| Summary of Significant Accounting Policies | (2)
Summary of Significant Accounting Policies
(a)
Use of Estimates in Preparation of Financial Statements The preparation of
financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting periods. The most significant estimates used in these financial statements include stock options, warrants, the valuation of
useful lives of property and equipment, . Actual results could differ from those estimates.
(b)
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. FemaSeed
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.
(c)
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.
(d)
Cash and Cash Equivalents The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of amounts invested in money market mutual funds and are stated at fair valu e. See Note 2( s
(e)
Accounts Receivable The Company grants trade credit to customers in the normal
course of business and does not require collateral or any other security to support its receivables. Management reviews its accounts receivable monthly for any collection issues. Potentially uncollectible accounts are written off to bad debt
expense when it is determined that the likelihood a customer account is uncollectible is probable. For the year ending December 31, 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.
(f)
Inventories Inventories are stated at the lower of cost or net realizable
value. Cost, which includes amounts related to materials, labor and overhead, is determined on a first‑in, first‑out basis. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of
completion, disposal, and transportation. Management reviews inventories continually for aging or
obsolescence and accounts for such items once identified. In 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:
2023
2022
Materials
$
367,934
244,498
Work in progress
128,993
100,453
Finished goods
170,191
91,772
Inventory, net
$
667,118
436,723
(g)
Other Assets The Company has research tax credits that are available to the
Company to offset future payroll withholding liabilities. As of December 31, 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:
2023
2022
Prepaid and other current assets
$
224,000
212,134
Other long-term assets
704,234
678,928
Research tax credits available to the Company
$
928,234
891,062
(h)
Property and Equipment Property and equipment are carried at cost less
accumulated depreciation and, if applicable, impairment charges. Expenditures which materially increase value or extend useful lives of assets are capitalized, while maintenance and repairs which do not improve or extend the lives of the
respective assets are charged to operations when incurred. Gains and losses on the retirement or disposal of individual assets are included in the results of operations. Depreciation and amortization are computed using the straight‑line method over estimated useful lives of assets as follows:
Leasehold improvements
Shorter of lease term(s) or useful life
Office equipment
5 years
Furniture and fixtures
7 years
Machinery and equipment
5
to 7 years 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.
(i)
Impairment of Long-Lived Assets The Company reviews long‑lived assets, including property and equipment and definite
lived intangibles, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset group may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash
flows expected to result from the use of the asset group and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long‑lived asset group exceeds its fair value.
The Company has not recorded any impairment losses to date.
(j)
Leases The Company records operating leases as right-of-use assets and operating lease
liabilities in its balance sheets for all operating leases with terms exceeding one year. Right-of-use assets represent the right to use
an underlying asset for the lease term, including extension options considered reasonably certain to be exercised, and operating lease liabilities to make lease payments. Right-of-use assets and operating lease liabilities are recognized based on
the present value of lease payments over the lease term. To the extent that lease agreements do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the lease commencement date to determine
the present value of lease payments. The expense for operating lease payments is recognized on a straight-line basis over the lease term and is included in operating expenses in the Company’s 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.
(k)
Intangible Assets Intangible assets consist of patent and trademark application costs and related
legal fees, carried at cost less accumulated amortization and, if applicable, impairment charges. Amortization is computed using the straight‑line method over a weighted average useful life of three years and is recorded in depreciation and amortization expense within the results of operations. Intangible assets consist of the following as of December 31:
2023
2022
Cost
$
1,668,951
1,668,951
Accumulated amortization
(1,668,951
)
(1,665,657
)
Net book value
$
—
3,294 Amortization expense for intangible assets for the years ended December 31, 2023 and
2022 was $3,294 and $21,799,
respectively.
(l)
Deferred Offering Costs Deferred offering costs, which consisted mainly of legal, consulting, and accounting
fees directly attributable to a strategic financing transaction, were capitalized in accordance with Staff Accounting Bulletin (SAB) Topic 5.A Expenses of Offering 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. These
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.
(m)
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:
2023
2022
Incentive and other compensation costs $ 1,082,606 85,191
Clinical trial costs
276,141
333,440
Director fees
60,210
—
Franchise taxes 12,160 26,886
Other
13,179
11,197
Accrued expenses
$
1,444,296
456,714
(n)
Clinical Holdback As part of the regulatory approval process for taking its products to market or
conducting post-market clinical studies to support marketing efforts for products with regulatory clearance, the Company enters into certain Clinical Trial Agreements (CTAs) which include, among other things, the compensation and payment schedule
the participating medical institutions and physicians will receive for all costs in connection with the clinical trial (or study) under the terms of the CTA. As individual patients are enrolled in the study by the participating medical institution
or physician, the Company pays certain per study fees according to the CTA for the duration of the trial. As invoices are received by the Company from the medical institution or physician, the Company retains any agreed upon percentage of total
invoiced costs, generally ranging between 5% - 15%, that is withheld from payment until the end of the study. These retained amounts are recorded as clinical holdback, a liability, on the accompanying balance sheets, and all expenses
incurred in connection with these CTA activities are expensed as services are provided, which are included as research and development expenses on the accompanying statements of comprehensive loss. The following table shows the activity within the clinical holdback liability
accounts for the year ended December 31, 2023:
Balance at December 31, 2022
$
141,864
Clinical holdback retained
5,900
Clinical holdback paid
(27,529
)
Balance at December 31, 2023
$
120,235
Less: clinical holdback - current portion
(65,300
)
Clinical holdback - long-term portion
$
54,935 The following table shows the activity within the clinical holdback liability
accounts for the year ended December 31, 2022:
Balance at December 31, 2021
$
168,738
Clinical holdback retained
21,456
Clinical holdback paid
(48,330
)
Balance at December 31, 2022
$
141,864
Less: clinical holdback - current portion
(45,206
)
Clinical holdback - long-term portion
$
96,658
(o)
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 Derivatives and Hedging—Contracts in Entity’s Own Eq 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 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.
(p)
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.
(q)
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
2023
2022
U.S.
$
1,013,925
1,090,359
International
58,045
115,859
Total
$
1,071,970
1,206,218
(r)
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.
(s)
Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents, and accounts receivable.
As of December 31, 2022, the Company maintained substantially all its cash and cash equivalents primarily in one bank, Silicon Valley Bank (SVB), in amounts which, at times, exceed federally insured limits, which Management believed, at that
time, SVB was financially sound and minimal credit risk existed with respect to these holdings. As of March 15, 2023, the Company transferred substantially all of its cash and cash equivalents to another financial institution, Wells Fargo Bank. The Company generates revenue from sales directly to U.S. customers and to the Company’s international distributors with all prices in U.S. dollars. For
the year ended December 31, 2022, Bayer Yakuhin, Ltd. accounted 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
(t)
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.
(u)
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.
(v)
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.
(w)
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.
(x)
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.
(y)
Income Taxes The Company utilizes the asset‑and‑liability method of accounting for income taxes
as set forth in ASC 740, Income Taxes 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.
(z)
Other Income For the years ended December 31, 2023 and 2022, the Company recorded no other income.
(aa)
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.
(ab)
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. As a
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) Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for
Convertible Instruments and Contracts in an Entity’s Own Equity
(ac)
Recently Issued Accounting Pronouncements – Not Yet Adopted In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic
28): Improvements to Reportable Segment Disclosures In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):
Improvements to Income Tax Disclosures No other new accounting pronouncements not yet effective are expected to have a material impact on the Company’s financial
statements. |
