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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-03-28 compared with 2023-03-30 · 1121 added, 23 removed, 13 unchanged (99% of the section changed)

1 unchanged sentence

Interest rate risk

Our cash and cash equivalents as of December 31, 2022 consisted of $12,961,936 in bank deposits and money market funds that presently earn very little interest.

We believe such interest-earning instruments carry a

low degree of interest rate risk.

Our cash and cash equivalents as of December 31, 2023 consisted of $21,716,077 in bank deposits and money market funds that earn interest.

We believe such interest-earning instruments carry a low degree of interest rate

The goals of our investment policy are liquidity and capital preservation;

we do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our

interest rate exposure.

We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short-term nature of our cash and cash equivalents.

we do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate exposure.

believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short-term nature of our cash and cash equivalents.

Foreign currency exchange risk

1 unchanged sentence

Our functional currency is the U.S.

and our revenue is denominated primarily in U.S.

dollar, and our

revenue is denominated primarily in U.S.

For the years ended December 31, 2023 and 2022, all our sales were in U.S.

Our expenses are generally denominated in the currencies in which our operations are located, which is

primarily in the United States.

Our expenses are generally denominated in the currencies in which our operations are located, which is primarily

in the United States.

A 10% change in exchange rates would not result in a material change in fair value of our cash and accounts receivable in 2023.

As our operations in countries outside of the United States grow, our results of

operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future.

To date, we have not entered into any material foreign currency hedging contracts, although

we may do so in the future.

As our operations in countries outside of the United States grow, our results of operations and

cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future.

To date, we have not entered into any material foreign currency hedging contracts, although we may do so in

Concentration of credit risk

Substantially all of our cash and cash equivalents were held at Silicon Valley Bank (SVB), and the amounts frequently exceeded federally insured limits.

On March 10, 2023, the Federal Deposit Insurance Corporation

(FDIC) announced that SVB had been closed by the California Department of Financial Protection and Innovation.

The United States Department of the Treasury announced in a joint statement with the Federal Reserve and FDIC that depositors of SVB

will have access to all of their money starting March 13, 2023, including funds exceeding federally insured limits.

As of December 31, 2022, substantially all of our cash and cash equivalents were held at Silicon Valley Bank (SVB), and the amounts frequently exceeded federally insured limits.

On March 10, 2023, the Federal Deposit

Insurance Corporation (FDIC) announced that SVB had been closed by the California Department of Financial Protection and Innovation.

The United States Department of the Treasury announced in a joint statement with the Federal Reserve and FDIC that

depositors of SVB will have access to all of their money starting March 13, 2023, including funds exceeding federally insured limits.

As a result we did not experience any losses with respect to our funds that had been deposited with SVB.

We are exposed to credit

risk in the event of default by the financial institutions holding our cash and cash equivalents.

If we are unable to access our cash and cash equivalents as needed, our financial position and ability to operate our business will be adversely

exposed to credit risk in the event of default by the financial institutions holding our cash and cash equivalents.

If we are unable to access our cash and cash equivalents as needed, our financial position and ability to operate our business will

be adversely affected.

Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act

until such time as those standards apply to private companies.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until

such time as those standards apply to private companies.

We have elected not to take advantage of such extended transition period, which means that we will adopt a new standard when a standard is issued or revised.

Financial Statements.

Financial Statements

Report of Independent Registered Public Accounting Firm ( KPMG LLP , PCAOB 185 )

Balance Sheets at December 31, 2023 and 2022

Statements of Comprehensive Loss for the Years Ended December 31, 2023 and 2022

Statements of Stockholders’ Equity for the Years Ended December 31, 2023 and 2022

Statements of Cash Flows for the Years Ended December 31, 2023 and 2022

Notes to Financial Statements

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, 2023 and 2022, the related

statements of comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended

December 31, 2023, in conformity with U.S.

generally accepted accounting principles.

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

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities

laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance

about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing

procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and

significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2016 .

Atlanta, Georgia

March 28, 2024

Balance Sheets

Current assets:

Cash and cash equivalents

Accounts receivable, net

Inventory, net

Prepaid and other current assets

Total current assets

Property and equipment, at cost:

Leasehold improvements

Office equipment

Furniture and fixtures

Machinery and equipment

Construction in progress

Less accumulated depreciation

Net property and equipment

Long-term assets:

Lease right-of-use assets, net

Intangible assets, net of accumulated amortization

Other long-term assets

Total long-term assets

( continued )

Balance Sheets

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

Accrued expenses

Clinical holdback – current portion

Lease liabilities – current portion

Total current liabilities

Long-term liabilities:

Clinical holdback – long-term portion

Convertible notes payable, net (including related parties)

Lease liabilities – long-term portion

Total long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity:

Common stock, $ 0.001 par, 200,000,000 authorized, 21,774,604

shares issued and 21,657,381 outstanding as of December 31, 2023 ;

and 11,986,927 shares issued and 11,869,704 outstanding as of December 31, 2022

Treasury stock, 117,223 common shares

Additional paid-in-capital

Accumulated deficit

( 108,381,629

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes to financial statements.

Statements of

Comprehensive Loss

Years ended December 31, 2023 and 2022

Cost of sales (excluding depreciation expense)

Operating expenses:

Research and development

Sales and marketing

General and administrative

Depreciation and amortization

Total operating expenses

Loss from operations

Other income (expense):

Interest income

Interest expense

Other expense

Total other income

Loss before income taxes

Income tax expense

Net loss attributable to common stockholders, basic and diluted

Net loss per share attributable to common stockholders, basic and diluted

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

See accompanying notes to financial statements.

Statements of Stockholders’ Equity

Treasury common stock

Preferred stock

comprehensive

stockholders’

paid-in capital

loss, net of tax

Balance at December 31, 2021

Issuance of common stock for cash upon exercise of options

Issuance of common stock in connection with Employee Stock Purchase Plan

Issuance of common stock in connection with at-the-market offering, net of issuance costs

Share-based compensation expense

Expiration of warrant

Balance at December 31, 2022

Issuance of common stock and warrants in connection with April 2023 Financing, net of offering costs

Issuance of common stock in connection with at-the-market offering, net of issuance costs

Issuance of warrants in connection with convertible notes, including related parties

Issuance of common stock in connection with Employee Stock Purchase Plan

Exercise of pre-funded warrants

Exercise of common warrants

Share-based compensation expense

Balance at December 31, 2023

( 108,381,629

See accompanying notes to financial statements.

Statements of Cash Flows

Years ended December 31, 2023 and 2022

Years ended December 31

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Amortization of right-of-use assets

Inventory reserve

Loss on fixed asset dispositions

Share-based compensation expense

Amortization of debt issuance costs and discount

Changes in operating assets and liabilities:

Accounts receivable

Prepaid and other assets

Accounts payable

Accrued expenses

Lease liabilities

Other liabilities

Net cash used in operating activities

Cash flows from investing activities:

Purchases of property and equipment

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from the issuance of common stock and warrants in April 2023 Financing

Equity issuance costs for April 2023 Financing

Proceeds from convertible notes, including related parties

Issuance costs for convertible notes, including related parties

Proceeds from exercise of pre-funded warrants

Proceeds from exercise of common warrants

Proceeds from common stock issued through ESPP and exercised options

Proceeds from at-the-market sales of common stock

Issuance costs for at-the-market sales of common stock

Payments of deferred offering costs

Repayment of note payable

Payments under lease obligations

Net cash provided by (used in) financing activities

Net change in cash and cash equivalents

Cash and cash equivalents:

Beginning of period

End of period

Supplemental cash flow information

Cash paid for:

Non-cash investing and financing activities:

Right-of-use asset obtained in exchange for a lease liability

Commissions costs relating to certain proceeds from issuance of common stock

Prepaid insurance financed with promissory notes

Fair value of warrants issued in connection with convertible notes

Deferred offering costs reclassified to additional paid-in-capital

See accompanying notes to financial statements.

Organization, Nature of Business, and Liquidity

Organization and Nature of Business

(the Company or Femasys) was incorporated in

Delaware on February 19, 2004 and is headquartered in Suwanee, Georgia.

The Company is a leading biomedical company focused on addressing significant unmet needs of women worldwide with a broad portfolio of in-office, accessible, and innovative

therapeutic and diagnostic products solutions, including a lead revolutionary product candidate and FDA-cleared products.

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 focused on servicing the reproductive health needs for those seeking solutions for infertility issues (FemaSeed®) or permanent birth control (FemBloc ® ).

The Company currently operates as one segment with

an initial focus on servicing the reproductive health needs for those seeking solutions for infertility issues or permanent birth control.

Femasys has an expansive intellectual property portfolio which covers both design and utility patents in the U.S.

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.

FemaSeed, a solution which enables directed intratubal insemination to improve on traditional intrauterine insemination (IUI) and provides a lower cost option to in vitro fertilization methods, received approval to sell FemaSeed in Canada in April

In September 2023 the Company received 510(k) clearance from the FDA for FemaSeed for intratubal insemination.

The clinical trial was still ongoing at the time of receiving regulatory clearance, however, enrollment was completed in November

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.

allows for fallopian tube evaluation after a FemBloc procedure to confirm occlusion (or procedure success).

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®™, 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

FemBloc, the Company’s solution for permanent birth control, is based on the Company’s non-surgical platform technology and in June 2023 Femasys received FDA approval of our IDE to evaluate the safety and efficacy of FemBloc, our

non-surgical, non-implant, in-office solution for permanent birth control in a pivotal clinical trial.

In August 2023 Femasys announced the initiation of enrollment in the FINALE [Prospective Multi-Center Trial for FemBloc Intratubal Occlusion for

TranscervicAL Permanent Birth Control] pivotal trial designed to evaluate the safety and efficacy of FemBloc.

This prospective, multi-center, open-label, single-arm study design includes pregnancy rate as the primary endpoint, which will be

analyzed once 401 women have used FemBloc for one year for permanent birth control.

In addition, the study is designed as a roll-in beginning with enrollment of 50 women for a clinical readout primarily of preliminary safety data prior to enrolling the remaining subjects.

An interim analysis of clinical data endpoints is planned once 300 women have used FemBloc for permanent birth control for one year .

Follow-up will continue annually for five years post-market.

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).

The Company had previously disclosed in

the financial statements as of and for the year ended December 31, 2022, that substantial doubt regarding the Company’s ability to continue as a going concern existed.

The Company has incurred net operating losses in every year since inception

and has an accumulated deficit as of December 31, 2023 of $ 108,381,629 .

For the year ended December 31, 2023, the Company generated a

net loss of $ 14,247,124 .

The Company expects such losses to increase over the next few years as the Company advances FemBloc through

clinical development until FDA approval is received and the product is available to be marketed.

Although the Company has a history of negative cash flows from operations and losses, the Company raised $ 20,800,182 , net during 2023 (see Notes 7 and 9).

As of December 31, 2023, the Company has cash and cash equivalents of $ 21,716,077 .

Based on the improvement in its cash position during 2023, the Company believes it has sufficient financial resources to fund operations and meet its capital requirements and

anticipated obligations as they come due in the next twelve months.

Therefore, the Company has concluded that the conditions and events raising substantial doubt no longer exist.

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 and FemaSeed to support the Company’s research and development activities, largely

in connection with FemBloc.

While we believe that our cash will provide sufficient cash to fund operations to meet our capital requirements and anticipated obligations as they become due, uncertainty around the Company’s product acceptance in the

market could have a negative impact on our liquidity.

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.

The Company’s ability to meet its obligations in the ordinary course of business is dependent upon its ability to manage financing and generate

sufficient cash flow to meet its obligations and ultimately to attain profitable operations.

Although management plans to ensure the Company will continue as a going concern, there is no assurance that viability can be obtained since the

availability and amount of such funding is not certain.

As such, there can be no assurance that the Company will be able to obtain additional liquidity if needed or under acceptable terms, if at all.

Summary of Significant Accounting Policies

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 stock options, warrants, the valuation of

useful lives of property and equipment, and clinical trial cost accruals .

Actual results could differ from those estimates.

Certain Risk and Uncertainties

Most of the products being developed by the Company, such as FemBloc, will require approval from the FDA or corresponding foreign regulatory agencies prior to commercial sales.

Intratubal Insemination Product, FemCath (formally FemVue) Cornual Balloon Catheter, FemVue Saline‑Air Device, FemChec Pressure Management Device, and FemCerv Endocervical Sampler have achieved FDA clearance.

FemaSeed, FemCath and FemCerv have

also received approval in Canada and FemVue 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.

Fair Value of Financial Instruments

Certain of the Company’s financial instruments, including cash, 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 is based on Level 1 inputs, and the fair value of stock options,

convertible notes and warrants are based on Level 3 inputs.

See Notes 3, 7, 9 and 10 for additional details.

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( s ) for information on concentration of credit risk.

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, 2023, the Company had no

write-offs, compared to $ 977 in 2022.

As of December 31, 2023 and 2022, the Company’s reserves for uncollectible accounts were $ 2,000 and $ 2,048 , respectively.

Inventories are stated at the lower of cost or net realizable

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 2023 and 2022, the Company disposed of inventory in the amount of $ 4,409 and

$ 2,847 , respectively.

As of December 31, 2023 and 2022, the FemVue reserve for slow moving, obsolete, or unusable inventories was $ 3,580 and $ 2,103 , respectively.

Inventory stated at cost,

net of reserve, consisted of the following as of December 31:

Work in progress

Finished goods

Inventory, net

The Company has research tax credits that are available to the

Company to offset future payroll withholding liabilities.

As of December 31, 2023 and 2022, the total amount of these credits is $ 928,234

and $ 891,062 , respectively.

The Company has included these amounts on the accompanying balance sheets as follows as of December 31:

Prepaid and other current assets

Other long-term assets

Research tax credits available to the Company

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

Furniture and fixtures

Machinery and equipment

Depreciation expense for the years ended 2023 and

2022 was $ 468,391 and $ 521,151 ,

respectively.

In 2023, the Company disposed of property and equipment at a cost of $ 187,826 with a net book value of $ 47,538 , which is recorded in operating expenses on the statements of comprehensive loss.

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.

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.

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 statements 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 statements of

comprehensive loss.

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:

Accumulated amortization

Net book value

Amortization expense for intangible assets for the years ended December 31, 2023 and

2022 was $ 3,294 and $ 21,799 ,

respectively.

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 Expenses of Offering , codified in Accounting Standards

Codification (ASC) 340-10-S99-1 Other Assets and Deferred Costs .

During 2022, the Company incurred $ 232,845 in deferred offering costs in connection with prospectuses filed in July 2022, including an offering to sell up to $ 150 million in stock, debt securities and warrants, and an Equity Distribution Agreement entered into with Piper Sandler which included an at-the-market (ATM) facility.

deferred offering costs will be offset against the total proceeds from the issuance of common stock available under the prospectuses, and the Company will expense any remaining balance of deferred offering costs if $ 150 million prospectuses is terminated or aborted.

As of December 31, 2023, and 2022, the Company offset $ 17,952 and $ 95 , respectively of deferred offering costs in

connection with the gross proceeds issued under the prospectuses.

As of December 31, 2023 and 2022, deferred offering costs capitalized were $ 214,798 and $ 232,750 , respectively, and

are included in other long-term assets in the accompanying balance sheet.

Accrued Expenses

Accrued compensation costs include incentive compensation and unused paid time off.

Accrued clinical trial expenses include research and development costs for third-party services, largely related to the Company’s clinical trials, which 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.

Other accrued expenses include director fees, taxes and other miscellaneous accrued expenses.

Accrued expenses consisted of the following as of December 31:

Incentive and other compensation costs

Clinical trial costs

Director fees

Franchise taxes

Accrued expenses

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, 2023:

Balance at December 31, 2022

Clinical holdback retained

Clinical holdback paid

Balance at December 31, 2023

clinical holdback - current portion

Clinical holdback - long-term portion

The following table shows the activity within the clinical holdback liability

accounts for the year ended December 31, 2022:

Balance at December 31, 2021

Clinical holdback retained

Clinical holdback paid

Balance at December 31, 2022

clinical holdback - current portion

Clinical holdback - long-term portion

C onvertible Notes with Warrants (November 2023 Financing)

The Company accounts for its convertible notes (“Notes”) based on an assessment of the convertible note terms and applicable guidance ASC 470-20, Debt with Conversion and Other Options and ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Eq uity.

The convertible notes are recorded as a long-term

liability in the balance sheets and the Company did not separate the conversion feature from the host contract as it did not meet the requirements for accounting as a derivative instrument.

The convertible notes are accounted for as a single

liability measured at its amortized cost.

The Company accounts for the warrants issued in conjunction with the convertible notes based on an assessment of applicable guidance under ASC 480, Distinguishing Liabilities from Equity and ASC 815.

The warrants are recorded as equity and do not qualify for derivative accounting.

Under ASC 470-20, for debt issued with warrants, the Company treats the

warrants as a debt discount, recorded as a contra-liability against the debt, and amortize the balance over the life of the underlying debt as interest expense in the statements of comprehensive loss.

The offset to the contra-liability is

recorded as additional paid-in capital in the balance sheets.

The convertible notes are recorded net of debt issuance costs and a discount.

The portion of the debt issuance costs allocated

to the convertible notes, based on the amount of proceeds allocated between the convertible notes and warrants, is being amortized over the term of the convertible notes using the effective interest method in addition to the discount initially

recognized for the fair value of warrants from the convertible notes.

The amortization of debt issuance costs and discount is included in interest expense in the statements of comprehensive loss.

If the debt is retired early, the associated

debt discount will then recognized immediately as interest expense in the statements of comprehensive loss.

See Note 7 for additional information on the November 2023 Financing.

Common Stock Warrants

The Company accounts for its common stock warrants as equity-classified instruments based on an assessment of the warrant’s

specific terms and applicable authoritative guidance under ASC 480 and ASC 815.

The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, whether the warrants meet the definition of a liability

pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially

require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification.

For issued warrants that meet all of the criteria for equity classification, the warrants are required to be

recorded as a component of additional paid-in capital at the time of issuance.

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, 2023 and 2022 from performance obligations satisfied or partially satisfied in prior periods.

Additionally, there were no unsatisfied performance obligations as of December 31, 2023 and 2022.

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, 2023, the Company has not had a history of significant returns.

The following table summarizes the Company’s sale primarily from

FemVue, by geographic region for the years ending December 31:

Primary geographical markets

International

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.

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.

the year ended December 31, 2022, Bayer Yakuhin, Ltd.

accounted for 10 % of total revenue.

No other customers accounted for more than 10% of total revenue for the year

ended December 31, 2023.

As of December 31, 2023 and 2022, the Company had two customers and one customer, respectively, with accounts receivable balances greater than 10% of total receivables.

The balances for these customers were 19 % and 11 % as of December 31, 2023

and 10 % as of December 31, 2022 .

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.

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.

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.

Advertising Expense

Advertising costs are expensed as incurred.

Advertising costs were $ 18,738 , and $ 41,022 for the years ended

December 31, 2023 and 2022, respectively.

They are reflected in sales and marketing expenses in the statements of comprehensive loss.

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 10.

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, 2023 and 2022.

As of December 31, 2023, the 2020 through 2023 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 2020 may also subject returns for those years to examination.

For the years ended December 31, 2023 and 2022, the Company recorded no other income.

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.

Recently Issued Accounting Pronouncements – Recently Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses:

Measurement of Credit Losses on Financial Instruments , which requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected.

The ASU is intended to improve financial reporting by

requiring earlier recognition of credit losses on certain financial assets including trade and financing receivables.

The ASU replaces the current incurred loss impairment model that recognizes losses when a probable threshold is met with a

requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased.

Additionally, from 2016 through 2023, the FASB issued additional related ASUs that provide further guidance and clarification

and become effective for the Company upon the adoption of ASU 2016-13.

The Company adopted ASU 2016-13 and its related ASUs (collectively referred to as Topic 326) effective January 1, 2023 using a modified retrospective transition approach.

result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required credit loss allowance disclosures for periods before the date of adoption.

Prior period amounts

continue to be presented in accordance with previously applicable GAAP.

The Company’s adoption of this new guidance did not have a material impact on the Company’s financial statements and

footnote disclosures.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt

with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for

Convertible Instruments and Contracts in an Entity’s Own Equity .

ASU 2020-06 reduces the number of accounting models for convertible instruments and allows more contracts to qualify for equity classification.

ASU 2020-06 is effective for

the Company’s annual reporting periods beginning after December 15, 2023.

Adoption is either with a modified retrospective method or a fully retrospective method of transition.

Early adoption is permitted, but no earlier than annual periods

beginning after December 15, 2020.

The Company adopted the standard on January 1, 2023 with a fully retrospective transition approach.

Recently Issued Accounting Pronouncements – Not Yet Adopted

In November 2023, the FASB issued ASU No.

2023-07, Segment Reporting (Topic

Improvements to Reportable Segment Disclosures .

The ASU improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

The ASU improves financial reporting by

requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses.

The amendments in this update are effective for fiscal years

beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

Management is currently assessing the impact of this standard on the Company’s financial statements and

will adopt the ASU on January 1, 2024.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures .

The ASU requires the annual financial statements to include consistent categories and greater disaggregation of information in the rate reconciliation, and income taxes paid disaggregated by

jurisdiction.

ASU 2023-09 is effective for the Company’s annual reporting periods beginning after December 15, 2024.

Adoption is either with a prospective method or a fully retrospective method of transition.

Early adoption is permitted.

Company is currently evaluating the effect that adoption of ASU 2023-09 will have on its financial statements and expects to adopt the ASU on January 1, 2025.

No other new accounting pronouncements not yet effective are expected to have a material impact on the Company’s financial

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.

The Company’s convertible notes are measured at fair value at each reporting period.

See Notes 7, 9 and 10 for additional information.

Cash and Cash Equivalents

As of December 31, 2023 and 2022,

money market funds included in cash and cash equivalents on the balance sheets were $ 21,278,895 and $ 12,553,557 , respectively, which represent Level 1 within the fair value hierarchy (see Note 3).

Commitments and Contingencies

Operating Leases

As of December 31, 2023, 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 April 2029 .

The Company has the option (Extension Option) to extend the term for one consecutive term of five years each at the greater of the then current prevailing rental rate or current base rent rate, as agreed by both parties, and upon certain terms and conditions.

Company must provide written notice of its intent to exercise this extension option at between nine and 12 months prior to the expiration date of April 2029 .

Under the terms of the lease agreement, the Company’s monthly rent is subject to increases on an annual basis.

As of December 31, 2023, the Company’s monthly rent payment was $ 47,029 .

Operating right-of-use assets and lease liabilities consist of the following as of December 31:

Lease right-of-use assets

Lease liabilities:

Lease liabilities – current portion

Lease liabilities – long-term portion

As of December 31, 2023 and 2022, 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 5.3 years and 1.1 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 are included in general and administrative expenses in the Company’s statements of comprehensive loss and are summarized as follows for the years ending December 31:

Operating lease cost

Short-term lease cost

Variable lease cost

The following table summarizes the Company’s undiscounted

cash payment obligations for its operating lease liabilities with initial terms of more than twelve months as of December 31, 2023:

Operating leases:

Total undiscounted lease payments -operating leases

imputed interest

Lease liability

current portion of lease liability

Lease liability, less current portion

Financing Leases

As of December 31, 2022, the Company had the right of use for certain leasehold improvements and office equipment at its facility located in Suwanee, GA.

Lease expense was

recognized as payment of financing lease, depreciation expense and interest expense.

The financing leases ended during 2023 .

Financing right-of-use assets and lease liabilities consist of

the following as of December 31, 2022:

Lease right-of-use assets

Accumulated depreciation

Lease liabilities:

Lease liabilities – current portion

Lease liabilities – long-term portion

As of December 31, 2022, 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 years.

During 2023, the finance leases reached the end of their lease terms.

Depreciation expense associated

with the Company’s financing leases was $ 11,796 and $ 18,283 for the years ended December 31, 2023 and 2022, respectively.

Interest expense associated with the financing leases was $ 599 and $ 2,892 for the years ended December 31, 2023 and 2022, respectively.

Clinical Trial Agreements (CTAs)

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.

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, 2023 and 2022, 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;

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, 2023 and 2022.

Notes Payable

AFCO Credit Corporation (AFCO)

In June 2022, the Company executed a 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 was 5.7 % and the monthly installment payment was $ 47,539 , which represents principal and interest.

The final installment payment was paid in March of 2023 .

In July 2023, the Company executed another Promissory Note with

AFCO to finance certain insurance premiums totaling $ 469,042 , requiring the Company to pay $ 48,423 in a down payment and make monthly installment payments.

The annual interest rate was 8.6 % and the monthly installment payment was $ 48,423 , which represents principal and interest.

The Promissory Note was paid in full without penalty during November 2023 .

As of December 31, 2023 and December 31, 2022, the principal

balance on the AFCO note was $ 0 and $ 141,298 ,

respectively and is included in Note payable in the accompanying balance sheets.

Interest expense in connection with the AFCO Promissory Notes was $ 12,304

and $ 10,572 for the years ended December 31, 2023 and 2022, respectively.

Convertible Notes with Warrants (November 2023 Financing)

On November 21, 2023, the Company issued (i) senior unsecured convertible notes in an

aggregate principal amount of $ 6,850,000 , convertible into shares of common stock at a conversion price of $ 1.18 per share, (ii) Series A Warrants to purchase up to an aggregate of 5,805,083 shares of common stock at an exercise price of $ 1.18 per share, and

(iii) Series B Warrants, together with the Series A Warrants, and, together with the convertible notes, to purchase up to an aggregate of 5,805,083

shares of common stock at an exercise price of $ 1.475 per share.

The financing resulted in aggregate gross proceeds of $ 6,850,000 , before $ 525,144 of transaction

The Company intends to use the net proceeds from the offering for general corporate purposes.

The Notes accrue interest at a rate of 6.0 % per annum, payable annually, in cash or shares of common stock at the Company’s option, and mature on November 21 2025 , unless earlier converted or redeemed.

The Notes are convertible into shares of common stock at the election of the holder

at any time at an initial conversion price of $ 1.18 .

The Company has agreed not to issue or sell any equity securities of the Company at a

price below the then-current conversion price for a period of 18 months after closing, subject to certain exceptions.

Beginning six months

after issuance, the Company may require holders to convert their Notes into conversion shares if the closing price of the common stock exceeds $ 2.36

per share for 10 consecutive trading days and the daily dollar trading volume of the common stock exceeds $ 1,000,000 per day during the same period and certain equity conditions described in the Notes are satisfied.

The Notes provide for certain events of

default, whereby each holder of Notes will be able to require the Company to redeem in cash any or all of the holder’s Notes at a premium of 115 %.

The conversion feature did not meet the requirements for separate accounting and is not accounted for as a derivative instrument.

The Series A Warrants are exercisable immediately and expire five years from the date of issuance.

The Company has the right to call the exercise of the Series A Warrants if the closing price of the common stock

exceeds 200 % of the Series A Exercise Price for 10 consecutive trading days and the daily dollar trading volume of the common stock exceeds $ 1,000,000

per day during the same period and certain equity conditions are satisfied.

The Series B Warrants are exercisable immediately, together with the Series A Warrant

Shares, and expire one year from the date of issuance.

The Company has the right to call the exercise of the Series B Warrants if the

closing price of the common stock exceeds 200 % of the Series B exercise price for 10 consecutive trading days and the daily dollar trading volume of the common stock exceeds $ 1,000,000

per day during the same period and certain equity conditions are satisfied.

There is no established public trading market for the warrants and the Company does not intend to list the Warrants on any national securities exchange or nationally

recognized trading system.

The Series A Warrants and Series B Warrants are classified as a component of

permanent equity because they are freestanding financial instruments that are legally detachable and separately exercisable from the shares of common stock from which they are issued, are immediately exercisable, do not embody an obligation for the

Company to repurchase its shares, and permit the holders to receive a fixed number of shares of common stock upon exercise.

The Series A and Series B Warrants were valued using the relative fair value method

and the following Black-Scholes assumptions:

Expected term (in years)

Risk‑free interest rate

Dividend yield

Expected volatility

Exercise price

Black-Scholes value

The November 2023 Financing proceeds of $ 6,850,000 net of $ 525,144 in transaction costs were allocated to

the convertible notes and Series A and Series B Warrants using the relative fair value method.

The valuation of the warrants was $ 2,219,165

and is recorded as a component of stockholders’ equity, and a total debt discount of $ 2,744,309 .

The convertible notes are recorded as a

long-term liability, net of discount and issuance costs.

For the convertible notes for the year ended December 31, 2023, the Company

recognized total interest expense of $ 152,488 , including coupon interest expense of $ 44,525 amortization of debt discount and issuance costs of $ 107,963 .

The effective interest rate for the discount amortization was 32.3 %.

The Notes and accrued interest, net of unamortized discount

costs was $ 4,258,179 as of December 31, 2023.

The fair value of the convertible notes at December 31, 2023, calculated using a discounted

cash flow analysis, was $ 6,126,151 .

There were no convertible notes as of December 31,2022.

Stated Interest Rate

Convertible Notes

Accrued and unpaid interest

Less unamortized discount and debt

issuance costs

Total Convertible Notes Payable

Future principal payments under the Notes if the conversion feature is not exercised,

net of unamortized debt discounts, are as follows:

Subtotal of future principal payments

Accrued and unpaid interest

Less unamortized discount and debt issuance costs

The current tax provisions and deferred tax provisions as

reflected in the financial statements is as follows as of December 31:

Current federal taxes

Current state taxes

Current tax provision

Deferred federal taxes

Deferred state taxes

Valuation allowance change

Deferred tax provision

Total income tax expense provision

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:

Federal income tax at statutory federal rate

Permanent differences

Research and development credit

Other deferred adjustments

State income tax expense (net of federal benefit)

Valuation allowance

Effective tax rate

Deferred tax assets

(liabilities) consisted of the following as of December 31:

Deferred tax asset arising from:

Net operating loss carry forwards

Accrued expenses (vacation)

Property and equipment

Research and development expense capitalization

Research and development tax credits

Share-based compensation expense

Lease liabilities

Deferred tax asset

Deferred tax liability arising from:

Right-of-use assets

Property and equipment

Deferred tax liability

Valuation allowance

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, 2023 and 2022.

The change in valuation allowance was $ 3,397,568 and $ 2,425,019 for the years ended December 31, 2023 and 2022, 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, 2023 and 2022,

respectively, the Company has $ 90,380,015 and $ 82,500,567 of federal net operating loss carry forwards and $ 3,231,910 and $ 2,838,559 of federal research and experimentation tax credits, respectively, and state net operating loss carry forwards of $ 12,425,590 and $ 9,522,312 , 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.

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, 2023:

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.

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 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.

On July 1, 2022, we filed a prospectus including an offering to sell up to $ 150 million in common and preferred stock, debt securities and warrants.

Additionally, we 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 we may offer and sell shares of our common stock from time to

time through the Sales Agent.

In October 2023, the Sales Agent was authorized to sell shares for aggregate proceeds up to $ 16.7 million

at current market prices until all shares are sold.

As of December 31, 2023, 3.3 million shares of common stock have been sold for

aggregate proceeds of $ 7.7 million under the Equity Distribution Agreement pursuant to the prospectus.

In April 2023, the Company sold an aggregate of (i) 1,318,000 shares of common stock and (ii) pre-funded warrants to purchase up to 1,878,722

shares of common stock in a registered direct offering (“pre-funded warrants”) and, in a concurrent private placement, warrants to purchase up to 3,196,722

shares of common stock (“common warrants”).

Additionally, common warrants were issued to the placement agent to purchase up to 191,803

shares of common stock as compensation for services (“placement agent warrants”), collectively the (“April 2023 Financing”).

The purchase price per share for the common stock, prefunded warrants was $ 1.22 and $ 1.2199 , respectively.

The gross proceeds from the

offering were $ 3,899,813 , less placement agent fees and offering expenses of $ 547,764 .

The Company intends to use the net proceeds from the offering for general corporate purposes.

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.

of common stock have no preemptive, subscription, redemption, or conversion rights.

Convertible Preferred Stock

As of December 31, 2023, no shares of convertible preferred stock have been issued and/or outstanding, and no dividends have been declared or paid since inception.

Redeemable Convertible Preferred Stock

As of December 31, 2023, no shares of redeemable convertible preferred stock have been issued and/or outstanding, and no dividends have been declared or paid since inception.

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, 2023

and 2022, no shares of preferred stock are outstanding.

April 2023 Financing

On April 20, 2023, the Company entered into a securities

purchase agreement pursuant to which the Company sold (i) 1,318,000 shares of common stock, (ii) pre-funded warrants to purchase 1,878,722 shares of common stock, (iii) common warrants to purchase 3,196,722 shares of common stock.

Additionally, common warrants to purchase 191,803

shares of common stock were issued to the placement agent compensation for services performed.

The pre-funded warrants, common warrants and placement agent

warrants were exercisable immediately following the closing date of the offering.

The pre-funded warrants have an unlimited term and an exercise price of $ 0.0001 per share.

The common warrants have a 5.5 year term and an exercise

price of $ 1.095 per share.

The placement agent warrants have a 5 year term and exercise price of $ 1.525 per share.

The offering resulted in

aggregate gross proceeds of $ 3,899,813 , before $ 547,764 of transaction costs.

The pre-funded warrants and common warrants are freestanding

financial instruments that are legally detachable and separately exercisable from the shares of common stock with which they were issued, are immediately exercisable, do not embody an obligation for the Company to repurchase its shares, and

permit the holders to receive a fixed number of shares of common stock upon exercise.

The common stock was valued at $ 1,133,480 , based on the Company’s stock price.

The pre-funded warrants and common warrants were valued at $ 1,615,701 and $ 1,854,099 , respectively, using the following

Black-Scholes assumptions:

Pre-funded warrants

Common warrants

Expected term (in years)

Risk‑free interest rate

Dividend yield

Expected volatility

Exercise price

Black-Scholes value

The net proceeds of $ 3,352,049 were allocated to the common stock, pre-funded warrants and common warrants using the relative fair value method and recorded to stockholders’ equity.

In June 2023,

all pre-funded warrants were exercised for shares of common stock.

In September and October 2023, all common warrants and 122,994

placement agent warrants were exercised for cash proceeds of $ 3,687,976 .

As of December 31, 2023, 68,809 placement agent warrants remain outstanding.

As of December 31, 2023, 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:

Expiration date

November 2024

December 2026

November 2028

In May 2022, a warrant to purchase 11,112 shares of common stock expired.

As of December 31, 2023, no dividends have been declared or paid since inception.

Equity Incentive Plans

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

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.

The Company 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.

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.

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:

Outstanding at December 31, 2021

Outstanding at December 31, 2022

Outstanding at December 31, 2023

Vested and exercisable at December 31, 2023

options granted under the 2021 Plan for the years ended December 31 2023 and 2022 were as follows:

The Black-Scholes weighted average assumptions for all stock

option awards granted during 2023 and 2022 were as follows:

Fair Value of Awards

Expected term (in years)

Risk‑free interest rate

Dividend yield

Expected volatility

The intrinsic value of options exercised during the year ended

December 31, 2022 was $ 3,306 .

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.

There were no options exercised during 2023.

The options outstanding and vested and currently

exercisable by exercise prices as of December 31, 2023 were as follows:

Options outstanding

Options vested and exercisable

December 31, 2023, the total number of shares of common stock reserved for future awards under the 2021 Plan is 629,555 .

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, 2023, awards to purchase 150,000 options are outstanding, 37,500 are exercisable, and the weighted

average remaining life is 8.4 years.

There were no

inducement grants awarded in 2023.

The Company uses the Black‑Scholes option pricing model to

determine the fair value of stock awards granted to employees and non-employees.

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:

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.

Risk‑Free Interest Rate

The risk‑free interest rate is based on U.S.

zero‑coupon issues with remaining terms similar to the expected term on the options.

Dividend Yield

The Company has not declared or paid any cash dividends from

inception through December 31, 2023 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.

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.

The Company accounts for forfeitures as they occur.

Employee Stock Purchase Plan (ESPP)

In June 2021, in connection with the IPO, the ESPP became

effective upon adoption 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 of December 31, 2023, 16,459 shares of common stock have been purchased under the ESPP to date, and the total number of shares of common stock reserved for future awards

under the ESPP is 386,946 .

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, 2023, and 2022 includes compensation expense for stock‑based awards based on the fair value estimated in accordance with the provisions of ASC 718.

The following table shows the stock-based compensation expense related to vested stock option grants to employees and non-employees awarded

under the stock plans and inducement grants by financial statement line item on the accompanying statements of comprehensive loss:

Research and development

Sales and marketing

General and administrative

Total share-based compensation expense

As of December 31, 2023, the remaining amount of stock‑based

compensation expense that is expected to be recognized in future periods for employees and non-employees is $ 849,834 which includes $ 155,222 of compensation expense to be recognized upon achieving a certain performance condition.

The $ 694,612 of unrecognized expense is expected to be recognized over a weighted average period of 3.0 years.

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, 2023 and 2022, the company contributed $ 75,202 and $ 73,947 of voluntary employer

matching contributions.

Related‑Party Transactions

In November 2023, the Company issued

unsecured convertible notes and accompanying Series A and Series B Warrants (see Note 7).

The transaction included issuance of a $ 5

million convertible note and Series A and Series B Warrants to PharmaCyte Biotech, Inc.

The interim CEO, President and Director of PharmaCyte Biotech, Inc., Joshua Silverman, serves on the Company’s board of directors.

During 2023, a family member of the CEO

earned total cash compensation of $ 138,000 .

During the year ended December 31, 2022,

there were no related-party transactions.

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:

Net loss attributable to common stockholders, basic & diluted

Weighted average number of shares used in computing net loss per share attributable to common stockholders, basic and diluted

Net loss per share attributable to common stockholders, basic and diluted

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:

Options to purchase common stock

Warrants to purchase common stock, in connection with April 2023 financing

Warrants to purchase common stock, in connection with November 2023 financing

Warrants to purchase common stock

Total potential shares

Subsequent Events

In March 2024, the Company sold 441,966 shares under the at-the-market facility, resulting in gross cash proceeds of $ 778,175 .

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk