FEMASYS INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. We are a leading biomedical innovator, addressing significant unmet needs in women’s health worldwide, with a broad patent-protected portfolio of disruptive, accessible, in-office therapeutic and diagnostic products. The Company is a U.S. manufacturer that has received global regulatory approvals for its product portfolio worldwide, and they are currently being commercialized in the U.S. and key international markets. FemaSeed ® Intratubal Insemination, a groundbreaking infertility treatment delivering sperm directly to the site of conception, is U.S. FDA-cleared and approved in Europe, United Kingdom (UK), Canada and Israel. Peer-reviewed publication of positive data from its pivotal clinical trial of FemaSeed demonstrated effectiveness and safety with high satisfaction from both patients and practitioners. FemVue ® , a companion diagnostic for fallopian tube assessment via ultrasound, is U.S. FDA-cleared and approved in Europe, UK, Canada, Japan and Israel. FemCerv®, an endocervical tissue sampler for cervical cancer diagnosis, is U.S. FDA-cleared and approved in Europe, UK, Canada and Israel. FemBloc® permanent birth control is a revolutionary first-of-its-kind non-surgical approach, that involves minimally-invasive placement of a patented delivery system for precise delivery of our proprietary synthetic tissue adhesive (blended polymer) into both fallopian tubes simultaneously. Over time, the blended polymer fully degrades and produces nonfunctional scar tissue to permanently block the fallopian tubes in the safest most natural approach. This is in stark contrast to centuries-old surgical sterilization with reported risks that include infection, minor or major bleeding, injury to nearby organs, anesthesia-related events, and even death. Along with the various surgical risks, some patients may not qualify as good surgical candidates due to obesity or medical comorbidities. The FemBloc non-surgical approach has the potential to offer a safer, more accessible in-office alternative with fewer risks, contraindications, and substantially lower cost. Peer-reviewed publication of positive data from its initial clinical trials of FemBloc have demonstrated compelling effectiveness and five-year safety with high satisfaction from both patients and practitioners. In March 2025, we announced CE mark certification under EU MDR as the first regulatory approval in the world for the FemBloc delivery system for non-surgical female permanent birth control. For the FemBloc blended polymer, an integral part of the FemBloc permanent birth control, we have successfully completed an expedited G12 Special MDR Audit for Class III devices and the Notified Body has recommended for CE mark approval pending the final stages of EMA review, with potential approval expected mid-2025. In March 2025, we announced strategic distribution partnerships for FemBloc in Spain. The pivotal clinical trial (clinicaltrials.gov: NCT05977751) is now enrolling participants for U.S. approval. FemCath® and FemChec®, companion diagnostic products for FemBloc’s ultrasound-based confirmation test, are U.S. FDA-cleared and approved in Europe and Canada. We are a woman-founded and led company with an expansive, internally created intellectual property portfolio with approximately 200 issued patents globally, in-house chemistry, manufacturing, and controls (CMC) and device manufacturing capabilities and proven ability to develop products with commercialization efforts underway. Our suite of products and product candidate address what we believe are multi-billion dollar global market segments in which there has been little advancement for many years, helping women avoid pharmaceutical solutions, implants and surgery that can be expensive and expose women to harm. Factors Affecting Our Business There are a number of factors that have impacted, and we believe will continue to impact, our results of operations and growth. These factors include: • Commencement and conduct of clinical trial for our product candidate . We must successfully recruit and enroll clinical trial participants in our clinical trial for FemBloc, in order to have the requisite data for regulatory submissions to the FDA for marketing authorization. • Regulatory approval of our product candidate . We must successfully obtain timely approval for our product candidate. For our sales to grow, we will need to receive FDA approval for the FemBloc system for permanent birth control, and will need to obtain regulatory approval or marketing authorization of our product candidate in international markets. • Clinical results . Publications of clinical results by us, our competitors and other third parties can have a significant influence on whether, and the degree to which, our products are used by healthcare practitioners and the procedures and treatments those healthcare practitioners choose to provide. • Commercialization and market acceptance . The success of our business will ultimately depend on our ability to commercialize our approved products and gain broad market acceptance of our products, which will require an extensive education process for both healthcare practitioners and patients of the benefits of our products, development of a robust sales force infrastructure and increased manufacturing capacity. 76 Table of Contents • Competition . Our industry has a number of large, well-capitalized companies. We must continue to successfully compete in light of our competitors’ existing and future products and related pricing and their resources to successfully market to the healthcare practitioners who use our products. • Our financial condition . We need substantial additional funding to continue our development and commercialization plan and may be unable to raise capital when needed. We must comply with covenants and payment obligations under our convertible notes. While these factors may present significant opportunities for us, they also pose significant risks and challenges that we must address. See the section titled “Risk Factors” for more information. Components of Our Comprehensive Loss Sales Sales are primarily from the sale of our FemaSeed and FemVue products. We sell our product to medical centers, including healthcare practitioner offices, primarily through our direct commercial team in the U.S., as well as through distribution partners in select international markets. For the year ended December 31, 2024, Comercial Medico Quiruigca, SA and Durgalab, distributors in Spain, accounted for approximately 15% and 12%, respectively, of our total revenue. For the years ended December 31, 2024 and 2023, Bayer Yakuhin, Ltd. accounted for approximately 7% and 5%, respectively, of our total revenue. For products sold in the U.S. through direct customer service, control is transferred upon shipment to customers. For products sold to distributors internationally, control is transferred upon shipment or delivery to the customer’s named location, based on the contractual shipping terms. Cost of sales Cost of sales consists primarily of costs of components for use in our products, the materials and labor that are used to produce our products, and the manufacturing overhead that directly supports production. We expect cost of sales to increase in absolute terms as our revenue grows. 77 Table of Contents Research and development Research and development, or R&D, expenses consist of engineering, product development, clinical, quality assurance and regulatory expenses. R&D expenses include: • cost of clinical trials to support our product candidate FemBloc and product enhancements, including expenses for activities conducted by third-party services providers, primarily clinical research organizations, or CROs, and site payments; • certain personnel-related expenses, including salaries, benefits and stock-based compensation; • materials and supplies used for internal R&D and clinical activities; • allocated overhead information technology expenses; and • cost of outside consultants, who assist with technology development, regulatory affairs, clinical affairs and quality assurance, and testing fees. We track outsourced development costs and other external research and development costs to specific product candidates on a program-by-program basis, fees paid to CROs, manufacturing and clinical development activities. However, we do not track our internal research and development expenses on a program-by-program basis as they primarily relate to compensation, overhead and early research and other costs which are deployed across multiple projects under development. R&D costs are expensed as incurred. In the future, we expect R&D expenses to increase in absolute dollars as we continue to develop our product candidate FemBloc, expand our product candidate pipeline, enhance our existing products and technologies and perform activities related to obtaining additional regulatory approval. Sales and marketing Sales and marketing expenses consist of personnel-related expenses, including compensation, benefits, and stock-based compensation. Other sales and marketing expenses include marketing and promotional activities, including travel, trade shows and market research, and cost of outside consultants. We expect to expand our sales force and increase our marketing efforts as we commercialize our products based on our platform technologies. As a result, we expect sales and marketing expenses to increase in absolute dollars in future periods. General and administrative General and administrative expenses consist of personnel-related expenses, including compensation, benefits, travel and stock-based compensation. Other general and administrative expenses include professional services fees, including legal, audit and tax fees, insurance costs, cost of outside consultants and employee recruitment and training costs. Depreciation and amortization Depreciation and amortization expenses consist of depreciation expense associated with our fixed assets and amortization associated with our lease right-of-use assets and patents. We expect to invest in capital equipment to support our ongoing and planned commercialization efforts and continue to invest in our intellectual property. As a result, we expect our depreciation and amortization expenses to increase in absolute dollars in the future. Other (expense) income Other (expense) income consists largely of interest earned on our cash equivalents and short-term investments, offset by interest expense and other expenses. Income tax expense Income tax expense consists of the minimum state income taxes we are required to pay. We have a full valuation allowance for deferred tax assets, including net operating loss carryforwards and tax credits related primarily to R&D. 78 Table of Contents Results of Operations Comparison of the Years Ended December 31, 2024 and 2023 The following table shows our results of operations for the years ended December 31, 2024 and 2023: Year Ended December 31, 2024 2023 Change % Change Sales $ 1,629,108 1,071,970 557,138 52.0 % Cost of sales (excluding depreciation expense) 544,903 380,069 164,834 43.4 % Operating expenses: Research and development 8,216,543 7,208,701 1,007,842 14.0 % Sales and marketing 4,030,150 650,126 3,380,024 519.9 % General and administrative 6,325,999 6,858,008 (532,009 ) -7.8 % Depreciation and amortization 297,318 483,481 (186,163 ) -38.5 % Total operating expenses 18,870,010 15,200,316 3,669,694 24.1 % Loss from operations (17,785,805 ) (14,508,415 ) (3,277,390 ) 22.6 % Other (expense) income: Interest income 582,354 431,019 151,335 35.1 % Interest expense (1,603,575 ) (165,390 ) (1,438,185 ) 869.6 % Total other (expense) income (1,021,221 ) 265,629 (1,286,850 ) -484.5 % Loss before income taxes $ (18,807,026 ) (14,242,786 ) (4,564,240 ) 32.0 % Income tax expense 9,602 4,338 5,264 121.3 % Net loss $ (18,816,628 ) (14,247,124 ) (4,569,504 ) 32.1 % Sales increased by $557,138 or 52.0%, to $1,629,108 in 2024 from $1,071,970 in 2023. The increase is attributable primarily to FemaSeed product sales of $509,650, which was commercialized in 2024. FemVue units sold increased by 6.9% in 2024 as compared to 2023, while maintaining a relatively flat average selling price. Cost of sales Cost of sales increased by $164,834, or 43.4%, to $544,903 in 2024 from $380,069 in 2023. The increase in cost of sales is primarily attributed to increased sales, partially offset by certain manufacturing efficiencies. Research and development The following table summarizes our R&D expenses incurred during the periods presented: Year Ended December 31, 2024 2023 Compensation and related personnel costs $ 4,652,802 3,733,928 Clinical-related costs 1,665,736 1,702,985 Material and development costs 1,113,129 1,091,930 Professional and outside consultant costs 673,733 570,628 Other costs 111,143 109,230 Total research and development expenses $ 8,216,543 7,208,701 R&D expenses increased by $1,007,842 or 14.0%, to $8,216,543 in 2024 from $7,208,701 in 2023. The increase is primarily due to increased compensation costs, material and development costs, and professional and outside consultant costs. 79 Table of Contents Sales and marketing Sales and marketing expenses increased by $3,380,024 or 519.9%, to $4,030,150 in 2024 from $650,126 in 2023. The increase relates primarily to compensation, marketing and travel costs as we recruited a commercial team to promote our available products. General and administrative General and administrative expenses decreased by $532,009, or 7.8%, to $6,325,999 in 2024 from $6,858,008 in 2023. The decrease relates primarily to decreased compensation expense and professional costs, partially offset by increased facility and other overhead costs. Depreciation and amortization Depreciation and amortization expenses decreased by $186,163, or 38.5%, to $297,318 in 2024 from $483,481 in 2023. The decrease relates to depreciation expense associated with the Company’s fixed assets and amortization expense associated with the Company’s intangible assets that have reached the end of their useful lives. Other (expense) income Total other (expense) income decreased by $1,286,850, or 484.5%, to $1,021,221 net expense in 2024 from $265,629 net income in 2023. The decrease relates to increased interest expense and non-cash discount amortization related to the convertible notes payable which were outstanding for the full year, partially offset by increased interest income. Income tax expense Income tax expense increased by $5,264 or 121.3%, to $9,602 in 2024 from $4,338 in 2023 due to an increase in the state minimum taxes we are required to pay. 80 Table of Contents Liquidity and Capital Resources Sources of liquidity Since our inception through December 31, 2024, our operations have been financed primarily by net proceeds from the sale of our common stock and convertible indebtedness and, to a lesser extent, product revenue. As of December 31, 2024, we had $3,451,761 of cash and cash equivalents and an accumulated deficit of $127,198,257. In July 2022, 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. As of October 2023, the Sales Agent was authorized to sell shares of common stock for an aggregate offering price up to $16.7 million pursuant to the prospectus. During the year ended December 31, 2024, we sold approximately 1.3 million shares of common stock for aggregate proceeds of $2 million, and as of December 31, 2024, approximately $7.0 million remains available for sale pursuant to the prospectus. As of December 31, 2024, approximately 4.6 million shares of common stock have been sold to date for aggregate proceeds of $9.8 million under the Equity Distribution Agreement pursuant to the prospectus. Subsequent to December 31, 2024, we raised approximately $5.4 million under the Equity Distribution Agreement. Based on our public float, as of the date of the filing of this Annual Report on Form 10-K, we are only permitted to utilize a shelf registration statement, including the registration statement under which our at the market offering is operated, subject to Instruction I.B.6 to Form S-3, which is referred to as the “baby shelf” rule. For so long as our public float is less than $75.0 million, we may not sell more than the equivalent of one-third of our public float during any 12 consecutive months pursuant to the baby shelf rules. In April 2023, we 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 and, in a concurrent private placement, warrants to purchase up to 3,196,722 shares of common stock. Additionally, common warrants were issued to the placement agent in this transaction to purchase up to 191,803 shares of common stock as compensation for services, collectively the (“April 2023 Financing”). The purchase price per share for the common stock, prefunded warrants was $1.22 and $1.2199, respectively. The net proceeds from the April 2023 Financing at closing were approximately $3.4 million. The warrants in the April 2023 Financing were fully exercised for additional cash proceeds of $3.5 million during 2023. Placement agent warrants of 122,994 were exercised for additional cash proceeds of $0.2 million during 2023. In November 2023, we entered into a securities purchase agreement with certain accredited investors pursuant to which we sold (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 to purchase up to an aggregate of 5,805,083 shares of common stock at an exercise price of $1.475 per share (collectively, the “November 2023 Financing”). Net proceeds from the November 2023 Financing were $6.3 million. The Series B Warrants expired in November 2024 unexercised. If exercised for cash, the Series A Warrants issued in the November 2023 Financing could result in proceeds of up to an additional $6.8 million. The Series A Warrants expire in November 2028. In February 2025, $85,000 of Series A Convertible Notes were converted into 72,033 shares of common stock. Funding requirements Based on our current operating plan, our current cash and cash equivalents, which include approximately $5.4 million we raised subsequent to year end 2024, and anticipated revenues from product sales are expected to be sufficient to fund our ongoing operations into the third quarter of 2025. Our estimate as to how long we expect our existing cash and cash equivalents to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate. 81 Table of Contents Our cash and cash equivalents as of December 31, 2024, revenues from product sales and approximately $5.4 million we raised subsequent to year end, will not be sufficient to sustain our operations, including funding our product candidate, FemBloc, through regulatory approval, and we will need to raise additional capital to complete the development and commercialization of our product candidate. However, we can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds will be available to us, that such additional financing will be sufficient to meet our needs or be on terms acceptable to us. This risk may increase if economic and market conditions deteriorate. In addition, we are limited under the terms of the convertible notes to sell securities at a price below $1.18 until May 2025. If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify, or delay the development of our product candidate, or we may need to obtain funds through collaborations or otherwise on terms that may require us to relinquish rights to our technologies or product candidate that we might otherwise seek to develop or commercialize independently. If we are unable to raise adequate additional capital as and when required in the future, we could be forced to cease development activities and terminate our operations, and you could experience a complete loss of your investment. We expect to continue to make substantial investments in our ongoing pivotal trial that is designed to provide clinical evidence of the safety and effectiveness of our product candidate, FemBloc. We also expect to continue to make investments in research and development to develop future products, manufacturing, regulatory affairs and post-market clinical trials. We will additionally need to make investments in our sales and marketing organization for FemaSeed, and if approved, FemBloc. Because of these and other factors, we expect to continue to incur substantial net losses and negative cash flows from operations for the foreseeable future. Our future capital requirements will depend on many factors, including: • the cost, timing and results of our clinical trial and regulatory reviews; • the cost and timing of establishing sales, marketing and distribution capabilities; • the timing, receipt and amount of sales from our current and potential products; • our ability to continue manufacturing our products and product candidate and to secure the components, services and supplies needed in their production; • the degree of success we experience in commercializing our products; • the emergence of competing or complementary technologies; • the cost of preparing, filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights; and • the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements relating to any of these types of transactions. Cash Flows Comparison of the Years Ended December 31, 2024 and 2023 The following table summarizes our cash flows for the years ended December 31: Year Ended December 31, 2024 2023 Net cash used in operating activities $ (19,444,009 ) (11,280,546 ) Net cash used in investing activities (847,764 ) (143,917 ) Net cash provided by financing activities 2,027,457 20,178,604 Net change in cash and cash equivalents $ (18,264,316 ) 8,754,141 Operating activities In 2024, cash used in operating activities was $19,444,009, attributable to a net loss of $18,816,628, a net change in our net operating assets and liabilities of $3,144,778, partially offset by non-cash charges of $2,517,397. Non-cash charges primarily consisted of $1,192,574 in amortization of the discount on the convertible notes, $872,000 in depreciation and amortization expenses and $444,147 in stock-based compensation. The change in our net operating assets and liabilities was primarily due to increases of $2,379,205 in inventory, $397,467 in accounts receivable, $139,136 in prepaid and other assets, a decrease of $406,636 in lease liabilities, partially offset by an increase of $207,481 in accounts payable. The Company intends to meet future operating cash requirements through increased sales of commercial products and fundraising, as discussed in Funding requirements. 82 Table of Contents In 2023, cash used in operating activities was $11,280,546, attributable to a net loss of $14,247,124, offset by non-cash charges of $1,739,186 and a net change in our net operating assets and liabilities of $1,227,392. Non-cash charges primarily consisted of $675,700 in stock-based compensation, $907,985 in depreciation and amortization and $107,963 in amortization of the discount on the convertible notes. The change in our net operating assets and liabilities was primarily due to an increase of $1,614,647 in accounts payable and accrued liabilities, partially offset by a decrease of $440,489 in lease liabilities. Investing activities In 2024, cash used in investing activities for the purchases of fixed assets and intangible assets was $761,706 and $86,058, respectively. In 2023, cash used in investing activities for the purchase of fixed assets was $143,917. Financing activities In 2024, cash provided by financing activities was $2,027,457, attributable to sales under the at-the-market facility of $2,025,104 and proceeds from common stock issued through the employee stock purchase plan of $63,106, less at-the-market facility issuance costs of $60,753. In 2023, cash provided by financing activities was $20,178,604, attributable primarily to cash provided by proceeds from the issuance of stock and subsequent warrant exercises of $7,587,977, sales under the at-the-market facility of $7,665,066, and the issuance of convertible notes for $6,850,000. Cash used in financing activities included payments of offering costs of $1,072,908, repayments on notes payable of $610,340, issuance costs for the at-the-market facility of $229,953 and payments under lease obligations of $16,193. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined in the rules and regulations of the SEC. Critical Accounting Estimates Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. While our significant accounting policies are more fully described in Note 2 to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following discussion addresses our most critical accounting policy, which are those that are most important to our financial condition and results of operations and require our most difficult, subjective and complex judgments. Revenue recognition Our policy is to recognize revenue when a customer obtains control of the promised goods under Accounting Standards Codification 606— Revenue from Contracts with Customers (Topic 606) , which we adopted effective January 1, 2018. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods, and we have elected to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price. 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. 83 Table of Contents 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 our 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, 2024, we have not had a history of significant returns. Recent Accounting Pronouncements See Notes 2(aa) and 2(ab) to our financial statements in Part II, Item 8 for information related to recently issued accounting pronouncements.