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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2013

OR

For the transition period from               to              

Commission file number: 000-54647

OVASCIENCE, INC.

(Exact name of registrant as specified in its charter)

617-500-2802
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

As of November 4, 2013, there were 18,231,548 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

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OVASCIENCE, INC.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2013

INDEX

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Part I.                                    Financial Information

Item 1.                                 Financial Statements (Unaudited)

OvaScience, Inc.

(A development stage company)

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share data)

See accompanying notes.

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OvaScience, Inc.

(A development stage company)

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

See accompanying notes.

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OvaScience, Inc.

(A development stage company)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

See accompanying notes.

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OvaScience, Inc.

(A development stage company)

Notes to Unaudited, Condensed Consolidated Financial Statements

1.                                      Organization and basis of presentation

OvaScience, Inc., incorporated on April 5, 2011 as a Delaware corporation, is a life science company focused on the discovery, development and commercialization of new treatments for female infertility. The Company’s operations to date have been limited to organizing and staffing the Company, business planning, raising capital, acquiring and developing its technology, identifying potential product candidates, planning and conducting a study in humans for its most advanced product candidate and undertaking preclinical studies of certain product candidates. The Company commenced our planned principal operations but have not generated any significant revenues to date. Accordingly, the Company is considered to be in the development stage.  As used throughout these unaudited, condensed consolidated financial statements, the terms “OvaScience,” “we,” “us,” and “our” refer to the business of OvaScience, Inc. and its wholly-owned subsidiary, OvaScience Securities Corporation.

Liquidity

We have incurred annual net operating losses in each year since our inception. We have not generated any product revenues related to our primary business purpose and have financed our operations primarily through private placements of our preferred stock and common stock. We have not completed development of any product candidate and have devoted substantially all of our financial resources and efforts to raising capital and incurring research and development and infrastructure costs. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years.

We believe that our cash resources and investments of approximately $49.6 million at September 30, 2013 will be sufficient to allow us to fund our current operating plan into 2015. We will be required to obtain additional funding in order to continue to fund our operations for 2015 and beyond. There can be no assurances, however, that the current operating plan will be achieved or that additional funding will be available on terms acceptable to us, or at all.

2.                                      Significant accounting policies

Unaudited interim financial data

The accompanying unaudited condensed consolidated September 30, 2013 balance sheet, the statements of operations and comprehensive loss for the three and nine months ended September 30, 2013 and 2012, and the statements of cash flows for the nine months ended September 30, 2013 and 2012, and the related interim information contained within the notes to the financial statements, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and the notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for the fair statement of our financial position at September 30, 2013 and results of our operations for the three and nine months ended September 30, 2013 and 2012 and our cash flows for the nine months ended September 30, 2013 and 2012. The results for the three and nine months ended September 30, 2013 are not necessarily indicative of future results.

Principles of consolidation

These condensed consolidated financial statements include the accounts of OvaScience and the accounts of our wholly-owned subsidiary, OvaScience Securities Corporation. All intercompany transactions have been eliminated in consolidation.

Use of estimates

These condensed consolidated financial statements are presented in conformity with U.S. generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from such estimates.

Segment and geographic information

We make operating decisions based upon the performance of the enterprise as a whole and utilize our consolidated financial statements for decision making.  We operate in one business segment, which focuses on developing product candidates dedicated to the treatment of female infertility.  We currently operate in only one geographic segment.

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Comprehensive loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss for the three and nine months ended September 30, 2013 and 2012, and the period from April 5, 2011 (inception) to September 30, 2013, is comprised of net loss and unrealized gains and losses on short-term investments. During the three and nine months ended September 30, 2013, there were no reclassifications out of other comprehensive loss.

Cash equivalents and short-term investments

Cash equivalents and short-term investments primarily consist of money market funds and corporate obligations. Corporate debt include obligations issued by corporations in countries other than the United States, including some issues that have not been guaranteed by governments and government agencies. We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents, which consist of money market funds are stated at fair value. They are also readily convertible to known amounts of cash and have such short-term maturities that each presents insignificant risk of change in value due to changes in interest rates. The classification of cash equivalents is consistent with prior periods.

The appropriate classification of marketable securities is determined at the time of purchase and reevaluated at each balance sheet date. We have classified all of our short-term investments at September 30, 2013 and December 31, 2012 as “available-for-sale.” We carry available-for-sale securities at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity.

The cost of available-for-sale debt securities are adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest and investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.

We conduct periodic reviews to identify and evaluate each investment that is in an unrealized loss position in order to determine whether an other-than-temporary impairment exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale debt securities that are determined to be temporary, and not related to credit loss, are recorded, net of tax, in accumulated other comprehensive income (loss).

For available-for-sale debt securities in an unrealized loss position, we perform an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is recorded within the statement of operations as an impairment loss.

Regardless of our intent to sell a security, we perform an additional analysis on all securities in an unrealized loss position to evaluate losses associated with the creditworthiness of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security and are recorded within earnings as an impairment loss.

Income Taxes

We use the liability method to account for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and income tax basis of assets and liabilities, as well as net operating loss and tax credit carryforwards, and are measured using the enacted tax rates and laws that will be in effect when the differences reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization. The effect of a change in tax rate on deferred taxes is recognized in income or loss in the period that includes the enactment date.

We use our judgment for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Any material interest and penalties related to unrecognized tax benefits are recognized in income tax expense.

Due to the uncertainty surrounding the realization of the net deferred tax assets in future periods, we have recorded a full valuation allowance against our otherwise recognizable net deferred tax assets as of September 30, 2013 and December 31, 2012.

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Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We determine fair value based on the assumptions market participants use when pricing the asset or liability. We also use the fair value hierarchy that prioritizes the information used to develop these assumptions.

Our available-for-sale securities are valued utilizing third party pricing services. The pricing services use many observable market inputs to determine value, including benchmark yields, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, monthly payment information and collateral performance. We validate the prices provided by our third party pricing services by understanding the models used, obtaining market values from other pricing sources, and confirming that those securities trade in active markets.

Concentrations of credit risk and off-balance sheet risk

Cash, cash equivalents and marketable securities are the only financial instruments that are potentially subject to concentrations of credit risk. We maintain our cash, cash equivalents and short-term investments with a high quality, accredited financial institution and, accordingly, such funds are subject to minimal credit risk. We have also established guidelines relating to diversification and maturities that allow us to manage risk. We have no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.

Research and development costs

Research and development costs are expensed to operations as incurred. Research and development expenses consist of costs associated with research activities, including license payments paid to third parties for rights to intellectual property, the costs of development of therapeutic product candidates and advances in the field of infertility. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the goods have been received or when the service has been performed rather than when the payment is made. Research and development expenses consist of:

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

·                  external research and development expenses incurred under arrangements with third parties, such as contract research organizations and consultants;

·                  license fees; and

·                  facilities and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and laboratory and other supplies.

Stock-based compensation

For awards granted to employees and directors, we measure stock-based compensation cost at the grant date based on the estimated fair value of the award, and recognize it as expense over the requisite service period on a straight-line basis. We record the expense of services rendered by non-employees based on the estimated fair value of the stock option as of the respective vesting date. We use the Black-Scholes valuation model in determining the fair value of all equity awards.

Property and equipment

Property and equipment is stated at cost. Expenditures for repairs and maintenance are recorded to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. Depreciation expense is recorded over the following estimated useful lives of the assets:

Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized.

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We review our long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying value of assets may not be fully recoverable and that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flow to the recorded value of the asset. If impairment is indicated, the asset will be written down to its estimated fair value.

For the three and nine months ended September 30, 2013, we recognized an impairment loss of $0.4 million related to laboratory equipment.  In July 2013, we entered into a master services agreement with a new global third party manufacturer to provide services for the manufacture of AUGMENT to replace our existing contract manufacturer.  As a consequence of the contract manufacturer transition, we determined that we would no longer use certain laboratory equipment, and as such, recorded an impairment loss.  The impairment loss is included within research and development expense.

Net loss per share

Basic and diluted net loss per common share is calculated by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Potentially dilutive shares include preferred stock, outstanding stock options and unvested restricted stock 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, prior to the use of the treasury stock method, due to their anti-dilutive effect:

3.                                      Fair value

We use a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs, which are considered the highest level inputs, are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our assumptions used to measure assets and liabilities at fair value. For fixed income securities, we reference pricing data supplied by our custodial agent and nationally known pricing vendors, using a variety of daily data sources, largely readily-available market data and broker quotes. The prices provided by third party pricing services are validated by reviewing their pricing methods and obtaining market values from other pricing sources. After completing these validation procedures, we did not adjust or override any fair value measurements provided by the pricing services as of September 30, 2013 or December 31, 2012.

The following table provides the assets carried at fair value measured on a recurring basis as of September 30, 2013:

The following table provides the assets carried at pair value measured on a recurring basis as of December 31, 2012.

There have been no changes to the valuation methods during the three and nine months ended September 30, 2013. There were no transfers of assets or liabilities between Level 1 and Level 2 during the three and nine months ended September 30, 2013. We had no short-term investments that were classified as Level 3 at any point during the three and nine months ended September 30, 2013 or during the year ended December 31, 2012.

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The carrying amounts reflected in the consolidated balance sheets for prepaid expenses and other current assets, other assets, accounts payable and accrued expenses approximate fair value due to their short term maturities.

4.                                      Cash, cash equivalents and short-term investments

The following tables summarize our cash, cash equivalents and marketable securities at September 30, 2013 and December 31, 2012 (in thousands):

We held 13 debt securities at September 30, 2013 that had been in an unrealized loss position for less than 12 months. We held no investments that have been in a continuous unrealized loss position for 12 months or longer.  The fair value on these securities was $14.7 million. We evaluated our securities for other-than-temporary impairments based on quantitative and qualitative factors. We considered the decline in market value for these 13 securities to be primarily attributable to current economic and market conditions. It is not more likely than not that we will be required to sell these securities, and we 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 September 30, 2013.

As of September 30, 2013, we held $12.8 million in financial institution debt securities and other corporate debt securities located in Canada, the United Kingdom, the Netherlands, Australia, and Norway.  Based on our analysis, we do not consider these investments to be other-than-temporarily impaired as of September 30, 2013.

We had no realized gains or losses on our short-term investments for the three months and nine months ended September 30, 2013 and 2012. There were no other-than-temporary impairments recognized for the three months and nine months ended September 30, 2013 and 2012.

5.                                      Common stock

In March 2013, we issued and sold in a private placement an aggregate of 3,888,880 shares of our common stock to investors at $9.00 per share. The private placement resulted in $32.7 million of net proceeds.

We filed a registration statement covering the resale of all such shares.

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6.                                      Stock-based compensation

The following table summarizes share-based compensation expense included within our condensed consolidated statements of operations:

On December 5, 2012, we issued a total of 192,308 restricted stock units (“RSUs”) to our Chief Executive Officer. This grant included 128,205 RSUs with time-based vesting as follows: 16,025 shares on March 31, 2013 and 16,025 shares each quarter thereafter until December 31, 2014. The fair value of the time-based RSUs is based on the closing price of our common stock on the award date, or $7.80 per share.  The stock-based compensation expense for the time-based grant is being recognized on a straight-line basis over the vesting period for the portion of the award that is probable of vesting. The grant also included 64,103 RSUs that will vest only upon the achievement of performance conditions that relate to 2013 and 2014 as determined by our board of directors. On March 20, 2013, the board of directors established the 2013 performance criteria for the first tranche of the award and communicated the performance criteria to the Chief Executive Officer. The grant date stock price of these performance-based RSUs was $10.00 per share. The Company recognized total stock-based compensation for the time-based awards and performance based awards of $0.2 million and $0.5 million for the three and nine months ended September 30, 2013.

Included within the general and administrative expense for the three and nine months ended September 30, 2013 is expense related to the RSUs with performance-based vesting provisions that will vest on December 31, 2013, based on our determination that certain defined performance metrics are probable of achievement.  The performance metrics for the RSUs that will vest on December 31, 2014 have not been established, and therefore we have not recorded any expense related to those RSUs.

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

The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to us including stage of product development and life science industry focus. The representative group of companies consisted of NeoGenomics, Inc., StemCells, Inc., BioSante Pharmaceuticals, Inc., Sangamo Biosciences, Inc., and Concept Therapeutics, Inc. As a result of being a development stage company in a very early stage of product development with no revenues, the representative group of companies has certain similar, but not all similar, characteristics to us. We believe the group selected has sufficient similar economic and industry characteristics and includes companies that are most representative of OvaScience.

As of September 30, 2013, we had approximately $15.9 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options and restricted stock units, which are expected to be recognized over a weighted-average period of 3.10 years.

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During the three months ended September 30, 2013, our former chief scientific officer transitioned from an employee to a member of our Scientific Advisory Board.  His options that would have vested during the year after the transition will continue to do so while he serves on the Scientific Advisory Board. As a result, we recognized an additional $0.2 million of stock-based compensation expense during the three and nine months ended September 30, 2013 with respect to the modification of these awards.

During the three and nine months ended September 30, 2013, we granted options to purchase 452,000 and 1,293,422 shares of our common stock at a weighted average grant date fair value of $10.24 and $9.85, respectively, and with a weighted average exercise price of $14.27 and $13.68, respectively. During the three and nine months ended September 30, 2012, we granted options to both employees and non-employees to purchase 141,000  and 274,840 shares of our common stock, respectively and with a weighted average exercise price of $5.48 and $4.91, respectively. The employee options were granted at a weighted average fair value of $3.95 and $3.52, for the three and nine months ended September 30, 2012, respectively.

7. Legal proceeding

On September 16, 2013, a purported shareholder class action, styled Meriam Ratner v. OvaScience, Inc., et al., was filed in the United States District Court for the District of Massachusetts, naming us and certain of our officers as defendants. The lawsuit alleges that we made material misrepresentations and/or omissions of material fact relating to the qualification of AUGMENT as a 361 HCT/P in our public disclosures, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The complaint seeks certification of a class of purchasers of our stock during the period February 25, 2013 through September 10, 2013. The plaintiff seeks unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including attorney’s fees. We believe that this action is without merit and intend to defend it vigorously. Pursuant to the Private Securities Litigation Reform Act of 1995, members of the putative class have until November 15, 2013 to apply to serve as “lead plaintiff” in the action. At this time, no assessment can be made as to the likely outcome of this lawsuit or whether the outcome will be material to us.

8. Subsequent Events

In preparing the financial statements included, we evaluated all subsequent events that occurred after September 30, 2013 through the date of the filing of this Form 10-Q. We did not have any material recognizable or unrecognizable subsequent events during this period.

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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,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “target,” “goal” 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 Part II, Item 1A — “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the Securities and Exchange Commission, or SEC.

Overview

We are a life science company focused on the discovery, development and commercialization of new treatments for female infertility.  In 2004, one of our scientific founders, Jonathan Tilly, Ph.D., from the Vincent Center for Reproductive Biology at the Massachusetts General Hospital, or MGH, discovered the existence of egg precursor cells within the ovaries of adult mice.  Subsequent research by Dr. Tilly demonstrated that these egg precursor cells also exist in human ovaries and have the potential to mature into eggs and, therefore, to replenish a woman’s egg supply.  These discoveries put into question the long held belief that a woman is born with a finite number of eggs.  This research also demonstrated that these egg precursor cells might provide a source of fresh cellular components, such as mitochondria, that could potentially be used to enhance the quality of existing eggs.

We hold an exclusive license from MGH to an issued patent and various patent applications directed to methods of identifying and purifying egg precursor cells, compositions comprising egg precursor cells and methods of using egg precursor cells to treat infertility and related disorders. In August 2013, we acquired a patent and pending application related to the culture of ovarian cells. We are working to develop product candidates based on these egg precursor cell discoveries, with the goal of improving the success of in vitro fertilization, or IVF.  In an IVF procedure, a woman’s own eggs, or the eggs of a donor, are fertilized outside of the woman’s body and the resulting embryos are transferred back into the woman’s uterus.

Dr. Tilly discovered the existence of mouse egg precursor cells by staining the outer cell layer of the ovary using an antibody that binds specifically to a protein found on egg precursor cells called mouse VASA homologue.  Following publication of this discovery in Nature in 2004, Dr. Tilly performed additional research, beginning in 2005, which demonstrated the existence of human egg precursor cells in adult human ovaries.  In this research, Dr. Tilly replicated the results obtained with mouse tissue using human ovarian tissue.  Dr. Tilly was able to isolate precursor cells in the ovaries of reproductive age women using an antibody that binds to the human VASA analogue protein, which is found on human egg precursor cells.  Dr. Tilly also conducted an experiment in which human egg precursor cells were isolated in vitro and then grafted into female mouse hosts and matured in vivo into eggs that exhibited a genetic signature indicating the eggs could be fertilized.  Dr. Tilly’s research findings with respect to human egg precursor cells were published in the March 2012 issue of Nature Medicine.

Although this research has demonstrated the existence of egg precursor cells in human ovaries, and suggests that it may be possible to develop human egg precursor cells into mature, fertilizable eggs, research with respect to human egg precursor cells is a new and emerging field.  As a result, there is ongoing debate regarding the role of egg precursor cells in human reproduction and whether egg precursor cells, when isolated from ovarian tissue, can be matured in the laboratory into fertilizable human eggs.

The IVF Market

According to the European Society for Human Reproduction, approximately 1.5 million assisted reproductive technologies, or ART cycles, are performed each year worldwide.  Approximately 154 thousand ART cycles were performed in the United States in 2011 per the Society for Assisted Reproductive Technologies.

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Our Product Candidates

AUGMENT

Our first product candidate is AUGMENT, which stands for autologous germline mitochondria energy transfer.  We are designing AUGMENT to increase the success of IVF by isolating mitochondria from a woman’s own egg precursor cells and then adding the mitochondria into the woman’s egg during IVF.  Mitochondria are the structures within cells responsible for energy production.  As a result of the passage of time and other factors, the eggs of women of advanced reproductive age often contain mitochondria that produce inadequate amounts of energy.  We believe that by supplementing preexisting egg mitochondria with mitochondria from egg precursor cells we will improve the likelihood that, after fertilization, the egg will develop into a viable embryo and thereby reduce the number of IVF cycles as well as the number of embryos transferred per cycle required to achieve a live birth.  In December 2012, we initiated a study in the United States in which 40 women aged 38 to 42 who have failed two to five IVF cycles will receive AUGMENT to assess both safety and effectiveness.  As part of the study, we planned to collect data on an additional group of women who have not received AUGMENT for a comparison group. We refer to this study as our AUGMENT Study.  On September 6, 2013, we received an “untitled” letter from the Food and Drug Administration (FDA) questioning the status of AUGMENT as a 361 HCT/P and advising us to file an Investigational New Drug (IND) application.  We anticipate having further discussions with the FDA to present details on AUGMENT and its qualifications as a 361 HCT/P, and to determine the appropriate path forward.  We continue to believe that AUGMENT qualifies as a 361 HCT/P and therefore will not be required to seek premarket approval or clearance of AUGMENT. Following the receipt of the FDA letter, we chose to suspend enrollment in the AUGMENT Study in the United States.  The study suspension was not due to safety concerns.  At the time of the study suspension, we had enrolled more than half of the 40 patients, which include patients who received AUGMENT and patients who were waiting to be treated with AUGMENT.  We plan to provide AUGMENT to IVF clinics to gain clinical experience in select countries outside of the United States in 2014.

OvaTure

Our second product candidate is OvaTure. We have, and will continue to optimize, the design for our OvaTure program as a potential next generation of IVF. OvaTure involves the creation of mature fertilizable eggs from a woman’s own egg precursor cells. If successful, this would allow women with compromised eggs due to age or other factors to undergo IVF using their own higher quality eggs. In addition, we believe OvaTure would reduce or eliminate the need for hormonal hyperstimulation for egg retrieval in the IVF process. Hormonal hyperstimulation is used in IVF to cause the maturation of multiple eggs. It is associated with significant side effects and is not appropriate for use by all women, for example, women with hormone-dependent cancers. We initiated development of OvaTure in 2012, and we conducted proof of concept studies in animals. We seek to demonstrate human proof of concept studies in which we mature egg precursor cells ex vivo, or outside the body, into fertilizable eggs using our defined culture conditions, and to initiate in 2014 further studies to support a potential Investigational New Drug Application / European Clinical Trial Application. We expect we will need to obtain regulatory approval of OvaTure prior to commercialization.

Other Product Opportunities

We also plan to develop and acquire additional product offerings related to the treatment of female infertility.  We are currently considering two opportunities:

·                  development of IVF culture media, which is the solution used to provide nutrients for eggs and embryos in the IVF process, that can increase the activity of mitochondria; and

·                  cryopreservation, or banking, of egg precursor cells for future fertility treatments.

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 accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, 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 under the circumstances. Actual results could differ from those estimates.

Please read 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, 2012 for a discussion of our critical accounting policies and estimates.

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There were no significant changes to our critical accounting policies and estimates in the nine months ended September 30, 2013.

We have irrevocably elected not to follow the extended transition period available to emerging growth companies provided for in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards.

Results of Operations

The following tables summarize our results of operations for each of the three and nine months ended September 30, 2013 and 2012, together with the change in these items in thousands of dollars and as a percentage:

Revenue

To date, we have not generated any revenue. Our ability to generate revenue, if ever, will depend heavily on the successful development and eventual commercialization of AUGMENT and our other product candidates.

Research and Development Expenses

The $1.7 million or 105% increase in research and development expense for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 was primarily attributable to:

·                  an increase of $0.5 million in stock-based compensation for employees and non-employees (including a modification of options that resulted in incremental stock-based compensation expense of $0.2 million) and salaries, bonus, payroll taxes and benefits, which were primarily driven by the hiring of new research and development personnel;

·                  an increase of $0.4 million resulting from the impairment of laboratory equipment;

·                  an increase of $0.4 million in contract research organization expenses and consulting fees primarily related to AUGMENT; and

·                  an increase of $0.2 million in research and development license expenses.

The $4.6 million or 119% increase in research and development expense for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 was primarily attributable to:

·                  an increase of $1.9 million in  contract research organization expenses and consulting fees primarily related to AUGMENT;

·                  an increase of $1.5 million in stock-based compensation for employees and non-employees (including a modification of options that resulted in incremental stock-based compensation expense of $0.2 million) and salaries, bonus, payroll taxes and benefits, which were primarily driven by the hiring of new research and development personnel; and

·                  an increase of $0.4 million resulting from the impairment of laboratory equipment;

We do not maintain or evaluate, and therefore do not allocate, internal research and development costs on a project-by-project basis.  We do not have actual external or total expenses by project for the inception to date or the three or nine months ended September 30, 2013 and September 30, 2012. Research and development expenses primarily related to the development of AUGMENT.

We expect our expenses to increase significantly in our OvaTure program. See Part II, Item 1A — “Risk Factors:” (we will need substantial additional funding).

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General and Administrative Expenses

The $2.1 million or 140% increase in general and administrative expense for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 was primarily due to:

·                  an increase of $1.4 million in both stock-based compensation and salaries, bonus, payroll taxes and benefits, which were primarily driven by the hiring of new general and administrative personnel; and

·                  an increase of $0.4 million in consulting and commercial preparation expenses.

The $4.2 million or 77% increase in general and administrative expense for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 was primarily due to:

·                  an increase of $3.2 million in stock-based compensation and salaries, bonus, payroll taxes and benefits, which were primarily driven by the hiring of new general and administrative personnel; and

·                  an increase of $0.8 million in consulting and commercial preparation expenses.

Interest Income

Interest income increased in the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012 primarily due to a higher average balance of our cash equivalents and short-term investments.

Liquidity and Capital Resources

Sources of Liquidity

We have not generated any commercial sales to date, and we do not expect to generate any such sales for the next several years, if at all. We have relied on the proceeds from sales of equity securities to fund our operations. Our short-term investments primarily trade in liquid markets, and the average days to maturity of our portfolio as of September 30, 2013 are less than six months.

Our significant capital resources are as follows:

Cash Flows

The principal use of cash in operating activities in all of the periods presented was the funding of our net loss. Cash flows from operations can vary significantly due to various factors, including changes in the net loss and stock-based compensation expense.

Net cash used in investing activities for the nine months ended September 30, 2013 included $16.0 million in purchases of short-term investments and proceeds of $3.7 million from maturities of short-term investments. Capital expenditures in the nine months ended September 30, 2013 primarily consisted of laboratory equipment.

Net cash used in investing activities for the nine months ended September 30, 2012 included $0.7 million of capital expenditures and $0.1 million of cash restricted by our new facility lease.

Net cash provided by financing activities for the nine months ended September 30, 2013 was primarily the result of the private placement of an aggregate of 3,888,880 shares of common stock at a price per share of $9.00 resulting in net proceeds of $32.7 million.

Net cash provided by financing activities for the nine months ended September 30, 2012 was primarily the result of the sale and issuance of 6,770,563 shares of our Series B preferred stock for net proceeds of approximately $35.0 million and private placement sale of an aggregate of 897,554 shares of common stock at a price per share of $5.50 resulting in net proceeds of $4.1 million.

Funding Requirements

Assuming we have no revenue from product sales, we expect our existing cash, cash equivalents and marketable securities of $49.6 million at September 30, 2013 will enable us to fund our current operating plan into 2015. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of

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the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we may enter into collaborations with third parties for development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our current product candidates. Our future capital requirements will depend on many factors, including:

·                  providing AUGMENT to IVF clinics to gain clinical experience in select countries outside the United States;

·                  educating physicians and embryologists regarding the use of AUGMENT;

·                  conducting any AUGMENT studies;

·                  incurring costs associated with foreign expansion;

·                  continuing our research and preclinical development of OvaTure and other product candidates;

·                  initiating clinical trials of OvaTure and other product candidates;

·                  seeking approval from the FDA and similar regulatory agencies outside of the United States for our product candidates that require such approval;

·                  establishing a domestic and international sales, marketing, manufacturing and distribution infrastructure to commercialize AUGMENT and any other product candidates we successfully develop;

·                  maintaining, expanding and protecting our intellectual property portfolio;

·                  hiring additional scientific, clinical, quality control and management personnel to support our product development and commercialization efforts in the United States and abroad;

·                  adding operational and financial personnel to handle the public company reporting and other requirements to which we are subject;

·                  seeking to identify additional product candidates that treat infertility; and

·                  developing, acquiring or in-licensing other products and technologies.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

Recently Adopted Accounting Standards

There are no recently issued accounting standards that have a material impact on us.

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Item 3.                                 Quantitative and Qualitative Disclosures About Market Risk

Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since a significant portion of our investments are in money market funds and corporate obligations. We do not enter into investments for trading or speculative purposes. We maintain our cash, cash equivalents and short-term investments with a high quality, accredited financial institution. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase.

A hypothetical 100 basis point increase in interest rates would result in an approximate $0.2 million decrease in the fair value of our investments as of September 30, 2013, as compared to an approximate $0.2 million decrease as of December 31, 2012. We have the ability to hold our fixed income investments until maturity and, therefore, we do not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments.

Item 4.                                 Controls and Procedures

Evaluation of Disclosure Controls and Procedures.  Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2013, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Controls.  No change in our internal control over financial reporting occurred during the fiscal quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II.                               Other Information

Item 1.                                 Legal Proceedings

On September 16, 2013, a purported shareholder class action, styled Meriam Ratner v. OvaScience, Inc., et al., was filed in the United States District Court for the District of Massachusetts, naming us and certain of our officers as defendants. The lawsuit alleges that we made material misrepresentations and/or omissions of material fact relating to the qualification of AUGMENT as a 361 HCT/P in our public disclosures during the period from February 25, 2013 through September 10, 2013, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The complaint seeks certification of a class of purchasers of our stock during the period February 25, 2013 through September 10, 2013. The plaintiff seeks unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including attorney’s fees. We believe that this action is without merit and intend to defend it vigorously. Pursuant to the Private Securities Litigation Reform Act of 1995, members of the putative class have until November 15, 2013 to apply to serve as “lead plaintiff” in the action. At this time, no assessment can be made as to the likely outcome of this lawsuit or whether the outcome will be material to us.

Item 1A.

RISK FACTORS

Investing in our common stock involves a high degree of risk.  In addition to the information, documents or reports included or incorporated by reference in this prospectus and, if applicable, any prospectus supplement or other offering materials, you should carefully consider the risks described below in addition to the other information contained in this report, before making an investment decision.  Our business, financial condition or results of operations could be harmed by any of these risks.  The risks and uncertainties described below are not the only ones we face.  Additional risks not currently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations.

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Risks Related to Our Financial Position and Need for Additional Capital

Our short operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

We commenced active operations in April 2011.  Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing our technology, identifying potential product candidates, planning for and enrolling patients for our AUGMENT study in humans and determining the preclinical and clinical path for our other product candidates, including OvaTure.  We have not yet commenced commercial sale of any product and have not yet demonstrated our ability to initiate or successfully complete any clinical trials, obtain marketing approvals or conduct sales, marketing and other activities necessary for successful product commercialization.  Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.

In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown challenges.  We will need to transition from a company focused on in-licensing and research to a company capable of developing multiple product candidates and supporting commercial activities.  We may not be successful in such a transition.

We have incurred significant losses since our inception.  We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.

Since our inception, we have incurred significant operating losses.  Our net loss was $6.9 million and $18.1 million for the three and nine months ended September 30, 2013, respectively, and $34.2 million for the period from April 5, 2011 (inception) to September 30, 2013.  To date, we have not generated any revenues and have financed our operations through private placements of our Series A preferred stock, Series B preferred stock and common stock.  We have devoted significant efforts to acquiring our technology and developing AUGMENT.  We initiated our AUGMENT study in December 2012.  In September 2013, we chose to suspend enrollment in the AUGMENT study in the U.S. while moving forward with our plans to provide AUGMENT to IVF clinics to gain clinical experience in select countries outside of the U.S.  This decision followed an  “untitled” letter we received from the Food and Drug Administration (FDA) on September 6, 2013 questioning the status of AUGMENT as a 361 HCT/P and advising us to file an Investigational New Drug (IND) application.  We anticipate having further discussions with the FDA to present details on AUGMENT and its qualifications as a 361 HCT/P, and to determine the appropriate path forward.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future.  The net losses we incur may fluctuate significantly from quarter to quarter.  We anticipate that our expenses will increase if and as we:

·                  provide AUGMENT to IVF clinics to gain clinical experience in select countries outside the United States;

·                  educate physicians and embryologists regarding the use of AUGMENT;

·                  conduct any AUGMENT studies;

·                  incur costs associated with foreign expansion;

·                  continue our research and preclinical development of OvaTure and other product candidates;

·                  initiate clinical trials of OvaTure and other product candidates;

·                  seek approval from the FDA and similar regulatory agencies outside of the United States for our product candidates that require such approval;

·                  establish a domestic and international sales, marketing, manufacturing and distribution infrastructure to commercialize AUGMENT and any other product candidates we successfully develop;

·                  maintain, expand and protect our intellectual property portfolio;

·                  hire additional scientific, clinical, quality control and management personnel to support our product development and commercialization efforts in the United States and abroad;

·                  add operational and financial personnel to handle the public company reporting and other requirements to which we are subject;

·                  seek to identify additional product candidates that treat infertility; and

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·                  develop, acquire or in-license other products and technologies.

To become and remain profitable, we must continue to develop and commercialize AUGMENT and develop and eventually commercialize other products with significant market potential.  This will require us to be successful in a range of challenging activities, including successfully providing AUGMENT to IVF clinics to gain clinical experience, marketing and selling AUGMENT, completing research, preclinical testing and clinical trials of other product candidates, obtaining marketing approval, if required, manufacturing, marketing and selling those products that we successfully develop, and addressing the challenges of foreign operations.  We may never succeed in these activities and, even if we do, may never generate revenues that are significant or large enough to achieve profitability.  We are currently conducting preclinical research and optimizing the design of the development program for our other product candidate, OvaTure.  If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.  Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations.

We will need substantial additional funding.  If we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

On September 6, 2013, we received an “untitled” letter from the Food and Drug Administration (FDA) questioning the status of AUGMENT as a 361 HCT/P and advising us to file an Investigational New Drug (IND) application.  We anticipate having further discussions with the FDA to present details on AUGMENT and its qualifications as a 361 HCT/P, and to determine the appropriate path forward.  In September 2013, we chose to suspend enrollment in the AUGMENT study in the U.S. We plan to provide AUGMENT to IVF clinics to gain clinical experience in select countries outside the United States.

In addition, we expect to incur significant expenses with respect to our research and development of OvaTure and other product candidates.  The clinical trials we will be required to conduct for these product candidates will be costly.  Furthermore, we expect to incur additional costs associated with operating as a public company.  Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations.  If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate some or all of our research and development programs or commercialization efforts.

Assuming we have no revenue from product sales, we expect that our existing cash, cash equivalents and marketable securities will enable us to fund our current operating plan into 2015.  Our future capital requirements will depend on many factors, including:

·                  providing AUGMENT to IVF clinics to gain clinical experience in select countries outside the United States;

·                  educating physicians and embryologists the use of AUGMENT;

·                  conducting any AUGMENT studies;

·                  incurring the costs associated with expansion of foreign operations;

·                  establishing a domestic and international sales, marketing, manufacturing and distribution infrastructure to commericalize AUGMENT and any other product, we successfully develop;

·                  receiving revenue, if any, from commercial activities of AUGMENT or any other product candidate;

·                  continuing research, preclinical development, and clinical trials for our product candidates, including OvaTure;

·                  following the regulatory process in the United States and abroad, including the premarketing and marketing approval requirements, to which some of our product candidates may be subject;

·                  following the regulatory or institutional review board review of our product candidates that are subject to such review;

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

·                  establishing collaborations and partnerships on favorable terms, if at all; and

·                  developing, acquiring or in-licensing other products and technologies.

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Identifying potential product candidates and product development is a time consuming, expensive and uncertain process that takes years to complete.  We may never generate the necessary data or results required to obtain necessary marketing approvals or achieve product sales for our product candidates.  We will need to continue to rely on additional financing to achieve our business objectives.  Adequate additional financing may not be available to us on acceptable terms, or at all.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

Until the time, if ever, that we can generate material product revenues, we plan to finance our cash needs through some combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements.  We do not have any committed external source of funds.  To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders.  Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.

Risks Related to Research, Development and Commercialization of Our Product Candidates

The science underlying our two principal product candidates, AUGMENT and OvaTure, is based on recent discoveries, and OvaTure has not been tested in humans.  We may not be able to successfully develop OvaTure or other product candidates.

AUGMENT and OvaTure are based on recent scientific discoveries relating to egg precursor cells, and OvaTure has not been tested in humans.  As a result, our AUGMENT and OvaTure programs are subject to a higher level of risk than programs based on longer established science that have been the subject of human clinical trials.  In December 2012, we commenced our AUGMENT study in humans to test the safety and efficacy of AUGMENT.  In September 2013, we chose to suspend enrollment in the AUGMENT study in the U.S.  This decision followed an “untitled” letter we received from the Food and Drug Administration (FDA) on September 6, 2013 questioning the status of AUGMENT as a 361 HCT/P and advising us to file an Investigational New Drug (IND) application.  We anticipate having further discussions with the FDA to present details on AUGMENT and its qualifications as a 361 HCT/P, and to determine the appropriate path forward.  We plan to provide AUGMENT to IVF clinics to gain clinical experience in select countries outside the United States in 2014. The data collected from these clinics, including whether, and by how much, the use of AUGMENT improves egg and embryo quality, increases the pregnancy and live birth rates of IVF and the safety of this product candidate will impact our ability to commercialize and generate revenues from sales of AUGMENT.  If the results at these clinics are unfavorable, AUGMENT may not be viable or significant additional time and expense could be required before we are able to commercialize this product candidate more broadly.

While one of our scientific founders has successfully conducted laboratory experiments in animals and experiments with human egg precursor cells that form the basis for some aspects of OvaTure, there are significant aspects of OvaTure that will require additional innovation for us to continue its preclinical and clinical development.  In addition, successful development of OvaTure depends on our ability to mature human egg precursor cells into fertilizable eggs.  Although our scientific founder’s research has demonstrated the existence of egg precursor cells in human ovaries, research with respect to egg precursor cells is a new and emerging field.  As a result, there is ongoing debate regarding the role of egg precursor cells in human reproduction as well as the ability of egg precursor cells to mature into fertilizable eggs when isolated from ovaries.  The recent nature of the scientific discoveries underlying OvaTure, the ongoing debate regarding the ability to mature human egg precursor cells into fertilizable eggs, the need for additional innovation and the absence of information from human clinical trials all increase the risks associated with this product candidate.  In any event, we believe that it will be costly and time consuming to develop OvaTure.

If we experience delays or difficulties in providing AUGMENT to IVF clinics to gain clinical experience in select countries outside the United States or conducting any AUGMENT studies, our ability to commercialize AUGMENT could be delayed or prevented.

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Clinical studies are expensive, difficult to design and implement and uncertain as to outcome.  Success in animal and preclinical studies does not ensure that studies in humans will be successful, and interim or preliminary findings do not necessarily predict final results.  In addition, the timing of results from and completion of the studies will depend, in part, on our ability to enroll the studies on the timeline expected.  Enrollment in the studies could be delayed for a number of reasons, including the unwillingness of patients to undergo, or physicians to prescribe, an additional surgical procedure in connection with IVF.

We may not be able to initiate or continue any future clinical trials for OvaTure or other product candidates for several reasons.  For example, if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States, we will not be able to commence clinical studies.  Patients who are eligible for future clinical trials may decide to use already established fertility treatments or to enroll in other clinical trials.

Patient enrollment is affected by other factors including:

·                  timing and capacity of GTP processing facilities / third party manufacturers;

·                  novelty of the product candidate being tested;

·                  form of infertility or severity of the condition being treated;

·                  eligibility criteria for the study in question;

·                  perceived risks and benefits of the product candidate under study;

·                  known side effects of the product candidate under study, if any;

·                  efforts of IVF clinics to facilitate enrollment in clinical trials;

·                  patient referral practices of physicians;

·                  ability to monitor patients adequately during and after treatment; and

·                  proximity and availability of clinical trial sites for prospective patients.

Our inability to enroll a sufficient number of patients for our clinical trials for OvaTure and other such product candidates would result in significant delays or may require us to abandon one or more clinical trials altogether.  Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of our company to decline and limit our ability to obtain additional financing.

Preclinical testing and clinical trials of OvaTure and any of our other product candidates that require such testing and trials may not be successful.  If we are unable to commercialize our product candidates or experience significant delays in doing so, our business will be materially harmed.

We intend to invest a significant portion of our efforts and financial resources in the identification, preclinical development and clinical trials of product candidates that treat infertility.  Our ability to generate product revenues will depend heavily on the successful development and eventual commercialization of our product candidates.  Unlike AUGMENT, which we believe meets the criteria for regulation as a 361 HCT/P, we expect that the FDA will regulate OvaTure and many of our other product candidates as drugs, biologics or medical devices under the PHSA or FDCA.  This means, among other things, that we will not be able to market such products in the United States unless and until we have successfully completed required testing (including clinical testing) and received marketing authorization from the FDA in the form of a NDA or BLA or, for medical devices, a 510(k) clearance or premarket approval application.  We have not received approval to market any products from regulatory authorities in any jurisdiction.  We have only limited experience in conducting preclinical testing and clinical trials and filing and supporting the applications necessary to gain marketing approvals and expect to rely on third parties, including contract research organizations, to assist us in this process.

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Prior to initiating clinical trials of OvaTure and other such product candidates, we may need to submit an IND to the FDA, or a similar application to other regulatory authorities outside of the United States, based on preclinical, animal and other tests.  Upon submitting such an IND or similar application, the FDA or other regulatory authorities might determine that the risks involved in OvaTure or our other products are too great to justify proceeding with a clinical study and impose a partial or full clinical hold.  They may require us to do significant and costly additional preclinical work before commencing our clinical trials or may not allow us to proceed with clinical trials at all.  In addition, an Institutional Review Board (IRB) must review and approve any clinical trial before we can commence that trial.  The IRB responsible for reviewing any of our clinical trials may decline to grant approval for a variety of reasons, including that they do not believe that patient rights would adequately be protected.  OvaTure and our other products rely on new and complex technology that impacts human reproductive systems.  Therefore, both the FDA and IRBs may be especially cautious in reviewing and approving our clinical protocols for such products.

If INDs for OvaTure or other product candidates do become effective, we will be required to conduct extensive clinical trials to demonstrate the safety, efficacy, purity and potency of our product candidates in humans.  We will need to follow this same process for any future product candidates that are regulated by the FDA as a biologic or new drug.  We will need to follow a similar process for any future product candidates that are regulated by the FDA as a medical device.

Clinical testing is expensive, difficult to design and implement, can take many years to complete, and is uncertain as to outcome.  A failure of one or more clinical trials can occur at any stage of testing.  The outcome of preclinical testing and early clinical trials may not predict the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results.  Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.  Either the FDA, equivalent foreign regulatory authorities or an IRB can suspend or terminate our clinical development programs at any time, for a number of reasons, including that further study presents unreasonable risk to human subjects or that the rights of those subjects are not protected.

We may experience numerous unforeseen events during, or as a result of, clinical trials, which could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:

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

·                  we may have delays in reaching, or fail to reach agreement on, acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

·                  clinical trials of our product candidates may produce negative or inconclusive results, or results subject to varying interpretations, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

·                  the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in our clinical trials may be slower than we anticipate or participants may drop out of our clinical trials at a higher rate than we anticipate;

·                  we or our third party contractors may fail to comply with regulatory requirements, such as conducting trials in accordance with current good clinical practices, and our contractors may fail to meet their contractual obligations to us in a timely manner or at all;

·                  we may have to suspend or terminate clinical trials of our product candidates for various reasons, including discovery that the participants are being exposed to unacceptable health risks;

·                  the cost of clinical trials of our product candidates may be greater than we anticipate; and

·                  the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate.

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we contemplate, if we are unable to successfully complete clinical trials or other testing of our product candidates, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns regarding our product candidates, we may:

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·                  be delayed in obtaining marketing approval for our product candidates;

·                  not obtain marketing approval at all;

·                  obtain approval for indications or patient populations that are not as broad as we intend or desire;

·                  obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;

·                  be subject to additional post-marketing testing requirements; or

·                  have the product removed from the market after obtaining marketing approval.

Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations and changes in regulatory review for each submitted product application may cause delays in the approval or rejection of an application.  In addition, securing FDA approval requires the submission of information about the product manufacturing process to, and successful inspection of manufacturing facilities by, the FDA.

Our product development costs will also increase if we experience delays in testing or obtaining marketing approvals.  Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do.  Such events could impair our ability to successfully commercialize our product candidates and may harm our business and results of operations.

Even if clinical trials for our product candidates are completed as planned, the FDA may still conclude that the risks inherent in our product candidates outweigh the demonstrated benefits, and may refuse to grant us marketing authorization.  Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

If we experience delays in obtaining, or if we fail to obtain, approval of OvaTure or other product candidates, our ability to generate revenues will be materially impaired and our business will be materially harmed.

If serious adverse or inappropriate side effects are identified during the development of our product candidates or with any procedures with which our product candidates are used, we may need to abandon or limit our development of those product candidates.

None of our product candidates has been proven effective and safe in humans.  It is impossible to predict when or if any of our product candidates will prove effective or safe in humans or, to the extent required, will receive marketing approval.  If our product candidates are associated with undesirable side effects or have characteristics that are unexpected with respect to the patient or the child conceived using our product or product candidates, we may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective.  In addition, if any of the procedures with which our product candidates are used is determined to be unsafe, we may be required to delay or abandon our product development or commercialization. For example, we expect AUGMENT will be administered as part of the ICSI process.  To the extent physicians limit or abandon the use of ICSI or other procedures with which AUGMENT is used, we may need to delay or abandon our development or commercialization of AUGMENT.

Even if we are able to commercialize any of our product candidates, they may fail to achieve the degree of market acceptance by physicians, patients and others in the medical community necessary for commercial success.

If we are able to commercialize AUGMENT or if any of our other product candidates receive marketing approval, they may nonetheless fail to gain sufficient market acceptance by physicians, patients and others in the medical community.  For example, doctors may continue to rely on current treatments, including fertility drugs and traditional IVF, which are well established in the medical community.  In addition, the novel nature of AUGMENT and OvaTure may affect market acceptance by physicians and patients.  If our product candidates do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable.  The degree of market acceptance of AUGMENT and our other product candidates, after receipt of any necessary approvals for commercial sale, will depend on a number of factors, including:

·                  efficacy and potential advantages as compared to traditional IVF or other alternative treatments;

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·                  ability to reduce the number of IVF cycles required to achieve a live birth;

·                  ability to reduce the cost of traditional IVF;

·                  ability to reduce the incidence of multiple births;

·                  the willingness of the target population to undergo, and of physicians to prescribe, an additional surgical procedure in connection with IVF;

·                  convenience compared to alternative treatments;

·                  adverse effects on patients or children conceived using our product candidates;

·                  ability to improve the side effect profile of infertility treatment;

·                  the willingness of the target population and of physicians to try new therapies based on recent scientific discoveries;

·                  limitations on the existing infrastructure to support AUGMENT or other product candidates, including adequately trained embryologists and the willingness of IVF clinics to incorporate the process into their current treatment regimen;

·                  the willingness of patients to pay out of pocket for our products, which, in the case of AUGMENT, will be in addition to the price of a standard IVF procedure;

·                  any negative publicity or political action related to our or similar products or IVF; and

·                  the strength of marketing and distribution support.

In addition, our ability to successfully commercialize our products will depend on the continued use and acceptance of IVF, ICSI and fertility treatments generally.  To the extent that the medical community or patient population determines that these procedures are unsafe or are otherwise not generally accepted, the market for our products and, therefore, our business would be negatively affected.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market our product candidates we may not be successful in commercializing them.

We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of products for the treatment of infertility.  To achieve commercial success for any product, we must either develop a sales and marketing team or outsource these functions to third parties.  We also plan to recruit appropriate sales and marketing resources for countries in which we determine to provide or launch AUGMENT on our own.  In the future, we may choose to expand the sales force for AUGMENT or other product candidates.

There are risks involved both with establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services.  For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch.  If the commercial launch of AUGMENT or another product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues to us are likely to be lower than if we were to market and sell any products ourselves.  In addition, we may not be successful in entering into arrangements with third parties to sell and market our products or may be unable to do so on terms that are favorable to us.  We likely will have limited control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively and in compliance with applicable laws.

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We may not be successful in our efforts to identify or discover additional product candidates.  If we do identify additional product candidates, we may expend our limited resources to pursue a particular product candidate and fail to capitalize on product candidates that may be more profitable or for which there is a greater likelihood of success.

An important element of our strategy is to identify and develop additional product candidates based on our egg precursor cell technology.  We may be unable to identify any such product candidates.  If we do identify additional candidates, we may not advance such candidates into clinical development for a number of reasons, including:

·                  there may be evidence that such candidates may have harmful side effects;

·                  preclinical studies may put into question the efficacy of such candidates;

·                  we may determine that such candidates are unlikely to achieve marketing approval or market acceptance; or

·                  such candidates may be too costly to manufacture or market.

Because we have limited financial and managerial resources, we focus on research programs and product candidates based on which candidates we believe have the highest likelihood of success and commercial value.  As a result, we may forego or delay pursuit of opportunities with other product candidates that later prove to have greater commercial potential.  Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities.  Our spending on current and future research and development programs and product candidates may not yield any commercially viable products.  For example, the programs we are considering relating to culture media and egg precursor cell banking may not reach commercialization or, if commercialized, may not be successful.  If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements when it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

We may not be successful in obtaining necessary rights to additional technologies or product candidates, including from our scientific founders, for our development pipeline through acquisitions and in-licenses.

We may be unable to acquire or in-license additional technologies or product candidates from third parties, including our scientific founders, in order to grow our business.  A number of more established companies may also pursue strategies to license or acquire product candidates that we may consider attractive.  These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities.

For example, we continue to work collaboratively with our scientific founders.  These scientists continue to be active in the field of infertility and may develop new product candidates or intellectual property based on their continued research relating to infertility.  The rights to new inventions by our scientific founders generally belong to the hospitals and academic institutions at which they are employed and are not subject to license or other rights in our favor.  In the event that our scientific founders, or other third party scientists or entities, develop product candidates or intellectual property that we wish to acquire or in-license, we may be unable to negotiate such acquisition or in-license.  Our failure to reach an agreement for any applicable product candidate or intellectual property could result in a third party acquiring the related rights and thereby harm our business.

In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us.  We also may be unable to license or acquire relevant product candidates on terms that would allow us to make an appropriate return on our investment.

We expect competition for acquiring and in-licensing product candidates that are attractive to us may increase in the future, which may mean fewer suitable opportunities for us as well as higher acquisition or licensing costs.  If we are unable to successfully obtain rights to suitable product candidates on reasonable terms, or at all, our business, financial condition and prospects for growth could suffer.

We face substantial competition, including from more established infertility treatments, such as traditional IVF, as well as advances in new artificial reproductive technologies, which may result in others discovering, developing or commercializing products before or more successfully than we do.

There are a number of fertility treatments that are generally accepted in the medical and patient communities, including fertility drugs, IUI and IVF.  Competition in the infertility market is largely based on pregnancy and live birth rates and side effects of treatment on patients.  Accordingly, our success is highly dependent on our ability to develop products that improve pregnancy and live birth rates and reduce risks and side effects, as compared to existing treatments.  The ability of any products that we successfully develop to reduce the overall costs associated with IVF also will be an important competitive factor.

Competitors may develop new infertility drugs, ART therapies, devices and techniques that could render obsolete our product candidates.  We are not aware of any company or organization developing a specific product that would compete directly with AUGMENT.  There are a number of pharmaceutical companies, biotechnology companies, universities and research organizations

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actively engaged in research and development of products for the treatment of infertility.  Some of these products, similar to AUGMENT and OvaTure, are designed to address the shortcomings of IVF.  In particular, we are aware of two companies that are currently developing products intended to identify high quality embryos for use in IVF.  Novocellus Ltd. is developing an embryo viability test, using culture media, to aid in the selection of embryos used in IVF.  Auxogyn, Inc. is developing software that analyzes embryo development against cell division timing parameters to help identify the highest quality embryo within a group of embryos.  If successfully developed, these products could improve outcomes and alleviate some of the other shortcomings of traditional IVF, thereby decreasing the need for our product candidates.  Fertility Focus, along with strategic partner Norgenix, are developing a fertiloscope for the early diagnosis of, and immediate corrective surgery for, the physical causes of infertility.  At this time, we cannot evaluate how our products, if successfully developed and commercialized, would compare technologically, clinically or commercially to any other potential products being developed or to be marketed by competitors.  There can be no assurance that we will be able to compete effectively.

Our competitors may develop and commercialize new technologies before we do, allowing them to offer products, services or solutions that are superior to those that we may offer or which establish market positions before the time, if any, at which we are able to bring products to the market.  Many of our competitors, either alone or with their strategic partners, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products.  Accordingly, our competitors may be more successful than we may be in developing, commercializing and achieving widespread market acceptance.  Our competitors’ products may be safer, more effective or more effectively marketed and sold than any treatment we may commercialize and may render our product candidates obsolete or non-competitive before we can recover the expenses of developing and commercializing any of our product candidates.  We anticipate that we will face intense and increasing competition as new treatments enter the market and advanced technologies become available.

We could be subject to negative publicity, political action and additional regulation because of the nature of our products.  These factors could increase our development and commercialization costs.

Our products are based on innovative science regarding eggs, embryos and fertilization.  These can be controversial subjects and, as a result, we could be subject to adverse publicity, political reaction and regulation, as well as changes to the laws and regulations affecting our product candidates.  This may result in our incurring costs beyond what we anticipate in order to develop and commercialize our product candidates or may make it impossible to develop our product candidates at all.  In addition, some states are considering adopting legislation defining when personhood begins.  To the extent adopted, this legislation could limit, restrict or prohibit the use of IVF, which would have a negative effect on our ability to develop and sell our product candidates and, as a result, on our business.

Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.

We face an inherent risk of product liability exposure related to the testing of our product candidates in human studies and clinical trials and will face an even greater risk if we commercialize AUGMENT or any other products that we may develop.  Product liability claims involving our activities may be made for significant amounts because our product candidates involve mothers and children.  For example, it is possible that we will be subject to product liability claims that assert that our product candidates or products have caused birth defects in children or that such defects are inheritable.  In light of the nature of our planned activities, these claims could be made many years into the future based on effects that were not observed or observable at the time of birth.  If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities.  Regardless of merit or eventual outcome, liability claims may result in:

·                  decreased demand for any product candidates or products that we may develop;

·                  injury to our reputation and significant negative media attention;

·                  withdrawal of clinical trial participants;

·                  significant costs to defend the related litigation;

·                  substantial monetary awards to trial participants or patients;

·                  loss of revenue;

·                  the diversion of management’s resources; and

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·                  the inability to commercialize any products that we may develop.

We obtained product liability insurance coverage when we initiated our AUGMENT study in the United States.  We will need to maintain product liability insurance coverage for providing AUGMENT to IVF clinics to gain clinical experience in select countries outside the United States, conducting any clinical studies for AUGMENT or clinical trials for our other product candidates.  Such insurance is increasingly expensive and difficult to procure.  In the future, such insurance may not be available to us at all, may only be available at a very high cost and, if available, may not be adequate to cover all liabilities that we may incur.  In addition, we may need to increase our insurance coverage in connection with the commercialization of AUGMENT or other product candidates.  If we are not able to obtain and maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise, our business could be harmed, possibly materially.

Procedures such as IVF, as well as companies that manufacture and store cells and tissues, are the subject of standards and recommendations by national non-governmental bodies.  Failure to comply with these standards could harm our commercial prospects or subject us to negative media attention or government sanctions.

Some national organizations set voluntary guidelines for procedures like IVF and for the manufacture and storage of human cells and tissues.  The American Society for Reproductive Medicine, or ASRM, for example, has issued recommendations on the minimum standards that ART practices should employ, including minimum qualifications of personnel and record keeping and informed consent practices.  ASRM also has issued guidelines on the number of embryos that should be transferred at a single time through IVF.  Similarly, the American Congress of Obstetricians and Gynecologists sets forth guidelines on numerous topics such as the circumstances in which embryos can be used for research purposes and the use of innovative medical procedures in clinical practice.  Although voluntary, subject to exceptions discussed below, if we, or third parties that we work with, including IVF clinics, fail to comply with these standards, our commercial prospects could be harmed because patients may prefer to use the services and products of companies that meet these voluntary standards.  Similarly, physicians or IVF clinics may be less likely to endorse or use procedures or products that would violate such standards.  In addition, failure to meet the standards could subject us to negative media attention.  Moreover, noncompliance with these professional organization standards could subject us to compliance risks in states that have incorporated the standards into state law.  For example, the state of Maryland has incorporated certain portions of the American Association of Tissue Banks’ Standards for Tissue Banking into its regulations.  Failure to comply with certain standards could, therefore, amount to a violation of state law to the extent we operate in a state that adopts a voluntary guideline into its regulations.

Risks Related to Regulatory Approval of Our Product Candidates and Other Regulatory Matters

On September 6, 2013, we received an “untitled” letter from the Food and Drug Administration (FDA) questioning the status of AUGMENT as a 361 HCT/P and advising us to file an Investigational New Drug (IND) application.  We anticipate having further discussions with the FDA to present details on AUGMENT and its qualifications as a 361 HCT/P, and to determine the appropriate path forward.  We continue to believe that AUGMENT qualifies as a 361 HCT/P.  If the FDA disagrees with our interpretation of the relevant laws and regulations as they apply to AUGMENT, and requires an IND for the AUGMENT study, we may need to delay or abandon development of AUGMENT or other product candidates in the United States.  The submission of an IND and a BLA or NDA would require us to compile significant amounts of data related to the AUGMENT process, as well as data from preclinical and clinical testing.  We cannot guarantee that we would ever be able to secure such approval.

The FDA regulates HCT/Ps, such as AUGMENT, under a two-tiered framework.  Certain higher risk HCT/Ps are regulated as new drugs, biologics or medical devices.  Manufacturers of new drugs, biologics and some medical devices must complete extensive clinical trials, which must be conducted pursuant to an effective IND or investigational device exemption.  The FDA must review and approve a BLA or NDA before a new drug or biologic may be marketed, and in some cases must approve a premarket approval application for medical devices.

By contrast, the FDA exempts certain lower risk HCT/Ps from these requirements if they meet certain specified criteria.  Such products frequently are referred to as “361 HCT/Ps,” because the FDA regulates them under the authority given to it under section 361 of the PHSA to create regulations to control the spread of communicable diseases.  We believe that AUGMENT meets the criteria for regulation as a 361 HCT/P rather than as a new drug or biologic and, therefore, that AUGMENT will not be subject to the requirement for an IND or FDA premarket review and approval.  Thus, our current financial and business plans assume that we will not need to seek or obtain FDA approval for AUGMENT.  Rather, we will have to comply with the requirements for 361 HCT/Ps set forth in FDA regulations and develop adequate substantiation to support marketing claims we make for the AUGMENT procedure.

The TRG is a body within the FDA designed to provide formal opinions regarding whether a particular product will be regulated as a 361 HCT/P.  Product manufacturers are not required to consult with the TRG and instead can market their products based on their own conclusion that the product meets the 361 HCT/P criteria. We have not consulted the TRG.

The regulatory pathway for cell and tissue-based products is subject to significant uncertainty.  The FDA’s criteria for regulation as a 361 HCT/P are complex, and the FDA has provided little guidance on the meaning of terms used in the criteria, such as

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“minimal manipulation,” “homologous,” or “combination of the cells and tissues with another article.” In addition, AUGMENT uses new technology that would present a matter of first impression for the FDA in determining whether to require premarket authorization.  Further, AUGMENT may receive a high degree of scrutiny from the FDA due to its use as an aid to reproduction.  The FDA or Congress could change the relevant criteria for determining which products qualify as 361 HCT/Ps or the regulatory requirements for HCT/Ps.

The courts may also interpret those criteria and requirements in unexpected ways.  For example, in United States v. Regenerative Sciences LLC, the United States District Court for the District of Columbia recently rejected a company’s argument that the Regenexx Procedure, which involves the use of stem cells for the treatment of various orthopedic conditions, was exempt from regulation by the FDA because the procedure constitutes the practice of medicine.  The court also held that the procedure does not qualify for regulation as a 361 HCT/P because it involves more than “minimal manipulation” of the cells.  The court’s finding turned on the fact that the Regenexx Procedure involves cell culture and expansion, which changes the biological characteristics of the cells.  We think the AUGMENT procedure is distinguishable from the Regenexx Procedure because AUGMENT does not involve cell cultures or cell expansion.  Nonetheless, this case suggests that courts may take a narrow view of what constitutes minimal manipulation.

Importantly, the court also noted the longstanding principle that the FDA’s decisions on scientific matters, including the agency’s conclusion that the procedure involves more than minimal manipulation, are entitled to substantial deference.  This means that if the FDA disagrees with our conclusion that AUGMENT should be regulated as a 361 HCT/P, and not as a new biologic or drug, it may be very difficult to challenge the agency’s position in court.

Even if the FDA regulates AUGMENT as a 361 HCT/P, we must still generate adequate substantiation for any claims made in our marketing of AUGMENT.  Failure to establish such adequate substantiation in the opinion of federal or state authorities or equivalent authorities outside of the United States could substantially impair our ability to generate revenue.

Although we may not need to submit AUGMENT to the FDA for preapproval, if the FDA regulates AUGMENT as a 361 HCT/P we still must generate adequate substantiation for claims we make in our marketing materials.  Both the FTC and the states retain jurisdiction over the marketing of products in commerce and require a reasonable basis for claims made in marketing materials.  Many countries outside of the U.S. have similar authorities that regulate the marketing of products.  We intend to generate such adequate substantiation for any claims we make about the AUGMENT procedure.  If, however, after we commence marketing of AUGMENT, the FTC or one or more states or foreign authorities conclude that we lack adequate substantiation for our claims, we may be subject to significant penalties or may be forced to alter our marketing of AUGMENT in one or more jurisdictions.  Any of this could materially harm our business.  In addition, if our promotion of AUGMENT suggests that AUGMENT is not a 361 HCT/P, the FDA or equivalent foreign regulatory authorities might consider the product to be a new drug or biologic.  We will therefore be limited in the promotional claims that we could make about AUGMENT.

We may not be able to continue our AUGMENT study as planned.

On September 6, 2013, we received an “untitled” letter from the Food and Drug Administration (FDA) questioning the status of AUGMENT as a 361 HCT/P and advising us to file an Investigational New Drug (IND) application.  We anticipate having further discussions with the FDA to present details on AUGMENT and its qualifications as a 361 HCT/P, and to determine the appropriate path forward.  We continue to believe that AUGMENT qualifies as a 361 HCT/P.  Moreover, even if our study does not require an IND, it will still be subject to various requirements designed to protect the safety of study participants, such as IRB requirements.  Such requirements could materially impact the time and costs required to complete the program.  In September 2013, we chose to suspend enrollment in the AUGMENT study in the U.S. We plan to provide AUGMENT to gain clinical experience at IVF clinics in select countries outside the United States in 2014.

Numerous states place restrictions on the operation of facilities and laboratories that recover, test, process, manufacture, store or dispose of certain cells and tissues.  If we do not comply with such state regulations, as well as potential local regulations, we could be subject to significant sanctions.

Various states, including New York, California, Florida, Illinois, Maryland, Texas, Massachusetts and others, impose requirements on facilities and laboratories that recover, test, process, manufacture, store or dispose of certain cells and tissues.  These requirements can have significant geographic reach.  In Maryland, for example, the permit requirements applicable to tissue banks, including reproductive tissue banks, apply not only to tissue banks located in Maryland, but also those tissue banks located outside of the state that are represented or serviced in Maryland.  In some cases, the requirements imposed by states, such as record keeping and testing requirements, may be more stringent than those imposed by the FDA. Failure to comply with these state requirements could subject us to significant sanctions.

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We will not be able to sell any product that is regulated as a medical device without obtaining and maintaining necessary regulatory clearances or approvals.

To market any products that are regulated as medical devices, or that require the use of a new medical device, such as the innovative culture media solution that we are planning to develop, we will need to seek approval or clearance from the FDA, either through the premarket approval process or the 510(k) clearance process.  We currently expect to be able to rely on the 510(k) clearance process, as opposed to the premarket approval process, for some of our medical device product candidates.  However, it is difficult to predict whether the FDA will allow us to use the 510(k) pathway or require us to use the premarket approval process.  We cannot guarantee that we will be able to obtain clearance or approval of these medical devices through either pathway.  In addition, even if the FDA permits us to use the 510(k) pathway, the requirements to bring a product to market through this process may be significantly more resource intensive than we currently expect.  The FDA has announced that it intends to make changes to the 510(k) process, and these changes, or any other changes related to FDA’s regulation of medical devices, could have an adverse effect on our ability to gain regulatory clearance for, and to commercialize, our product candidates.  In addition, any modifications to medical devices that we successfully bring to market, if any, may require new regulatory clearances or premarket approvals.  Marketing a medical device without the necessary clearance or approval could result in a warning letter, fines, injunctions, product seizures or other civil or criminal penalties.  Delays in our receipt of regulatory clearance or approval will cause delays in our ability to sell our products, which will have a negative effect on our ability to generate and grow revenues.

Failure to obtain required marketing approval in international jurisdictions would prevent our product candidates from being marketed abroad.

In certain countries outside the United States, in order to provide AUGMENT to IVF clinics to gain clinical experience in accordance with our plans, AUGMENT will need to meet the requirements of a class of products exempt from premarket review and approval under applicable regulations.  Further, in order to market and sell our products in the EU and many other jurisdictions, we or our third party collaborators may need to obtain separate marketing approvals and will need to comply with numerous and varying regulatory requirements.  The approval process varies among countries and can involve additional testing.  The time required to obtain approval may differ substantially from that required to obtain FDA approval.  The regulatory approval process outside the United States generally is subject to risks like those associated with obtaining FDA approval.  In addition, in many countries outside the United States, a product must be approved for reimbursement before the product can be approved for sale in that country.  We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all.  Approval by the FDA for marketing in the United States does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA.

In the EU, for example, our products could be regulated as medicinal products, advanced therapy medicinal products, as medical devices or as human tissues and cells intended for human applications.  Products regulated as advanced therapy medicinal products may only be placed on the market in the EU once they have been granted a marketing authorization by the European Commission.  Securing a marketing authorization from the European Commission requires the submission of extensive preclinical and clinical data and supporting information, including information about the manufacturing process, to the EMA to establish the product candidate’s safety, efficacy and quality.  Following review of the marketing authorization application the EMA will issue an opinion, which the European Commission will take into account when deciding whether or not to grant a marketing authorization.  Products regulated as medical devices in the EU are not subject to premarket review and approval by regulatory authorities.  However, before placing the product on the market in the EU the manufacturer must demonstrate that the product meets certain essential requirements set out in applicable laws.  For lower risk devices, the manufacturer may self-declare conformity to the essential requirements and apply the CE mark to the device.  All other devices must undergo a conformity assessment procedure by a notified body, which is a third party licensed by regulatory authorities to perform such assessments.  If the notified body agrees that the essential requirements have been met, it will issue a CE certificate, which allows the manufacturer to draw up a declaration of conformity and apply the CE mark to the device.  Once a medical device has been CE marked it may be marketed throughout the EU.

Products regulated as human tissues and cells for human applications that do not fall within the definition of an advanced therapy medicinal product or a medical device are not generally subject to premarket review and approval by regulatory authorities.  However, the establishments that process and use such human tissues and cells must be licensed and are subject to various quality system and adverse event reporting requirements.  We believe that the AUGMENT procedure should be subject to this general regimen for human cells and tissues, but regulatory authorities in the EU and other foreign jurisdictions could disagree with our conclusion and determine that the procedure involves sufficient manipulation of the cells to bring the product within the scope of the rules governing advanced therapy medicinal products.  The relevant criteria for determining which products qualify as advanced therapy medicinal products could also change.  If the European Commission or other foreign regulatory authority determines that AUGMENT is an advanced therapy medicinal product and, therefore, requires premarket review, we may be required to halt any on-going studies or other uses in humans and conduct a more time consuming and expensive clinical trial program for this product candidate and may be unable to file for or obtain the necessary approvals to commercialize AUGMENT.

While we believe EU marketing authorization is not required, medical treatments and processes, such as IVF, are regulated at the national level in the EU.  Such national regulations may restrict the extent to which the eggs used in IVF treatments may be

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manipulated.  In addition, certain other countries outside the EU and United States may have regulations that require us to obtain permission prior to commercializing AUGMENT.

In addition to the challenges associated with obtaining any necessary marketing approvals in international jurisdictions, economic, political and other risks associated with foreign operations could adversely affect our international sales.

If we succeed with our international commercialization strategy, then our business will be subject to risks associated with doing business internationally.  For example, our future results of operations could be harmed by a variety of factors, including:

·                  changes in foreign currency exchange rates;

·                  changes in a country’s or region’s political or economic conditions, particularly in developing or emerging markets;

·                  trade protection measures and import or export licensing requirements;

·                  differing business practices associated with foreign operations;

·                  difficulty in staffing and managing widespread operations, including compliance with labor laws and changes in those laws;

·                  differing protection of intellectual property and changes in that protection; and

·                  differing regulatory requirements and changes in those requirements.

We do not currently have an international infrastructure including, without limitation, to sales, manufacturing and distribution and have no experience in conducting foreign operations.  Establishing commercial activities and complying with laws in foreign jurisdictions may be costly and could disrupt our operations.

Even if we successfully launch AUGMENT, it will be subject to ongoing regulation.  We could be subject to significant penalties if we fail to comply with these requirements, and we may be unable to commercialize our products.

Even if the FDA allows AUGMENT or any other product candidate of ours to be marketed as a 361 HCT/P and, therefore, without an NDA or BLA, we will still be subject to numerous post-market requirements, including those related to registration and listing, record keeping, labeling, current good tissue practices, or cGTPs, donor eligibility and other activities.  HCT/Ps that do not meet the definition of a 361 HCT/P and, therefore, are approved via an NDA or BLA, are also subject to these ongoing obligations.  If we fail to comply with these requirements, we could be subject to warning letters, product seizures, injunctions or civil and criminal penalties.  We are currently relying on a third party cGTP-compliant facility to conduct the various steps involved in the AUGMENT process, including the purification of the woman’s mitochondria from the ovarian tissue biopsy.  In the future, we may establish our own processing facility, which would need to be cGTP compliant.  Any failure by us or the third party facility on which we rely to maintain cGTP compliance could require remedial action, such as product recalls and delays in distribution and sales of AUGMENT and any other products that we develop, as well as enforcement actions.

Moreover, even if the FDA or equivalent foreign regulatory authorities allows AUGMENT or any other product candidate to be marketed without premarket approval, the agency could still seek to withdraw the product from the market for a variety of reasons, including if the agency develops concerns regarding the safety or efficacy of the product or the product’s manufacturing process.

OvaTure and any other product candidates for which we obtain marketing approval are subject to continuing regulation after approval.  We may be subject to significant penalties if we fail to comply with these requirements.

Any product candidate for which we obtain marketing approval or clearance will be subject to continuing regulation by the FDA or equivalent foreign regulatory authorities.  For example, such products will be subject to requirements relating to submission of safety and other post-marketing information and reports, registration and listing, manufacturing, packaging, quality control, storage, distribution, quality assurance and corresponding maintenance of records and documents, labeling, advertising and promotional activities, distribution of samples to physicians and recordkeeping.  Even if marketing approval or clearance of a product candidate is granted, the approval or clearance may be subject to limitations on the uses for which the product may be marketed, be subject to restrictions on distribution or use through a risk evaluation and mitigation strategy, or contain requirements for costly post-marketing testing to further evaluate the safety or efficacy of the product.  The FDA closely regulates the post-approval marketing and promotion of drugs, biologics and medical devices to ensure such products are marketed only for the approved indications or cleared uses and in

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accordance with the provisions of the approved labeling.  The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we market our products other than for their approved indications, we may be subject to enforcement action for off-label marketing.

In addition, later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

·                  restrictions on the labeling or marketing of a product;

·                  restrictions on product distribution or use;

·                  requirements to conduct post-marketing clinical trials;

·                  warning or untitled letters from the FDA or equivalent foreign regulatory authorities;

·                  withdrawal of the products from the market;

·                  refusal to approve pending applications or supplements to approved applications;

·                  recall of products;

·                  fines, restitution or disgorgement of profits or revenue;

·                  suspension or withdrawal of marketing approvals;

·                  refusal to permit the import or export of our products;

·                  product seizure;

·                  injunctions; or

·                  the imposition of civil or criminal penalties.

It is unlikely that third party payors will cover or reimburse for AUGMENT or other, future products and services, and many patients may be unable to afford them.

Many third party payors, both in the United States and other foreign countries, including national health services or government funded insurance programs as well as private payors, place significant restrictions on coverage and reimbursement for IVF and other ART procedures.  Those restrictions may include limits on the types of procedures covered, limits on the number of procedures covered and overall annual or lifetime dollar limits on reimbursement for IVF and other ART procedures.  As a result, we believe very few third party payors, either in the United States or the EU, will reimburse for AUGMENT or likely our other future products and services.  Thus, it is likely that IVF clinics and physicians will be able to use AUGMENT and our other products and services in the treatment of a patient only if the patient can afford and is willing to pay out-of-pocket.  The cost of AUGMENT and our other future products and services may be beyond the means of many patients.  This may limit the size of the market for AUGMENT or our future products and services and, thereby, limit our future revenues.

Even in those limited situations in which government or private payors may cover AUGMENT or other, future products and services, cost containment pressures may later cause these third party payors to adopt strategies designed to limit the amount of reimbursement paid to IVF clinics and physicians, including but not limited to the following:

·                  reducing reimbursement rates;

·                  challenging the prices charged for medical products or services;

·                  further limiting products and services covered;

·                  challenging whether products or services are medically necessary;

·                  taking measures to limit utilization of products and services;

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·                  negotiating prospective or discounted contract pricing;

·                  adopting capitation strategies; and

·                  seeking competitive bids.

Additionally, in those limited situations where ART procedures such as IVF are available to disabled patients of childbearing age enrolled in federal healthcare programs, such as Medicare, the covered services and products may be subject to changes in coverage and reimbursement rules and procedures, including retroactive rate adjustments.  These contingencies could even further decrease the range of products and services covered by such programs or the reimbursement rates paid directly or indirectly for such products and services.  Such changes could further limit our ability to sell our products, which may have a material adverse effect on our revenues.

In March 2010, Congress enacted sweeping healthcare reform legislation known as the Affordable Care Act.  The Affordable Care Act will substantially change the way that healthcare is financed by both governmental and private insurers and significantly affect the delivery and financing of healthcare in the United States.  The Affordable Care Act contains provisions that, among other things, govern enrollment in federal healthcare programs, effect reimbursement changes, encourage use of comparative effectiveness research in healthcare decision making and enhance fraud and abuse requirements and enforcement.  The Affordable Care Act imposes a significant annual fee on companies that manufacture or import branded prescription drug products, which could include products such as OvaTure, if the FDA regulates it as a biologic.  The fee, which is not deductible for federal income tax purposes, is based on the manufacturer’s market share of sales of branded drugs and biologics, excluding orphan drugs, to, or pursuant to coverage under, specified U.S. government programs.  In addition, the new law subjects most medical devices to a 2.3% excise tax, beginning on January 1, 2013.  The implementation of the Affordable Care Act may have a material adverse effect on our results of operations and financial condition.

The reimbursement process for products and procedures outside the United States generally is subject to all of the risks associated with reimbursement in the United States, including the risk that it is unlikely that third party payors will cover or reimburse AUGMENT or other, future products and services.  Many national health services and third party payors in the EU already place coverage and reimbursement limits on ART procedures, including IVF, and may impose even greater limits in the future.  In many EU member states medicinal products and medical devices are subject to formal pricing and reimbursement approvals before they can be reimbursed by national health services or government-funded insurance schemes.  Reimbursement may be conditional on the agreement by the seller not to sell the product above a fixed price in that country, or the national authority may unilaterally establish a reimbursement price in connection with the inclusion of the product on a list of reimbursable products.

The likelihood that many third party payors will refuse to cover and reimburse for AUGMENT and our future products and services and that many patients will be unable to afford to pay for them out of pocket may reduce the demand for, or the price of, AUGMENT and other future products and services, which would have a material adverse effect on our revenues.  Additional legislation or regulation relating to the healthcare industry or third party coverage and reimbursement may be enacted in the future, and could adversely affect the revenues generated from the sale of our products.

Several states and certain foreign countries have enacted legislation that may hamper the ability of IVF clinics and physicians to pass through the cost of our products to patients or third party payors.

Several states, including California and New York, and certain foreign countries require direct billing of laboratory or pathology services, prohibit physicians from marking up the cost of laboratory or pathology services when they pass these costs on to patients or other payors or require that physicians disclose to patients what they actually paid to obtain laboratory or pathology services.  Additionally, the federal government has enacted regulations limiting the Medicare reimbursement available to physicians who contract out the technical component of certain laboratory and pathology procedures.

To the extent that AUGMENT or possibly other, future products or services are treated as laboratory or pathology services for purposes of reimbursement, these laws may make it difficult for us to market those products and services to IVF clinics and physicians in some states and may also require us to restructure our business model before we can expand into certain markets.  To the extent that our IVF clinic and physician customer base anticipates seeking Medicare reimbursement, these laws may require a comprehensive restructuring of our business model, and therefore adversely impact our ability to market our products.  Any additional legislation or regulation in this area could also adversely affect our ability to market our products.

Even though we anticipate very limited third party coverage and reimbursement for AUGMENT and our future products and services, our future arrangements with third party payors and IVF clinics and physicians may be subject to foreign, federal and

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state fraud and abuse laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Even though we anticipate very limited third party coverage and reimbursement, including from federal healthcare programs, for AUGMENT and possibly other, future products and services, our future arrangements with third party payors and IVF clinics and physicians may expose us to broadly applicable fraud and abuse laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute AUGMENT and possibly other, future products and services for which we obtain marketing approval.  Restrictions under federal and state fraud and abuse laws and regulations that may be applicable to our business include the following:

·                  the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid;

·                  the federal Stark law prohibits physicians from referring patients to hospitals, laboratories, and other types of entities in which they or their immediate family members have a financial interest, if the referral is for a select list of Medicare or Medicaid-covered services, including most clinical laboratory services, and also prohibits entities that furnish the covered services subsequent to a prohibited referral from billing Medicare or Medicaid for the services provided and from receiving payment from a federal healthcare program for those services;