traditional intrauterine insemination (IUI) and provides a lower cost option to in vitro fertilization methods, received approval in April 2021 from the FDA on its IDE and the clinical study was initiated in July 2021. An updated study design received approval in October 2022 from the FDA. FemVue® (FemVue), a solution that enables fallopian tube assessment with ultrasound as an alternative to the radiologic approach (hysterosalpingogram) for the diagnosis of infertility, is approved for sale in the U.S., Japan, and Canada. FemChec® (FemChec), allows for fallopian tube evaluation after a FemBloc procedure to confirm occlusion (or procedure success). FemCerv® (FemCerv) is a solution for complete tissue sampling with minimal contamination of the endocervical canal as an alternative to the single biopsy method, and is approved for sale in the U.S. FemCath™ (FemCath), allows for selective evaluation of an individual fallopian tube as an alternative to the traditional intrauterine catheter that is undirected, is approved for sale in the U.S. Basis of Presentation The Company has prepared the accompanying financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Liquidity As of December 31, 2022, the Company has cash and cash equivalents of $ 12,961,936 . The Company plans to finance its operations and development needs with its existing cash and cash equivalents, in the future with additional equity and/or debt financing arrangements, and revenue primarily from the sale of FemVue to support the Company’s research and development activities, largely in connection with FemBloc and FemaSeed. There can be no assurance that the Company will be able to obtain additional financing on terms acceptable to the Company, on a timely basis, or at all. If the Company is not able to obtain sufficient funds on acceptable terms when needed, the Company’s business, results of operations, and financial condition could be materially adversely impacted. For the year ended December 31, 2022, the Company generated a net loss of $ 11,394,170 . The Company expects such losses to increase over the next few years as the Company advances FemBloc and FemaSeed through clinical development until FDA approval is received and the products are available to be marketed. The financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net operating losses in every year since inception and has an accumulated deficit as of December 31, 2022 of $ 94,134,505 and expects to incur additional losses and negative operating cash flows for at least the next twelve months. The Company’s ability to meet its obligations is dependent upon its ability to generate sufficient cash flows from operations and future financing transactions. Although management expects the Company will continue as a going concern, there is no assurance that management’s plans will be successful since the availability and amount of such funding is not certain. Accordingly, substantial doubt exists about the Company’s ability to continue as a going concern for at least one year from the issuance of these financial statements. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern. 81 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 The Company is evaluating strategies to obtain the required additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, and restructuring of operations to grow revenues and decrease expenses. However, given the impact of the economic downturn on the U.S. and global financial markets, the Company may be unable to access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all. (2) Summary of Significant Accounting Policies (a) Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting periods. The most significant estimates used in these financial statements include the pre-IPO valuation of common stock, stock options, warrants, the valuation of useful lives of property and equipment, and clinical trial cost accruals . Actual results could differ from those estimates. (b) Certain Risk and Uncertainties Most of the products developed by the Company, such as its FemBloc and FemaSeed, will require approval from the FDA or corresponding foreign regulatory agencies prior to commercial sales. The FemCath (formally FemVue) Cornual Balloon Catheter, FemVue® Saline‑Air Device, FemChec® Pressure Management Device, and FemCerv® Endocervical Sampler have achieved FDA clearance. The FemVue® Saline‑Air Device has also received approval to sell in Canada, Hong Kong and Japan. There can be no assurance the Company’s other products in development will receive the necessary clearances. If the Company is denied clearance or clearance is delayed, it might have a material adverse impact on the Company. The medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the court has entered final judgment and all appeals are exhausted. The Company’s competitors may assert that its products or the use of its products are covered by United States or foreign patents held by them. If such relevant patents are upheld as valid and enforceable and the Company is found to infringe, the Company could be prevented from selling its products unless it can obtain a license to use technology or ideas covered by such patents or are able to redesign its products to avoid infringement. A license may not be available at all or on commercially reasonable terms, and it may not be able to redesign its products to avoid infringement. The Company relies on single source suppliers to provide certain components of all its products commercially available and those under development. The Company purchases these components on a purchase order basis. If the Company overestimates its component requirements, it could have excess inventory, which would increase its costs and result in write‑downs harming its operating results. If the Company underestimates its requirements, it may not have an adequate supply, which could interrupt the manufacturing of its products. (c) Fair Value of Financial Instruments Certain of the Company’s financial instruments, including cash, accounts receivable, inventory, accounts payable, accrued expenses, notes payable and other liabilities approximate their fair value because of the short‑term maturity of these financial instruments. The fair value of the Company’s cash equivalents are based on Level 1 inputs (notes 3 and 4), and the fair value of stock options and warrants is based on Level 3 inputs (note 3). (d) Cash and Cash Equivalents The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of amounts invested in money market mutual funds and are stated at fair valu e. See note 2(q) for information on concentration of credit risk. 82 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 (e) Accounts Receivable The Company grants trade credit to customers in the normal course of business and does not require collateral or any other security to support its receivables. Management reviews its accounts receivable monthly for any collection issues. Potentially uncollectible accounts are written off to bad debt expense when it is determined that the likelihood a customer account is uncollectible is probable. For the year ending December 31, 2022, the company had written off $ 977 against the reserve, compared to $ 0 in 2021. As of December 31, 2022 and 2021, the Company’s reserves for uncollectible accounts were $ 2,048 and $ 2,026 , respectively. (f) Inventories Inventories are stated at the lower of cost or net realizable value. Cost, which includes amounts related to materials, labor and overhead, is determined on a first‑in, first‑out basis. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. Management reviews inventories continually for aging or obsolescence and accounts for such items once identified. In 2022 and 2021, the Company disposed of inventory in the amount of $ 2,847 and $ 586 , respectively. As of December 31, 2022 and 2021, the FemVue reserve for slow moving, obsolete, or unusable inventories was $ 2,103 and $ 850 , respectively. Inventory stated at cost, net of reserve, consisted of the following as of December 31: 2022 2021 Materials $ 244,498 111,531 Work in progress 100,453 12,795 Finished goods 91,772 83,944 Inventory, net $ 436,723 208,270 (g) Other Assets The Company has research tax credits that are available to the Company to offset future payroll withholding liabilities. As of December 31, 2022 and 2021, the total amount of these credits is $ 891,062 and $ 766,571 , respectively. The Company has included these amounts on the accompanying balance sheets as follows as of December 31: 2022 2021 Other current assets $ 212,134 184,638 Other long-term assets 678,928 581,933 Research tax credits available to the Company $ 891,062 766,571 (h) Property and Equipment Property and equipment are carried at cost less accumulated depreciation and, if applicable, impairment charges. Expenditures which materially increase value or extend useful lives of assets are capitalized, while maintenance and repairs which do not improve or extend the lives of the respective assets are charged to operations when incurred. Gains and losses on the retirement or disposal of individual assets are included in the results of operations. Depreciation and amortization are computed using the straight‑line method over estimated useful lives of assets as follows: Leasehold improvements Shorter of lease term(s) or useful life Office equipment 5 years Furniture and fixtures 7 years Machinery and equipment 5 to 7 years 83 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 Depreciation expense for the years ended 2022 and 2021 was $ 521,151 and $ 532,552 , respectively. In 2022, the Company disposed of property and equipment at a cost of $ 28,234 with a net book value of $ 2,285 , which is recorded in other expense on the statements of comprehensive loss. In 2021, the Company disposed of property and equipment at a cost of $ 11,401 with a net book value of $ 3,098 , which is recorded in other expense on the statements of comprehensive loss. (i) Impairment of Long-Lived Assets The Company reviews long‑lived assets, including property and equipment and definite lived intangibles, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset group may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset group and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long‑lived asset group exceeds its fair value. The Company has no t recorded any impairment losses to date. (j) Leases The Company records operating leases as right-of-use assets and operating lease liabilities in its balance sheets for all operating leases with terms exceeding one year . Right-of-use assets represent the right to use an underlying asset for the lease term, including extension options considered reasonably certain to be exercised, and operating lease liabilities to make lease payments. Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term. To the extent that lease agreements do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the lease commencement date to determine the present value of lease payments. The expense for operating lease payments is recognized on a straight-line basis over the lease term and is included in operating expenses in the Company’s statement of comprehensive loss. Non-lease components included in lease agreements are accounted for separately. The Company records finance leases as right-to-use assets and finance lease liabilities in its balance sheets for all finance leases with terms exceeding one year , similar to operating leases, and records interest expense and depreciation expense on the right-of-use asset in the statement of comprehensive loss. (k) Intangible Assets Intangible assets consist of patent and trademark application costs and related legal fees, carried at cost less accumulated amortization and, if applicable, impairment charges. Amortization is computed using the straight‑line method over a weighted average useful life of three years and is recorded in depreciation and amortization expense within the results of operations. Intangible assets consist of the following as of December 31: 2022 2021 Cost $ 1,668,951 1,668,951 Accumulated amortization ( 1,665,657 ) ( 1,643,858 ) Net book value $ 3,294 25,093 Amortization expense for intangible assets for the years ended December 31, 2022 and 2021 was $ 21,799 and $ 39,976 , respectively. Amortization expense related to intangible assets is expected to be $ 3,294 for the year ended December 31, 2023. (l) Deferred Offering Costs Deferred offering costs, which consisted mainly of legal, consulting, and accounting fees directly attributable to a strategic financing transaction, were capitalized in accordance with Staff Accounting Bulletin (SAB) Topic 5.A, codified in Accounting Standards Codification (ASC) 340-10-S99-1. During 2022, the Company incurred $ 232,845 in deferred offering costs in connection with the Equity Distribution Agreement entered in July 2022 with Piper Sandler which included an At-The-Market (ATM) facility. These deferred offering costs will be offset against the total proceeds from the issuance of common stock available under the Equity Distribution Agreement, and the Company will expense any remaining balance of deferred offering costs if the Equity Distribution agreement is terminated or aborted. In December 2022, the Company offset $ 95 of deferred offering costs in connection with the gross proceeds issued under the ATM facility. 84 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 In May 2021, the Company expensed $ 188,544 of deferred offering costs in connection with another financing transaction to focus on the IPO transaction. In June 2021, upon the closing of the IPO, total deferred offering costs of $ 1,591,143 were offset against the proceeds of the IPO offering. As of December 31, 2022, deferred offering costs capitalized were $ 232,750 and are included in other long-term assets in the accompanying balance sheet. As of December 31, 2021, no amounts of deferred offering costs were capitalized. (m) Accrued Expenses Accrued clinical trial expenses include research and development costs for third-party services, largely related to the Company’s clinical trials, that are estimated based upon the services provided but not yet invoiced. These costs, at times, may be a significant component of the research and development expenses and the Company makes estimates in determining the accrued expense each period. As actual costs become known, the Company adjusts its accrual. Accrued other expenses include director fees, sales taxes and other accrued expenses. Accrued expenses consisted of the following as of December 31: 2022 2021 Clinical trial costs $ 333,440 301,730 Compensation costs 85,191 98,272 Franchise taxes 26,886 103,020 Other 11,197 100,765 Accrued expenses $ 456,714 603,787 85 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 (n) Clinical Holdback As part of the regulatory approval process for taking its products to market or conducting post-market clinical studies to support marketing efforts for products with regulatory clearance, the Company enters into certain Clinical Trial Agreements (CTAs) which include, among other things, the compensation and payment schedule the participating medical institutions and physicians will receive for all costs in connection with the clinical trial (or study) under the terms of the CTA. As individual patients are enrolled in the study by the participating medical institution or physician, the Company pays certain per study fees according to the CTA for the duration of the trial. As invoices are received by the Company from the medical institution or physician, the Company retains any agreed upon percentage of total invoiced costs, generally ranging between 5 % - 15 %, that is withheld from payment until the end of the study. These retained amounts are recorded as clinical holdback, a liability, on the accompanying balance sheets, and all expenses incurred in connection with these CTA activities are expensed as services are provided, which are included as research and development expenses on the accompanying statements of comprehensive loss. The following table shows the activity within the clinical holdback liability accounts for the year ended December 31, 2022: Balance at December 31, 2021 $ 168,738 Clinical holdback retained 21,456 Clinical holdback paid ( 48,330 ) Balance at December 31, 2022 $ 141,864 Less: clinical holdback - current portion ( 45,206 ) Clinical holdback - long-term portion $ 96,658 The following table shows the activity within the clinical holdback liability accounts for the year ended December 31, 2021: Balance at December 31, 2020 $ 164,972 Clinical holdback retained 15,503 Clinical holdback paid ( 11,737 ) Balance at December 31, 2021 $ 168,738 Less: clinical holdback - current portion ( 18,947 ) Clinical holdback - long-term portion $ 149,791 86 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 (o) Revenue Recognition The Company’s policy is to recognize revenue when a customer obtains control of the promised goods under ASC 606, Revenue from Contracts with Customers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods, and the Company has elected to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price. The Company does not have multiple performance obligations in its customer orders, so revenue is recognized upon shipment of the Company’s goods based upon contractually stated pricing at standard payment terms ranging from 30 to 60 days. All revenue is recognized point in time and no revenue is recognized over time. There was no revenue recognized during the years ended December 31, 2022 and 2021 from performance obligations satisfied or partially satisfied in prior periods. Additionally, there were no unsatisfied performance obligations as of December 31, 2022 and 2021. The majority of products sold directly to U.S customers are shipped via common carrier, and the customer pays for shipping and handling and assumes control Free on Board (FOB) shipping point. Products shipped to the Company’s international distributors are in accordance with their respective agreements; however, the shipping terms are generally EX-Works, reflecting that control is assumed by the distributor at the shipping point. Returns are only accepted with prior authorization from the Company. Items to be returned must be in original unopened cartons and are subject to a 30 % restocking fee. As of December 31, 2022, the Company has not had a history of significant returns. The following table summarizes the Company’s sales, primarily from FemVue, by geographic region for the years ending December 31: Primary geographical markets 2022 2021 U.S. $ 1,090,359 1,005,612 International 115,859 174,077 Total $ 1,206,218 1,179,689 (p) License, Manufacturing, and Supply Agreement – Bayer Yakuhin The Company entered into a FemVue® License, Manufacturing, and Supply Agreement with Bayer Yakuhin, Ltd., a wholly owned subsidiary of Bayer AG, in 2012. The Company sells products based on purchase orders provided by Bayer Yakuhin in accordance with their agreement. Control and risk of ownership transfer at the time of shipment and Femasys records revenue at that time. (q) Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents, and accounts receivable. As of December 31, 2022, the Company maintained substantially all its cash and cash equivalents primarily in one bank, Silicon Valley Bank (SVB), in amounts which, at times, exceed federally insured limits, which Management believed, at that time, SVB was financially sound and minimal credit risk existed with respect to these holdings. As of March 15, 2023, the Company transferred substantially all of its cash and cash equivalents to another financial institution, Wells Fargo Bank. The Company generates revenue from sales directly to U.S. customers and to the Company’s international distributors with all prices in U.S. dollars. For the years ended December 31, 2022 and 2021, Bayer Yakuhin, Ltd. accounted for 10 % and 15 % of total revenue, respectively. No other customers accounted for more than 10% of total revenue. As of December 31, 2022, the Company had one customer with an accounts receivable balance greater than 10% of total receivables or 16 % of total receivables. As of December 31, 2021, the company had no customer with an accounts receivable balance greater than 10% of total receivables. 87 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 (r) Research and Development The Company’s research and development expenses consist of engineering, product development, and clinical and regulatory expenses and are expensed as incurred. These expenses include direct expenses related to employee compensation, including salary, benefits and stock-based compensation; expenses related to consulting fees, testing fees, materials, and supplies; and activities conducted by third-party service providers, which include the conducting of preclinical studies and clinical trials. (s) Sales and Marketing The Company’s sales and marketing expenses consist of direct expenses related to employee compensation, including salary, benefits and stock-based compensation, advertising and marketing, business development, customer service, and travel. (t) General and Administrative The Company’s general and administrative expenses include accounting, human resources, and general corporate expenses. These expenses are primarily related to employee compensation, including salary, benefits, and stock‑based compensation. General corporate expenses generally relate to office rent, utilities, insurance, legal, and professional fees. (u) Advertising Expense Advertising costs are expensed as incurred. Advertising costs were $ 41,022 and $ 27,000 for the years ended December 31, 2022 and 2021, respectively. They are reflected in sales and marketing expenses in the statements of comprehensive loss. (v) Stock-Based Compensation Share‑based payments, including grants of stock options, are recognized in the financial statements based on their fair value. The fair value of stock options is estimated using the Black‑Scholes model. This model requires the input of highly subjective assumptions, including the expected term of the award, expected stock volatility, and the price of the underlying shares of stock. Details of the stock‑based compensation and accounting treatment are discussed in note 9. (w) Income Taxes The Company utilizes the asset‑and‑liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the net operating loss, capital loss, and tax credit carry forwards. Valuation allowances are established against deferred tax assets if it is more likely than not that they will not be realized. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company has determined it had no unrecognized tax benefits as of December 31, 2022 and 2021. As of December 31, 2022, the 2019 through 2022 tax years remain subject to examination by federal and most state tax authorities. The use of net operating losses generated in tax years prior to 2018 may also subject returns for those years to examination. (x) Other Income For the year ended December 31, 2022, the Company recorded no other income. For the year ended December 31, 2021, the Company recorded $ 821,515 in other income in connection with the Small Business Administration (SBA) Paycheck Protection Program (PPP) loan forgiveness program (see note 6). 88 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 (y) Net Loss per Share Attributable to Common Stockholders Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period, without consideration of common stock equivalents. The net loss attributable to common stockholders is calculated by adjusting the net loss of the Company for the cumulative dividends, if any, on the convertible preferred stock. Diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders since the effect of potentially dilutive securities is anti-dilutive given the net loss of the Company. (z) Recently Issued Accounting Pronouncements – Recently Adopted On January 1, 2021, the Company adopted Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which the Financial Accounting Standards Board (FASB) issued in December 2019. This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance was effective for annual periods after December 15, 2020, including interim periods within those annual periods. The Company’s adoption of this new guidance did not have a material impact on the Company’s financial statements and footnote disclosures. (aa) Recently Issued Accounting Pronouncements – Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard changes the accounting for credit losses for financial assets and certain other instruments, including trade receivables and contract assets, that are not measured at fair value through net income. Under legacy standards, we recognize an impairment of receivables when it was probable that a loss had been incurred. Under the new standard, we are required to recognize estimated credit losses expected to occur over the estimated life or remaining contractual life of an asset (which includes losses that may be incurred in future periods) using a broader range of information including reasonable and supportable forecasts about future economic conditions. The guidance is effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years with early adoption permitted. We do not expect the adoption of the standard to have a significant impact on the Company’s results of operations, financial position or cash flows as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors. No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements. (3) Fair Value The Company applies a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories: Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for Identical or similar instruments in markets that are not active, and model‑based valuation techniques for which all significant assumptions are observable in the market. Level 3 – Valuation is generated from model‑based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions market participants would use in pricing the asset or liability. The Company’s options on common stock and warrants are classified as equity instruments and are measured at fair value at issue date. The Company values the options based on the Black‑Scholes option pricing model. The Company uses unobservable inputs for the model’s assumptions, including management’s assumptions of the Company’s volatility and price of the underlying stock (notes 8 and 9). (4) Cash and Cash Equivalents As of December 31, 2022 and 2021, money market funds included in cash and cash equivalents on the balance sheets were $ 12,553,557 and $ 24,388,443 , respectively, which represent Level 1 within the fair value hierarchy (see note 3). 89 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 (5) Commitments and Contingencies (a) Leases As of December 31, 2022, the Company has the right of use for its facilities located in Suwanee, GA under a long-term operating lease agreement, as amended (Lease Agreement), which expires January 2024 . The Company has the option (Extension Option) to extend the term for two consecutive terms of five years each at 100 % of the then current market rate, as agreed by both parties, and upon certain terms and conditions and the Company must provide written notice of its intent to exercise this extension option at least twelve months prior to the expiration date of January 2024. In September 2022, the Company provided written notice to the lessor of its intent to exercise this extension option and is currently working with the lessor on the terms. Under the terms of the lease agreement, the Company’s monthly rent is subject to increases on an annual basis. As of December 31, 2022, the Company’s monthly rent payment was $ 45,659 . Operating right-of-use assets and lease liabilities consist of the following as of December 31: 2022 2021 Lease right-of-use assets $ 307,761 635,668 Total $ 307,761 635,668 Lease liabilities: 2022 2021 Lease liabilities – current portion $ 357,640 383,616 Lease liabilities – long-term portion 28,584 386,224 Total $ 386,224 769,840 As of December 31, 2022 and 2021, the weighted average discount rate for all operating leases with initial terms of more than one year was approximately 10 % and the weighted average remaining term for operating leases was 1.1 years and 2.1 years, respectively. The operating lease agreement for the Company’s facility includes non-lease costs, such as common area maintenance, which are recorded as variable lease costs. Operating lease expenses for the year ended are summarized as follows for the years ending December 31: Lease cost: 2022 2021 Operating lease cost $ 485,598 487,746 Short-term lease cost 5,730 3,343 Variable lease cost 41,198 17,497 Total $ 532,526 508,586 (b) Financing Leases The Company has the right of use for certain leasehold improvements and office equipment at its facility located in Suwanee, GA. For the years ending December 31, 2022 and 2021, no new financing leases were entered into during the year. Lease expense will be recognized as payment of financing lease, depreciation expense and interest expense. 90 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 Financing right-of-use assets and lease liabilities consist of the following as of December 31: 2022 2021 Lease right-of-use assets $ 150,122 150,122 Accumulated depreciation ( 138,326 ) ( 120,043 ) Net $ 11,796 30,079 Lease liabilities: 2022 2021 Lease liabilities – current portion $ 16,193 23,058 Lease liabilities – long-term portion — 16,193 Total $ 16,193 39,251 As of December 31, 2022 and 2021, the weighted average discount rate for all financing leases with initial terms of more than one year was approximately 10 %, and the weighted average remaining term for financing leases was 0.7 and 1.6 years, respectively. Depreciation expense associated with the Company’s financing leases was $ 18,283 and $ 18,540 , respectively, and interest expense was $ 2,892 and $ 5,090 for the years ended December 31, 2022 and 2021, respectively. The following table summarizes the Company’s undiscounted cash payment obligations for its lease liabilities with initial terms of more than twelve months as of December 31, 2022: Operating leases: 2023 $ 557,500 2024 47,029 Total undiscounted lease payments -operating leases 604,529 Financing leases: 2023 16,792 Total undiscounted lease payments -finance leases 16,792 Total undiscounted lease payments 621,321 Less: imputed interest ( 218,904 ) Lease liability 402,417 Less: current portion of lease liability ( 373,833 ) Lease liability, less current portion $ 28,584 (c) Clinical Trial Agreements As part of the regulatory approval process for taking its products to market or conducting post-market clinical studies to support marketing efforts for products with regulatory clearance, the Company enters into a CTA to compensate each participating medical institution and physician. Generally, upon executing a CTA with a participating medical institution or physician, the Company pays a fee for review board approval that usually requires annual renewals and one time site startup costs. As individual patients are enrolled in the clinical trial by the participating medical institution or physician, the Company pays certain per patient fees according to the CTA for the duration of the trial. Expenses incurred in connection with these CTA activities are expensed as services are provided and are included in research and development expenses on the accompanying statements of comprehensive loss. (d) Legal Claims Occasionally, the Company may be a party to legal claims or proceedings of which the outcomes are subject to significant uncertainty. In accordance with ASC 450, Contingencies , the Company will assess the likelihood of an adverse judgment for any outstanding claim as well as ranges of probable losses. When it has been determined that a loss is probable and the amount can be reasonably estimated, the Company will record a liability. For the years ended December 31, 2022 and 2021, there were no material legal contingencies requiring accrual or disclosure. The Company, as permitted under Delaware law and in accordance with its bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director who is or was serving at the Company’s request in such capacity. The Company entered into employment agreements with its officers, which provides for indemnification protection in the executive’s capacity as an officer for actions taken within the scope of employment. The maximum amount of potential future indemnification is unlimited; however, the Company has obtained director and officer insurance that limits its exposure. The Company believes the fair value for these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations as of December 31, 2022 and 2021. 91 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 (6) Notes Payable (a) Paycheck Protection Program Loan In June 2021, the Company was notified by the Georgia Primary Bank (the Lender) that the unsecured loan in the amount of $ 812,500 , which was made pursuant to the PPP, and accrued interest of $ 9,015 was fully forgiven; and, as a result, the entire amount was derecognized on the Company’s financial statements, which was included as other income for the twelve months ended December 31, 2021 on the accompanying statements of comprehensive loss. The Company is required to maintain all necessary records for at least six years following the date of forgiveness, and the SBA reserves the right to audit the Company’s fully forgiven PPP loan. As of December 31, 2022 and 2021, no amounts were outstanding under the PPP loan. For the years ended December 31, 2022 and 2021, no interest expense on the PPP loan was recognized. (b) AFCO Credit Corporation (AFCO) In June 2021, the Company executed a Promissory Note with AFCO to finance certain insurance premiums totaling $ 558,367 , requiring the Company to pay $ 111,673 in a down payment and make monthly installment payments. The annual interest rate was 5.25 % and the monthly installment payments were $ 45,751 , which represented principal and interest. The final installment payment was paid April 2022 . In June 2022, the Company executed another Promissory Note with AFCO to finance certain insurance premiums totaling $ 465,380 , requiring the Company to pay $ 47,539 in a down payment and make monthly installment payments. The annual interest rate is 5.7 % and the monthly installment payment is $ 47,539 , which represent principal and interest. The final installment payment is due March of 2023 . As of December 31, 2022 and December 31, 2021, the principal balance on the AFCO note was $ 141,298 and $ 181,123 , respectively and is included in Notes payable – current portion in the accompanying balance sheets. Interest expense in connection with the AFCO promissory notes was $ 10,572 and $ 10,775 the years ended December 31, 2022 and 2021, respectively. (7) Income Taxes The current tax provisions and deferred tax provisions as reflected in the financial statements is as follows as of December 31: 2022 2021 Current federal taxes $ — — Current state taxes 6,300 4,000 Current tax provision 6,300 4,000 Deferred federal taxes ( 2,797,001 ) ( 1,913,368 ) Deferred state taxes 371,982 ( 98,744 ) Deferred tax provision ( 2,425,019 ) ( 2,012,112 ) Valuation allowance change 2,425,019 2,012,112 Total income tax expense provision $ 6,300 4,000 92 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the financial statements is as follows as of December 31: 2022 2021 Federal income tax at statutory federal rate 21.00 % 21.00 % Permanent differences — 2.00 Research and development credit ( 1.00 ) 3.00 Other deferred adjustments — — State income tax expense (net of federal benefit) 1.00 1.00 Valuation allowance ( 21.00 ) ( 27.00 ) Effective tax rate — % — % Deferred tax assets (liabilities) consisted of the following as of December 31: 2022 2021 Deferred tax asset arising from: Net operating loss carry forwards $ 17,869,574 16,873,473 Accrued expenses (vacation) 7,625 13,920 Intangibles 90,508 82,451 Property and equipment 41,279 — Research and development expense capitalization 1,487,512 — Research and development tax credits 3,088,254 3,190,604 Share-based compensation expense 46,312 20,207 Lease liabilities 90,224 188,789 Other 1,189 8,898 Deferred tax asset 22,722,477 20,378,342 Deferred tax liability arising from: UNICAP ( 10,733 ) ( 10,615 ) Right-of-use assets ( 71,646 ) ( 138,239 ) Property and equipment — ( 14,409 ) Deferred tax liability ( 82,379 ) ( 163,263 ) Valuation allowance $ 22,640,098 20,215,079 Net deferred tax asset $ — — Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the Company is required to reduce its deferred tax assets by a valuation allowance if it is more likely than not that some or all of its deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, the Company assesses the likelihood that it will be able to recover its deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, the Company determined that, based on all available evidence, there was substantial uncertainty as to whether it will recover recorded net deferred taxes in future periods. Accordingly, the Company recorded a valuation allowance against all of its net deferred tax assets as of December 31, 2022 and 2021. The change in valuation allowance was $ 2,425,019 and $ 2,012,112 for the years ended December 31, 2022 and 2021, respectively. Beginning on January 1, 2022, the Tax Cuts and Jobs Act, enacted in December 2017, eliminated the option to deduct research and development expenditures in the current period and requires taxpayers to capitalize and amortize U.S.-based and non-U.S. based research and development expenditures over five and fifteen years, respectively. This legislation does not impact the Company’s current tax obligations. As of December 31, 2022 and 2021, respectively, the Company has $ 82,500,567 and $ 78,264,967 of federal net operating loss carry forwards and $ 2,838,559 and $ 2,407,689 of federal research and experimentation tax credits, respectively, and state net operating loss carry forwards of $ 9,522,312 and $ 7,774,956 , respectively. The utilization of such net operating loss carryforwards and the realization of tax benefits in future years depend predominately upon having taxable income. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in a limitation on the amount of net operating loss carry forwards and tax credit carry forwards that may be used in future years. 93 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 The Company’s net operating losses may be subject to Section 382 of the Internal Revenue Code which provide for a limitation on the annual use of net operating losses following certain ownership changes that could limit the Company’s ability to utilize these carryforwards. The Company has completed an analysis covering the period February 19, 2004 through December 31, 2018, to determine if such ownership changes have occurred and concluded it was more likely than not that there were changes in ownership during the period, with the most recent change of ownership occurring on December 16, 2016. Further analyses will be performed prior to recognizing the benefits of any losses or credits in the financial statements, and the Company is in the process of determining the limitations that Section 382 will have on the Company’s net operating loss carryforwards and research credits. In general, the annual use limitation equals the aggregate value of the Company’s stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The following schedule indicates the expiration year, as of December 31, for the Company’s federal net operating loss carryforwards available to future years without taking into account any Section 382 limitations as of December 31, 2022: 2024 $ 430,332 2025 865,274 2026 1,213,130 2027 2,082,043 2028 2,536,605 2029 2,235,045 2030 4,132,949 2031 3,160,709 2032 3,533,521 2033 2,987,848 2034 2,516,728 2035 4,777,558 2036 4,503,474 2037 6,869,819 Indefinitely 40,655,622 Total $ 82,500,657 The FASB issued authoritative guidance on accounting for uncertainty in income taxes, which clarifies the accounting for income taxes, by prescribing a minimum recognition threshold that a tax position is required to meet before recognition in the financial statements. The guidance also provides direction on recognition, measurement, classification, interest, and penalties, accounting in interim periods, disclosure, and transition. Management has determined there are no uncertain tax positions. Accordingly, these financial statements do not include any adjustments or disclosures related to uncertain tax positions. (8) Stockholders’ Equity The Company’s Board of Directors approved in January 2017 the Tenth Amended and Restated Certificate of Incorporation authorizing the Company to issue for all classes of stock 169,000,000 shares at $ 0.001 par value per share, of which 95,853,558 shares were designated Common Stock and 73,146,442 shares were designated Preferred Stock. In May 2021, Amendment No 1 of the Tenth Amended and Restated Certificate of Incorporation was filed with the Secretary of Delaware where each nine shares of common stock issued and outstanding were automatically converted into one share of common stock (reverse stock split); thus, the Company effected a 1-for- 9 reverse stock split of its common stock. The par value and the authorized shares of the common stock were not adjusted as a result of the reverse stock split. The reverse stock split resulted in an adjustment to the convertible preferred stock conversion price to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse stock split for all periods presented. 94 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 In June 2021, the Company issued 2,650,000 shares of common stock in connection with the Company’s IPO of its common stock at $ 13.00 per share. Net proceeds to the Company, after deducting underwriting discounts, commissions, and legal expenses, was $ 31,613,500 . Offering costs incurred by the company were $ 2,016,143 , which include legal expenses incurred and paid by the underwriters of $ 425,000 . Immediately prior to the closing of the IPO, all of the convertible Series A preferred stock and redeemable convertible Series B and Series C preferred stock automatically converted into 8,116,343 shares of common stock. The Company filed an Eleventh Amended and Restated Certificate of Incorporation (the “Amended and Restated Certificate”) with the Secretary of State of the State of Delaware in connection with the completion of the IPO on June 22, 2021. The Amended and Restated Certificate amends and restates the Company’s existing certificate of incorporation in its entirety to, among other things: (i) authorize 200,000,000 shares of common stock; (ii) eliminate all references to the previously-existing series of preferred stock (Series A, B and C); and (iii) authorize 10,000,000 shares of undesignated preferred stock that may be issued from time to time by the Board in one or more series. In July 2022, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Piper Sandler & Co. (“Piper Sandler” or the “Sales Agent”) and filed a related Prospectus establishing an “at-the-market” facility, pursuant to which the Company may offer and sell shares of common stock having an aggregate offering price of up to $ 8,800,000 from time to time through the Sales Agent pursuant to the Prospectus. As of December 31, 2022, 51,251 shares of common stock had been sold under the Equity Distribution Agreement. (a) Common Stock The holders of the common stock shall have the exclusive right to vote for the election of directors and on all other matters requiring stockholder action, each outstanding share entitling the holder thereof to one vote on each matter properly submitted to the stockholders of the Company for their vote; provided, however, that, except as otherwise required by law, holders of common stock, as such, shall not be entitled to vote on any amendment to the Amended and Restated Certificate (or on any amendment to a certificate of designations of any series of preferred stock) that alters or changes the powers, preferences, rights or other terms of one or more outstanding series of preferred stock if the holders of such affected series of preferred stock are entitled to vote, either separately or together with the holders of one or more other such series, on such amendment pursuant to this Amended and Restated Certificate (or pursuant to a certificate of designations of any series of preferred stock). Dividends may be declared and paid or set apart for payment upon the common stock out of any assets or funds of the Company legally available for the payment of dividends, but only when and as declared by the Board of Directors or any authorized committee thereof. In the event of our liquidation or dissolution, the holders of common stock are entitled to receive proportionately the Company’s net assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption, or conversion rights. (b) Convertible Preferred Stock In June 2021, 17,210,609 shares of convertible preferred stock outstanding were automatically converted into 1,912,332 shares of common stock after taking into account the 1-for- 9 reverse stock split. As of December 31, 2022, no shares of convertible preferred stock have been issued and/or outstanding, and no dividends have been declared or paid since inception. (c) Redeemable Convertible Preferred Stock In June 2021, 55,835,833 shares of redeemable convertible preferred stock outstanding were automatically converted into 6,204,011 shares of common stock after taking into account the 1-for- 9 reverse stock split. As of December 31, 2022, no shares of redeemable convertible preferred stock have been issued and/or outstanding, and no dividends have been declared or paid since inception. 95 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 (d) Preferred Stock Under the terms of the Amended and Restated Certificate, the Company’s Board of Directors is authorized to direct the Company to issue shares of preferred stock in one or more series without stockholder approval. The Board of Directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. The purpose of authorizing the Board of Directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings, and other corporate purposes, could have the effect of making it more difficult for a third-party to acquire, or could discourage a third-party from seeking to acquire, a majority of the outstanding voting stock. As of December 31, 2022 and 2021, no shares of preferred stock are outstanding. (e) Warrants As of December 31, 2022, the Company has warrants outstanding to purchase shares of common stock, which are all exercisable in whole or in part, with expiration dates as follows: Number of warrants Exercise Expiration date outstanding price March 2024 31,882 $ 31.50 April 2024 4,762 $ 31.50 April 2025 55,117 $ 7.25 December 2026 128,934 $ 9.45 January 2027 12,705 $ 9.45 Total 233,400 In May 2022, a warrant to purchase 11,112 shares of common stock expired. (f) Dividends As of December 31, 2022, no dividends have been declared or paid since inception. As of December 31, 2022, the Company had 11,869,704 shares of common stock outstanding, (9) Equity Incentive Plans (a) Stock Option Plans – Prior to the IPO Prior to the IPO in June 2021, the Company maintained two equity incentive plans, the 2004 Stock Incentive Plan, as amended, or 2004 Plan, and the 2015 Stock-Based Incentive Compensation Plan, or 2015 Plan, which provided the Company’s employees, non-employee directors, consultants and independent contractors the opportunity to participate in the equity appreciation of the business through the receipt of stock options to purchase shares of common stock. New grants ceased being made under the 2004 Plan upon the adoption of the 2015 Plan; however, outstanding stock options under the 2004 Plan may continue to be exercised in accordance with their terms. We adopted the 2015 Plan in April 2015, which contains substantially similar terms and conditions as the 2004 Plan. The 2015 Plan initially had 1,176,681 shares of common stock reserved for issuance under the 2015 Plan and was administered by the compensation committee of the Board of Directors. Upon the closing of the IPO, no further awards will be made under the 2015 Plan; however, outstanding stock options under the 2015 Plan may continue to be exercised in accordance with their terms. No grants were awarded under our 2015 plan for the years ended December 31, 2022 and 2021. (b) Stock Option Plans – Post the IPO In June 2021, in connection with the IPO, the 2021 Equity Incentive Plan (2021 Plan) became effective, which was adopted by the Board of Directors in February 2021 and the stockholders approved the 2021 Plan in March 2021. The 2021 Plan is administered by our compensation committee. Upon the effectiveness of the 2021 Plan, no new grants will be awarded under our 2015 Stock-Based Incentive Compensation Plan. 96 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 Under the 2021 Plan, the Company may grant awards in respect of shares of common stock to employees, consultants, and non-employee directors pursuant to option awards, stock appreciation right, or SAR, awards, restricted stock awards, restricted stock unit, or RSU, awards, performance stock awards, performance stock unit, or PSU, awards, and other stock-based awards. The total number of shares of common stock available for awards under the 2021 Plan is 1,111,111 , provided that such number shall be automatically increased on each January 1, beginning on January 1, 2022, by 4 % of the outstanding number of shares of common stock on the immediately preceding December 31 or such lesser number of shares as determined by the Board of Directors. The aggregate number of shares of our common stock that will be available for issuance under awards granted pursuant to the 2021 Plan shall also be increased by the number of shares underlying the portion of an award granted under the 2015 Plan that is cancelled, terminated or forfeited or lapses after the effective date of the 2021 Plan. No more than 1,111,111 shares of common stock issued under the 2021 Plan may be issued pursuant to the exercise of incentive stock options (ISO), provided that such number shall be automatically increased on each January 1, beginning on January 1, 2022, by the lesser of 4 % of the outstanding number of shares of common stock on the immediately preceding December 31 or 555,555 shares of common stock. Shares of common stock issued by us in connection with the assumption or substitution of outstanding grants or under certain stockholder approved plans from an acquired company shall not reduce the number of shares of common stock available for awards under the 2021 Plan. Shares of common stock underlying the portion of an award that is forfeited or otherwise terminated for any reason whatsoever, in any case, without the issuance of shares of common stock, will be added back to the number of shares of common stock available for grant under the 2021 Plan. No non-employee director may be granted awards under the 2021 Plan in any one calendar year covering a number of shares of common stock that have a fair market value on the grant date in excess of $ 350,000 in the first calendar year of such non-employee director’s initial service as a non-employee director and $ 200,000 in any other calendar year of such non-employee director’s service as a non-employee director. Options granted under the 2021 Plan may be either ISOs or nonqualified stock options. The price at which shares of common stock may be purchased upon exercise shall be determined by the compensation committee but shall not be less than the fair market value of one share of common stock on the date of grant, or, in the case of an ISO granted to a ten-percent stockholder, less than 110 % of the fair market value of a share of common stock on the date of grant. The compensation committee may grant options that have a term of up to 10 years, or, in the case of an ISO granted to a ten-percent stockholder, five years . The award agreement shall specify the exercise price, term, vesting requirements, including any performance goals, and any other terms and conditions applicable to the granted option. Unless otherwise provided in an award agreement or an effective employment, consulting, severance or similar agreement with us or a subsidiary, upon a participant’s termination of service for any reason, the unvested portion of each award of options granted generally will be forfeited with no compensation due the participant. Activity under the stock option plans was as follows: Weighted average Number of exercise options price Balances at December 31, 2020 743,627 $ 3.60 Granted — — Exercised ( 44,698 ) 2.83 Expired ( 556 ) 27.00 Forfeited ( 8,378 ) 5.43 Balances at December 31, 2021 689,995 $ 3.58 Granted 367,670 5.33 Exercised ( 9,445 ) 1.71 Expired ( 10,558 ) 27.00 Forfeited ( 106,112 ) 4.09 Balances at December 31, 2022 931,550 $ 3.97 97 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 Stock options granted under the stock option plans for the years ended December 31 2022 and 2021 were as follows: 2022 2021 Employee 299,670 — Nonemployee 68,000 — Total 367,670 — The intrinsic value of options exercised during the years ended December 31, 2022 and 2021 was $ 3,306 and $ 159,062 , respectively. The intrinsic values represent the dollar value of the exercised stock options whereby the fair market value of the underlying common stock exceeded the exercise price of the stock option as of the exercise date. The options outstanding and vested and currently exercisable by exercise prices as of December 31, 2022 were as follows: Option outstanding Options vested and exercisable Weighted Weighted Weighted average Number of average average Exercise Outstanding remaining options Exercise remaining price (in shares) life years vested price life years $ 1.13 - 1.67 91,100 9.59 — $ — — 1.68 - 1.86 193,335 3.21 82,224 1.71 3.21 1.87 - 3.14 166,850 9.09 — — — 3.15 - 3.60 259,836 4.50 259,836 3.24 4.50 3.61 - 5.31 68,616 5.23 68,616 3.97 5.23 5.32 - 9.56 51,813 6.95 38,765 6.12 6.95 9.57 - 13.00 100,000 9.07 — — — 931,550 6.23 449,441 3.32 4.58 As of December 31, 2022, the total number of shares of common stock reserved for future awards under the 2021 Plan is 1,325,247 . (c) Inducement Grants For the year ended December 31, 2022, the Company awarded, outside the 2021 Plan, two stock option grants for the right to purchase a total of 150,000 shares of common stock (inducement grants), which were approved by the Compensation Committee. The weighted average exercise price was $ 2.42 . The inducement grants will vest in equal installments over four years provided the employee remains employed by the Company on the vesting date. As of December 31, 2022, awards to purchase 150,000 options are outstanding, none are exercisable, and the weighted average remaining life is 9.4 years. (d) Valuation The Company uses the Black‑Scholes option pricing model to determine the fair value of stock awards granted to employees and nonemployees. The determination of the fair value of share‑based payment awards granted using a pricing model is affected by the Company’s stock price as well as the assumptions regarding a number of complex and subjective variables as follows: (i) Expected Term The expected term of stock options represents the period the stock options are expected to remain outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, the Company estimates the expected term for all options granted by using the simplified method provided by the ASC 718, which calculates the expected term as the average of the time-to-vesting and the contractual life of the options. The contractual term for options awarded since inception is 10 years for employees and non-employees. (ii) Risk‑Free Interest Rate The risk‑free interest rate is based on U.S. Treasury zero‑coupon issues with remaining terms similar to the expected term on the options. (iii) Dividend Yield The Company has not declared or paid any cash dividends from inception through December 31, 2022 and does not plan to pay any cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model. 98 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 (iv) Expected Volatility Expected volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period. The Company determines volatility based on an analysis of comparable companies. (v) Forfeitures The Company accounts for forfeitures as they occur. The Black-Scholes weighted average assumptions for all stock option awards granted during 2022 were as follows: 2022 2021 Equity Plan Inducement Grants Fair Value of Awards $ 2.06 2.01 Grant Price $ 5.33 2.42 Expected term (in years) 6.28 6.25 Risk‑free interest rate 2.13 % 2.52 % Dividend yield — % — % Expected volatility 107.98 % 107.70 % (e) Employee Stock Purchase Plan (ESPP) In June 2021, in connection with the IPO, the ESPP became effective which was adopted by the Board of Directors in February 2021 and the stockholders approved the 2021 ESPP Plan in March 2021. The ESPP is administered by the compensation committee. The total number of shares of common stock available for purchase under the ESPP is 166,666 , provided that such number is automatically increased on January 1 of each calendar year, from January 1, 2022 through January 1, 2031 by the least of (i) 1.0 % of the total number of shares of common stock outstanding on December 31 of the immediately preceding calendar year, (ii) 222,222 shares of common stock or (iii) a number determined by the board of directors that is less than the foregoing clauses (i) and (ii). Under the ESPP, the Company may specify offerings with durations of not more than 27 months and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of common stock will be purchased for employees participating in the offering. An offering may be terminated under certain circumstances. No employee may purchase more than 12,254 shares of common stock under the ESPP during any offering period. Unless otherwise determined by the board of directors, shares of common stock will be purchased for accounts of employees participating in the ESPP at a price per share equal to the lower of (i) 85 % of the fair market value of a share of common stock on the last date of an offering period or (ii) 85 % of the fair market value of a share of common stock on the first day of such offering period. As December 31, 2022, 4,843 shares of common stock have been purchased under the ESPP, and the total number of shares of common stock reserved for future awards under the ESPP is 279,864 . (f) Stock‑Based Compensation Expense Stock‑based compensation expense recognized is based on the value of the portion of stock option awards that is ultimately expected to vest on a straight-line basis. Stock‑based compensation expense recognized in the Company’s statements of comprehensive loss during the years ended December 31, 2022 and 2021 includes compensation expense for stock‑based awards based on the fair value estimated in accordance with the provisions of ASC 718, Compensation – Stock Compensation. 99 Table of Contents FEMASYS INC. Notes to Financial Statements December 31, 2022 and 2021 The following table shows the stock-based compensation expense related to vested stock option grants to employees and nonemployees awarded under the stock plans and inducement grants by financial statement line item on the accompanying statement of comprehensive loss: 2022 2021 Research and development $ 95,484 106,469 Sales and marketing 6,680 3,759 General and administrative 122,775 83,138 Total share-based compensation expense $ 224,939 193,366 As of December 31, 2022, the remaining amount of stock‑based compensation expense that is expected to be recognized in future periods for employees and nonemployees is $ 1,058,218 , which includes $ 463,311 of compensation expense to be recognized upon achieving a certain performance condition. The $ 594,907 of unrecognized expense is expected to be recognized over a weighted average period of 2.9 years. (10) Retirement Plan The Company has a 401(k) defined contribution plan covering substantially all full‑time employees, meeting certain eligibility requirements. The Company has no required matching or other contribution requirements. For the year end December 31, 2022 and 2021, the company contributed $ 73,947 and $ 0 of voluntary employer matching contributions. (11) Related‑Party Transactions During the years ended December 31, 2022 and 2021, there were no related-party transactions. (12) Net Loss per Share Attributable to Common Stockholders The following table sets forth the computation of the basic and diluted net loss per share for the years ended December 31: 2022 2021 Net loss attributable to common stockholders, basic & diluted $ ( 11,394,170 ) ( 7,537,845 ) Weighted average number of shares used in computing net loss per share attributable to common stockholders, basic and diluted 11,815,019 6,712,028 Net loss per share attributable to common stockholders, basic and diluted $ ( 0.96 ) ( 1.12 ) The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding because they would be anti-dilutive for the years ended December 31: 2022 2021 Options to purchase common stock 1,081,550 689,995 Warrants to purchase common stock 233,460 244,572 Total potential shares 1,315,010 934,567 100 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.