Notes to Unaudited, Condensed Consolidated Financial Statements

 

1.                                       Organization

OvaScience, Inc., incorporated on April 5, 2011 as a Delaware corporation, is a company focused on the development of new treatment options for women and couples struggling with infertility. Each OvaScience treatment is based on the company’s proprietary technology platform that leverages the discovery of egg precursor, or EggPC ^SM , cells. As used in these consolidated financial statements, the terms “OvaScience,” “the Company,” “we,” “us,” and “our” refer to the business of OvaScience, Inc. and its wholly owned subsidiaries. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing our technology, identifying potential fertility treatments, developing the OvaPrime ^SM  treatment, the OvaTure ^SM  treatment and the AUGMENT ^SM  treatment, introducing AUGMENT in select international in vitro fertilization ("IVF") clinics and determining the regulatory and development path for our fertility treatments. We have generated limited revenues to date, and do not anticipate significant revenues in the near term. On June 21, 2017, we announced that we would continue to focus on advancing OvaPrime in clinical development and OvaTure in preclinical development and would discontinue ongoing efforts related to the AUGMENT treatment outside of North America. To better align our organization with these strategic priorities, we restructured our workforce and reduced our workforce by approximately 50% . On January 3, 2018, we announced a further restructuring of our organization and a workforce reduction of approximately 50% . On May 3, 2018, we announced that our board of directors had approved a corporate restructuring plan furthering its on-going efforts to effectively align Company resources. Additionally, our management team and board of directors have initiated a process to explore a range of strategic alternatives for enhancing shareholder value, including the potential sale or merger of the Company. In connection with the restructuring plan, the Company plans to reduce its workforce by approximately 70% , with the majority of the reduction in personnel expected to be completed by June 30, 2018. As a result, we expect to realize annualized cost savings beginning in the fourth quarter of 2018. We estimate that we will incur one-time costs of approximately $0.5 million to $1.0 million in the form of termination benefits and retention arrangements related to the restructuring plan.

     We are subject to a number of risks similar to other life science companies, including, but not limited to, risks associated with clinical and preclinical development, the need to develop and obtain marketing approval for certain of our fertility treatments, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of our fertility treatments and protection of proprietary technology, and the outcome of our exploration of strategic alternatives. If we do not successfully develop and commercialize any of our fertility treatments, we will be unable to generate treatment revenue or achieve profitability. As of March 31, 2018 , we had an accumulated deficit of approximately $308.9 million .

Liquidity

We have incurred annual net operating losses in each year since our inception. We have generated limited treatment revenues related to our primary business purpose and have financed our operations primarily through private placements of our preferred stock, which was subsequently converted to common stock, and public sales of our common stock and interest income earned on cash, cash equivalents, and short-term investments balances.

 We have devoted substantially all of our financial resources and efforts to the research and development of our OvaPrime and OvaTure fertility treatments and the introduction of AUGMENT in select international IVF clinics. We expect to continue to incur significant expenses related to the research and development of OvaPrime and OvaTure and incur operating losses for the next several years.

We believe that our cash, cash equivalents and short-term investments of $58.3 million at March 31, 2018 , will be sufficient to fund our current operating plan for at least the next 12 months from the date of filing this Form 10-Q. There can be no assurances, however, that the current operating plan will be achieved or that additional funding, if needed, will be available on terms acceptable to us, or at all.

2.                                       Basis of presentation and significant accounting policies

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). These condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

Certain information and footnote disclosures normally included in our annual financial statements have been omitted. In the opinion of management, the unaudited interim financial statements reflect all adjustments, which with the exception of restructuring accruals described in Note 9, consisted of normal and recurring adjustments, necessary for the fair presentation of our financial position at March 31, 2018 , results of our operations and cash flows for the three months ended March 31, 2018 and 2017 .

The results for the three months ended March 31, 2018 are not necessarily indicative of future results. These condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2017, which are contained in our Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Annual Report on Form 10-K”) that was filed with the Securities and Exchange Commission (“SEC”) on March 15, 2018.

Use of estimates and summary of significant accounting policies

These condensed consolidated financial statements are presented in conformity with US GAAP, which requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Our significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in our 2017 Annual Report on Form 10-K.

Net loss per share

Basic and diluted net loss per common share are calculated by dividing net loss by the weighted average number of shares outstanding during the period. Potentially dilutive shares, including outstanding stock options and unvested restricted stock units, are only included in the calculation of diluted net loss per share when their effect is dilutive.

The amounts in the table below were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect (in thousands):

Collaborations

In December 2013, we entered into a collaboration agreement, the OvaTure Collaboration, with Intrexon Corporation, or Intrexon, governing the use of Intrexon's synthetic biology technology platform for the accelerated development of our OvaTure platform. The OvaTure Collaboration provided that Intrexon would deliver laboratory and animal data to support the successful filing of an IND for OvaTure.

We participated as an equal member on the Joint Steering Committee, or JSC and Intellectual Property Committee, or IPC. The JSC agreed upon the services and the activities to be included in the work plan, and the IPC had authority over intellectual property matters. We had the tie-breaking vote if there were any disputes with the JSC.

On February 1, 2018, we provided Intrexon with written notice of termination of the OvaTure Collaboration. We believed that we could continue the development of OvaTure by building out our internal capabilities and expertise under the leadership of Dr. James Lillie, our Chief Scientific Officer, and engaging with contract research organizations that have specific, complementary capabilities to our own. 

Recent accounting pronouncements

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years using a retrospective transition method to each period presented. The Company adopted this standard as of January 1, 2018 on a retrospective basis, which resulted in the recast of the prior reporting period in the statement of cash flows. For the three months ended March 31, 2018 and 2017 ,  $0.8 million  and  $0.8 million , respectively, of restricted cash is included in the total of cash and restricted cash balance at the end of period. A reconciliation of cash and restricted cash from our condensed consolidated statement of cash flows to the amounts reported within our condensed consolidated balance sheet is also included in a table below our condensed consolidated statement of cash flows.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 requires changes in the presentation of debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. This update is effective for annual and interim periods beginning after December 15, 2017 using a retrospective transition method to each period presented. We adopted this standard as of January 1, 2018 with no material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for both operating and financing leases with lease terms of more than 12 months. In addition, ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. The amendment is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. We are currently assessing the impact ASU 2016-02 will have on our consolidated financial statements and footnote disclosures thereto.

In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers, which defers the effective date of ASU No. 2014-09 by one year. ASU 2014-09 amends the guidance for accounting for revenue from contracts with customers. ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and creates a new Topic 606, Revenue from Contracts with Customers. This guidance is now effective for fiscal years beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016. Two adoption methods are permitted: retrospectively to all prior reporting periods presented, with certain practical expedients permitted; or retrospectively with the cumulative effect of initially adopting the ASU 2014-09 recognized at the date of initial application. We adopted ASU 2015-14 effective January 1, 2018 and elected to adopt ASU 2015-14 using the modified retrospective approach and applied the standard only to contracts that have not yet been completed as of January 1, 2018. The impact under this methodology to our previously reported revenues is insignificant in the periods reported, and therefore the Company did not record a cumulative catch-up to deferred revenue and accumulated deficit upon adoption of the new standard on January 1, 2018.

3.                                      OvaXon Joint Venture

In December 2013, we entered into a joint venture with Intrexon to leverage Intrexon’s synthetic biology technology platform and our technology relating to EggPC cells to focus on developing significant improvements in human and animal health. We and Intrexon formed OvaXon, LLC (“OvaXon”) to conduct the joint venture. Each party contributed $1.5 million of cash to OvaXon, each party has a 50% equity interest and all costs and profits will be split accordingly. Each party will also have 50% control over OvaXon and any disputes between us and Intrexon will be resolved through arbitration, if necessary.

Starting in August 2017, Intrexon continued bovine EggPC work for us under the OvaTure Collaboration rather than under the OvaXon joint venture (the "August 2017 Amendment"). We are in discussions with Intrexon regarding the future of the OvaXon joint venture. 

OvaXon no longer qualifies as a variable interest entity as a result of the August 2017 Amendment, and our future losses associated with OvaXon are now limited. We and Intrexon have equal ability to direct the activities of OvaXon through JSC and IPC membership and 50% voting rights and therefore ability to exert significant influence over OvaXon. As we have the ability to exert significant influence over OvaXon, in accordance with ASC 323 Equity Method and Joint Ventures , we will continue to account for OvaXon under the equity method and not consolidate its financial results with ours.

We recorded losses from equity method investments related to OvaXon of a de minimis amount and $0.4 million for the three months ended March 31, 2018 and 2017 , respectively. As of March 31, 2018 and December 31, 2017, our investment in OvaXon was approximately $0.1 million and $0.1 million , respectively.

4.                                       Fair value

The fair value of our financial assets reflects our estimate of amounts that we would have received in connection with the sale of such asset in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of our assets, we seek to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (our assumptions about how market participants would price assets and liabilities). We use the following fair value hierarchy to classify assets based on the observable inputs and unobservable inputs we used to value our assets and liabilities:

The following tables summarize our assets that are measured at fair value as of March 31, 2018 and December 31, 2017 (in thousands):

5.                                       Cash, cash equivalents and short-term investments

The following tables summarize our cash, cash equivalents and short-term investments as March 31, 2018 and December 31, 2017 (in thousands):

At March 31, 2018 and December 31, 2017 , we held ten and ten debt securities that had been in an unrealized loss position for less than 12 months , respectively. At March 31, 2018 and December 31, 2017 , the aggregate fair value of the securities in an unrealized loss position for less than 12 months was $20.7 million and $22.9 million , respectively. At March 31, 2018 , we did not hold any investments that have been in a continuous unrealized loss position for 12 months or longer.

We evaluate our securities for other-than-temporary impairments based on quantitative and qualitative factors, and we considered the decline in market value for the ten debt securities in an unrealized loss position as of March 31, 2018 , to be primarily attributable to the then current economic and market conditions. We will likely not be required to sell these securities, and do not intend to sell these securities before the recovery of their amortized cost bases, which recovery is expected within the next 12 months. Based on our analysis, we do not consider these investments to be other-than-temporarily impaired as of March 31, 2018 .

As of March 31, 2018 , we held $5.4 million in financial institution debt securities and other corporate debt securities located in Canada and Australia. As of December 31, 2017 , we held $12.0 million in financial institution debt securities and other corporate debt securities located in Australia, Luxembourg, Japan, Norway and Sweden.

We had no realized gains or losses on our short-term investments for the three months ended March 31, 2018 and 2017.

6.                                       Property and equipment

 

Property and equipment and related accumulated depreciation and amortization are as follows (in thousands):

We recorded depreciation and amortization expense of $0.3 million and $0.5 million for the three months ended March 31, 2018 and 2017 , respectively.

In December 2016, we initiated a corporate restructuring and in January 2017, we commenced a search to find a buyer for certain excess fixed assets, primarily comprised of laboratory equipment. As of January 31, 2017, we met the criteria to classify such assets as held-for-sale and estimated the fair value less costs to sell these assets at $0.5 million . In June 2017, we initiated the first part of our plan to sell a portion of the fixed assets classified as held-for-sale, consisting primarily of fixed assets located domestically. In July 2017, we completed the sale of these assets with a carrying value of $0.2 million and received net proceeds of $0.3 million . We recorded a gain on the sale of these excess assets of $0.1 million .

In February 2018, we completed the sale of the remaining $0.3 million of assets, primarily those located internationally and received net proceeds of $0.2 million . We recorded an immaterial loss on the sale of these assets, which is

included in loss from continuing operations in our condensed consolidated statement of operations and comprehensive loss for the three months ending March 31, 2018 .

7.     Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following as of  March 31, 2018 and December 31, 2017  (in thousands):

Other accrued expenses consist of accrued costs related to travel, equipment purchases, lab supplies and other miscellaneous costs.

8.                                       Stock-based compensation

Stock options

A summary of our stock option activity and related information as of March 31, 2018 is as follows:

No stock options were exercised during the three months ended March 31, 2018 or March 31, 2017 .

The fair value of each stock-based option award is estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

As of March 31, 2018 , we had approximately $4.0 million of total unrecognized compensation cost, related to unvested stock options, which we expect to recognize over a weighted-average period of 2.9 years.

During the three months ended March 31, 2018 , we granted options to purchase 1,179,877 shares of our common stock to employees at a weighted average grant date fair value of $ 0.70 per share, and with a weighted average exercise price of $0.96 per share. During the three months ended March 31, 2017 , we granted options to purchase 1,832,250 shares of our common stock at a weighted average grant date fair value of $1.20 per share and with a weighted average exercise price of $1.58 per share.

We did not grant any options to purchase common stock to non-employees for the three months ended March 31, 2018 . We granted 150,000 options to purchase common stock with a weighted average exercise price of $1.60 per share to non-employees for the three months ended March 31, 2017 . Stock-based awards issued to non-employees are revalued at each reporting date until vested.

9.                                       Restructuring

In December 2016, we initiated a reduction in workforce of approximately  30%  in connection with our change in corporate strategy. As of December 31, 2017 , we had recognized all restructuring charges related to our December 2016 restructuring activities, approximately  $6.9 million  comprised of  $2.4 million recorded as one-time termination benefits,  $1.7 million  as a benefit under an ongoing benefit plan,  $2.0 million  of fixed asset impairment charges and  $0.9 million of other restructuring related charges including legal fees and contract cancellation fees.

On June 21, 2017, we initiated a reduction in workforce of approximately 50% in connection with our decision to focus on the development and advancing of OvaPrime and OvaTure and to no longer offer the AUGMENT treatment on a commercial basis outside of North America. As of December 31, 2017 , we had recognized all restructuring charges related to our June 2017 restructuring activities, approximately  $2.3 million  comprised of  $1.7 million recorded as one-time termination benefits,  $0.3 million  as a benefit under an ongoing benefit plan,  $0.2 million  of fixed asset impairment charges and  $0.1 million of other restructuring related charges including legal fees.

In January 2018, we initiated a reduction in workforce of approximately 50% in connection with a decision to streamline our operations and reduce our cost structure. During the three months ended March 31, 2018 , we recognized restructuring charges of  $0.7 million  primarily comprised of $0.7 million of one-time termination benefits all attributable to our January 2018 restructuring activities. As of March 31, 2018, we have recognized substantially all restructuring charges related to our January 2018 restructuring activities. Our restructuring charges for the three months ended March 31, 2018 , are included in our condensed consolidated statements of operations and comprehensive loss.

For the three months ended March 31, 2018 , we made cash payments of $0.8 million primarily related to severance benefits and other restructuring costs, all of which relate to our January 2018 restructuring activities, respectively. For the three months ended  March 31, 2017 , we made cash payments of  $2.2 million  primarily related to severance benefits, of which all related to our December 2016 restructuring activities.

As of  March 31, 2018 , our restructuring accrual was  $0.5 million  and was recorded in accrued expenses and other current liabilities in our condensed consolidated balance sheet. Since the execution of our restructuring activities, we have incurred a total of $9.9 million of restructuring charges, of which $6.9 million relates to our December 2016 restructuring activities and $2.4 million relates to our June 2017 restructuring activities and $0.7 million to our January 2018 restructuring activities.

The following table outlines our restructuring activities for the three months ended March 31, 2018  (in thousands):

Other restructuring costs consist primarily of professional fees including legal fees and contract termination fees.   

10.                                       Commitments and contingencies

On October 9, 2015, a purported class action lawsuit was filed in the Suffolk County Superior Court in the Commonwealth of Massachusetts against us, several of our officers and directors and certain of the underwriters from our January 2015 follow-on public offering of our common stock. The plaintiffs purported to represent those persons who purchased shares of our common stock pursuant or traceable to our January 2015 follow-on public offering. The plaintiffs alleged, among other things, that the Company made false and misleading statements and failed to disclose material information in the Company’s January 2015 Registration Statement and incorporated offering materials. Plaintiffs allege violations of Sections 11, 12 and 15 of the Securities Act of 1933, as amended, and seek, among other relief, unspecified compensatory damages, rescission, pre-and post-judgment interest and fees, costs and disbursements. On December 7, 2015, the OvaScience defendants filed a notice of removal with the Federal District Court for the District of Massachusetts.  On December 30, 2015, plaintiffs filed a motion to remand the action to the Superior Court. Oral argument on the motion to remand was held on February 19, 2016. On February 23, 2016, the District Court granted plaintiffs' motion to remand the action to the Superior Court. On February 26, 2016, a second putative class action suit was filed in the Suffolk County Superior Court in the Commonwealth of Massachusetts against the Company, several of our officers and directors and certain of the underwriters from the January 2015 follow-on public offering of the Company's common stock. The complaint is substantially similar to the complaint filed in October 2015. The two actions subsequently were consolidated and plaintiffs filed a First Amended Class Action Complaint on June 17, 2016. Defendants filed motions to dismiss the complaint. Those motions were denied by order dated December 22, 2016. On August 17, 2016, an additional plaintiff, Westmoreland County Employee Retirement System (“Westmoreland”) moved to intervene in the consolidated action. The defendants opposed Westmoreland’s motion to intervene. The Superior Court granted Westmoreland’s motion to intervene on October 27, 2017. On August 7, 2017, the plaintiffs filed their motion for class certification, which the defendants opposed. Oral argument on the motion for class certification was held on September 29, 2017. On November 7, 2017, the Superior Court denied the plaintiffs’ motion for class certification. On August 14, 2017, the defendants filed their motion for summary judgment against plaintiffs Heather Carlson, Cesar Castellanos, Philipp Hofmann, and Carlos Rivas, which the plaintiffs opposed. Oral argument on the motion for summary judgment was held on October 18, 2017. On November 21, 2017, the Superior Court allowed the defendants’ motion for summary judgment, and the claims asserted by plaintiffs Heather Carlson, Cesar Castellanos, Philipp Hofmann, and Carlos Rivas in the consolidated actions were dismissed, leaving Westmoreland as the sole remaining plaintiff. On November 22, 2017, Westmoreland filed a putative class action complaint in the U.S. District Court for the District of Massachusetts against the same defendants alleging the same claims as are alleged in the state court case (the “Westmoreland Federal Action”). On January 17, 2018, the lead plaintiff in a different case, a purported shareholder class action alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Dahhan Action”) filed a motion to intervene in the Westmoreland Federal Action and to consolidate the Westmoreland Federal Action with the Dahhan Action. We have opposed this motion, which is pending. In the Westmoreland Federal Action, on January 22, 2018, Westmoreland moved for appointment of lead plaintiff and approval of lead and liaison counsel. The lead plaintiff in the Dahhan Action opposed the motion. With the court’s leave, on April 26, 2018, the defendants opposed Westmoreland’s motion on statute of limitations grounds. This motion is pending. On January 22, 2018, Westmoreland filed a motion to voluntarily dismiss the Superior Court action without prejudice. The defendants opposed that motion. Oral argument on Westmoreland’s motion for voluntary dismissal was held on April 3, 2018. On April 5, 2018, the Superior Court allowed Westmoreland’s motion for voluntary dismissal with prejudice. The Superior Court entered final judgment on April 10, 2018, dismissing Westmoreland’s claims without prejudice and dismissing the claims of plaintiffs Heather Carlson, Cesar Castellanos, Philipp Hofmann, and Carlos Rivas with prejudice. We believe that the complaints in both cases are without merit and intend to defend against the remaining pending litigation. There can be no assurance, however, that we will be successful. A resolution of these lawsuits adverse to the Company or the other defendants could have a material effect on our consolidated financial position and results of operations in the period in which the lawsuit is resolved. At present, we are unable to estimate potential losses, if any, related to the lawsuit.

On November 9, 2016, a purported shareholder derivative action was filed in the Business Litigation Session of the Suffolk County Superior Court in the Commonwealth of Massachusetts against certain of our present and former officers and directors alleging breaches of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and corporate waste for purported actions related to the January 2015 follow-on public offering. On February 23, 2017, the court approved the parties’ joint stipulation to stay all proceedings in the action until further notice. Following a status conference in December 2017, the stay was lifted. On January 25, 2018, at the parties’ request, the court entered a second order staying all proceedings in the action under further order of the court. We believe that the complaint is without merit and intend to defend against the litigation. There can be no assurance, however, that we will be successful. A resolution of this lawsuit adverse to the Company or the other defendants could have a material effect on our consolidated financial position and results of operations in the period in which the lawsuit is resolved. At present, we are unable to estimate potential losses, if any, related to the lawsuit.

On March 24, 2017, a purported shareholder class action lawsuit was filed in the U.S. District Court for the District of Massachusetts against the Company and certain of our present and former officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  On July 5, 2017, the Court entered an order approving the appointment of Freedman Family Investments LLC as lead plaintiff, the firm of Robins Geller Rudman & Dowd LLP as lead counsel, and the Law Office of Alan L. Kovacs as local counsel.  Plaintiff filed an amended complaint on August 25, 2017.  We have filed a motion to dismiss the amended complaint, which is pending. On January 17, 2018, the lead plaintiff moved to consolidate the Westmoreland Federal Action with this case. We have opposed this motion, which is pending. We believe that the complaint is without merit and intend to defend against the litigation. There can be no assurance, however, that we will be successful. A resolution of this lawsuit adverse to the Company or the other defendants could have a material effect on our consolidated financial position and results of operations in the period in which the lawsuit is resolved. At present, we are unable to estimate potential losses, if any, related to the lawsuit.

On June 30, 2017, a purported shareholder derivative complaint was filed in the U.S. District Court for the District of Delaware against certain of our present and former directors and the Company as a nominal defendant, alleging breach of fiduciary duties, waste of corporate assets, unjust enrichment, and violations of Section 14(a) of the Securities Exchange Act of 1934, alleging that compensation awarded to the director defendants was excessive. We have filed a motion to dismiss the complaint, which is pending. At the parties’ request, the court stayed all deadlines in this case and cancelled the hearing on defendants’ motion to dismiss while the parties engage in settlement negotiations. We believe that the complaint is without merit and intend to defend against the litigation. There can be no assurance, however, that we will be successful. At present, we are unable to estimate potential losses, if any, related to the lawsuit.

On July 27, 2017, a purported shareholder derivative complaint was filed in the U.S. District Court for the District of Massachusetts against certain of our present and former directors and the Company as a nominal defendant, alleging breach of fiduciary duty, unjust enrichment and violations of Section 14(a) of the Securities Exchange Act of 1934 alleging that compensation awarded to the director defendants was excessive and seeking redress for purported actions related to the Company’s January 2015 follow-on public offering and public statements. On September 26, 2017, the plaintiffs filed an amended complaint which eliminated all claims regarding allegedly excessive director pay. On October 27, 2017, the defendants filed a motion to dismiss the amended complaint. The court heard oral argument on the motion to dismiss on April 5, 2018. On April 13, 2018, the court granted the defendants’ motion to dismiss the complaint for failure to state a claim for relief under Section 14(a). The court also dismissed the plaintiffs’ pendent state law claims without prejudice, based on lack of subject matter jurisdiction. On April 25, 2018, the plaintiffs moved for leave to amend the complaint, and to stay this case pending the outcome of the Westmoreland Federal Action and the Dahhan Action. The defendants do not believe that the proposed amended complaint cures the defects in the current complaint, but have informed plaintiffs’ counsel that, in the interest of judicial economy, the defendants would not oppose the proposed amendment if the court would consider staying the case pending the resolution of the pending Westmoreland Federal Action and the Dahhan Action. On April 27, 2018, the court granted the plaintiffs’ motion for leave to amend the complaint and for a stay. On April 30, 2018, the plaintiffs filed their second amended complaint. Per the court’s order of April 27, 2018, the case will be stayed upon the filing of the second amended complaint. We believe that the complaint is without merit and intend to defend against the litigation. There can be no assurance, however, that we will be successful. At present, we are unable to estimate potential losses, if any, related to the lawsuit.

We are not party to any other material litigation in any court.

11.                                       Subsequent Events

On May 3, 2018, we provided a strategic update on our business.   We announced that we will scale back investments in our research and development efforts, including putting a hold on our planned Phase 1b/2a clinical trial of OvaPrime, in order to preserve resources while we evaluate the results of our ongoing preclinical studies and continue to monitor patients in our Phase 1 clinical trial of OvaPrime.  Under the leadership of Dr. James Lillie, our Chief Scientific Officer, a small internal scientific team will continue to leverage specialized contract research organizations and select academic partners to progress our OvaTure program.  We will also continue to offer AUGMENT to patients in Japan through an exclusive license to IVF Japan. 

Additionally, we announced that we have initiated a process to explore a range of strategic alternatives for enhancing shareholder value, including the potential sale or merger of the Company.  Our Board of Directors has established a Business Development Committee that will work with management to oversee this process and has engaged Ladenburg Thalmann & Co. Inc. to act as its strategic financial advisor. 

In conjunction with these decisions, we will also restructure our organization to streamline operations and reduce our cost structure, including reducing our workforce by approximately 70 percent .  We anticipate the majority of the reduction in personnel will be completed by June 30, 2018.  We expect to realize annualized cost savings beginning in the fourth quarter of 2018.  We anticipate incurring one-time costs related to our restructuring initiatives of approximately  $0.5 million  to  $1.0 million , which primarily consist of severance-related termination benefits.

On May 3, 2018, the Company’s Board of Directors approved retention arrangements for the Company’s Chief Executive Officer, Senior Vice President - Finance, Chief Scientific Officer and other employees, substantially as described below.

CEO Retention Arrangements : Pursuant to Dr. Kroeger’s Employment Agreement with the Company, dated June 21, 2017, Dr. Kroeger is entitled to a payment of 12 months’ base salary in the event of a termination of his employment without cause or for good reason (as defined in the Employment Agreement) within one year following a Change in Control Event (as defined in the Employment Agreement). Pursuant to the retention arrangements, under those circumstances Dr. Kroeger will also be entitled to his full bonus opportunity for the year (60% of his then-current base salary).

In addition, Dr. Kroeger will be entitled to receive a cash bonus equal to 1% of the OvaScience Deal Value (defined below) implied in a Change in Control Event, which will fully vest six months after the closing of such transaction, would be immediately payable in the event of a termination of his employment without cause or for good reason within one year following a Change in Control Event, and shall be forfeited if no strategic transaction is entered into within eighteen months of May 3, 2018.

On May 10, 2018, Dr. Kroeger will also receive a new grant of options to purchase 715,000 shares of the Company’s common stock at an exercise price equal to the closing price of the Company’s common stock on the grant date, which shall vest in full upon the closing of a Change in Control Event, and shall be forfeited by Dr. Kroeger if no strategic transaction is entered into within eighteen months. Dr. Kroeger will have the right to exercise this option for a three-year period after any termination of his employment (other than a termination for cause) following a Change in Control Event. The “OvaScience Deal Value” shall be the product of the number of shares of the Company outstanding immediately prior to the closing of a Change in Control Event multiplied by the closing price of the Company’s common stock on the date of the closing of the Change in Control Event.

As previously reported, when he joined the Company, Dr. Kroeger received a grant of 1,783,108 options to purchase common stock of the Company at an exercise price of $1.46 per share (the “Kroeger New Hire Options”), which are currently under water relative to the closing price of the common stock on May 2, 2018 of $0.91. Under their original terms, each of the Kroeger New Hire Options can be exercised for 90 days after termination of employment. The retention arrangements approved for Dr. Kroeger provide that 1,069,864 of the Kroeger New Hire Options may be exercised for three years after his termination (other than for cause). The remaining 713,242 Kroeger New Hire Options shall retain a 90 day post-termination exercise period.

Retention Arrangements for Other Officers and for Employees: Pursuant to the employment agreements between the Company and Jonathan Gillis, Senior Vice President - Finance and Dr. James Lillie, Chief Scientific Officer, respectively, Mr. Gillis and Dr. Lillie are each entitled to a payment of six months’ base salary in the event of a termination of employment without cause or for good reason. Pursuant to the retention arrangements, Mr. Gillis and Dr. Lillie will each also be entitled to a payment of his full bonus opportunity for the year (35% and 40% of his then-current base salary, respectively) in the event of a termination of his employment without cause or for good reason following a Change in Control Event. Two other non-

executive employees of the Company will also receive the same provision with respect to their bonus payment in the event of a termination of employment without cause or for good reason following a Change in Control Event.

In addition, Mr. Gillis, Dr. Lillie and two non-executive employees will be entitled to receive cash bonuses in an amount equal to an aggregate of 1.25% of the OvaScience Deal Value implied by a Change in Control Event, which will fully vest six months after the closing of such transaction for Mr. Gillis and Dr. Lillie, will fully vest immediately upon the closing of such transaction for the non-executive employees, and shall be forfeited if no strategic transaction is entered into within eighteen months of the date hereof. The cash bonuses would be paid in full in the event of a termination of Mr. Gillis’ or Dr. Lillie’s employment without cause or for good reason following a Change in Control Event.

On May 10, 2018, Mr. Gillis and Dr. Lillie will also receive new grants of 75,000 and 125,000 options, respectively, to purchase shares of the Company’s common stock, with an exercise price equal to the closing price of the Company’s common stock on the grant date, which shall vest in full upon the closing of a strategic transaction, and shall be forfeited if no strategic transaction is entered into within eighteen months. Mr. Gillis and Dr. Lillie will have the right to exercise these options for a one-year period after any termination of their respective employment (other than for cause). Three other non-executive employees and a consultant will receive option grants (in an aggregate amount of 260,000 options) in connection with the retention arrangements, which shall vest in full upon the closing of a strategic transaction and shall be forfeited if no strategic transaction is entered into within eighteen months. In addition, pursuant to the retention arrangements, all outstanding option grants held by Mr. Gillis (206,145 options), Dr. Lillie (357,057 options) and four other non-executive employees and one consultant (in an aggregate amount of 789,632 options) will be exercisable for a one-year period (increased from a 90 day period in the original grants) after any termination of such employee’s employment (other than for cause) following a Change in Control Event.

The Company will enter into definitive agreements reflecting these terms with each affected employee and executive.