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. In connection with the restructuring plan, we reduced our workforce by approximately 50% , with the majority of the reduction in personnel completed by June 30, 2018. On August 8, 2018, we entered into a definitive agreement with Millendo Therapeutics, Inc. ("Millendo") under which Millendo will merge with OvaScience in an all-stock transaction (Note 11).

     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 June 30, 2018 , we had an accumulated deficit of approximately $316.6 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 operating losses for the next several years.

We believe that our cash, cash equivalents and short-term investments of $53.6 million at June 30, 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 June 30, 2018 , results of our operations for the three and six months ended June 30, 2018 and 2017 and cash flows for the six months ended June 30, 2018 and 2017 .

The results for the three and six months ended June 30, 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 June 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting. ASU 2018-07 is intended to reduce the cost and complexity and to improve financial reporting for non-employee share-based payments. The ASU expands the scope of Topic 718, Compensation-Stock Compensation (which currently only includes share-based payments to employees), to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This update is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. Upon transition, entities will remeasure unsettled liability-classified awards and any unmeasured equity-classified awards for non-employees at fair value as of the adoption date. A cumulative-effect adjustment to retained earnings will be required as of the beginning of the fiscal year of adoption. We are currently assessing the impact ASU 2016-13 will have on our consolidated financial statements and footnote disclosures thereto.

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 six months ended June 30, 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 June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments. This may result in the earlier recognition of allowances for losses. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. We are currently assessing the impact ASU 2016-13 will have on our consolidated financial statements and footnote disclosures thereto.

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. The amendment is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, Leases, to address two requirements of ASU 2016-02. ASU 2018-11 allows entities to recognize a cumulative-effect adjustment from the application of ASU 2016-02 to the opening balance of retained earnings in the period of adoption. In addition, ASU 2018-11 provides lessors with a practical expedient to not separate non-lease components from the associated lease component if certain conditions are met. We are currently assessing the impact ASU 2016-02 will have on our consolidated financial statements and footnote disclosures thereto.

ASU 2014-09, Revenue from Contracts with Customers, 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 was effective for the Company on January 1, 2018. 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 2014-09 effective January 1, 2018 and elected to adopt ASU 2014-09 using the modified retrospective approach and applied the standard only to contracts that had 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 for the three and six months ended June 30, 2018 , respectively. We recorded losses from equity method investments related to OvaXon of $0.5 million and $0.9 million for the three and six months ended June 30, 2017, respectively. As of June 30, 2018 and December 31, 2017, our investment in OvaXon was approximately $0.1 million .

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 June 30, 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 of June 30, 2018 and December 31, 2017 (in thousands):

At June 30, 2018 and December 31, 2017 , we held five and ten debt securities that had been in an unrealized loss position for less than 12 months , respectively. At June 30, 2018 and December 31, 2017 , the aggregate fair value of the securities in an unrealized loss position for less than 12 months was $10.4 million and $22.9 million , respectively. At June 30, 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 five debt securities in an unrealized loss position as of June 30, 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 June 30, 2018 .

As of June 30, 2018 , we held $7.9 million in financial institution debt securities and other corporate debt securities located in Australia, Canada, Luxembourg, Norway and Sweden. 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 and six months ended June 30, 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 $0.2 million and 0.5 million for the three and six months ended June 30, 2018 , respectively. We recorded depreciation and amortization expense of $0.5 million and $1.0 million for the three and six months ended June 30, 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 six months ending June 30, 2018 .

In May 2018, we initiated a corporate restructuring and concluded a portion of the carrying value of our assets was not recoverable. For the three and six months ended June 30, 2018, we recorded an impairment charge of $2.2 million , which is included within our condensed consolidated statements of operations and comprehensive loss. We determined the fair value of these assets subject to impairment based on expected future cash flows using Level 2 inputs under ASC 820.

In May 2018, we commenced a search to find a buyer for certain excess fixed assets, primarily comprised of laboratory equipment. As of June 30, 2018, we met the criteria to classify such assets as held-for-sale and estimated the fair value less costs to sell these assets at $0.1 million .

7.     Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following as of  June 30, 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 June 30, 2018 is as follows:

No stock options were exercised during the three and six months ended June 30, 2018 or June 30, 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 June 30, 2018 , we had approximately $2.8 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 six months ended June 30, 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. No option grants were made during the three months ended June 30, 2018. During the three and six months ended June 30, 2017 , we granted options to purchase 2,183,106 and 4,015,356 shares of our common stock at weighted average grant date fair values of $1.11 and $1.15 per share, respectively, and with weighted average exercise prices of $1.46 and $1.51 per share, respectively.

We did not grant any options to purchase common stock to non-employees for the three and six months ended June 30, 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 and six months ended June 30, 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. In May 2018, we initiated a further reduction in workforce of approximately 50% in connection with our on-going efforts to effectively align Company resources. During the three months ended June 30, 2018 , we recognized restructuring charges of  $2.9 million , primarily comprised of $0.7 million of one-time termination benefits and $2.2 million of asset impairment charges attributable to our May 2018 restructuring activities. During the six months ended June 30, 2018, we recognized restructuring charges of $3.6 million , primarily comprised of $1.4 million of one-time termination benefits attributable to our January 2018 and May 2018 restructuring activities and $2.2 million of asset impairment charges attributable to our May 2018 restructuring activities. As of June 30, 2018, we have recognized substantially all restructuring charges related to our January 2018 and May 2018 restructuring activities. Our restructuring charges for the three and six months ended June 30, 2018 , are included in our condensed consolidated statements of operations and comprehensive loss. For the three months ended June 30, 2017, we recognized restructuring charges of  $2.0 million  including  $1.3 million  of one-time termination benefits,  $0.3 million  of benefits under an ongoing benefit plan,  $0.3 million  of fixed asset impairment charges and  $0.1 million  of legal fees. For the six months ended June 30, 2017, we recognized restructuring charges of  $3.5 million , including  $2.3 million  of one-time termination benefits,  $0.3 million  recorded for benefits under an ongoing benefit plan and  $0.3 million of fixed asset impairment charges. Our restructuring charges for the three and six months ended June 30, 2017, are included in our condensed consolidated statements of operations and comprehensive loss.

For the six months ended June 30, 2018 , we made cash payments of $1.3 million primarily related to severance benefits and other restructuring costs, primarily related to our January 2018 and May 2018 restructuring activities. For the six months ended  June 30, 2017 , we made cash payments of  $4.1 million  primarily related to severance benefits, of which all related to our December 2016 restructuring activities.

As of  June 30, 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 $12.8 million of restructuring charges, of which $6.9 million relates to our December 2016 restructuring activities, $2.3 million relates to our June 2017 restructuring activities, $0.7 million relates to our January 2018 restructuring activities and $2.9 million relates to our May 2018 restructuring activities.

The following table outlines our restructuring activities for the six months ended June 30, 2018  (in thousands):

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. On July 16, 2017, the court denied the motions to intervene and consolidate the actions. In the Westmoreland Federal Action, on January 22, 2018, Westmoreland moved for appointment of lead plaintiff and approval of lead and liaison counsel. On July 16, 2018, the Court granted the motion, appointing Westmoreland as lead plaintiff and approved lead and liaison counsel. 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 the remaining Westmoreland Federal Action are without merit and intend to defend against 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 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. 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. 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. The parties have reached a settlement of the action whereby the Company agreed to seek shareholder approval for certain changes to non-director executive compensation. The Company also has agreed to pay $300,000 in attorney’s fees to plaintiff’s counsel, which has been accrued as of June 30, 2018. The settlement is subject to final approval by the Court. The Court has scheduled a fairness hearing for August 30, 2018. There can be no assurance, however, that the settlement will be approved. At present, we are unable to estimate potential losses should the settlement not be approved.

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 plaintiff 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 on 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 August 8, 2018, we entered into a definitive agreement with Millendo Therapeutics, Inc. ("Millendo") under which Millendo will merge with OvaScience in an all-stock transaction. The merger will create a leading rare endocrine disease company focused on the development of distinct and transformative treatments for several diseases where there is a significant unmet medical need. Upon completion of the merger, OvaScience will be renamed Millendo Therapeutics, Inc., and is expected to trade on the Nasdaq Capital Market under the ticker symbol MLND.

An investor syndicate has committed to invest up to $30 million in the combined company, which will fund the further development, potential approval and commercialization of Millendo’s lead assets, livoletide and nevanimibe, and is expected to close before or concurrently with the completion of the merger. The total cash balance of the combined company following the closing of the merger and the financing is expected to be at least $70 million .

On a pro forma basis and based upon the number of shares of OvaScience common stock to be issued in the merger, current OvaScience shareholders will own approximately 20% of the combined company and current Millendo investors will own approximately 80% of the combined company (before accounting for the additional financing transaction). The actual allocation will be subject to adjustment based on OvaScience’s net cash balance at the time of closing. The transaction has been approved by the board of directors of both companies. The merger is expected to close in the fourth quarter of 2018, subject to the approval of OvaScience shareholders at a special shareholder meeting, as well as other customary conditions.

The combined company will be led by Julia Owens, Ph.D., Millendo Chief Executive Officer and President, and will be headquartered in Ann Arbor, Michigan.

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

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Without limiting the foregoing, the words “may,” “shall,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “target,” “goal”, “seek”, “likely,” “hope” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us up to, and including, the date of this document, and we expressly disclaim any obligation to update any such forward-looking statements to reflect events or circumstances that arise after the date hereof. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth in this Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as under the heading “Risk Factors” contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 and in Part II, Item 1A “Risk Factors” of this Quarterly Report.

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Overview

OvaScience, Inc. is a company focused on the discovery and development of new treatment options for women and couples struggling with infertility. OvaScience is leveraging the breakthrough discovery of egg precursor, or EggPC ^SM , cells to transform the treatment landscape for women’s fertility.

OvaPrime is a potential fertility treatment that could help restore a woman’s egg production. With OvaPrime, a woman’s own EggPC cells are isolated from a niche within her ovary where they are quiescent and repositioned such that they receive the appropriate signals to mature in vivo into new, fertilizable eggs. The addressable market for OvaPrime is women undergoing IVF diagnosed with Diminished Ovarian Reserve, including Premature Ovarian Insufficiency and Poor Ovarian Response. Based on a 2015 report from the CDC, this represents approximately thirty one percent of all IVF cycles, or 0.6 million women per year globally.    

OvaTure is a potential fertility treatment that eliminates the need for hormone stimulation typically required as part of standard in vitro fertilization (IVF). With OvaTure, a woman’s own EggPC cells are isolated from her ovary and matured in vitro into new, fertilizable eggs. This potential treatment may be an option for all women undergoing IVF, which represents approximately 1.9 million women per year globally.

AUGMENT is a fertility treatment designed to improve embryo development and pregnancy rates. With AUGMENT, mitochondria from a woman’s own EggPC cells are isolated and injected into the egg during IVF.

AUGMENT was introduced in select clinics outside of the United States. AUGMENT is currently available to patients in Japan through a collaborative access agreement with the IVF Japan Group. AUGMENT is not available in the United States.

OvaScience is completing preclinical animal studies designed to evaluate its egg precursor (EggPC ^SM ) cell technology platform and inform the future development of OvaPrime. Based on preliminary data from these experiments, OvaScience has decided to scale back investments in its OvaPrime research and development efforts, including halting its planned Phase 1b/2a clinical trial. The Company has done so in order to preserve resources while it completes these experiments and awaits the final results, and while it continues to monitor patients in its ongoing Phase 1 clinical trial. Under the leadership of Dr. James Lillie, Chief Scientific Officer, a small internal scientific team will continue in-house efforts to progress the Company’s OvaTure program in conjunction with specialized contract research organizations and select academic partners. The Company will also continue to offer AUGMENT to patients in Japan through an exclusive license to IVF Japan Group.

On August 8, 2018, OvaScience announced that it had entered into a definitive agreement with Millendo under which Millendo will merge with OvaScience in an all-stock transaction. The transaction has been approved by the board of directors of both companies. The merger is expected to close in the fourth quarter of 2018, subject to the approval of OvaScience shareholders at a special shareholder meeting, as well as other customary conditions.

Critical Accounting Policies and Significant Judgments and Estimates

The discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of our condensed consolidated financial statements requires us to make judgments, estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We evaluate our estimates, on an ongoing basis, including those related to accrued expenses and assumptions in the valuation of stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. Actual results could differ from those estimates.

Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of our critical accounting policies and estimates. 

There were no other significant changes to our critical accounting policies and estimates in the six months ended June 30, 2018 .

Results of Operations

The following table summarizes our results of operations for the three and six months ended June 30, 2018 and 2017 , together with the changes from period to period (in thousands of dollars except for percentages):

Revenues  

Revenues for the three and six months ended June 30, 2018 were $81,000 and $148,000 , respectively as compared to $84,000 and $147,000 for the three and six months ended June 30, 2017, respectively. We do not anticipate significant revenue from our programs in the near term.

Cost of Revenues

Costs of revenues for the three and six months ended June 30, 2018 were $0.1 million and $0.2 million , respectively, compared to $0.3 million and $0.5 million for the three and six months ended June 30, 2017, respectively. The decrease in costs of revenues for the three and six months ended June 30, 2018 is attributable to the decrease in the number of biopsies performed primarily as a result of our shift in corporate priorities related to AUGMENT resulting from our restructuring activities and the related pricing programs offered, as well as a decrease in compensation costs resulting from our restructuring activities. Our costs of revenues include the cost of processing patient tissue that corresponds to treatment revenues for the reporting period. Given our shift in corporate priorities and focus on research and development, we expect cost of revenues to continue to decrease in the future.

Research and Development Expense

The $2.6 million , or 52% , decrease in our research and development expense for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 , from $5.0 million to $2.4 million was primarily attributable to:

The $5.7 million , or 53% , decrease in our research and development expense for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 , from $10.8 million to $5.0 million was primarily attributable to:

Our research and development expense would increase if our programs were to successfully advance towards commercialization. We do not believe that our historical costs are indicative of the future costs associated with these programs nor do they represent what any other future treatment program we initiate may cost. Due to the variability in the length of time and scope of activities necessary to develop a fertility treatment and uncertainties related to cost estimates and our ability to commercialize and/or obtain marketing approval for our fertility treatments, accurate and meaningful estimates of the total costs required to bring our fertility treatments to market are not available.

Additionally, because of the risks inherent in drug discovery and development, we cannot reasonably estimate or know:

Selling, General and Administrative Expense

The $8.1 million , or 75% , decrease in selling, general and administrative expense for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 , from $10.8 million to $2.6 million was primarily attributable to:

The $11.0 million , or 62% , decrease in selling, general and administrative expense for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 , from $17.9 million to $6.9 million was primarily attributable to:

We expect selling, general and administrative expense to continue to decrease as a result of the corporate restructuring announcements in December 2016, June 2017, January 2018 and May 2018. We do not believe that our historical costs of supporting AUGMENT represent what any other future commercial treatment program we initiate may cost to support and do not anticipate substantial costs associated with supporting AUGMENT.

Restructuring Expense

Restructuring expenses were $2.9 million  and $3.6 million for the three and six months ended June 30, 2018 , respectively. For the three months ended June 30, 2018 , we recognized restructuring charges of  $2.9 million , primarily comprised of $0.7 million of one-time termination benefits and $2.2 million of asset impairment charges attributable to our May 2018 restructuring activities. During the six months ended June 30, 2018, we recognized restructuring charges of $3.6 million , primarily comprised of $1.4 million of one-time termination benefits attributable to our January 2018 and May 2018 restructuring activities and $2.2 million of asset impairment charges attributable to our May 2018 restructuring activities.