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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to

Commission File Number 001-36464

Agile Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

101 Poor Farm Road

Princeton, New Jersey 08540

(Address including zip code of principal executive offices)

(609) 683-1880

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

There were 34,377,329 shares of the registrant’s common stock, $0.0001 par value, outstanding as of November 1, 2018.

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Agile Therapeutics, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2018

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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q includes statements that are, or may be deemed, “forward-looking statements.”  In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “designed,” “could,” “might,” “will,” “should,” “approximately” or, in each case, their negative or other variations thereon or comparable terminology, although not all forward-looking statements contain these words.  They appear in a number of places throughout this Form 10-Q and include statements regarding our current intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ongoing and planned development, commercialization, and market uptake of Twirla® (AG200-15) and our other potential product candidates, the strength and breadth of our intellectual property, our ongoing and planned clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, the legal and regulatory landscape impacting our business, the degree of clinical utility of our products, particularly in specific patient populations, expectations regarding clinical trial data, our development and validation of manufacturing capabilities, our results of operations, financial condition, liquidity, prospects, growth and strategies, the length of time that we will be able to continue to fund our operating expenses and capital expenditures, our expected financing needs and sources of financing, the industry in which we operate and the trends that may affect the industry or us.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and healthcare, regulatory and scientific developments and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Form 10-Q. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, they may not be predictive of results or developments in future periods.

Some of the factors that we believe could cause actual results to differ from those anticipated or predicted include:

·                  the fact that our existing cash and cash equivalents may not be sufficient to fund the completion of the development and regulatory approval process for Twirla and the potential that we may be unable to raise additional financing on terms acceptable to us, or at all;

·                  the potential that we are required to reformulate Twirla and, if required, our ability to develop or fund a reformulation that will address the FDA’s concerns, including showing bioequivalence, if necessary;

·                  the potential that we are unable to successfully complete the wear study of Twirla and Xulane® suggested by the U.S. Food and Drug Administration, or FDA;

·                  our ability to adequately and timely respond to the deficiencies in our second Twirla complete response letter, or 2017 CRL, including the Pearl Index that the FDA noted is substantially higher than previously approved combined hormonal contraceptives;

·                  the potential that the FDA could require us to conduct additional studies to address the concerns raised in the 2017 CRL, which could include an additional Phase 3 trial, in the event we are required to reformulate Twirla;

·                  the likelihood that we will require additional correspondence with the FDA prior to the resubmission of our NDA, in addition to the planned correspondence regarding the design of the suggested wear study;

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·                  our ability to resubmit the Twirla new drug application, or NDA, and obtain and maintain regulatory approval of our product candidates, and the labeling under any approval we may obtain;

·                  the potential that other issues will arise that will negatively impact acceptance, review, and approval of Twirla by the FDA, including a determination by an Advisory Committee that Twirla should not be approved;

·                  the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;

·                  our ability along with our third-party manufacturer, Corium International, Inc., or Corium, to complete successfully the scale-up of the commercial manufacturing process for Twirla, including the qualification and validation of equipment related to the expansion of Corium’s manufacturing facility and to pass an FDA pre-approval inspection;

·                  the performance and financial condition of third-party manufacturers;

·                  the success and timing of our clinical trials;

·                  our ability to retain key employees;

·                  regulatory and legislative developments in the United States and foreign countries;

·                  our plans to develop and commercialize our product candidates;

·                  the size and growth of the potential markets for our product candidates and our ability to serve those markets;

·                  the rate and degree of market acceptance of any of our product candidates;

·                  our ability to obtain and maintain intellectual property protection for our product candidates;

·                  the successful development of our sales and marketing capabilities;

·                  our inability to timely obtain from our third-party manufacturer, Corium, sufficient quantities or quality of our product candidates or other materials required for a clinical trial; and

·                  our ability to successfully implement our strategy.

Any forward-looking statements that we make in this Form 10-Q speak only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Form 10-Q. You should also read carefully the factors described in “Part I — Item 1A. Risk Factors” of this Form 10-Q to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all.

This Form 10-Q includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data.

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We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Twirla® is one of our trademarks used in this Form 10-Q.  This Form 10-Q also includes trademarks, tradenames, and service marks that are the property of other organizations. Solely for convenience, our trademarks and tradenames referred to in this Form 10-Q may appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor to these trademarks and tradenames.

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Agile Therapeutics, Inc.

Part I — Financial Information

ITEM 1.  Financial Statements

Agile Therapeutics, Inc.

Balance Sheets

(Unaudited)

(in thousands, except par value and share data)

See accompanying notes to unaudited financial statements.

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Agile Therapeutics, Inc.

Statements of Operations

(Unaudited)

(in thousands, except par value and share data)

See accompanying notes to unaudited financial statements.

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Agile Therapeutics, Inc.

Statements of Cash Flows

(Unaudited)

(in thousands)

See accompanying notes to unaudited financial statements.

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Agile Therapeutics, Inc.

Notes to Unaudited Financial Statements

September 30, 2018

(in thousands, except share and per share data)

1. Organization and Description of Business

Nature of Operations

Agile Therapeutics, Inc. (“Agile” or the “Company”) was incorporated in Delaware on December 22, 1997. Agile is a forward-thinking women’s healthcare company dedicated to fulfilling the unmet health needs of today’s women. The Company’s activities since inception have consisted principally of raising capital and performing research and development, including development of the Company’s lead product candidate. The Company is headquartered in Princeton, New Jersey.

The Company’s lead product candidate, Twirla®, also known as AG200-15, is a once-weekly prescription contraceptive patch that is at the end of Phase 3 clinical development. Substantially all of the Company’s resources are currently dedicated to developing and seeking regulatory approval for Twirla in the United States. The Company has not generated product revenue to date and is subject to a number of risks similar to those of other early stage companies, including, but not limited to, dependence on key individuals, the difficulties and uncertainties inherent in the development of commercially usable products, market acceptance of products, protection of proprietary technology, the potential need to obtain additional capital necessary to fund the development of its products, competition from larger companies and compliance with U.S. Food and Drug Administration (the “FDA”) and other government regulations.  If the Company does not successfully commercialize any product candidates, it will be unable to generate recurring product revenue or achieve profitability.  The Company has incurred operating losses and negative cash flows from operating activities each year since inception. As of September 30, 2018, the Company had an accumulated deficit of approximately $237.7 million.  The Company expects to continue to incur net losses into the foreseeable future.

The Company has financed its operations to date primarily through the issuance and sale of its common stock in both public and private offerings (see Note 7), private placements of its convertible preferred stock, venture loans, and non-dilutive grant funding.

Going Concern

On December 21, 2017, the Company received a complete response letter (the “2017 CRL”) from the FDA citing deficiencies related to the manufacturing process for Twirla and raising questions on the in vivo adhesion properties of Twirla and their potential relationship to the Company’s Phase 3 clinical trial results. The Company’s ability to commercialize Twirla, and the timing of Twirla commercialization, is dependent on the FDA’s review of the Company’s response to the 2017 CRL and its NDA for Twirla, and other items such as timely and successful completion of the validation of equipment for commercial manufacturing, ultimate FDA approval, and the company’s ability to secure additional capital. In January 2018, following the Company’s receipt of the 2017 CRL, the Company significantly scaled back its preparations for commercialization of Twirla, including commercial pre-launch and manufacturing validation activities, pending its ability to address the 2017 CRL and receive approval of Twirla. In April 2018, the Company met with the FDA in a Type A meeting to discuss the deficiencies in the Twirla NDA and the regulatory path for approval of Twirla, and the Company announced the content of the official minutes from the meeting in May 2018.

In June 2018, the Company announced it had submitted a formal dispute resolution request (“FDRR”) with the FDA for Twirla.  The dispute pertained to the determination from the FDA’s reviewing Division of Bone, Reproductive and Urologic Products (“DBRUP”) that concerns surrounding the in vivo adhesion properties of Twirla prevent the approval and could not be addressed through the Company’s proposed patient compliance programs.   The initial FDRR was submitted in June 2018 and was reviewed by the Office of Drug Evaluation III (“ODE III”), which denied the Company’s appeal on July 20, 2018. The Company then escalated its appeal to the Office of New Drugs (“OND”).

In October 2018, the OND formally denied the Company’s appeal and provided a path forward for resubmission of the NDA for Twirla that may not require that the Company reformulate Twirla or conduct a bioequivalence study between formulations, as previously suggested

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Agile Therapeutics, Inc.

Notes to Unaudited Financial Statements

September 30, 2018

(in thousands, except share and per share data)

by DBRUP.  Specifically, OND suggested that the Company conduct a wear study to evaluate whether Twirla demonstrates a generally similar adhesion performance to Xulane®, the generic version of the previously marketed Ortho Evra® contraceptive patch, a product the FDA considers to have acceptable adhesion.  If this result is demonstrated, OND stated that the study would support the conclusion of adequate Twirla adhesion.  OND has recommended that the Company first meet with DBRUP to gain agreement on the specific design and success criteria of a wear study for Twirla.  The wear study suggested by OND to address adhesion provides a path forward for resubmission of the NDA for Twirla, but is not intended to address efficacy.  Rather, if the wear study is successful, Twirla’s safety and efficacy, including the Pearl Index that FDA noted is substantially higher than other previously approved combined hormonal contraceptives, will need to be reviewed by FDA after the Company resubmits the NDA for Twirla.  This is an issue that the FDA plans to bring to Advisory Committee after the adhesion issue has been resolved.  The Company has submitted a request for a Type A meeting and plans to discuss the specifics of the proposed wear study with the FDA as soon as possible.  The Company’s plans to seek approval for Twirla are dependent on its planned meeting with the FDA on the parameters of the wear study for Twirla and its ability to reach agreement with the FDA on the scope and size of the study.  The Company can make no assurances that it can successfully complete the wear study suggested by the FDA or that the results will demonstrate adequate adhesion of Twirla. If the Company is unable to successfully complete a wear trial of Twirla and Xulane to support the conclusion of adequate Twirla adhesion, the FDA will likely require the Company to reformulate Twirla and conduct additional clinical or bioequivalence studies before it can resubmit the Twirla NDA.

The Company also announced a reduction in its workforce and reductions in other planned operating expenses (see Note 9) as it pursued formal dispute resolution.  As a result of these planned cost reductions, the Company believes that its cash and cash equivalents as of September 30, 2018, will be sufficient to meet its projected operating requirements into the second quarter of 2019 which include an estimate of the costs to complete a comparative wear study. The timing and cost of the Twirla wear study may affect the Company’s ability to funds its operations into the second quarter of 2019.  The Company anticipates providing a further business update, which will review its planned resubmission timeline, cash position and funding requirements after it agrees with the FDA on the parameters of the wear study for Twirla.  The Company will require additional capital to fund operating needs for the remainder of the second quarter of 2019 and beyond, including among other items, preparation for an anticipated Advisory Committee meeting, the resumption and completion of its commercialization plan for Twirla, which primarily includes the validation of the Company’s commercial manufacturing process and the commercial launch of Twirla, if approved, and advancing the development of its other potential product candidates.  The Company cannot assure you that the FDA will approve Twirla, or that the Company along with Corium, its third-party manufacturer, will be able to complete validation of the Company’s commercial manufacturing successfully and in a timely manner.

The Company anticipates it will continue to incur net losses for the foreseeable future and the Company’s ability to continue operations for the remainder of the second quarter of 2019 and beyond will depend on its ability to obtain additional funding, as to which no assurances can be given. There can be no assurance that any financing by the Company can be realized by the Company, or if realized, what the terms of any such financing may be, or that any amount that the Company is able to raise will be adequate. Based upon the foregoing, there is substantial doubt about the Company’s ability to continue as a going concern.

As of September 30, 2018, the Company had cash and cash equivalents of $16.9 million. The Company continues to analyze various alternatives, including strategic and refinancing alternatives, asset sales and mergers and acquisitions. The Company’s future success depends on its ability to raise additional capital and/or implement the various strategic alternatives discussed above. The Company cannot be certain that these initiatives or raising additional capital, whether through selling additional debt or equity securities or obtaining a line of credit or other loan, will be available to it or, if available, will be on terms acceptable to the Company. If the Company issues additional securities to raise funds, these securities may have rights, preferences, or privileges senior to those of its common stock, and the Company’s current stockholders will experience dilution. If the Company is unable to obtain funds when needed or on acceptable terms, the Company then may be unable to complete the development of Twirla, and may also be required to further cut operating costs, forego future development and other opportunities and may need to seek bankruptcy protection.

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Agile Therapeutics, Inc.

Notes to Unaudited Financial Statements

September 30, 2018

(in thousands, except share and per share data)

The unaudited financial statements as of September 30, 2018 have been prepared under the assumption that the Company will continue as a going concern for the next 12 months. The Company’s ability to continue as a going concern is dependent upon its uncertain ability to obtain additional equity and/or debt financing and reduce expenditures. The accompanying financial statements as of September 30, 2018 do not include any adjustments that might result from the outcome of this uncertainty. If the Company is unable to continue as a going concern, it may have to liquidate its assets and may receive less than the value at which those assets are carried on the financial statements.

Basis of Presentation

The accompanying unaudited interim financial statements have been prepared by the Company, without audit, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2017 filed with the SEC.

In the opinion of management, the unaudited interim financial statements reflect all adjustments, which are normal recurring adjustments, necessary for the fair presentation of the financial information for the interim periods have been made.  The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the operating results for the full fiscal year or any future period.

2. Summary of Significant Accounting Policies

The Company’s complete listing of significant accounting policies is described in Note 2 to the Company’s audited financial statements as of December 31, 2017 included in its annual report on Form 10-K filed with the SEC.

Use of Estimates

The preparation of the Company’s financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company bases its estimates and judgments on historical experience and various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amounts of expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, the accounting for common stock warrants, stock-based compensation, income taxes, and accounting for research and development costs. Actual results could differ from those estimates.

Fair Value of Financial Instruments

In accordance with Accounting Standards Codification (“ASC”) 825, Financial Instruments, disclosures of fair value information about financial instruments are required, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Cash and cash equivalents are carried at fair value (see Note 3).

Other financial instruments, including accounts payable and accrued liabilities, are carried at cost, which approximates fair value given their short-term nature.

Long-Lived Assets

In accordance with ASC 360, Property, Plant and Equipment, the Company’s policy is to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

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Agile Therapeutics, Inc.

Notes to Unaudited Financial Statements

September 30, 2018

(in thousands, except share and per share data)

may not be recoverable.  Management does not believe that there has been any impairment of the carrying value of any long-lived assets as of September 30, 2018.

Warrants

The Company accounts for its warrants to purchase redeemable convertible stock in accordance with ASC 480, Distinguishing Liabilities from Equity. ASC 480 requires that a financial instrument, other than an outstanding share, that, at inception, is indexed to an obligation to repurchase the issuer’s equity shares, regardless of the timing or the probability of the redemption feature and may require the issuer to settle the obligation by transferring assets be classified as a liability. The Company measures the fair value of its warrant liability using the Black-Scholes option-pricing model with changes in fair value recognized as increases or reductions to other income (expense) in the statement of operations.

In connection with the completion of the Company’s initial public offering in May 2014, the warrants to purchase shares of Series A-1 and Series A-2 preferred stock expired unexercised and the warrants to purchase shares of Series C preferred stock automatically converted into warrants to purchase shares of common stock.  Warrants with non-standard anti-dilution provisions (referred to as down round protection) are classified as liabilities and re-measured each reporting period.  As of September 30, 2018, there were outstanding 62,505 warrants to purchase common stock at $6.00 per share. These warrants expire on December 14, 2019.

The warrants issued in connection with the Company’s debt financing completed in February 2015 (see Note 6) are classified as a component of stockholders’ equity. The value of such warrants was determined using the Black-Scholes option-pricing model.  As of September 30, 2018, there were outstanding 180,274 warrants to purchase common stock at $5.89 per share related to this debt financing. These warrants expire on February 24, 2020.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation. The Company grants stock options for a fixed number of shares to employees and non-employees with an exercise price equal to the fair value of the shares at grant date. Compensation cost is recognized for all share-based payments granted and is based on the grant-date fair value estimated using the weighted-average assumption of the Black-Scholes option pricing model based on key assumptions such as stock price, expected volatility and expected term.  The Company elects to account for forfeitures when they occur.  The equity instrument is not considered to be issued until the instrument vests. As a result, compensation cost is recognized over the requisite service period with an offsetting credit to additional paid-in capital.

The Company also awards restricted stock units (“RSUs”) to employees and its board of directors.  RSUs are generally subject to forfeiture if employment terminates prior to the completion of the vesting restrictions.  The Company expenses the cost of the RSUs, which is determined to be the fair market value of the shares of common stock underlying the RSUs at the date of grant, ratably over the period during which the vesting restrictions lapse.  Cost associated with performance-based restricted stock units with a performance condition which affects the vesting is recognized only if the performance condition is probable of being satisfied.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares outstanding during the period determined using the treasury-stock and if-converted methods. For purposes of diluted net loss per share calculation, common stock warrants, unvested RSUs and stock options are considered to be potentially dilutive securities but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per share were the same for all periods presented.

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Agile Therapeutics, Inc.

Notes to Unaudited Financial Statements

September 30, 2018

(in thousands, except share and per share data)

The following table sets forth the outstanding potentially dilutive securities that have been excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2018 and 2017, respectively, because to do so would be anti-dilutive (in common equivalent shares):

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed below, the Company does not believe that the adoption of recently issued standards have or may have a material impact on our consolidated financial statements or disclosures.

On January 1, 2018, the Company adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers.  Since the Company has not recognized any revenue to date, the adoption of ASC 606 did not have any impact on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. While the Company is currently evaluating the impact of adopting ASU 2016-02, the Company preliminarily estimates recording a lease asset and lease liability of approximately $0.3 million on its balance sheets, with no material impact on its statements of operations.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part 1) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.  This ASU eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock.  ASU 2017-11 is effective for annual periods beginning after December 31, 2018.  Early adoption is permitted.  The Company does not believe the impact of the adoption of ASU 2017-11 will have a material impact on its financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to change the terms or conditions of a share-based payment award. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This Update is the final version of Proposed ASU 2016-360—Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting, which has been deleted. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this ASU did not have a material impact on the Company’s financial statements.

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Agile Therapeutics, Inc.

Notes to Unaudited Financial Statements

September 30, 2018

(in thousands, except share and per share data)

In June 2018, the FASB issued ASU No. 2018-07, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting, which amends the existing accounting standards for share-based payments to nonemployees.  This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees.  Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date.  This ASU becomes effective in the first quarter of fiscal year 2019 and early adoption is permitted, but no earlier than an entity’s adoption date of ASC 606.  The Company elected to early adopt this ASU during the third quarter of 2018 and adoption of ASU No. 2018-07 did not have a material impact on the Company’s financial statements.

3. Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, describes the fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

·                  Level 1 — Quotes prices in active markets for identical assets and liabilities. The Company’s Level 1 assets consist of cash and cash equivalents.  The Company has no Level 1 liabilities.

·                  Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities. The Company has no Level 2 assets or liabilities.

·                  Level 3 — Unobservable inputs that are supported by little or no market data and which require internal development of assumptions about how market participants price the fair value of the assets or liabilities. The Company has no Level 3 assets. The Company’s Level 3 liabilities consist of the warrant liability.

The Company is required to mark the value of its warrant liability to market and recognize the change in valuation in its statements of operations each reporting period.

The following table sets forth the Company’s financial instruments measured at fair value by level within the fair value hierarchy as of September 30, 2018 and December 31, 2017.

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Agile Therapeutics, Inc.

Notes to Unaudited Financial Statements

September 30, 2018

(in thousands, except share and per share data)

The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of September 30, 2018 include (i) volatility (70.0%), (ii) risk free interest rate of 2.59% (estimated using treasury bonds with a 1.25 year life), (iii) strike price ($6.00) for the common stock warrants, (iv) fair value of common stock ($0.37) and (v) expected life (1.25 years).

The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of December 31, 2017 include (i) volatility (70.0%), (ii) risk free interest rate of 1.89% (estimated using treasury bonds with a 2-year life), (iii) strike price ($6.00) for the common stock warrants, (iv) fair value of common stock ($2.69) and (v) expected life (2 years).

The following is a rollforward of the fair value of Level 3 warrants:

There were no transfers between Level 1, 2 or 3 during 2018 or 2017. If the Company’s estimates regarding the fair value of its warrants are inaccurate, a future adjustment to these estimated fair values may be required. Additionally, these estimated fair values could change significantly.

4. Prepaid Expenses

Prepaid expenses consist of the following:

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Agile Therapeutics, Inc.

Notes to Unaudited Financial Statements

September 30, 2018

(in thousands, except share and per share data)

5. Accrued Liabilities

Accrued liabilities consist of the following:

6. Loan and Security Agreements

Hercules Capital, Inc.

In February 2015, the Company entered into a loan and security agreement (the “Hercules Loan Agreement”) with Hercules Capital, Inc. (“Hercules”) for a term loan of up to $25.0 million. In August 2016, the Company entered into the First Amendment to Loan and Security Agreement (the “First Amendment”) with Hercules, which amended certain terms of the Hercules Loan Agreement. In May 2017, the Company entered into the Second Amendment to Loan and Security Agreement (the “Second Amendment”) with Hercules which further amended certain terms of the Hercules Loan Agreement. A first tranche of $16.5 million was funded upon execution of the Hercules Loan Agreement, approximately $15.5 million of which was used to repay the Company’s previous term loan with Oxford Finance LLC.

The First Amendment extended the Company’s option to draw down the second tranche of $8.5 million (the “Second Term Loan Advance”) of the term loan facility provided under the Hercules Loan Agreement (the “Term Loan”) until March 31, 2017 and made the Second Term Loan Advance subject to the consent of Hercules, among other customary conditions. The Second Amendment further extended the Company’s option to draw the Second Term Loan Advance until January 31, 2018 and continued to make the Second Term Loan Advance subject to the consent of Hercules, among other customary conditions. The First Amendment also extended the interest-only payments until January 31, 2017, in connection with the first tranche of $16.5 million (the “First Term Loan Advance” and together with the Second Term Loan Advance, the “Term Loan Advances”). The period during which the additional tranche of $8.5 million may be drawn has expired and therefore the $8.5 million can no longer be drawn by the Company.

The First Amendment provides the Term Loan will mature on December 1, 2018. As a result of the First Amendment, and in connection with the extension of the interest-only period from the First Term Loan Advance, Hercules returned to the Company the principal payments paid by the Company in July and August 2016, which such returned payments will once again constitute outstanding Term Loan advances under the Hercules Loan Agreement. In connection with the execution of the First Amendment, the Company paid Hercules a facility fee of $165. The facility fee represents a debt issue cost which is being reflected as a reduction to the carrying amount of the loan payable in accordance with ASU 2015-03. Such issue costs are being amortized to interest expense over the life of the Term Loan using the effective interest method. As of September 30, 2018 and December 31, 2017, the Company had outstanding borrowings of $5.9 million and $10.9 million, respectively, related to the Hercules Loan Agreement which is recorded on the balance sheet in loan payable, current portion.  As of September 30, 2018, the fair value of Term Loan approximates its carrying value.

The Term Loan accrues interest at a rate of the greater of 9.0% or 9.0% plus Prime minus 4.25% and is payable monthly. Principal is due in 23 consecutive monthly installments beginning on February 1, 2017 and ending on December 1, 2018. In addition to the outstanding principal balance, the Company is required to make an end of term

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Agile Therapeutics, Inc.

Notes to Unaudited Financial Statements

September 30, 2018

(in thousands, except share and per share data)

final payment of approximately $611 on the maturity date of the Term Loan (December 1, 2018). The amount of the end of term final payment is being accrued over the loan term as interest expense.

The Company may prepay all, but not less than all, of the Term Loan subject to a prepayment premium of 1.0% of the outstanding principal. The obligations of the Company under the Hercules Loan Agreement are secured by a perfected first position lien on all of the assets of the Company, excluding intellectual property assets.

In connection with the Hercules Loan Agreement, the Company issued Hercules a warrant to purchase 180,274 shares of the Company’s common stock at an exercise price of $5.89 per share which expires on February 24, 2020 and granted Hercules the right to participate in future equity financings in an amount up to $2.0 million while the loan and warrant are outstanding.

The Company allocated the proceeds of $16.5 million in accordance with ASC 470 based on the relative fair values. The relative fair value of the warrants of approximately $1.2 million at the time of issuance, which was determined using the Black-Scholes option-pricing model, was recorded as additional paid-in capital and reduced the carrying value of the debt. The significant assumptions used in preparing the option pricing model for valuing the Company’s warrant issued to Hercules include (i) volatility (75.0%), (ii) risk free interest rate of 1.22% (estimated using treasury bonds with a 4-year life), (iii) strike price ($5.89) for the common stock warrant, (iv) fair value of common stock ($9.82) and (v) expected life (4 years). The discount on the debt is being amortized to interest expense over the term of the debt.

Interest expense on the Hercules Loan Agreement including the accretion of the value of the related warrants, accrual of term loan back-end fee and amortization of the deferred financing costs was approximately $91 and $289, for the three and nine months ended September 30, 2018, respectively and $459 and $1,509, for the three and nine months ended September 30, 2017, respectively.

7. Stockholders’ Equity

Shelf Registration Statement

On June 19, 2015, the Company filed a universal shelf registration statement with the SEC for the issuance of common stock, preferred stock, warrants, rights, debt securities and units up to an aggregate amount of $150.0 million (the “2015 Shelf Registration Statement”).  On July 1, 2015, the 2015 Shelf Registration Statement was declared effective by the SEC.  The Company completed offerings of common stock in both January 2016 and August 2017 utilizing the 2015 Shelf Registration Statement.  The 2015 Shelf Registration Statement expired on June 30, 2018 and the Company no longer has an active Shelf Registration Statement.

2017 Public Offering of Common Stock

In August 2017, the Company completed an underwritten public offering of 5,333,334 shares of its common stock at a public offering price of $3.75 per share.  Proceeds from this offering, net of underwriting discounts, commissions and other offering costs were approximately $18.5 million.

Performance Based Restricted Stock Awards

In January 2018, the Company granted up to 365,000 shares of performance-based restricted stock units (“Performance Units”) under the Company’s 2014 Incentive Compensation Plan primarily to executive officers, which are largely contingent upon the achievement of performance goals during the performance period beginning on the date of grant and ending on December 31, 2019 as set forth in each individual’s Performance Unit agreement. Performance Units granted in January 2018 replaced Performance Units granted in April 2017 which expired.  Given the uncertainty of the achievement of the performance goals during the performance period, the Company has not recorded compensation expense related to these awards for the three and nine months ended September 30, 2018.

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Agile Therapeutics, Inc.

Notes to Unaudited Financial Statements

September 30, 2018

(in thousands, except share and per share data)

Stock-Based Compensation Expense

Stock-based compensation expense was allocated as follows:

8.  Income Taxes

Sale of New Jersey Net Operating Losses

In January 2018, the Company received net proceeds of approximately $0.5 million in non-dilutive financing through the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the “Program”).  The Program enables approved biotechnology companies to sell their unused Net Operating Loss Carryovers and unused Research and Development Tax Credits for at least 80% of the value of the tax benefits to unaffiliated, profitable corporate taxpayers in the State of New Jersey.  The New Jersey Economic Development Authority and the New Jersey Department of the Treasury’s Division of Taxation administer the Program.  The Company intends to use the proceeds from the sale for working capital purposes.  The Company has now reached the maximum lifetime benefit of $15.0 million under the Program and will no longer be eligible to participate in the Program.

9. Restructuring Costs

In June 2018, the Company announced a reduction in its workforce, which resulted in the termination of several employees primarily from the Company’s commercial and clinical teams, representing approximately thirty percent of its employees.  This workforce reduction, along with other reductions in planned operating expenses is designed to preserve cash while the Company pursued formal dispute resolution with the FDA for Twirla and determines a regulatory path forward for the resubmission of the Company’s NDA for Twirla.

In June 2018, the Company also announced that it had adopted a retention plan (the “Retention Plan”) to provide (i) cash retention payments to all remaining employees in order to induce such employees to remain employed by the Company through December 31, 2018 and (ii) stock option grants to all remaining employees in order to induce such employees to remain employed by the Company through December 31, 2019.

Each employee who participates in the Retention Plan and (i) remains continuously employed by the Company through December 31, 2018 or (ii) has been terminated by the Company other than for cause (as defined in an applicable employment agreement, or, if no employment agreement exists, as determined by the Company in good faith) prior to December 31, 2018, shall be paid a lump-sum cash payment in an amount determined by the compensation committee (“Compensation Committee”) of the Company’s board of directors at the time of the adoption of the Retention Plan.  If an eligible employee terminates service prior to December 31, 2018 for any reason other than termination of employment by the Company without cause, no such cash retention payment shall be made to the eligible employee. The total amount of the cash portion of the Retention Plan is approximately $0.6 million.

In addition, all remaining employees were granted a stock option to purchase the number of shares of common stock as approved by the Compensation Committee, with a per share exercise price of $0.58, representing the closing price of the Company’s common stock as reported by Nasdaq on the date the Retention Plan was approved by the Compensation Committee.  Each option will vest in four equal 25% installments on the following dates: (i) June 20, 2018, (ii) December 31, 2018, (iii) June 30, 2019 and (iv) December 31, 2019.

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Agile Therapeutics, Inc.

Notes to Unaudited Financial Statements

September 30, 2018

(in thousands, except share and per share data)

A summary of accrued restructuring costs, included as a component of accrued liabilities on the Company’s unaudited September 30, 2018 balance sheet is as follows:

10. Commitments and Contingencies

The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company’s operations or its financial position. As of September 30, 2018, the Company has not recorded a provision for any contingent losses.

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and notes thereto included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2018.  Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Dollars in the text and in tabular format are presented in thousands, except per share data, or as otherwise indicated.

Overview

We are a forward-thinking women’s healthcare company dedicated to fulfilling the unmet health needs of today’s women. Twirla® and our other current potential product candidates are designed to provide women with contraceptive options that offer greater convenience and facilitate compliance. Our lead product candidate, Twirla, also known as AG200-15, is a once-weekly prescription contraceptive patch that is at the end of Phase 3 clinical development.

Recent Regulatory History

On December 21, 2017, the U.S. Food and Drug Administration, or FDA, issued a complete response letter, or the 2017 CRL, indicating that our resubmitted New Drug Application, or NDA, for Twirla could not be approved in its present form. The 2017 CRL identifies deficiencies relating to quality control adhesion test methods and specifications which are part of the manufacturing process for Twirla. The 2017 CRL also noted that objectionable conditions identified during an inspection for the Twirla NDA of our third-party manufacturer, Corium International Inc., or Corium’s, facility must be resolved. The 2017 CRL further questions the in vivo adhesion properties of Twirla and their potential relationship to the SECURE clinical trial results, concluding that we have not established that Twirla has the adhesion properties requisite for safe and effective use at this time.

In November 2017 and December 2017, Corium provided the FDA with responses to each of the observations made during the FDA’s facility inspection. In April 2018, we met with the FDA in a Type A meeting to discuss the deficiencies in the Twirla NDA and the regulatory path for approval of Twirla, and we announced the content of the official minutes from the meeting in May 2018, which included FDA’s conclusion that the in vivo adhesion properties of Twirla were not adequate to support approval of the NDA and that we needed to reformulate Twirla.  The FDA also said it anticipates discussing the safety and efficacy of Twirla at an Advisory Committee meeting to obtain input on whether the benefits outweigh the risks.  The FDA also provided guidance on the path forward for addressing the manufacturing quality control test method issues related to Twirla and informed us that whether these issues have been adequately addressed would be subject to review by the FDA when we resubmit our Twirla NDA.

In June 2018, we announced we had submitted a formal dispute resolution request, or FDRR, with the FDA for Twirla.  The dispute pertained to the determination from the FDA’s reviewing Division of Bone, Reproductive and Urologic Products, or DBRUP, that concerns surrounding the in vivo adhesion properties of Twirla prevent the approval of the NDA and could not be addressed through our proposed patient compliance programs.  By submitting the FDRR, we availed the Company of the FDA’s established appeal process whereby disagreements with conclusions reached by a reviewing Division within the FDA are reviewed above the Division level.  The initial FDRR we submitted in June 2018 was denied by the Office of Drug Evaluation III, or ODE III, on July 20, 2018. We then escalated our appeal to the Office of New Drugs, or OND.

In October 2018, OND formally denied our appeal and provided a path forward for resubmission of the NDA for Twirla that may not require that we reformulate Twirla or conduct a bioequivalence study between formulations, as previously suggested by DBRUP in the April 2018 Type A meeting.  Specifically, OND suggested that we conduct a wear study to evaluate whether Twirla demonstrates a generally similar adhesion performance to Xulane®, the generic version of the previously marketed Ortho Evra® contraceptive patch, a product the FDA considers to have acceptable adhesion.  If this result

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is demonstrated, OND stated that the study would support the conclusion of adequate Twirla adhesion.  OND has recommended that we first meet with DBRUP to gain agreement on the specific design and success criteria of a wear study for Twirla.  The wear study suggested by OND to address adhesion provides a path forward for resubmission of the NDA for Twirla but is not intended to address efficacy.  Rather, if the wear study is successful, Twirla’s safety and efficacy, including the Pearl Index that FDA noted is substantially higher than other previously approved combined hormonal contraceptives, will need to be reviewed by FDA after we resubmit the NDA for Twirla.  This is an issue that the FDA plans to bring to Advisory Committee after the adhesion issue has been resolved.  We have submitted a request for a Type A meeting and plan to discuss the specifics of the proposed wear study with the FDA at that meeting.  Our plans to seek approval for Twirla are dependent on our planned meeting with the FDA on the parameters of the wear study for Twirla and our ability to reach agreement with the FDA on the scope and size of the study.  We can make no assurances that we can successfully complete the wear study suggested by the FDA or that the results will demonstrate adequate adhesion of Twirla. If we are unable to successfully complete a wear trial of Twirla and Xulane to support the conclusion of adequate Twirla adhesion, the FDA will likely require us to reformulate Twirla and conduct additional clinical or bioequivalence studies before we can resubmit the Twirla NDA.

In addition, while Corium has provided the FDA with responses to each of the observations made during the FDA’s facility inspection, we expect that the FDA will re-inspect our manufacturing partner’s facilities during its review of our anticipated resubmission before approval can be granted. The FDA may also determine that our responses to the manufacturing deficiencies in the 2017 CRL and Corium’s responses to the manufacturing facility inspection observations are not sufficient or require additional analyses and/or studies and deny approval of the Twirla NDA on this basis as well.

Financial Overview

Since our inception in 1997, we have devoted substantial resources to developing and seeking regulatory approval for Twirla, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. We incurred research and development expenses of $14.4 million, $20.9 million and $25.6 million during the years ended December 31, 2017, 2016 and 2015, respectively.  We incurred research and development expenses of $1.5 million and $7.9 million for the three and nine months ended September 30, 2018, respectfully, and $3.2 million and $11.7 million for the three and nine months ended September 30, 2017, respectfully.  We anticipate that a portion of our operating expenses will continue to be related to research and development as we continue to develop Twirla. Substantially all of our resources are currently dedicated to developing and seeking regulatory approval for Twirla.

We have funded our operations primarily through sales of common stock, convertible preferred stock, convertible promissory notes and term loans.  As of September 30, 2018 and December 31, 2017 respectively, we had $16.9 million and $35.9 million in cash and cash equivalents.

In February 2015, we entered into a loan and security agreement with Hercules Capital, Inc. or Hercules, for a term loan of up to $25.0 million, which we refer to as the Hercules Loan Agreement. A first tranche of $16.5 million was funded upon execution of the Hercules Loan Agreement, approximately $15.5 million of which was used to repay our existing term loan. The Hercules Loan Agreement was amended in August 2016 to, among other things, extend the period during which we could have drawn the additional tranche of $8.5 million to March 31, 2017 and extended the period during which we make interest-only payments until January 31, 2017. The Hercules Loan Agreement was further amended in May 2017 to extend the period during which we could have drawn the additional tranche of $8.5 million to January 31, 2018. The period during which the additional tranche of $8.5 million may be drawn has expired and therefore the $8.5 million can no longer be drawn by us. On February 1, 2017, we began making principal payments with respect to the Hercules Loan Agreement. See further discussion in “Funding Requirements and Other Liquidity Matters” below.

In January 2016, we closed an underwritten public offering of 5,511,812 shares of common stock at a public offering price of $6.35 per share.  In February 2016, the underwriters of the public offering of common stock exercised in full their option to purchase an additional 826,771 shares of common stock at the public offering price

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of $6.35 per share, less underwriting discounts and commissions.  A total of 6,338,583 shares of common stock were sold in the public offering, resulting in total net proceeds of approximately $37.5 million.

In August 2017, we completed an underwritten public offering of 5,333,334 shares of common stock at a public offering price of $3.75 per share.  Proceeds from our August 2017 public offering, net of underwriting discounts, commissions and other offering costs, were approximately $18.5 million.

We have not generated any revenue and have never been profitable for any year. Our net loss was $28.3 million, $28.7 million and $30.3 million for the years ended December 31, 2017, 2016 and 2015, respectively. Our net loss was $3.8 million and $16.0 million for the three and nine months ended September 30, 2018, respectively.  We expect to incur increased expenses and increasing operating losses for the foreseeable future as we seek the approval of our NDA for Twirla,  which will now include designing and implementing the wear study of Twirla and Xulane suggested by the FDA, complete the qualification and validation of our commercial manufacturing process, initiate pre-launch commercial activities, commercially launch Twirla, if approved, advance our other potential product candidates and expand our research and development programs. Substantially all of our resources are currently dedicated to developing and seeking regulatory approval for Twirla.

Going Concern

We believe that our cash and cash equivalents as of September 30, 2018, will be sufficient to meet our projected operating requirements into the second quarter of 2019 which include an estimate of the costs to complete a comparative wear study.  The timing and cost of the Twirla wear study may affect our ability to fund our operations into the second quarter of 2019. We anticipate providing a further business update, which will review our planned resubmission timeline, cash position, and related funding requirements, after we agree with the FDA on the parameters of the wear study for Twirla.  We will require additional capital to fund our operating needs for the remainder of the second quarter of 2019 and beyond including, among other items, preparation for an anticipated Advisory Committee meeting, the resumption and completion of our commercial plan for Twirla, which primarily includes the validation of our commercial manufacturing process and the commercial launch of Twirla, if approved, and advancing the development of our other potential product candidates.

Pursuant to the receipt of the 2017 CRL, and the delay in the approval timeline for Twirla, our ability to continue operations for the remainder of the second quarter of 2019 and beyond will depend on our ability to obtain additional funding, as to which no assurances can be given. Based upon the foregoing, there is substantial doubt about our ability to continue as a going concern. There can be no assurance that any financing by us can be realized, or if realized, what the terms of any such financing may be, or that any amount that we are able to raise will be adequate.

As of September 30, 2018, we had cash and cash equivalents of $16.9 million. We continue to analyze various alternatives, including strategic and refinancing alternatives, asset sales and mergers and acquisitions. Our future success depends on our ability to raise additional capital and/or implement the various strategic alternatives discussed above. We cannot be certain that these initiatives or raising additional capital, whether through selling additional debt or equity securities or obtaining a line of credit or other loan, will be available to us or, if available, will be on terms acceptable to us. If we issue additional securities to raise funds, whether through the issuance of equity or convertible debt securities, or any combination thereof, these securities may have rights, preferences, or privileges senior to those of our common stock, and our current stockholders will experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with pharmaceutical partners, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, including Twirla, or grant licenses on terms that may not be favorable to us. If we are unable to obtain funds when needed or on acceptable terms, we then may be unable to complete the development of Twirla, and may also be required to further cut operating costs, forego future development and other opportunities and may need to seek bankruptcy protection.

The unaudited financial statements as of September 30, 2018 have been prepared under the assumption that we will continue as a going concern for the next 12 months. Our ability to continue as a going concern is dependent

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upon our uncertain ability to obtain additional equity and/or debt financing and reduce expenditures. These unaudited financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We do not own any manufacturing facilities and rely on Corium for all aspects of the manufacturing of Twirla. We will need to continue to invest in the manufacturing process for Twirla, and incur significant expenses, in order to complete the equipment qualification and validation related to the expansion of Corium’s manufacturing capabilities in order to be capable of supplying projected commercial quantities of Twirla, if approved. We continue to plan the process of scaling up the commercial manufacturing capabilities for Twirla with Corium and the associated costs and timelines. We expect the validation and expansion of our commercial manufacturing process to be completed after the approval of Twirla. If we obtain regulatory approval for Twirla, we expect to incur significant expenses in order to create an infrastructure to support the commercialization of Twirla, including sales, marketing, distribution, medical affairs and compliance functions, which will require additional capital.

We have incurred and will continue to incur additional costs associated with operating as a public company. Accordingly, we will need additional financing to support our continuing operations and other potential product candidates in our pipeline in addition to the commercial activities required for the pre-launch and launch of Twirla, if approved. We will seek to fund our operations through public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise additional capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.

Financial Operations Overview

Revenue

To date, we have not generated any revenue. In the future, we may generate revenue from product sales, license fees, milestone payments and royalties from the sale of products developed using our intellectual property. Our ability to generate revenue and become profitable depends on our ability to successfully commercialize Twirla and any product candidates that we may advance in the future. If we fail to complete the development of Twirla or any other potential product candidates we advance in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, will be adversely affected.

Research and Development Expenses

Since our inception, we have focused our resources on our research and development activities. Research and development expenses consist primarily of costs incurred for the development of Twirla and other current and future potential product candidates, and include:

·                  expenses incurred under agreements with contract research organizations, or CROs, and investigative sites that conduct our clinical trials and preclinical studies;

·                  employee-related expenses, including salaries, benefits, travel and stock-based compensation expenses;

·                  the cost of acquiring, developing and manufacturing clinical trial materials, including the supply of our product candidates;

·                  costs associated with research, development and regulatory activities; and

·                  costs associated with equipment scale-up required for commercial production.

Research and development costs are expensed as incurred. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or information provided to us by our third-party vendors.

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Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We do not currently utilize a formal time allocation system to capture expenses on a project-by-project basis, as the majority of our past and planned expenses have been and will be in support of Twirla. In 2018, we expect our research and development expenses will likely decrease as compared with our 2017 research and development expenses as we completed our pursuit of formal dispute resolution, determine a regulatory path forward for the resubmission of our NDA for Twirla, and plan and initiate a comparative wear study of Twirla and Xulane.  Research and development expenses in 2018 consist primarily of those costs associated with the continued development and refinement of our commercial manufacturing process, costs associated with the formal dispute resolution process, planning and initiating a comparative wear study, and preparation and resubmission of the NDA for Twirla. In response to the 2017 CRL, we have significantly scaled back equipment qualification and validation of our commercial manufacturing process and resumption and completion of these activities will require additional capital.

To date, our research and development expenses have related primarily to the development of Twirla. Research and development expenses in 2018 include support for the formal dispute resolution process, planning and initiating a comparative wear study of Twirla and Xulane, preparing the resubmission of our NDA, and will also go toward the qualification and validation of our commercial manufacturing process. For the three months ended September 30, 2018 and 2017, our research and development expenses were approximately $1.5 million and $3.2 million, respectively.  For the nine months ended September 30, 2018 and 2017, our research and development expenses were approximately $7.9 million and $11.7 million, respectively.  The following table summarizes our research and development expenses by functional area.

It is difficult to determine with any certainty the exact duration and completion costs of any of our future clinical trials of Twirla or our other current and future potential product candidates we may advance. It is also difficult to determine if, when or to what extent we will generate revenue from the commercialization and sale of our product candidates that obtain regulatory approval.

We anticipate providing a further business update, which will review our planned resubmission timeline, cash position and related funding requirements, after we agree with the FDA on the parameters of the wear study for Twirla. The timing and outcome of the Twirla wear study may affect the timing of our NDA resubmission.  Consistent with our previous NDA resubmission in 2017, we currently expect that our resubmission of the NDA responding to the 2017 CRL will be categorized as a Type 2 resubmission and receive a review period of six months from the date of resubmission of the NDA. We may, however, never succeed in achieving regulatory approval for Twirla or any of our other potential product candidates or such approval may be delayed. The duration, costs and timing of clinical trials and development of our other potential product candidates in addition to Twirla will depend on a variety of factors, including the uncertainties of future clinical trials and preclinical studies, the rate of subject enrollment, obtaining additional capital, and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition,

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manufacturing capability and commercial viability. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, or experience issues with our manufacturing capabilities we could be required to expend significant additional financial resources and time with respect to the development of that product candidate. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate’s commercial potential. Substantially all of our resources are currently dedicated to developing and seeking regulatory approval for Twirla.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance and administrative functions including payroll taxes and health insurance, stock-based compensation and travel expenses. Other general and administrative expenses include facility-related costs, insurance and professional fees for legal, patent review, consulting and accounting services. General and administrative expenses are expensed as incurred.

For the three months ended September 30, 2018 and 2017, our general and administrative expenses totaled approximately $1.8 million and $3.5 million, respectively.  For the nine months ended September 30, 2018 and 2017, our general and administrative expenses totaled approximately $7.2 million and $9.1 million, respectively.  In January 2018, following our receipt of the 2017 CRL, we significantly scaled back our preparations for commercialization of Twirla, including commercial pre-launch activities, which had primarily increased over the second-half of 2017 as described below, pending our ability to address the 2017 CRL and receive approval of Twirla. However, if Twirla is approved, we intend to commercialize Twirla in the United States through a direct sales force. In which case, we anticipate that our general and administrative expenses will increase in the future with the continued research, development and potential commercialization of Twirla, its planned line extensions, and any of our other potential product candidates, and as we operate as a public company. These increases will likely include increased selling and marketing costs, including payroll and operating costs, related to the commercial launch of Twirla, if approved, legal and accounting services, stock registration and printing fees, addition of new personnel to support compliance and communication needs, increased insurance premiums, outside consultants and investor relations. Additionally, if in the future we believe regulatory approval of Twirla or any of our other potential product candidates appears likely, we anticipate that we would begin preparations for commercial operations, which would result in an increase in payroll and other expenses, particularly with respect to the sales and marketing of our product candidates.

Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosures. On an ongoing basis, our actual results may differ significantly from our estimates.

There have been no material changes to our critical accounting policies and estimates from the information discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K.

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Results of Operations

Comparison of the Three Months Ended September 30, 2018 and 2017

Research and development expenses.  Research and development expenses decreased by $1.6 million, or 51%, from $3.2 million for the three months ended September 30, 2017 to $1.6 million for the three months ended September 30, 2018. This decrease in research and development expenses was primarily due to the following:

·                  a decrease in manufacturing commercialization expenses of $1.0 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017.  This decrease reflects reduced activity associated with the scale-up process and the on-going qualification process of the commercial manufacturing equipment primarily as a result of the receipt of the 2017 CRL.  Costs related to the qualification, validation and manufacture of Twirla will be recorded as research and development expenses until we receive approval of our NDA for Twirla;

·                  a decrease in clinical development expenses of $0.4 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017.  This decrease primarily relates to the completion of the close-out activities associated with our SECURE clinical trial during 2017.  There were no external costs related to the SECURE clinical trial incurred during the three months ended September 30, 2018; and

·                  a decrease in personnel-related expenses of $0.2 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017.  This decrease is primarily the result of the reduction in workforce that was announced in June 2018 as part of our restructuring efforts.

General and administrative expenses.  General and administrative expenses decreased by $1.7 million, or 50%, from $3.5 million for the three months ended September 30, 2017 to $1.8 million for the three months ended September 30, 2018. This decrease in general and administrative expense was primarily due to:

·                  a decrease in commercial development expense of $1.2 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017.  This decrease relates to the suspension of

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our pre-commercialization activities such as brand building, advocacy and consulting as a result of the receipt of the 2017 CRL;

·                  a decrease in professional fees expense of $0.3 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017.  This decrease is primarily the result of a reduction in the use of consultants and lower legal and patent-related costs; and

·                  a decrease in stock compensation expense of $0.2 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017.  This decrease is primarily the result of the reduction in workforce that was announced in June 2018 as part of our restructuring efforts.

Restructuring costs.  In June 2018, we announced a reduction in our workforce, which resulted in the termination of several employees primarily from our commercial and clinical teams, representing approximately thirty percent of our employees.  This workforce reduction, along with other reductions in planned operating expenses was designed to preserve cash while we pursued formal dispute resolution with the FDA for Twirla and as we determine the regulatory path forward for the resubmission of our NDA for Twirla.  In addition, in June 2018, we also announced that we had adopted a retention plan to provide (i) cash retention payments to be made to all remaining employees in order to induce such employees to remain employed by us through December 31, 2018 and (ii) stock option grants to all remaining employees in order to induce such employees to remain employed by us through December 31, 2019. Restructuring costs of $0.3 million for the three months ended September 30, 2018 represent costs related to the accrual of the retention bonus.  All severance-related costs were accrued as of June 30, 2018.

Interest income.  Interest income comprises interest earned on cash and cash equivalents.

Interest expense.  Interest expense is primarily attributable to our term loan with Hercules for the three months ended September 30, 2018 and 2017, respectively.  Interest expense also includes the amortization of the discount associated with allocating value to the common stock warrants issued to Hercules, the amortization of the deferred financing costs associated with the term loan and the accrual of the final payment due to Hercules.  Interest expense decreased by $0.2 million, or 42%, from $0.5 million for the three months ended September 30, 2017 to $0.3 million for the three months ended September 30, 2018.  This decrease is primarily the result of a decrease in the principal outstanding under our term loan with Hercules for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017.

Change in fair value of warrants.  Certain of our warrants to purchase shares of our common stock are recorded at fair value and are subject to re-measurement at each balance sheet date. These liabilities are re-measured at each balance sheet date with the corresponding charge to earnings recorded within change in fair value of warrant liability. The fair value of the common stock warrants with non-standard anti-dilution provisions are determined using the Black-Scholes option pricing model which incorporates a number of assumptions and judgments to estimate the fair value of these warrants including the fair value per share of the underlying stock, the remaining contractual term of the warrants, risk-free interest rate, expected dividend yield, credit spread and expected volatility of the price of the underlying stock. The market price of our common stock has been and may continue to be volatile.  Consequently, future fluctuations in the price of our common stock may cause significant increases or decreases in the fair value of the warrant liability.

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Comparison of the Nine Months Ended September 30, 2018 and 2017

Research and development expenses.  Research and development expenses decreased by $3.8 million, or 32%, from $11.7 million for the nine months ended September 30, 2017 to $7.9 million for the nine months ended September 30, 2018. This decrease in research and development expenses was primarily due to the following:

·                  a decrease in clinical development expenses of $2.0 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.  This decrease primarily relates to the completion of the close-out activities associated with our SECURE clinical trial during 2017.  There were no external costs related to the SECURE clinical trial incurred during the nine months ended September 30, 2018;

·                  a decrease in regulatory expenses of $0.7 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.  This decrease primarily relates to reduction of regulatory activity during the nine months ended September 30, 2018 as compared the nine months ended September 30, 2017.  Regulatory expenses for the nine months ended September 30, 2017 included external costs associated with the preparation of our NDA resubmission and response to the FDA’s CRL received by us in February 2013;

·                  a decrease in manufacturing commercialization expenses of $0.5 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.  This decrease reflects reduced activity associated with the scale-up process and the on-going qualification process of the commercial manufacturing equipment primarily as a result of the receipt of the 2017 CRL.  Costs related to the qualification, validation and manufacture of Twirla will be recorded as research and development expenses until we receive approval of our NDA for Twirla; and

·                  a decrease in personnel-related expenses of $0.3 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.  This decrease is primarily the result of the reduction in workforce that was announced in June 2018 as part of our restructuring efforts.

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General and administrative expenses.  General and administrative expenses decreased by $1.9 million, or 21%, from $9.1 million for the nine months ended September 30, 2017 to $7.2 million for the nine months ended September 30, 2018. This decrease in general and administrative expense was primarily due to:

·                  a decrease in commercial development expense of $1.8 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.  This decrease relates to the suspension of our pre-commercialization activities such as brand building, advocacy and consulting as a result of the receipt of the 2017 CRL;

·                  a decrease in professional fees expense of $0.5 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.  This decrease is primarily the result of a reduction in the use of consultants and lower legal and patent-related costs; and

·                  an increase in personnel costs of $0.4 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.  This increase relates to the addition of personnel during the second half of 2017 to help prepare for launch of Twirla, if approved.

Restructuring costs.  In June 2018, we announced a reduction in our workforce, which resulted in the termination of several employees primarily from our commercial and clinical teams, representing approximately thirty percent of our employees.  This workforce reduction, along with other reductions in planned operating expenses was designed to preserve cash while we pursued formal dispute resolution with the FDA for Twirla and as we determine the regulatory path forward for the resubmission of our NDA for Twirla.  In addition, in June 2018, we also announced that we had adopted a retention plan to provide (i) cash retention payments to be made to all remaining employees in order to induce such employees to remain employed by us through December 31, 2018 and (ii) stock option grants to all remaining employees in order to induce such employees to remain employed by us through December 31, 2019. Restructuring costs of $0.7 million for the nine months ended September 30, 2018 represent $0.4 million of severance-related costs and $0.3 million of costs related to the accrual of the retention bonus.

Interest income.  Interest income comprises interest earned on cash and cash equivalents.

Interest expense.  Interest expense is primarily attributable to our term loan with Hercules for the nine months ended September 30, 2018 and 2017, respectively.  Interest expense also includes the amortization of the discount associated with allocating value to the common stock warrants issued to Hercules, the amortization of the deferred financing costs associated with the term loan and the accrual of the final payment due to Hercules.  Interest expense decreased by $0.5 million, or 37%, from $1.5 million for the nine months ended September 30, 2017 to $1.0 million for the nine months ended September 30, 2018.  This decrease is primarily the result of a decrease in the principal outstanding under our term loan with Hercules for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.

Change in fair value of warrants.  Certain of our warrants to purchase shares of our common stock are recorded at fair value and are subject to re-measurement at each balance sheet date. These liabilities are re-measured at each balance sheet date with the corresponding charge to earnings recorded within change in fair value of warrant liability. The fair value of the common stock warrants with non-standard anti-dilution provisions are determined using the Black-Scholes option pricing model which incorporates a number of assumptions and judgments to estimate the fair value of these warrants including the fair value per share of the underlying stock, the remaining contractual term of the warrants, risk-free interest rate, expected dividend yield, credit spread and expected volatility of the price of the underlying stock. During the nine months ended September 30, 2018, we reported income of $29 thousand related to the decrease in the fair value of the warrants as compared to income of $82 thousand for the nine months ended September 30, 2017. The market price of our common stock has been and may continue to be volatile.  Consequently, future fluctuations in the price of our common stock may cause significant increases or decreases in the fair value of the warrant liability.

Benefit from income taxes.  For the nine months ended September 30, 2018, we received $0.5 million from the sale of New Jersey state Net Operating Loss Carryovers, or NOLs, as part of the Technology and Business Tax Certificate Program, or the Program.  We did not receive any payments under the Program during the nine months

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ended September 30, 2017.  The Program enables approved biotechnology companies to sell their unused NOLs and unused Research and Development Tax Credits for at least 80% of the value of the tax benefits to unaffiliated, profitable corporate taxpayers in the State of New Jersey.  The New Jersey Economic Development Authority and the New Jersey Department of the Treasury’s Division of Taxation administer the Program.  We intend to use the proceeds from the sale for working capital purposes.  We have reached the maximum lifetime benefit of $15.0 million under the Program and is no longer eligible to participate in the Program.

Liquidity and Capital Resources

At September 30, 2018, we had cash and cash equivalents totaling $16.9 million. We invest our cash equivalents in short-term highly liquid, interest-bearing investment-grade and government securities in order to preserve principal.

The following table sets forth the primary sources and uses of cash for the periods indicated:

Operating Activities

We have incurred significant costs in the area of research and development, including CRO fees, manufacturing, regulatory and other clinical trial costs, as our lead product candidate, Twirla, was being developed. Net cash used in operating activities was $13.8 million for the nine months ended September 30, 2018 and consisted primarily of a net loss of $16.0 million, which was offset by non-cash stock-based compensation expense of $2.8 million, non-cash interest expense of $0.4 million and a decrease in working capital of $1.0 million.  Net cash used in operating activities was $18.8 million for the nine months ended September 30, 2017 and consisted primarily of a net loss of $22.1 million which was offset by non-cash stock-based compensation expense of $2.7 million and non-cash interest expense of $0.5 million. Cash used in operations in 2018 has been offset, in part, by the proceeds received from the sale of New Jersey NOLs under the Program. The decreased clinical development expenses were offset by increased commercial development and commercial manufacturing expenses related to the initialization of pre-commercialization activities for Twirla.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2018 and 2017 was $0.3 million and $0.8 million, respectively. Cash used in investing activities for these periods primarily represents the acquisition of equipment to be used in the commercialization of Twirla, if approved.

Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2018 was $4.9 million which primarily represented principal payments under the Hercules Loan Agreement, which began on February 1, 2017.  Net cash provided by financing activities for the nine months ended September 30, 2017 was $14.6 million which primarily represented net proceeds of $18.5 million received from our follow-on offering of common stock offset, in part, by principal payments under the Hercules Loan Agreement of $4.1 million.

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Funding Requirements and Other Liquidity Matters

Since 2012 we have sought regulatory approval for Twirla and, in the process, received two complete response letters from the FDA in connection with our NDA for Twirla, which have included requests to conduct additional studies and gather additional information on our manufacturing process for Twirla. In January 2018, in response to the 2017 CRL, we significantly scaled back equipment qualification and validation of our commercial manufacturing process and our other commercial pre-launch activities.  Since then we have engaged with the FDA to seek clarity on a regulatory path for the potential approval of Twirla culminating in a formal dispute resolution request to the FDA.  In October 2018, the FDA’s Office of New Drugs formally denied our appeal and provided a path forward for resubmission of the NDA for Twirla that will require us to conduct a wear study to evaluate whether Twirla demonstrates a generally similar adhesion performance to Xulane, the generic version of the previously marketed Ortho Evra® contraceptive patch, a product the FDA considers to have acceptable adhesion.  If this result is demonstrated, we plan to resubmit our NDA with the results from this wear study along with our other responses to the 2017 CRL.  The FDA has informed us that in connection with the review of the Twirla NDA, the FDA plans to bring the issue of Twirla’s safety and efficacy to an Advisory Committee. We have submitted a request for a Type A meeting and plan to discuss the specifics of the proposed wear study with the FDA at that meeting.  Our plans to seek approval for Twirla are dependent on our planned meeting with the FDA on the parameters of the wear study for Twirla and our ability to reach agreement with the FDA on the scope and size of the study.  We can make no assurances that we can successfully complete the wear study suggested by the FDA or that the results will demonstrate adequate adhesion of Twirla. If we are unable to successfully complete a wear trial of Twirla and Xulane to support the conclusion of adequate Twirla adhesion, the FDA will likely require us to reformulate Twirla and conduct additional clinical or bioequivalence studies before we can resubmit the Twirla NDA.

In addition to the reductions in planned operating expenses we began implementing in January 2018, we reduced our workforce by approximately thirty percent in June 2018 as we pursued formal dispute resolution and a path forward for the resubmission of our NDA for Twirla.  As a result of these planned cost reductions, we believe that our cash and cash equivalents as of September 30, 2018, will be sufficient to meet our projected operating requirements into the second quarter of 2019 which include an estimate of the costs to complete a comparative wear study.  The timing and cost of the Twirla wear study may affect our ability to fund our operations into the second quarter of 2019. We anticipate providing a further business update, which will review our planned resubmission timeline, cash position, and related funding requirements, after we agree with the FDA on the parameters of the wear study for Twirla.  We will require additional capital to fund our operating needs for the remainder of the second quarter of 2019 and beyond including, among other items, preparation for an anticipated Advisory Committee meeting, the resumption and completion of our commercial plan for Twirla, which primarily includes the validation of our commercial manufacturing process and the commercial launch of Twirla, if approved, and advancing the development of our other potential product candidates.  We cannot assure you that the FDA will approve Twirla, or that we along with Corium, our third-party manufacturer, will be able to complete validation of our commercial manufacturing successfully and in a timely manner.

Consistent with our previous NDA resubmission in 2017, we currently expect that our resubmission of the NDA responding to the 2017 CRL will be categorized as a Type 2 resubmission and receive a review period of six months from the date of resubmission of the NDA. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:

·                  conduct the wear study of Twirla and Xulane suggested by the FDA;

·                  need to reformulate Twirla if the results of the wear study do not support resubmission of our Twirla NDA and we are required to conduct additional studies;

·                  prepare for and participate in an Advisory Committee review of the safety and efficacy of Twirla;

·                  seek marketing approval for Twirla in the United States;

·                  establish a sales and marketing infrastructure to commercialize Twirla in the United States, if approved;

·                  continue the equipment qualification and validation related to the expansion of Corium’s manufacturing facility in preparation for potential commercial operations;

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·                  continue to evaluate additional line extensions for Twirla and initiate development of potential product candidates in addition to Twirla;

·                  maintain, leverage and expand our intellectual property portfolio; and

·                  add operational, financial and management information systems and personnel, including personnel to support our product development and future commercialization efforts.

We may also need to raise additional funds sooner if we choose to accelerate components of our commercial plan or we encounter any unforeseen events that affect our current business plan or we may choose to raise additional funds to provide us with additional working capital. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional capital when needed or on attractive terms or are unable to enter into strategic collaborations, we then may be unable to complete the development of Twirla, and may also be required to further cut operating costs, forgo future development and other opportunities or even terminate our operations, which may involve seeking bankruptcy protection. Because of the numerous risks and uncertainties associated with the development, including, among other things, manufacturing scale up, FDA review of the NDA for Twirla and commercialization of Twirla, if approved, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of Twirla. Our future capital requirements will depend on many factors, including:

·                  the costs, timing and outcome of the wear study of Twirla and Xulane suggested by the FDA;

·                  the costs, timing and outcome of regulatory review of Twirla;

·                  the costs of the equipment qualification and validation related to the expansion of Corium’s manufacturing facility in preparation for potential commercial operations;

·                  the costs of future commercialization activities, including the commercial launch, product sales, marketing, manufacturing and distribution, for Twirla, if approved;

·                  the revenue, if any, received from commercial sales of Twirla, if approved;

·                  the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and

·                  the costs associated with any potential business or product acquisitions, strategic collaborations, licensing agreements or other arrangements that we may establish.

We do not have any committed external source of funds. Until such time, if ever, as we can generate substantial cash flows from product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of September 30, 2018 that will affect our future liquidity:

Our operating lease commitment relates to our lease of office space in Princeton, New Jersey. In August 2015, we renewed this lease with the new term to expire in November 2020.

February 2015 Loan and Security Agreement — Hercules Capital, Inc.

The first tranche of the Hercules Loan Agreement was funded in February 2015. In August 2016, we entered into the First Amendment to Loan and Security Agreement, or the “First Amendment” with Hercules, which amends certain terms of the Hercules Loan Agreement.

The First Amendment extended our option to draw down the second tranche of $8.5 million referred to as the “Second Term Loan Advance”, of the term loan facility provided under the Hercules Loan Agreement, or the Term Loan, until March 31, 2017 and made the Second Term Loan Advance subject to the consent of Hercules, among other customary conditions. The Hercules Loan Agreement was further amended in May 2017 to extend the period during which we could draw the second tranche of $8.5 million to January 31, 2018 and continues to make the Second Term Loan Advance subject to the consent of Hercules, among other customary conditions. The period during which the additional tranche of $8.5 million may be drawn has expired and therefore the $8.5 million can no longer be drawn by us. The First Amendment also extended the interest-only payments until January 31, 2017, in connection with the first tranche of $16.5 million, or the First Term Loan Advance, and together with the Second Term Loan Advance, referred to as the Term Loan Advances.

The First Amendment provides that the Term Loan will mature on December 1, 2018. The First Amendment also provides that as part of the extension of the interest-only period from the First Term Loan Advance, Hercules returned to us the principal payments paid by us in July and August 2016, which such returned payments will once again constitute Term Loan Advances under the Hercules Loan Agreement. In connection with the execution of the First Amendment, we paid Hercules a facility fee of $0.165 million.

The Term Loan accrues interest at a rate of the greater of 9.0% or 9.0% plus Prime minus 4.25% and is payable monthly. Principal is due in 23 consecutive monthly installments beginning on February 1, 2017 and ending on December 1, 2018. In addition, we are required to make a final payment of $0.6 million on the maturity date of the Term Loan, December 1, 2018. The final payment is being accrued and recorded to interest expense over the life of the Term Loan. On February 1, 2017, we began making principal payments with respect to the Term Loan.

We may prepay all, but not less than all, of the Hercules Loan subject to a prepayment premium of 3.0% of the outstanding principal if prepaid during the first year, 2.0% of the outstanding principal if prepaid during the second year and 1.0% of the outstanding principal if prepaid after the second year. Our obligations under the Hercules Loan are secured by a perfected first position lien on all of our assets, excluding intellectual property assets.

In connection with the Hercules Loan Agreement, we issued Hercules a warrant to purchase 180,274 shares of our common stock at an exercise price of $5.89 per share and granted Hercules the right to participate in future equity financings in an amount up to $2.0 million while the loan and warrant are outstanding.

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We allocated the proceeds of $16.5 million in accordance with ASC 470 based on the relative fair values. The relative fair value of the warrants of approximately $1.2 million at the time of issuance, which was determined using the Black-Scholes option-pricing model, was recorded as additional paid-in capital and reduced the carrying value of the debt. The discount on the debt is being amortized to interest expense over the term of the debt.

Shelf Registration Statement

On June 19, 2015, we filed a universal shelf registration statement with the SEC for the issuance of common stock, preferred stock, warrants, rights, debt securities and units up to an aggregate amount of $150.0 million, which we refer to as the 2015 Shelf Registration Statement. On July 1, 2015, the 2015 Shelf Registration Statement was declared effective by the SEC. During the first quarter of 2016 and the third quarter of 2017, we completed offerings of common stock utilizing the 2015 Shelf Registration Statement (see below). The 2015 Shelf Registration Statement expired on June 30, 2018 and we no longer have an active Shelf Registration Statement.

2016 Public Offering of Common Stock

In January 2016, we closed an underwritten public offering of 5,511,812 shares of common stock registered under the 2015 Shelf Registration Statement at a public offering price of $6.35 per share. In February 2016, the underwriters of the public offering of common stock exercised in full, their option to purchase an additional 826,771 shares of common stock at the public offering price of $6.35 per share, less underwriting discounts and commissions. A total of 6,338,583 shares of common stock were sold in the public offering resulting in total net proceeds of approximately $37.5 million. One of our stockholders, who is also affiliated with an individual that was at the time a member of our Board of Directors, purchased 393,700 shares of common stock for approximately $2.5 million in the public offering.

2017 Public Offering of Common Stock

In August 2017, we completed an underwritten public offering of 5,333,334 shares of common stock registered under the 2015 Shelf Registration Statement at a public offering price of $3.75 per share. Proceeds from this public offering, net of underwriting discounts, commissions and other offering costs were approximately $18.5 million.

Recent Accounting Pronouncements

See Note 2 to our financial statements that discusses new accounting pronouncements.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance sheets.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are exposed to market risks in the ordinary course of our business. Market risk is the risk of change in fair value of a financial instrument due to changes in interest rates, equity prices, financing, exchange rates or other factors. These market risks are principally limited to interest rate fluctuations.

We had cash and cash equivalents of $16.9 million and $35.9 million at September 30, 2018 and December 31, 2017, respectively consisting primarily of funds in cash and money market accounts. The primary objective of our investment activities is to preserve principal and liquidity while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of our investment portfolio, we do not believe an immediate 10.0% increase in interest rates would have a material effect

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on the fair market value of our portfolio, and accordingly we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

Our results of operations and cash flows are subject to fluctuations due to changes in interest rates, principally in connection with the Hercules Loan Agreement. We do not believe that we are materially exposed to changes in interest rates. We do not currently use interest rate derivative instruments to manage exposure to interest rate changes. We estimate that a 1% unfavorable change in interest rates would not have a material effect on interest expense for the year ended December 31, 2018.

Inflation Risk

Inflation generally affects us by increasing our cost of labor and pricing of contracts and agreements. We do not believe that inflation had a material effect on our business, financial condition, or results of operations during the three and nine months ended September 30, 2018.

Item 4.  Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of such date are effective, at the reasonable assurance level, in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes to Internal Controls Over Financial Reporting

There has been no change in internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

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Part II:  Other Information

Item 1.  Legal Proceedings.

We are not currently subject to any material legal proceedings.

Item 1A.    Risk Factors.

Investing in our common stock involves a high degree of risk. You should carefully consider the risk factors set forth below as well as the other information contained in this Quarterly Report on Form 10-Q and in our other public filings in evaluating our business. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently view to be immaterial may also materially adversely affect our business, financial condition or results of operations. In these circumstances, the market price of our common stock would likely decline.

Risks Related to our Overall Business

We are significantly dependent on the success of our product candidate, Twirla, which depends on regulatory approval. The FDA provided a path forward to resubmit the Twirla NDA, which involves a comparative wear study of Twirla and Xulane. Failure of the wear study to support resubmission of our Twirla NDA, and/or our failure to resubmit the Twirla NDA and to receive regulatory approval of Twirla would have a material adverse effect on our business and would likely require us to reduce or, even discontinue, operations.

None of our product candidates has been approved for sale by any regulatory agency. Any product candidate we develop is subject to extensive regulation by federal, state and local governmental authorities in the U.S., including the FDA. Our success is primarily dependent on our ability to obtain regulatory approval for our most advanced product candidate, Twirla. The approval process in the U.S. is uncertain, can take many years and requires the expenditure of substantial resources, and we are unable to predict the timing of when regulatory approval may be received, if ever, in any jurisdiction. We are not currently pursuing any regulatory approvals for Twirla or any other potential product candidate outside the United States.

We filed a Section 505(b)(2) NDA, for approval of Twirla by the FDA, which is required before marketing a new drug in the United States. Our 505(b)(2) NDA relied in part on clinical trials that we conducted and in part on the FDA’s findings of safety and efficacy from investigations for approved products containing the active ingredients and on published scientific literature for which we have not obtained a right of reference. In connection with the original submission of our NDA in April 2012, the FDA indicated in a Complete Response Letter, or the 2013 CRL, which we received in February 2013, that our NDA was not sufficient for approval as originally submitted. In accordance with the FDA’s advice and comments, we conducted an additional Phase 3 clinical trial, the SECURE clinical trial, which was completed in December 2016. In June 2017, we resubmitted our Twirla NDA.

On December 21, 2017, the FDA issued a second CRL, or the 2017 CRL, indicating that our resubmitted NDA could not be approved in its present form. The 2017 CRL identifies deficiencies relating to quality control adhesion test methods and specifications which are part of the manufacturing process for Twirla. The 2017 CRL also noted that objectionable conditions identified during a pre-approval inspection, or PAI, of a facility of our third-party manufacturer, Corium International Inc., or Corium, for the Twirla NDA must be resolved.  The 2017 CRL further questions the in vivo adhesion properties of Twirla and their potential relationship to the SECURE clinical trial results, stating that we have not established that Twirla has the adhesion properties requisite for safe and effective use at this time. The FDA stated that it is unclear whether the trial results, including the higher than expected Pearl Index for a combined hormonal contraceptive, the discontinuation rate, and rates of unscheduled bleeding were a result of the adhesion properties of the product or other factors. The FDA also suggested, if it is determined that the product adhesion concerns are due to the design or formulation of the drug product, that we may need to design a new transdermal system and conduct another clinical trial with the new transdermal system in a U.S. population. The FDA also identified additional pregnancies, many of which were in women who had delays in applying patches, which they argued should be added to the Pearl Index calculation.

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The 2017 CRL contains recommendations for developing manufacturing in-process tests for ensuring the quality and in vivo adhesion of the commercial scale product as well as the finished drug specifications and release test method for adhesion. The 2017 CRL also recommends that we assess the in vivo adhesion properties demonstrated in the SECURE clinical trial and determine whether there was any relationship between the adhesion properties and Twirla efficacy, cycle control, and safety.  Finally, the 2017 CRL recommends that we address the implications of clinical trial subject patch compliance and the high withdrawal and dropout rates for real world use. The 2017 CRL does not identify any specific issues relating to the safety of Twirla. In November 2017 and December 2017, Corium provided the FDA with responses addressing each of the observations made during the FDA’s facility inspection, which included a PAI for Twirla which we do not know whether the FDA will find acceptable.

At our request, the FDA’s Division of Bone, Reproductive and Urologic Products, or DBRUP, had a Type A meeting with us on April 16, 2018 to discuss the 2017 CRL and the regulatory path for approval of Twirla.  In its official minutes, the FDA informed us that, in order to address concerns surrounding in vivo adhesion, we needed to reformulate the transdermal system, conduct a formal in vivo adhesion study with the new formulation, and demonstrate bioequivalence to the data and information in the original formulation.  The FDA also said that it anticipates discussing the safety and efficacy of Twirla at an Advisory Committee meeting to obtain input on whether the benefits of Twirla outweigh the risks.  The FDA also provided guidance on the path forward for addressing the manufacturing quality control test method issues related to Twirla and informed us that whether these issues have been adequately addressed would be subject to review by the FDA when we resubmit our Twirla NDA.

We disagreed with the FDA’s conclusions regarding the in vivo adhesion properties of Twirla and the need for product reformulation, and we submitted a formal dispute resolution request, or FDRR, to the FDA.  In October 2018, the FDA’s Office of New Drugs, or OND, formally denied our appeal and provided a path forward for resubmission of the NDA for Twirla that may not require that we reformulate Twirla or conduct a bioequivalence study between formulations, as previously suggested by DBRUP.  Specifically, OND suggested that we conduct a wear study to evaluate whether Twirla demonstrates a generally similar adhesion performance to Xulane, the generic version of the previously marketed Ortho Evra® contraceptive patch, a product the FDA considers to have acceptable adhesion.  If this result is demonstrated, OND stated that the study would support the conclusion of adequate Twirla adhesion.  OND has recommended that we first meet with DBRUP to gain agreement on the specific design and success criteria of a wear study for Twirla.  The wear study suggested by OND to address adhesion provides a path forward for resubmission of the NDA for Twirla but is not intended to address efficacy.  Rather, if the wear study is successful, Twirla’s safety and efficacy, including the Pearl Index that FDA noted is substantially higher than other previously approved combined hormonal contraceptives, will need to be reviewed by FDA after we resubmit the NDA for Twirla.  This is an issue that the FDA plans to bring to Advisory Committee after the adhesion issue has been resolved.  We have submitted a request for a Type A meeting and plan to discuss the specifics of the proposed wear study with the FDA as soon as possible.  Our plans to seek approval for Twirla are dependent on our planned meeting with the FDA on the parameters of the wear study for Twirla and our ability to reach agreement with the FDA on the scope and size of the study.  We can make no assurances that we can successfully complete the wear study suggested by the FDA or that the results will demonstrate adequate adhesion of Twirla. If we are unable to successfully complete a wear trial of Twirla and Xulane to support the conclusion of adequate Twirla adhesion, the FDA will likely require us to reformulate Twirla and conduct additional clinical or bioequivalence studies before we can resubmit the Twirla NDA.  Even if we do successfully complete the wear study, there is no guarantee that the FDA will find Twirla to have an adequate risk benefit profile or determine that its manufacturing, specifications, and test methods are satisfactory.

Consistent with our previous NDA resubmission in 2017, we currently expect that our resubmission of the NDA responding to the 2017 CRL will be categorized as a Type 2 resubmission and receive a review period of six months from the date of resubmission of the NDA.  Upon resubmission, there can be no assurance that we will address the outstanding FDA questions and comments in a manner sufficient for approval in the U.S, as we will not only need to conduct the wear study but we will also need to address the FDA’s other 2017 CRL questions and comments.  If we are unable to sufficiently address the FDA’s questions and comments, it would adversely impact our NDA, and ultimately, approval of Twirla. Even if we resolve the adhesion issue, and the FDA agrees that the wear study of Twirla and Xulane demonstrates adequate Twirla adhesion, the FDA, and an FDA Advisory Committee, may still determine that Twirla’s potential benefits do not outweigh its risks and therefore are not sufficient to support the approval of Twirla.

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Moreover, the FDA must determine that Corium’s manufacturing facilities meet certain FDA requirements for product manufacturing, before granting product approval and before we can use them in the commercial manufacture of our products. We cannot assure you that Corium’s responses to the objectionable conditions found during the FDA’s facility inspection will adequately address the issues communicated by the FDA in the 2017 CRL. If Corium is not able to address the objectionable conditions to the FDA’s satisfaction and we cannot find an alternative supplier, the FDA will not approve our future Twirla NDA resubmission. Failure to comply with the statutory and regulatory requirements further subjects the manufacturer and product sponsor to possible legal or regulatory action, such as delay of approval, suspension of manufacturing, seizure of product or voluntary recall of a product, among other regulatory actions.

Failure to receive approval or significant additional delay in obtaining an FDA decision on whether to approve our resubmitted NDA for Twirla would have a material adverse effect on our business and results of operations, including possible termination of Twirla development and restructuring of our organization, which could include reducing, or even terminating, our operations. In January 2018, following our receipt of the 2017 CRL, we significantly scaled back our preparations for commercialization of Twirla, including commercial pre-launch and manufacturing validation activities, pending our ability to address the 2017 CRL and receive approval of Twirla, which reduced our cash outlay. We further reduced expenditures when, in June 2018, we announced a reduction in our workforce representing approximately thirty percent of our employees.  This workforce reduction, along with other reductions in our planned operating expenses, was designed to reduce operating expenses and preserve cash while we pursued formal dispute resolution. We continue to maintain expenditures relating to completing the development and seeking regulatory approval of Twirla, which will now include designing and implementing the comparative wear study of Twirla and Xulane suggested by the FDA. We will require additional funding to complete the commercial validation of the manufacturing process and commercial launch for Twirla.  Our planned timeline for seeking approval of Twirla and our ability to fund our operations through the period of time necessary to receive approval of Twirla, if at all, could be adversely affected based on the outcome of our expected meeting with the FDA on the parameters of the wear study, including primarily the scope, size and cost of the study, any or all of which may require us to seek additional funding. We may not be able to obtain sufficient additional funding or generate sufficient revenue and cash flows to continue our operations at planned levels and be forced to reduce, or even terminate, our operations. Even if Twirla is approved, the labeling approved by the FDA may restrict how and to whom we and our potential partners, if any, may market the product or the manner in which our product may be administered and sold, which could significantly limit the commercial opportunity for Twirla. See, Risks Related to Regulatory Approval and Clinical Trials for Our Product Candidates, Risks Related to Our Financial Position and Need for Capital, and Risks Relating to the Commercialization of Our Product Candidates,” for additional information.

Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.

Our financial statements as of September 30, 2018 have been prepared under the assumption that we will continue as a going concern for the next twelve months. In our Annual Report on Form 10-K for the year ended December 31, 2017, our independent registered public accounting firm has issued a report that includes an explanatory paragraph referring to our recurring losses from operations and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. As of September 30, 2018, we had cash and cash equivalents of $16.9 million. After the reduction in our workforce, representing approximately thirty percent of our employees, along with other reductions in planned operating expenses, we believe that our cash and cash equivalents as of September 30, 2018, will be sufficient to meet our projected operating requirements into the second quarter of 2019 which include an estimate of the costs to complete a comparative wear study.  We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Pursuant to the receipt of the 2017 CRL, the formal dispute resolution process with the FDA, the suggestion by the FDA that we conduct a comparative wear study with Twirla and Xulane, the outcome of which cannot be guaranteed, and the subsequent delay in the approval timeline for Twirla and as a result of our financial condition and other factors described herein, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will depend on our ability to obtain additional funding, as to which no assurances can be given. We continue to analyze various alternatives, including strategic and refinancing alternatives, asset sales and mergers and acquisitions. Our future success depends on our ability to raise additional capital and/or implement the various strategic alternatives discussed above. We

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cannot be certain that these initiatives or raising additional capital, whether through selling additional debt or equity securities or obtaining a line of credit or other loan, will be available to us or, if available, will be on terms acceptable to us. If we issue additional securities to raise funds, these securities may have rights, preferences, or privileges senior to those of our common stock, and our current shareholders may experience dilution. If we are unable to obtain funds when needed or on acceptable terms, we then may be unable to complete the development of Twirla and may also be required to further cut operating costs, forego future development and other opportunities or even terminate our operations, which may involve seeking bankruptcy protection.

Risks Related to the Regulatory Approval and Clinical Trials for Our Product Candidates

We have not obtained regulatory approval for any of our product candidates in the United States or any other country, and such approval or approvals may never be granted or may be substantially delayed if regulatory authorities require additional time or studies to assess the safety and efficacy of our product candidates.

We currently do not have any product candidates that have gained regulatory approval for sale in the United States or any other country, and we cannot guarantee that we will ever have marketable products. Our business is substantially dependent on our ability to complete the development of, obtain regulatory approval for and successfully commercialize product candidates in a timely manner. We cannot commercialize product candidates in the United States without first obtaining regulatory approval to market each product candidate from the U.S. Food and Drug Administration, or FDA; similarly, we cannot commercialize product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. We are not currently pursuing any regulatory approvals for Twirla or any other potential product candidate outside the United States.

Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, we must demonstrate in preclinical studies and well-controlled clinical trials and, with respect to approval in the United States, to the satisfaction of the FDA, that the product candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. In the United States, it is necessary to submit a new drug application, or NDA, to obtain FDA approval. An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and efficacy for each desired indication, although we may partially rely on published scientific literature or the FDA’s prior approval of similar products. The NDA must also include significant information regarding the chemistry, manufacturing and controls, or CMC, for the product. The FDA may further inspect our manufacturing facilities to ensure that the facilities can manufacture our product candidates and our products, if and when approved, in compliance with the applicable regulatory requirements, as well as inspect our clinical trial sites to ensure that our studies are properly conducted. Obtaining approval of an NDA is a lengthy, expensive and uncertain process, and approval may not be obtained. Upon submission, or resubmission, of an NDA, the FDA must make an initial determination that the application is sufficiently complete to accept the submission for filing. We cannot be certain that any submissions we might make will be accepted for filing and review by the FDA, or ultimately be approved.

If the application is not approved, the FDA may require that we conduct additional clinical or preclinical trials, reformulate the product, address issues with our manufacturing process or facilities, or take other actions before it will reconsider our application. If the FDA requires additional studies or data, or if we are unable to successfully complete a comparative wear trial of Twirla and Xulane to support the conclusion of adequate Twirla adhesion and are required to reformulate Twirla before resubmitting the Twirla NDA, or if the FDA, an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval we may never receive marketing approval or we would incur delays in the marketing approval process and increased costs which may require us to expend more resources than we have available. Studies required to demonstrate the safety and efficacy of our product candidates are time consuming, expensive and together take several years or more to complete, and approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions and could lead to additional costs and delays.  In addition, the FDA may not consider any additional information to be complete or sufficient to support approval.

For instance, we have sought regulatory approval for Twirla since 2012 and, in the process, received two complete response letters from the FDA in connection with our NDA for Twirla, which have included requests to conduct additional studies and gather and develop additional information on our manufacturing process, test

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methods, and specifications for Twirla.  We initially filed an NDA with the FDA for Twirla in April 2012, which included results from two previously conducted Phase 3 clinical trials for Twirla. In response, the FDA issued the 2013 CRL, which identified certain issues, including a request for additional clinical data, quality information and CMC information, which needed to be addressed before approval could be granted.  We gathered the requested information and, in accordance with the FDA’s advice and comments, conducted an additional Phase 3 clinical trial, the SECURE clinical trial, which was completed in December 2016.  Although we met with the FDA in October 2013 to discuss the SECURE trial as requested in the 2013 CRL and received substantial written comments from the FDA in subsequent interactions, we did not seek and did not obtain agreement with the FDA on a special protocol assessment regarding the SECURE clinical trial.  Based on the results of the SECURE clinical trial and additional information relating to the manufacture of Twirla, we resubmitted our NDA in June 2017.  Our NDA resubmission in 2017 was intended to be a complete response to the 2013 CRL.  It included efficacy and safety data from the SECURE clinical trial, the requested manufacturing information, and a summary response to the 2013 CRL.

On December 21, 2017, the FDA issued the 2017 CRL, indicating that our resubmitted NDA could not be approved in its present form. The 2017 CRL identifies deficiencies relating to quality control adhesion test methods and specifications which are part of the manufacturing process for Twirla. The 2017 CRL also noted that objectionable conditions identified during a PAI of our third-party manufacturer, Corium, for the Twirla NDA must be resolved.  The 2017 CRL further questions the in vivo adhesion properties of Twirla and their potential relationship to the SECURE clinical trial results, concluding that we have not established that Twirla has the adhesion properties requisite for safe and effective use at this time.  The 2017 CRL contains recommendations for developing manufacturing in-process tests for ensuring the quality and in vivo adhesion of the commercial scale product as well as the finished drug specifications and release test method for adhesion. The 2017 CRL also recommends that we assess the in vivo adhesion properties demonstrated in the SECURE clinical trial and determine whether there is an adverse impact on the product performance. Finally, the 2017 CRL recommends that we address the implications of clinical trial subject patch compliance and the high withdrawal and dropout rates. The 2017 CRL does not identify any specific issues relating to the safety of Twirla.  In addition, in November 2017 and December 2017, Corium provided the FDA with responses addressing each of the observations made during the FDA’s facility inspection, which included a PAI for Twirla which we do not know whether the FDA will find acceptable.

At our request, the FDA’s Division of Bone, Reproductive and Urologic Products had a Type A meeting with us on April 16, 2018 to discuss the deficiencies in the Twirla NDA identified in the 2017 CRL and the regulatory path for approval of Twirla.  In its official minutes, the FDA informed us that to address concerns surrounding in vivo adhesion we needed to reformulate the transdermal system, conduct a formal in vivo adhesion study with the new formulation, and demonstrate bioequivalence to the data and information in the original formulation.  The FDA also said it anticipates discussing the safety and efficacy of Twirla at an Advisory Committee meeting to obtain input on whether the benefits outweigh the risks.  The FDA also provided guidance on the path forward for addressing the manufacturing quality control test method issues related to Twirla, and informed us that whether these issues have been adequately addressed would be subject to review by the FDA when we resubmit our Twirla NDA

We disagreed with the FDA’s conclusions regarding the in vivo adhesion properties of Twirla and the need for product reformulation, and we submitted a formal dispute resolution request, or FDRR, to the FDA.  In October 2018, the FDA’s Office of New Drugs, or OND, formally denied our appeal and provided a path forward for resubmission of the NDA for Twirla that may not require that we reformulate Twirla or conduct a bioequivalence study between formulations, as previously suggested by DBRUP.  Specifically, OND suggested that we conduct a wear study to evaluate whether Twirla demonstrates a generally similar adhesion performance to Xulane, the generic version of the previously marketed Ortho Evra® contraceptive patch, a product the FDA considers to have acceptable adhesion.  If this result is demonstrated, OND stated that the study would support the conclusion of adequate Twirla adhesion.  OND has recommended that we first meet with DBRUP to gain agreement on the specific design and success criteria of a wear study for Twirla.  The wear study suggested by OND to address adhesion provides a path forward for resubmission of the NDA for Twirla but is not intended to address efficacy.  Rather, if the wear study is successful, Twirla’s safety and efficacy, including the Pearl Index that OND noted is substantially higher than other previously approved combined hormonal contraceptives, will need to be reviewed by FDA after we resubmit the NDA for Twirla.  This is an issue that the FDA plans to bring to Advisory Committee after the adhesion issue has been resolved.  We have submitted a request for a Type A meeting and plan to discuss the specifics of the proposed wear study with the FDA as soon as possible.  We can make no assurances that we can successfully complete the wear study suggested by the FDA or that the results will demonstrate adequate adhesion of Twirla. If we are unable to successfully complete a wear trial of

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Twirla and Xulane to support the conclusion of adequate Twirla adhesion, the FDA will likely require us to reformulate Twirla and conduct additional clinical or bioequivalence studies before we can resubmit the Twirla NDA.  Even if we do successfully complete the wear study, there is no guarantee that the FDA will find Twirla to have an adequate risk benefit profile or determine that its manufacturing, specifications, and test methods are satisfactory.

We anticipate providing a further business update, which will review our planned resubmission timeline, after we agree with the FDA on the parameters of the wear study for Twirla. The timing and outcome of the Twirla wear study will impact the timing of our NDA resubmission.  If we are unable to successfully complete a wear trial of Twirla and Xulane to support the conclusion of adequate Twirla adhesion, the FDA will likely require us to reformulate Twirla and conduct additional clinical or bioequivalence studies before we can resubmit the Twirla NDA.  Consistent with our previous NDA resubmission in 2017, we currently expect that our resubmission of the NDA responding to the 2017 CRL will be categorized as a Type 2 resubmission and receive a review period of six months from the date of resubmission of the NDA.  Upon resubmission, there can be no assurance that we will address the outstanding FDA questions in a manner sufficient for approval in the U.S.

Moreover, the FDA must determine that Corium’s manufacturing facilities meet certain FDA requirements for product manufacturing, before granting product approval and before we can use them in the commercial manufacture of our products. We cannot assure you that Corium’s responses to the objectionable conditions found during the FDA’s facility inspection will adequately address the issues communicated by the FDA in the 2017 CRL.   We also expect that the FDA will re-inspect the Corium facilities during its review of our planned resubmission before approval can be granted. The FDA may also determine that our responses to the deficiencies in the 2017 CRL and Corium’s responses to the manufacturing facility inspection objectionable conditions are not sufficient or require product development and additional analyses and/or studies and deny approval of the Twirla NDA on this basis as well. The FDA may also find additional objectionable conditions upon re-inspection of the Corium facility. If the FDA does not approve the Corium facility for the manufacture of Twirla, or if Corium is not able to address the objectionable conditions found by the FDA, the FDA could withhold approval or we may need to find an alternative supplier, which will take time and monetary expenditures, and which we may not be able to do on favorable terms to us or at all.

In connection with our planned resubmission of the Twirla NDA in response to the 2017 CRL, we cannot predict whether regulators will agree with our conclusions regarding the results of the SECURE clinical trial or any clinical trials we have conducted to date or will conduct prior to resubmitting the Twirla NDA, including whether our data are reliable and generalizable, demonstrate adequate  adhesion properties and/or demonstrate adequate safety and efficacy sufficient for approval. For example, based on our analysis of the SECURE clinical trial data, the Pearl Index for the overall intent to treat population of subjects 35 years of age and under was 4.80 with an upper-bound of the 95% confidence interval of 6.06, but in the obese subpopulation of subjects 35 years of age and under, the Pearl Index was 6.42 with an upper-bound of the 95% confidence interval of 8.88. If we were to exclude the data on the obese subpopulation, our Pearl Index for non-obese patients was 3.94 with an upper-bound of the 95% confidence interval of 5.35. The highest Pearl Index for a hormonal contraceptive product approved by the FDA to date was 3.19 and the highest upper-bound of the 95% confidence interval was 5.03. In the combined safety database for our three Agile Phase 3 trials (n>3,000), there were 5 subjects with potentially study drug related deep vein thromboses, or DVTs, or pulmonary embolisms, or PEs, 4 of whom were obese (BMI 30 kg/m2). The October 2018 FDRR decision letter did not reach a decision on efficacy.  Nonetheless, OND did communicate that upon its initial review, our analyses of population differences and study design do not seem to support our conclusions regarding efficacy results from SECURE.  However, ultimate approvability of a hormonal contraceptive is based on a risk/benefit assessment of the overall safety and efficacy profile of a product, not only a specific Pearl Index. A fuller assessment of the clinical outcomes from the SECURE trial, and specifically the safety and efficacy of Twirla, will need to be conducted by the FDA and a likely Advisory Committee when or if we resubmit our NDA for Twirla.

The FDA indicated in the official minutes of our end of review Type A Meeting and in its October 2018 FDRR decision letter that it anticipates reviewing the safety and efficacy of Twirla during an Advisory Committee meeting to obtain input on whether the benefits outweigh the risks.  The Advisory Committee may recommend non-approval for Twirla or may recommend approval with label restrictions.  Even if the Advisory Committee determines that the benefits of Twirla outweigh its risks and recommends approval, the FDA could still conclude that the Pearl Index is too high to demonstrate efficacy and an adequate risk/benefit profile for either the overall

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study population or a subgroup of the study population. Accordingly, the FDA may not approve our Twirla NDA. Alternatively, the FDA may determine that for a specific subgroup of patients, Twirla has lower efficacy and presents a higher risk, necessitating labeling restrictions. For instance, the FDA may require labeling restrictions on the use of Twirla for patients in certain BMI categories. We also may not obtain approval of Twirla based on these data or any other basis, or if approved, may only receive approval with significant labeling restrictions.

We may be unable to initiate or complete development of Twirla and our other potential product candidates on schedule, if at all. The timing for the completion of the studies for our potential product candidates other than Twirla will require funding beyond our existing cash and cash equivalents. In addition, if regulatory authorities require additional time or studies to assess the safety or efficacy of Twirla, require us to conduct a comparative wear study between Twirla and Xulane that is significantly larger in scope and size than we are currently planning, or require us to reformulate the product, we may not have or be able to obtain adequate funding to complete the necessary steps for approval for any or all of our product candidates. Additional delays may result if the FDA, an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. In fact, we may never receive approval. Studies required to demonstrate the safety and efficacy of our product candidates are time consuming, expensive and together take several years or more to complete. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions.

In addition to the factors discussed above, delays in regulatory approvals or rejections of applications for regulatory approval in the United States, Europe, Japan or other markets may result from many other factors, including:

·                  Lack of adequate funding to commence or continue our clinical trials due to unforeseen costs or other business decisions;

·                  Our inability to obtain sufficient funds required to complete clinical development, manufacturing development or regulatory review processes;

·                  Regulatory requests for additional analyses, reports, data, non-clinical and preclinical studies and clinical trials;

·                  Our inability to adequately address the cited deficiencies in the 2017 CRL;

·                  Regulatory requests for additional product design work and testing;

·                  Regulatory questions regarding interpretations of data and results and the emergence of new information regarding our product candidates or other products;

·                  Clinical holds, other regulatory objections to commencing or continuing a clinical trial or the inability to obtain regulatory approval to commence a clinical trial in countries that require such approvals;

·                  Failure to reach agreement with the FDA or non-U.S. regulators regarding the scope or design of our clinical trials;

·                  Our inability to enroll or retain a sufficient number of subjects who meet the inclusion and exclusion criteria in our clinical trials;

·                  Our inability to conduct our clinical trials in accordance with regulatory requirements or our clinical trial protocols;

·                  Corium’s inability to adequately resolve the objectionable conditions observed by the FDA when inspecting the facility or our inability to find an alternative supplier;

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·                  We may be unable to obtain approval for the manufacturing processes or Corium’s facilities with whom we contract for clinical and commercial supplies;

·                  Unfavorable or inconclusive results of clinical trials and supportive non-clinical studies, including unfavorable results regarding safety or efficacy of our product candidates during clinical trials;

·                  Failure to meet the level of statistical significance required for approval;

·                  Any determination that a clinical trial presents unacceptable health risks to subjects;

·                  Our inability to reach agreements on acceptable terms with prospective CROs and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

·                  Our inability to identify and maintain a sufficient number of clinical trial sites;

·                  Our inability to obtain approval from IRBs to conduct clinical trials at their respective sites;

·                  Our inability to timely obtain from our third-party manufacturer sufficient quantities or quality of the product candidate or other materials required for a clinical trial;

·                  Failure of manufacturers to comply with FDA’s or comparable regulatory authorities’ requirements for the manufacture of products and product candidates;

·                  FDA or comparable regulatory authority determinations that our manufacturing processes, specifications, or tests are not sufficient or acceptable;

·                  FDA or comparable regulatory authority determinations that our clinical trials were not properly conducted or that such conduct did not comply with regulatory requirements;

·                  Our inability to obtain agreement from the FDA on product labeling;

·                  We may have insufficient funds to pay the significant user fees required by the FDA upon the filing of any future NDAs; and

·                  We may have difficulty in maintaining contact with subjects, resulting in incomplete data.

Regulatory authorities outside of the United States, such as in Europe and Japan and in emerging markets, also have requirements for approval of drugs for commercial sale with which we must comply prior to marketing in those areas. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our product candidates. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. However, the failure to obtain regulatory approval in one jurisdiction could have a negative impact on our ability to obtain approval in a different jurisdiction. Approval processes vary among countries and can involve additional product candidate testing and validation and additional administrative review periods. Seeking foreign regulatory approval could require additional non-clinical studies or clinical trials, which could be costly and time consuming. Foreign regulatory approval may include all of the risks associated with obtaining FDA approval. For all of these reasons, if we seek foreign regulatory approval for Twirla or any of our other potential product candidates, we may not obtain such approvals on a timely basis, if at all.

The process to develop and obtain regulatory approval for product candidates is long, complex and costly both inside and outside of the United States, and approval is never guaranteed. Even if our product candidates were to successfully obtain approval from regulatory authorities, any such approval might significantly limit the approved indications for use, including more limited patient populations, require that precautions, contraindications or warnings be included on the product labeling, including boxed warnings, require expensive and time-consuming

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post-approval clinical studies, risk evaluation and mitigation strategies, or REMS, or surveillance as conditions of approval, or, through the product label, the approval may limit the claims that we may make, which may impede the successful commercialization of our product candidates. For example, we believe that Twirla, if approved, will have labeling consistent with other marketed hormonal contraceptive products, which includes class labeling that warns of risks of certain serious conditions, including venous and arterial blood clots, heart attacks, thromboembolism, and stroke, as well as liver tumors, gallbladder disease, and hypertension, and a boxed warning regarding risks of smoking and CHC use, particularly in women over 35 years old who smoke. However, regulatory authorities may require the inclusion of additional statements about adverse events in the labeling, including additional boxed warnings or contraindications, as well as additional labeled limitations, such as limitations on the use of Twirla for women based on BMI or weight. Following any approval for commercial sale of our product candidates, certain changes to the product, such as changes in manufacturing processes and additional labeling claims, as well as new safety information, will be subject to additional FDA notification, or review and approval. Also, regulatory approval for any of our product candidates may be withdrawn. If we are unable to obtain regulatory approval for our product candidates in one or more jurisdictions, or if any approval contains significant limitations, our ability to market to our full target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed. Furthermore, we may not be able to obtain sufficient funding or generate sufficient revenue and cash flows to continue our operations at planned levels and be forced to reduce, or even terminate, our operations.

The FDA has disagreed with our interpretation of clinical results obtained from the SECURE clinical trial, our results do not guarantee support for regulatory approval of our NDA, and, even if the SECURE clinical trial data are deemed to be positive by the FDA, the FDA may disagree with other aspects of the SECURE clinical trial and decline to approve Twirla for the proposed indication.

Even if we believe that the data from the SECURE clinical trial are positive, the FDA could determine that the data from the SECURE clinical trial were negative or inconclusive or could reach a different conclusion than we did on that same data. For instance, following our resubmission of our NDA, the FDA issued the 2017 CRL and raised questions on the in vivo adhesion properties of Twirla and their potential adverse impact on our Phase 3 clinical trial results, concluded that we have not established that Twirla has the adhesion properties requisite for safe and effective use at this time, and recommended that we assess the in vivo adhesion properties demonstrated in the SECURE clinical trial and determine whether there is an adverse impact on product performance.  The FDA also recommended we address the implications of clinical trial subject patch compliance and the high withdrawal and dropout rates, among other recommendations and deficiencies further described in our Annual Report on Form 10-K, which we filed with the SEC on March 12, 2018. We met with the FDA at a Type A meeting to discuss the deficiencies identified in the 2017 CRL and received the official minutes of that meeting on May 15, 2018.  Among other points, the FDA also indicated in the official minutes and also in its October 2018 FDRR decision letter that, if we are able to demonstrate an adequate Twirla adhesion profile the FDA anticipates reviewing the safety and efficacy of Twirla, including the Pearl Index that the FDA has noted is substantially higher than other previously approved combined hormonal contraceptives, during an Advisory Committee meeting to obtain input on whether the benefits outweigh the risks.  The October 2018 FDRR decision letter did not reach a decision on efficacy.  Nonetheless, OND did communicate that upon its initial review, our analyses of population differences and study design do not seem to support our conclusions regarding efficacy results from SECURE.  As noted above, a fuller assessment of the clinical outcomes from the SECURE trial, and specifically the safety and efficacy of Twirla, will need to be conducted by the FDA and a likely Advisory Committee when or if we resubmit our NDA for Twirla.

Typically, Advisory Committees will provide responses to specific questions asked by the FDA, including the committee’s view on the approvability of the product candidate under review.  Advisory Committee decisions are not binding but an adverse decision at the Advisory Committee may have a negative impact on the regulatory review of Twirla. The Advisory Committee may recommend non-approval for Twirla or may recommend approval with label restrictions.  Even if the Advisory Committee determines that the benefits of Twirla outweigh its risks for either the full study population or a subgroup, and recommends approval, the FDA could still decline to approve the product candidate.  By example, the FDA may not agree with our analysis of the relationship between BMI and efficacy for Twirla and the FDA may interpret our overall data differently than we do and may decline to approve Twirla on this or any other basis.  FDA may conclude that the Pearl Index is too high to demonstrate efficacy and an adequate risk/benefit profile for either the overall study population or a subgroup of the study population.  FDA

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may, accordingly, not approve Twirla or only approve the product candidate for use in a specific subgroup, such as the non-obese study population.  FDA may also decline to approve Twirla on any other basis.

Negative or inconclusive results of a clinical trial or difference of opinion or negative Advisory Committee outcome could cause the FDA to decline to approve our application or require us to repeat the trial or conduct additional clinical trials prior to obtaining approval for commercialization, and there is no guarantee that additional trials would achieve positive results to the satisfaction of the FDA or that the FDA will agree with our interpretation of the results.  Any such determination by the FDA would delay the timing of our commercialization plan for Twirla or prevent its further development, or the further development of our other potential product candidates, and adversely affect our business operations. Additionally, the FDA has the authority to re-inspect SECURE clinical trial sites as part of a review of an NDA, and the FDA may provide review commentary at any time during the resubmission and review process, either of which could delay the review timeline, adversely affect the review process, or even prevent the approval of Twirla, any of which would adversely affect our business.

There is no guarantee that the data obtained from the SECURE clinical trial or any other clinical trial will be supportive of, or guarantee, or result in our successfully obtaining timely FDA approval of Twirla for a commercially viable indication, if at all. We plan to resubmit our NDA for Twirla with the clinical data from the SECURE clinical trial and additional information and analyses responding to the 2017 CRL. When we do resubmit, the FDA could determine that the trial did not meet its objectives, or the FDA could still have concerns about the conduct of the SECURE clinical trial, including regarding discontinuance of subjects from the trial, which was a factor mentioned in the 2017 CRL. While we designed the protocol for the SECURE clinical trial in consultation with the FDA and completed analyses to address the issues raised in the 2013 CRL, and are completing the analyses and other requested items from the 2017 CRL, there is no guarantee that the FDA will deem such steps to be sufficient to address those issues when they are formally reviewed as a part of an NDA resubmission or to demonstrate safety and efficacy to the satisfaction of the FDA.  Moreover, we cannot guarantee that we will resubmit our Twirla NDA for numerous reasons, including if our wear study is unsuccessful, if the study, as a result of its parameters, size, and scope, is more burdensome than we are prepared to conduct, or if we believe we are unable to respond to the issues raised in the 2017 CRL.

The FDA has significant discretion in the review process, and we cannot predict whether the FDA will agree with our conclusions regarding the results of the SECURE clinical trial, including whether our data are reliable and generalizable. For example, the FDA may disagree with our calculations relating to the number of pregnancies occurring on study, or may view the SECURE clinical trial data, and other information and analyses as insufficient to demonstrate a favorable benefit/risk profile for approval for the proposed indication. Ultimate approvability of a hormonal contraceptive is based on a risk/benefit assessment of the overall safety and efficacy profile of a product, not only a specific Pearl Index.  However, upon any future NDA resubmission, the FDA may find that the Twirla Pearl Index does not support a satisfactory benefit/risk profile to permit product approval.

At any future point in time, the FDA could require us to complete further clinical or preclinical trials or take other actions which could delay or preclude approval of the NDA and would require us to obtain significant additional funding. There is no guarantee such funding would be available to us on favorable terms, if at all, nor is there any guarantee that FDA would consider any additional information complete or sufficient to support approval.

Failure can occur at any stage of clinical development. If the clinical trials for Twirla or any of our current or future product candidates are unsuccessful, we could be required to abandon development.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. A failure of one or more clinical trials can occur at any stage of testing for a variety of reasons. The outcome of preclinical testing and early clinical trials may not be predictive of the outcome of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. In some instances, there can be significant variability in safety or efficacy results between different trials of the same product candidate due to numerous factors, including changes in or adherence to trial protocols, differences in size and type of the subject populations and the rates of dropout among clinical trial subjects. Our future clinical trial results therefore may not demonstrate safety and efficacy sufficient to obtain regulatory approval for our product candidates. For example, we received the 2013 CRL from the FDA with respect to an NDA previously filed for Twirla, in which the FDA requested, among other items, additional Phase 3 clinical data to support the application. The SECURE clinical trial was designed in consultation

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with the FDA and is different than the design of our previous clinical trials of Twirla and it is possible that the FDA could conclude that there was significant variability in the safety and efficacy results of these trials. Additionally, while our SECURE clinical trial was designed and implemented in a manner to address the FDA’s comments and guidance, it is possible that the FDA could ultimately conclude that the data, when combined with a wear study, are not supportive of approval because of a lack of adequate adhesion, efficacy, or safety. By example, the 2017 CRL raised FDA questions and comments regarding the results of the SECURE trial, as discussed elsewhere in this quarterly report.  The FDA has indicated in its correspondence with us and its October 2018 FDRR decision letter that it anticipates reviewing the safety and efficacy of Twirla, including the Pearl Index that FDA has noted is substantially higher than other previously approved combined hormonal contraceptives, during an Advisory Committee meeting to obtain input on whether the benefits outweigh the risks.  The Advisory Committee may recommend non-approval for Twirla or may recommend approval with label restrictions.  Even if the Advisory Committee determines that the benefits of Twirla outweigh its risks and recommends approval, the FDA could still conclude that the Pearl Index is too high to demonstrate efficacy and an adequate risk/benefit profile for either the overall study population or a subgroup of the study population, and may decline to approve the Twirla NDA or require us to repeat the trial or conduct additional clinical trials to assess Twirla’s safety and efficacy prior to obtaining approval. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Our clinical trials may not be successful.

In addition, in its October 2018 FDRR decision letter, the FDA suggested that we conduct a comparative wear study to evaluate whether Twirla demonstrates a generally similar adhesion performance to Xulane, the generic version of the previously marketed Ortho Evra® contraceptive patch, a product the FDA considers to have acceptable adhesion.  If this result is demonstrated, the FDA stated that the study would support the conclusion of adequate Twirla adhesion.  We have submitted a request for a Type A meeting and plan to discuss the specifics of the proposed wear study with the FDA as soon as possible.  We can make no assurances that we can successfully complete the wear study suggested by the FDA or that the results will demonstrate adequate adhesion of Twirla. If we are unable to successfully complete a wear trial of Twirla and Xulane to support the conclusion of adequate Twirla adhesion, the FDA will likely require us to reformulate Twirla and conduct additional clinical or bioequivalence studies before we can resubmit the Twirla NDA.  Even if we do successfully complete the wear study, there is no guarantee that the FDA will find Twirla to have an adequate risk benefit profile or determine that its manufacturing, specifications, and test methods are satisfactory.

Flaws in the design of a clinical trial may not become apparent until the clinical trial is well-advanced. We have limited experience in designing contraceptive clinical trials and may be unable to design and execute clinical trials to support regulatory approval of our product candidates. In addition, clinical trials often reveal that it is not practical or feasible to continue development efforts for a product candidate.

We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to subjects. Furthermore, regulatory agencies, Institutional Review Boards, or IRBs, or data safety monitoring boards, if utilized in our clinical trials, may at any time order the temporary or permanent discontinuation of our clinical trials or request that we cease using certain investigators in the clinical trials if such regulatory agencies or boards believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to subjects. Since our inception, we have not voluntarily or involuntarily suspended or terminated a clinical trial due to unacceptable safety risks to subjects.

If the results of the clinical trials for our current product candidates or clinical trials for any future product candidates do not achieve the primary efficacy endpoints or demonstrate unexpected safety issues, the prospects for approval of our product candidates will be materially adversely affected. For example, in the 2013 CRL that we received from the FDA in connection with the NDA previously filed for Twirla, one of the FDA’s comments was that acceptable evidence of efficacy was not demonstrated, as measured by Pearl Index, or PI. Specifically, in our completed Phase 3 trials, the PI was higher than that seen in registration trials for previously approved hormonal contraceptives.  Most recently, the FDA made this same observation with regard to the SECURE trial in its October 2018 FDRR decision. Experts seem to agree that inconsistent or incorrect use is a major contributor to the increased PI seen in more recent contraceptive trials. The PI values from clinical trials are also affected by additional factors, including differences in study design, increased sensitivity of early pregnancy tests, weight and body mass index, or BMI, of the study population and user experience. For example, consistent with other recent hormonal contraceptive

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clinical trials, including Ortho Evra® and Quartette®, and the 2015 meta-analysis conducted by the FDA authors on the effect of obesity on the effectiveness of hormonal contraceptives, a relationship between obesity and efficacy was observed among subjects 35 years of age and under in our SECURE clinical trial. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have failed to achieve similar results in later clinical trials, including longer-term trials, or have failed to obtain regulatory approval of their product candidates. Many compounds that initially showed promise in clinical trials or earlier preclinical studies have later been found to cause undesirable or unexpected adverse effects that have prevented further development of the compound. The FDA may interpret the data from the SECURE clinical trial differently than we do and may decline to approve Twirla on this or any other basis.  By example, the FDA has consistently expressed concern that the Pearl Index from the SECURE trial is higher than that for any previously approved product.

In addition to the circumstances noted above, we may experience numerous unforeseen events that could cause our clinical trials to be delayed, suspended or terminated, or which could delay or prevent our ability to receive regulatory approval for or to commercialize our product candidates, including:

·                  Clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or implement a clinical hold;

·                  The number of subjects required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials at a higher rate than we anticipate. For instance, we experienced a high withdrawal rate in our Phase 3 clinical trials for Twirla, and we experienced slower than anticipated enrollment in our SECURE clinical trial;

·                  Our third-party contract research organization, or CRO, or study sites may fail to comply with regulatory requirements or with the clinical trial protocol or fail to meet their contractual obligations to us in a timely manner, or at all. For instance, investigator compliance with study procedures was an issue that we encountered in our two Phase 3 clinical trials for Twirla completed prior to SECURE;

·                  Regulators or IRBs may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site or to amend a trial protocol;

·                  We may have delays in reaching or may fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites and our CRO;

·                  We may have delays in adding new investigators or clinical trial sites, or we may experience a withdrawal of clinical trial sites;

·                  Clinical study subjects may not follow the study procedures.  For instance, in our SECURE study, FDA identified additional on-treatment pregnancies, many of which occurred in women who had delays in applying the patch;

·                  We may elect or be required to suspend or terminate clinical trials of our product candidates based on a finding that the subjects are being exposed to health risks or due to other reasons;

·                  The cost of clinical trials for our product candidates may be greater than we anticipate;

·                  The supply or quality of our product candidates or other materials, including comparator drugs, necessary to conduct clinical trials of our product candidates may be insufficient or inadequate;

·                  There may be changes in government regulations or administrative actions;

·                  Our product candidates may have undesirable adverse effects or other unexpected characteristics;

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·                  We may not be able to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;