SENS 10-Q
Senseonics Holdings, Inc. (SENS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the Quarterly Period Ended
or
For the transition period from ______ to ______
Commission file number:
(Exact name of registrant as specified in its charter)
| 3841 |
|
(
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
There were
TABLE OF CONTENTS
2
Senseonics Holdings, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
September 30, | December 31, |
| |||||
2020 | 2019 | ||||||
(unaudited) | |||||||
Assets |
|
| |||||
Current assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Restricted cash | | — | |||||
Accounts receivable, net | | | |||||
Accounts receivable - related parties | | | |||||
Inventory, net | | | |||||
Prepaid expenses and other current assets |
| |
| | |||
Total current assets |
| |
| | |||
Purchase put option | | — | |||||
Deposits and other assets |
| |
| | |||
Property and equipment, net |
| |
| | |||
Total assets | $ | | $ | | |||
Liabilities and Stockholders’ Deficit | |||||||
Current liabilities: | |||||||
Accounts payable | $ | | $ | | |||
Accrued expenses and other current liabilities |
| |
| | |||
Term Loans, net | — | | |||||
2025 Notes, net |
| — |
| | |||
Total current liabilities |
| |
| | |||
Long-term debt and notes payables, net | | | |||||
Derivative liabilities |
| |
| | |||
Other liabilities | | | |||||
Total liabilities |
| |
| | |||
Preferred stock and additional paid-in-capital, subject to possible redemption: $ | | — | |||||
Total temporary equity | | — | |||||
Commitments and contingencies | |||||||
Stockholders’ deficit: | |||||||
Common stock, $ |
| |
| | |||
Additional paid-in capital |
| |
| | |||
Accumulated deficit |
| ( |
| ( | |||
Total stockholders' deficit |
| ( |
| ( | |||
Total liabilities and stockholders’ deficit | $ | | $ | | |||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Senseonics Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||
Revenue, net | $ | |
| $ | | $ | |
| $ | |
| ||
Revenue, net - related parties | | | | | |||||||||
Total revenue | | | | | |||||||||
Cost of sales | ( | | | | |||||||||
Gross profit (loss) | | ( | ( | ( | |||||||||
Expenses: | |||||||||||||
Sales and marketing expenses | |
| |
| |
| | ||||||
Research and development expenses | |
| |
| |
| | ||||||
General and administrative expenses | |
| |
| |
| | ||||||
Operating loss | ( | ( |
| ( |
| ( | |||||||
Other (expense) income, net: | |||||||||||||
Interest income | | | | | |||||||||
Loss on extinguishment and issuance of debt | ( |
| ( |
| ( |
| ( | ||||||
Interest expense | ( | ( | ( | ( | |||||||||
Debt issuance costs | ( | ( | ( | ( | |||||||||
Gain on fair value and change in fair value of derivatives | | | | | |||||||||
Other expense | ( |
| ( |
| ( |
| ( | ||||||
Total other (expense) income, net | ( | | ( | | |||||||||
Net loss | ( | ( | ( | ( | |||||||||
Total comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Basic and diluted net loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Basic and diluted weighted-average shares outstanding | |
| |
| |
| | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Senseonics Holdings, Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(in thousands)
Additional | Total |
| |||||||||||||
Common Stock | Paid-In | Accumulated | Stockholders' |
| |||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity (Deficit) |
| |||||
Three months ended September 30, 2019: | |||||||||||||||
Balance, June 30, 2019 | | $ | | $ | | $ | ( | $ | | ||||||
Issuance of common stock | |
| |
| | — | | ||||||||
Exercise of stock options | | — | — | — | — | ||||||||||
Stock-based compensation expense and vesting of RSUs | |
| — |
| | — | | ||||||||
Issuance of warrants related to debt | — | — | | — | | ||||||||||
Net loss | — |
| — |
| — | ( | ( | ||||||||
Balance, September 30, 2019 | | $ | | $ | | $ | ( | $ | | ||||||
Nine months ended September 30, 2019: | |||||||||||||||
Balance, December 31, 2018 |
| | $ | | $ | |
| $ | ( | $ | | ||||
Issuance of common stock | |
| |
| |
| — |
| | ||||||
Exercise of stock options |
| |
| — |
| |
|
| — |
| | ||||
Stock-based compensation expense and vesting of RSUs | |
| — |
| |
|
| — |
| | |||||
Issuance of warrants related to debt | — | — | | — | | ||||||||||
Net loss |
| — |
| — |
| — |
|
| ( |
| ( | ||||
Balance, September 30, 2019 |
| | $ | | $ | |
| $ | ( | $ | | ||||
Three months ended September 30, 2020: | |||||||||||||||
Balance, June 30, 2020 | | $ | | $ | | $ | ( | $ | ( | ||||||
Exercise of stock options and ESPP purchases | |
| |
| | — | | ||||||||
Exchange and conversion of convertible notes, net | | | | — | | ||||||||||
Stock-based compensation expense and vesting of RSUs | — | — | | — | | ||||||||||
Net loss | — |
| — |
| — | ( | ( | ||||||||
Balance, September 30, 2020 | | $ | | $ | | $ | ( | $ | ( | ||||||
Nine months ended September 30, 2020: | |||||||||||||||
Balance, December 31, 2019 | | $ | | $ | | $ | ( | $ | ( | ||||||
Issuance of common stock, net |
| |
| — |
| ( |
|
| — |
| ( | ||||
Exercise of stock options and ESPP purchases |
| |
| |
| |
|
| — |
| | ||||
Exchange and conversion of convertible notes, net | | | | — | | ||||||||||
Stock-based compensation expense and vesting of RSUs |
| — |
| — |
| |
|
| — |
| | ||||
Issuance of warrants related to debt, net | — | — | | — | | ||||||||||
Net loss |
| — |
| — |
| — |
|
| ( |
| ( | ||||
Balance, September 30, 2020 |
| | $ | | $ | |
| $ | ( | $ | ( | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Senseonics Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine Months Ended | |||||||
September 30, | |||||||
| 2020 |
| 2019 | ||||
Cash flows used in operating activities |
| ||||||
Net loss | $ | ( | $ | ( | |||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization expense |
| |
| | |||
Non-cash interest expense (debt discount and deferred costs) |
| |
| | |||
Loss on extinguishment and issuance of debt | | — | |||||
Change in fair value of derivatives | ( | ( | |||||
Stock-based compensation expense |
| |
| | |||
Provision for inventory obsolescence and net realizable value | | | |||||
Non-cash lease expense | — | | |||||
Loss on disposal of assets | | — | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable | | | |||||
Prepaid expenses and other current assets |
| ( |
| ( | |||
Inventory | | ( | |||||
Deposits and other assets | | ( | |||||
Accounts payable |
| ( |
| ( | |||
Accrued expenses and other liabilities | ( | | |||||
Deferred revenue | — | ( | |||||
Accrued interest | ( | ( | |||||
Operating lease liabilities | ( | — | |||||
Other |
| — |
| ( | |||
Net cash used in operating activities |
| ( |
| ( | |||
Cash flows used in investing activities | |||||||
Capital expenditures |
| ( |
| ( | |||
Net cash used in investing activities |
| ( |
| ( | |||
Cash flows used in financing activities | |||||||
Issuance of common stock, net | ( | | |||||
Proceeds from exercise of stock options and ESPP purchases | | | |||||
Proceeds from debt issuance, net of costs |
| |
| — | |||
Proceeds from 2025 Notes, net of cost | — | | |||||
Proceeds from Solar term loan, net of cost | — | | |||||
Proceeds from issuance of warrants, net of costs | — | | |||||
Payments of notes payable | ( | ( | |||||
Cost of modification of Second Lien Notes | ( | — | |||||
Repurchase of 2023 Notes | — | ( | |||||
Net cash (used in) provided by financing activities |
| ( |
| | |||
Net decrease in cash, cash equivalents and restricted cash |
| ( |
| ( | |||
Cash, cash equivalents and restricted cash, at beginning of period |
| |
| | |||
Cash, cash equivalents and restricted cash, at ending of period | $ | | $ | | |||
Supplemental disclosure of cash flow information | |||||||
Cash paid during the period for interest | $ | | $ | | |||
Supplemental disclosure of non-cash investing and financing activities | |||||||
Property and equipment purchases included in accounts payable and accrued expenses | $ | — | $ | | |||
Issuance of common stock converted from notes payables | $ | | $ | — | |||
Exchange of 2025 Notes for Second Lien Notes | $ | ( | $ | — | |||
Issuance of Second Lien Notes | $ | | $ | — | |||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Senseonics Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. | Organization and Nature of Operations |
Senseonics Holdings, Inc., a Delaware corporation, is a medical technology company focused on the development and commercialization of long-term, implantable continuous glucose monitoring (“CGM”) systems to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy.
Senseonics, Incorporated is a wholly owned subsidiary of Senseonics Holdings and was originally incorporated on October 30, 1996 and commenced operations on January 15, 1997. Senseonics Holdings and Senseonics, Incorporated are hereinafter collectively referred to as the “Company” unless otherwise indicated or the context otherwise requires.
2. | Going Concern and Liquidity Update |
The Company’s operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, lack of operating history and uncertainty of future profitability. Since inception, the Company has suffered substantial operating losses, principally from expenses associated with the Company’s research and development programs and commercial launch of the Eversense® CGM System (for use up to
The Company generated a net loss of $
On August 9, 2020, the Company entered into a Collaboration and Commercialization Agreement with Ascensia Diabetes Care Holdings AG (“Ascensia”) and entered into a financing agreement pursuant to which the Company issued $
7
On April 24, 2020, the Company received $
In connection with the entry into the Highbridge Loan Agreement on April 24, 2020, the Company entered into a Note and Purchase Exchange Agreement with the Lenders, pursuant to which the Company’s senior convertible notes maturing on January 15, 2025 (the “2025 Notes”) were exchanged for (i) $
On April 22, 2020, the Company received $
The Company believes that these agreements provide the financial resources and mutual commitment to support the growth of Eversense and specifically for the Company, the manufacturing of Eversense and continued product development, including the U.S. launch of the new 180-day Eversense product, if approved. The timing and success of these collaborations and financings are dependent on certain events occurring in accordance with the Company’s plans, and may be influenced by uncontrollable external factors, including restrictions or impacts of COVID-19. Even with these transactions and that the potential subsequent closings contemplated by the transactions have not yet occurred, management’s doubt regarding its ability to continue as a going concern for the next twelve months from the date this Quarterly Report on Form 10-Q is filed is not yet alleviated.
3. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Although the Company considers the disclosures in these unaudited consolidated financial statements to be adequate to make the information presented not misleading, certain information or footnote information normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of financial position at September 30, 2020 and December 31, 2019, results of operations, comprehensive loss, and changes in stockholder’s equity (deficit) for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019 have been included. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 16, 2020, and amended on April 28, 2020. The interim results for September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future interim periods.
The consolidated financial statements reflect the accounts of Senseonics Holdings, Inc. and its wholly owned operating subsidiary Senseonics Incorporated.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. In the accompanying unaudited consolidated financial statements,
8
estimates are used for, but not limited to, stock-based compensation, recoverability of long-lived assets, deferred taxes and valuation allowances, derivative assets and liabilities, obsolete inventory, warranty obligations, variable consideration related to revenue, depreciable lives of property and equipment, and accruals for clinical study costs, which are accrued based on estimates of work performed under contract. The Company considered COVID-19 related impacts to its estimates, as appropriate, within its unaudited condensed consolidated financial statements and there may be changes to those estimates in future periods due to the uncertainties surrounding the severity and duration of the COVID-19 pandemic. Actual results could differ from those estimates; however, management does not believe that such differences would be material.
Segment Information
The Company views its operations and manages its business in
Comprehensive Loss
Comprehensive loss comprises net loss and other changes in equity that are excluded from net loss. For the three and nine months ended September 30, 2020 and 2019, the Company’s net loss equaled its comprehensive loss and, accordingly, no additional disclosure is presented.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value. Cash and cash equivalents consisted of the following as of the periods listed below (in thousands):
September 30, | December 31, | ||||||||||||||||
|
| 2020 |
| 2019 |
| ||||||||||||
Cash ⁽¹⁾ | $ | | $ | | |||||||||||||
Money market funds | | | |||||||||||||||
Commercial paper | — | | |||||||||||||||
Corporate bonds | — | | |||||||||||||||
Cash and cash equivalents | $ | | $ | | |||||||||||||
| (1) | Includes overnight repurchase agreements |
Restricted Cash
The Company’s restricted cash includes pledged cash as collateral related to its credit card program with Silicon Valley Bank. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows (in thousands):
September 30, | December 31, | |||||||||||||||
|
| 2020 |
| 2019 | ||||||||||||
Cash and cash equivalents | $ | | $ | | ||||||||||||
Restricted cash | | — | ||||||||||||||
Cash, cash equivalents and restricted cash | $ | | $ | | ||||||||||||
Long-lived Assets
Management reviews long-lived assets, including property and equipment and right-of-use assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As a result of COVID-19 and the events described above in Note 2, the Company identified an indicator of impairment and completed an impairment assessment. As part of the assessment, the Company concluded the fair value of some of its property and equipment exceeded its carrying values and recognized an impairment of property and
9
equipment in the amount of $
Warranty Obligation
The Company provides a warranty of
At September 30, 2020 and December 31, 2019, the warranty reserve was $
September 30, | December 31, | |||||
| 2020 |
| 2019 | |||
Balance at beginning of the year | $ | | $ | | ||
Provision for warranties during the period | | | ||||
Settlements made during the period | ( | ( | ||||
Balance at end of the year | $ | | $ | | ||
Revenue
The Company recognizes revenue in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company generates revenue from sales of its Eversense CGM system and related components at a fixed price to third-party distributors in the European Union and to a network of strategic fulfillment partners in the United States (collectively, “Customers”) who then resell the products to health care providers and patients. The Company is paid for its sales directly to the Customers, regardless of whether or not the Customers resell the products to health care providers and patients. Customer contracts do not include the right to return unless there is a product issue, in which case the Company may provide replacement product. Product conformity guarantees do not create additional performance obligations and are accounted for as warranty obligations in accordance with guarantee and loss contingency accounting guidance.
Revenue is recognized, at a point in time, when the Customers obtain control of the product based upon the delivery terms as defined in the contract at an amount that reflects the consideration which is expected to be received in exchange for the product. Contracts with the Customers include performance obligations for supply of goods and the performance obligation is typically satisfied upon transfer of control of the product. Distribution contracts may also contain requirements for training and customer service support, however these are not assessed as performance obligations given the activities are considered immaterial in the context of the contract. The payment terms and
10
conditions of the Customers vary, but the Company is typically paid within
Revenue is recognized only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in a future period. The Company’s contracts may contain variable consideration such as prompt-pay discounts or tier-volume price discounts. Variable consideration, including the reimbursements paid by the Company to its Customers in accordance with the Eversense Bridge Program initiated in March 2019 and to a lesser extent, other discounts and prompt-pay incentives, is treated as a reduction in revenue when the product sale is recognized. Depending on the variable consideration, the Company estimates the expected value based on the terms of the agreements, historical data, insurance payor mix, reimbursement rates, and market conditions. In connection with the Eversense Bridge Program, the Company reimburses participating Customers an amount up to a fixed maximum for the difference in the cost of the Eversense CGM System and what they collect from insurance payors and the patient’s fee of $
Contract assets consist of trade receivables from Customers and contract liabilities consist of amounts due to Customers in connection with the Eversense Bridge Program, classified as patient access and incentive programs within accrued liabilities on the accompanying unaudited condensed consolidated balance sheets. Trade receivables for customers in the United States are recorded at net realizable value, which is generally the contractual price but may be net of anticipated prompt-pay or promotional discounts.
Concentration of Revenue and Customers
For the three months ended September 30, 2020 and 2019, the Company derived
11
Revenue by Geographic Region
The following table sets forth net revenue derived from the Company’s
Three Months Ended | Nine Months Ended | ||||||||||
September 30, 2020 | September 30, 2020 | ||||||||||
% | % | ||||||||||
(Dollars in thousands) | Amount | of Total | Amount | of Total | |||||||
Revenue, net: | |||||||||||
Outside of the United States | $ | | % | $ | | % | |||||
United States | | | |||||||||
Total | $ | | % | $ | | % | |||||
Three Months Ended | Nine Months Ended | ||||||||||
September 30, 2019 | September 30, 2019 | ||||||||||
% | % | ||||||||||
(Dollars in thousands) | Amount | of Total | Amount | of Total | |||||||
Revenue, net: | |||||||||||
Outside of the United States | $ | | % | $ | | % | |||||
United States | | | |||||||||
Total | $ | | % | $ | | % | |||||
Accounts Receivable
Accounts receivable consist of amounts due from the Company’s Customers and are recorded at net realizable value, which may include reductions for allowances for doubtful accounts at the time potential collection risk is identified or for promotional or prompt-pay discounts offered. The Company extended payment terms and provided one-time COVID-19 pandemic relief concessions to some of its customers in the United States for allowances up to a specified amount if they are unable to sell through Eversense and related components on hand prior to product expiry, which began to occur in the third quarter of 2020 and the Company expects to continue to occur in the fourth quarter of 2020. The Company does not have a history of collectability concerns, however an immaterial allowance for uncollectible accounts was recorded as of September 30, 2020. There were
Net Loss per Share
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company evaluated the Series A Preferred Stock to determine if those shares represented a participating security. Because the holders of the Series A Preferred Stock participate in Common Stock dividends, it is considered a participating security and the application of the two-class method will be applied once the Company has net income. The holders of the Series A Preferred Stock do not participate in losses; therefore, there is no impact to the current period net loss. The Masters option to purchase additional Series A Preferred Stock are not considered participating securities because the option holder is not entitled to participate in dividends until the option is exercised and the resulting Series A Preferred Stock shares are issued.
12
For periods of net loss, diluted net loss per share is calculated similarly to basic loss per share because the impact of all potential common shares is anti-dilutive. The total number of anti-dilutive shares at September 30, 2020 and 2019, consisting of common stock options and stock purchase warrants, which have been excluded from the computation of diluted net loss per share, was as follows:
September 30, | ||||
| 2020 |
| 2019 | |
Stock-based awards | | | ||
Second Lien Notes | | — | ||
2023 Notes | | | ||
2025 Notes | | | ||
2024 Notes | | — | ||
Warrants | | | ||
Total anti-dilutive shares outstanding | | | ||
For periods of net income, and when the effects are not anti-dilutive, diluted earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the impact of all potential dilutive common shares, consisting primarily of common stock options stock purchase warrants and employee stock purchases using the treasury stock method.
Exit or Disposal Costs
Costs associated with exit or disposal activities, such as restructuring, sale or termination of a line of business, the closure of business activities in a particular location, the relocation of business activities, changes in management structure and a fundamental reorganization that affects the nature and focus of operations, are recognized and measured initially at their fair values during the period in which an obligation meets the definition of a liability. The Company’s workforce reduction on March 26, 2020 did not permit continuation of service past March 31, 2020 and associated one-time employee termination benefit costs in the amount of $
Recent Accounting Pronouncements
Recently Adopted
In August 2018, the Financial Accounting Standards Board (“FASB “) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements on fair value measurements. The new standard includes additional disclosure requirements regarding the range and weighted average to develop significant unobservable inputs within Level 3 fair value measurements. The Company adopted this on its effective date, January 1, 2020 and did not have a material impact on the consolidated financial statements and related disclosures.
Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities in unrealized loss positions, the new standard requires allowances to be recorded instead of reducing the amortized cost of the investment. The Company does not currently hold or plan to invest in available-for-sale securities and has not historically experienced collection issues or bad debts with trade receivables. Accordingly, the Company does not expect this to have a significant impact on its consolidated financial statements and related disclosures at this time. The Company will adopt this guidance on its effective date for smaller reporting companies, January 1, 2023.
13
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
4. Inventory, net
Inventory, net of reserves, consisted of the following (in thousands):
| September 30, |
| December 31, | |||
2020 |
| 2019 | ||||
Finished goods |
| $ | |
| $ | |
Work-in-process |
| |
| | ||
Raw materials |
| |
| | ||
Total | $ | | $ | | ||
The Company charged $
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
September 30, | December 31, | |||||
2020 |
| 2019 | ||||
Contract manufacturing⁽¹⁾ | $ | | $ | | ||
Insurance | | | ||||
Clinical and preclinical | | | ||||
Marketing and sales |
| |
| | ||
Rent | | — | ||||
IT and software | | | ||||
Other |
| |
| | ||
Interest receivable |
| — |
| | ||
Total prepaid expenses and other current assets | $ | | $ | | ||
| (1) | Includes deposits for manufacturing and amounts for materials procured by contract manufacturers on behalf of the Company following its March 2020 announcement of its streamlined operational focus and may be applied when manufacturing resumes. |
14
6. | Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consisted of the following (in thousands):
September 30, | December 31, | |||||
2020 |
| 2019 | ||||
Compensation and benefits | $ | | $ | | ||
Interest on notes payable |
| |
| | ||
Product warranty and replacement obligations | | | ||||
Professional and administration services | | | ||||
Research and development | | | ||||
Operating lease |
| |
| | ||
Contract manufacturing |
| |
| | ||
Patient access programs | | | ||||
Sales and marketing services | | | ||||
Other | | | ||||
Total accrued expenses and other current liabilities | $ | | $ | | ||
7.Notes Payable, Preferred Stock and Stock Purchase Warrants
Repayment of Solar Term Loan
On March 22, 2020, the Company and Solar terminated its Loan and Security Agreement, dated as of July 16, 2019 (the “Solar Loan Agreement”).
In connection with the termination, the Company paid $
A loss on the extinguishment of debt in the amount of $
PPP Loan
On April 22, 2020, the Company received $
Under the terms of the PPP Note and the PPP Loan, interest accrues on the outstanding principal at a rate of
15
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply for forgiveness for all or a part of the Company’s PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the specified period after the loan origination for certain purposes including payroll costs, interest on debt obligations incurred prior to February 15, 2020, rent payments on certain leases, and certain qualified utility payments, provided that at least
The PPP Note may be prepaid in part or in full, at any time, without penalty. The PPP Note provides for certain customary events of default, including (i) failing to make a payment when due under the PPP Note, (ii) failure to do anything required by the PPP Note or any other loan document, (iii) defaults of any other loan with the Bank, (iv) failure to disclose any material fact or make a materially false or misleading representation to the Bank or SBA, (v) default on any loan or agreement with another creditor, if the Bank believes the default may materially affect the Company’s ability to pay the PPP Note, (vi) failure to pay any taxes when due, (vii) becoming the subject of a proceeding under any bankruptcy or insolvency law, having a receiver or liquidator appointed for any part of the Company’s business or property, or making an assignment for the benefit of creditors, (viii) having any adverse change in financial condition or business operation that the Bank believes may materially affect the Company’s ability to pay the PPP Note, (ix) if the Company reorganizes, merges, consolidates, or otherwise changes ownership or business structure without the Bank’s prior written consent, or (x) becoming the subject of a civil or criminal action that the Bank believes may materially affect the Company’s ability to pay the PPP Note. Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require immediate payment of all amounts owed under the PPP Note, collect all amounts owing from the Company, and file suit and obtain judgment against the Company.
Highbridge Credit Facility
Highbridge Loan Agreement
On April 21, 2020, the Company entered into the Highbridge Loan Agreement with certain funds managed by Highbridge, the Lenders and Wilmington Savings Fund Society, SCB, as collateral agent.
Pursuant to the Highbridge Loan Agreement, the Company borrowed an aggregate principal amount of $
On August 14, 2020, the Company prepaid the First Lien Notes in full, including the discounted prepayment premium, in the amount of approximately $
The First Lien Notes were secured, senior obligations that bear interest at the annual rate of
The First Lien Notes also contained redemption features that were evaluated for bifurcation as separate derivative instruments including the permitted prepayment put option, the mandatory accelerated redemption and the mandatory redemption and reinvestment upon an asset sale. The Company recorded the fair value of the embedded features in the amount of $
16
The debt issuance costs incurred in connection with the Highbridge financings were allocated between the First Lien Notes, Second Lien Notes, common stock, and warrants. The Company incurred and deferred $
Exchange Agreement with Highbridge
On April 21, 2020, the Company entered into a Note Purchase and Exchange Agreement with certain funds managed by Highbridge providing for the exchange (the “Exchange”) of $
On August 9, 2020, the Company entered into a First Amendment to Note Purchase and Exchange Agreement with Highbridge (as amended by the Amendment, the “Exchange Agreement”). The debt issuance costs incurred in connection with the Amendment were allocated to the Second Lien Notes. Loan modifications require third-party debt related costs to be expensed immediately. In connection with the Amendment, the Company recorded a total of $
The Second Lien Notes are secured, senior obligations of the Company, junior only to the First Lien Notes. Interest in cash at the annual rate of
The Company will have the right to prepay the Second Lien Notes at any time, subject to a prepayment premium, which in certain circumstances the Company may elect to pay in common stock, equal to the aggregate amount of interest payments through maturity.
The holders of the Second Lien Notes have the right to convert the aggregate principal of the Second Lien Notes (together with any applicable prepayment premium) to common stock at a price per share equal to
The Exchange Agreement contains customary terms and covenants, including without limitation: financial covenants, such as maintaining a minimum cash balance; and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The Exchange Agreement also contains customary events of default, after which the Second Lien Notes may be due and payable immediately, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, material adverse changes, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against us, and change of control, termination of any guaranty, governmental approvals, and lien priority.
The Second Lien Notes also contain redemption features that were evaluated for bifurcation as separate derivative instruments including the permitted prepayment put option, the mandatory accelerated redemption and the
17
mandatory redemption and reinvestment upon an asset sale. Unlike the First Lien Notes, the Second Lien Notes also permit voluntary conversion at the option of the holder as described above. The Company recorded the fair value of these embedded features in the amount of $
Since Highbridge was a noteholder of the 2025 Notes and exchanged $
During the quarter ended September 30, 2020, Highbridge voluntarily converted a total of $
Convertible Notes
2024 Notes
On August 9, 2020, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with PHC, as the purchaser (together with the other purchasers from time to time party thereto, the “Note Purchasers”) and Alter Domus (US) LLC, as collateral agent. Pursuant to the Note Purchase Agreement, the Company borrowed $
The 2024 Notes are senior secured obligations of the Company and will be guaranteed on a senior secured basis by the Company’s wholly owned subsidiary, Senseonics, Incorporated. Interest at the annual rate of
18
The Note Purchasers are entitled to convert the 2024 Notes to common stock at a conversion rate of
Subject to specified conditions, on or after October 31, 2022, the 2024 Notes are redeemable by the Company if the closing sale price of the common stock exceeds
The Note Purchase Agreement contains customary terms and covenants, including financial covenants, such as operating within an approved budget and achieving minimum revenue and liquidity targets, and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The Note Purchase Agreement also contains customary events of default, after which the 2024 Notes be due and payable immediately, including defaults related to payment compliance, material inaccuracy of representations and warranties, covenant compliance, material adverse changes, bankruptcy and insolvency proceedings, cross defaults to certain other agreements, judgments against the Company, change of control or delisting events, termination of any guaranty, governmental approvals, and lien priority.
The Company also has the option to sell and issue PHC up to $
The Note Purchase Agreement also contained several provisions requiring bifurcation as a separate derivative liability including an embedded conversion feature, mandatory prepayment upon event of default that constitutes a breach of the minimum revenue financial covenant, optional redemption upon an event of default, change in interest rate after PMA approval and default interest upon an event of default. The Company recorded the fair value of the embedded features in the amount of $
In connection with the issuance of the Note Purchase Agreement, the Company incurred $
2025 Notes
In July 2019, the Company issued $
19
The 2025 Notes also contained an embedded conversion option requiring bifurcation as a separate derivative liability, along with the fundamental change make-whole provision and the cash settled fundamental make-whole shares provision. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded to other income (expense) in the Company’s consolidated statement of operations and comprehensive loss.
In connection with the Exchange on April 24, 2020, $
2023 Notes
In the first quarter of 2018, the Company issued $
The Company bifurcated the embedded conversion option, along with the interest make-whole provision and make-whole fundamental change provision as a derivative liability. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statement of operations and comprehensive loss.
Convertible Preferred Stock and Warrants
On August 9, 2020, the Company entered into a Stock Purchase Agreement with Masters, pursuant to which the Company issued and sold to Masters
The Series A Preferred Stock is contingently redeemable upon occurrence of a change of control event which is considered outside the control of the Company, and therefore the Series A Preferred Stock has been classified in temporary equity on the consolidated balance sheet. At each reporting period, the Company evaluates the probability of the Series A Preferred Stock being redeemed. The Company’s policy is to recognize the difference in carrying value to
20
redemption value once the redemption becomes probable. As of September 30, 2020, the features that would require redemption (e.g., occurrence of a change of control) was not deemed probable.
The Company accounted for the option to purchase up to an additional
The following carrying amounts were outstanding under the Company’s notes payable as of September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020 | |||||||
Principal ($) | Debt Discount ($) | Issuance Costs ($) | Carrying Amount ($) | ||||
2023 Notes | | ( | - | | |||
2025 Notes | | ( | ( | | |||
2024 Notes | | ( | ( | | |||
Second Lien Notes | | ( | ( | | |||
PPP Loan | | - | - | | |||
December 31, 2019 | |||||||
Principal ($) | Debt Discount ($) | Issuance Costs ($) | Carrying Amount ($) | ||||
Solar Term Loan | | ( | ( | | |||
2023 Notes | | ( | - | | |||
2025 Notes | | ( | ( | | |||
Interest expense related to the notes payable for the three and nine months ended September 30, 2020 was as follows (dollars in thousands):
Three months ended September 30, 2020 | |||||||||||
Effective Interest Rate | Interest ($) | Debt Discount and Fees ($) | Issuance Costs ($) | Final Payment Fee ($) | Total Interest Expense ($) | ||||||
2023 Notes | | | - | - | | ||||||
2025 Notes | | | | - | | ||||||
First Lien Notes | | | | - | | ||||||
Second Lien Notes | | | | - | | ||||||
2024 Notes | | - | | - | | ||||||
PPP Loan | | - | - | - | | ||||||
Total | | | | - | | ||||||
Nine months ended September 30, 2020 | |||||||||||
Effective Interest Rate | Interest ($) | Debt Discount and Fees ($) | Issuance Costs ($) | Final Payment Fee ($) | Total Interest Expense ($) | ||||||
Solar Term Loan | | | - | - | | ||||||
2023 Notes | | | - | - | | ||||||
2025 Notes | | | | - | | ||||||
First Lien Notes | | | | - | | ||||||
Second Lien Notes | | | | - | | ||||||
2024 Notes | | - | | - | | ||||||
PPP Loan | | - | - | - | | ||||||
Total | | | | - | | ||||||
21
The following are the scheduled maturities of the Company’s notes payable as of September 30, 2020, including PIK interest on the Second Lien Notes (in thousands):
2020 (remaining three months) |
| $ | — | |
2021 | |
| ||
2022 |
| | ||
2023 | | |||
Thereafter | | |||
Total |
| $ | |
8. | Stockholders’ Deficit |
In November 2019, the Company entered into an Open Market Sale Agreement with Jefferies LLC which allows the Company to issue and sell up to $
9. Stock-Based Compensation
2015 Plan
In December 2015, the Company adopted the 2015 Equity Incentive Plan (the “2015 Plan”), under which incentive stock options, non-qualified stock options and restricted stock units may be granted to the Company’s employees and certain other persons in accordance with the 2015 Plan provisions, such as officers and directors. In February 2016, the Company’s Board of Directors adopted and the Company’s stockholders approved an Amended and Restated 2015 Equity Incentive Plan (the “amended and restated 2015 Plan”), which became effective on March 17, 2016. The Company’s board of directors may terminate the amended and restated 2015 Plan at any time. Options granted under the amended and restated 2015 Plan expire
Pursuant to the amended and restated 2015 Plan, the number of shares of the Company’s common stock reserved for issuance automatically increases on January 1 of each year, ending on January 1, 2026, by
Inducement Plan
On May 30, 2019, the Company adopted the Senseonics Holdings, Inc. Inducement Plan (the “Inducement Plan”), pursuant to which the Company reserved
2016 Employee Stock Purchase Plan
In February 2016, the Company adopted the 2016 Employee Stock Purchase Plan, (the “2016 ESPP”). The 2016 ESPP became effective on March 17, 2016. The maximum number of shares of common stock that may be issued under the 2016 ESPP was initially
22
provide that there will be no January 1 increase in the share reserve for such calendar year or that the increase in the share reserve for such calendar year will be a lesser number of shares of common stock. At September 30, 2020 there were
The 2016 ESPP permits participants to purchase shares of the Company’s common stock through payroll deductions of up to
The 2016 ESPP is considered compensatory for financial reporting purposes.
1997 Plan
On May 8, 1997, the Company adopted the 1997 Stock Option Plan (the “1997 Plan”), under which incentive stock options, non-qualified stock options, and restricted stock awards may be granted to the Company’s employees and certain other persons in accordance with the 1997 Plan provisions. Approximately
10. | Fair Value Measurements |
The following table represents the fair value hierarchy of the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020 |
| ||||||||||||
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| |||||
Assets | |||||||||||||
Money market funds⁽¹⁾ | $ | | $ | | $ | — | $ | — | |||||
Liabilities | |||||||||||||
Embedded features of the 2023 Notes | $ | | $ | — | $ | — | $ | | |||||
Embedded features of the 2025 Notes | | — | — | | |||||||||
Embedded features of the Second Lien Notes | | — | — | | |||||||||
Embedded features of the 2024 Notes | | — | — | | |||||||||
December 31, 2019 |
| ||||||||||||
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| |||||
Assets | |||||||||||||
Money market funds⁽¹⁾ | $ | | $ | | $ | — | $ | — | |||||
Commercial paper⁽¹⁾ | | — | | — | |||||||||
Corporate bonds | | — | | — | |||||||||
Liabilities | |||||||||||||
Embedded features of the 2023 Notes | $ | | $ | — | $ | — | $ | | |||||
Embedded features of the 2025 Notes | | — | | — | |||||||||
| (1) | Classified as cash and cash equivalents due to their short-term maturity |
23
At September 30, 2020, the 2025 Notes no longer had sufficient trading activity and therefore transferred from Level 2, to Level 3. The following table provides a reconciliation of the beginning and ending net balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3) (in thousands):
Embedded | |||
Features of | |||
| the Notes | ||
December 31, 2019 | $ | | |
Initial fair value of embedded features of First Lien Notes | ( | ||
Initial fair value of embedded features of Second Lien Notes | | ||
Initial fair value of embedded features of 2024 Notes | | ||
Change in derivative (including the partial settlement of the 2025 Notes and settlement of the First Lien Notes) | | ||
September 30, 2020 | $ | | |
The recurring Level 3 fair value measurements of the embedded features of the notes payable include the following significant unobservable inputs at September 30, 2020:
2023 Notes | 2025 Notes | 2024 Notes | Second Lien | ||||||
Unobservable Inputs | Assumptions | Assumptions | Assumptions | Assumptions | |||||
Risky (bond) rate |
| | % | | % | | % | | % |
Stock price volatility |
| | % | N/A | % | | % | | % |
Probabilities of conversion provisions | % | N/A | % | % | | % | |||
Time period until maturity (yrs) |
| N/A | | ||||||
Dividend yield |
| — | % | — | % | — | % | — | % |
11. | Income Taxes |
The Company has
On March 27, 2020, Congress enacted the CARES Act, as amended by the Flexibility Act, to provide certain relief as a result of the COVID-19 pandemic. The enactment of the CARES Act did
12. | Related Party Transactions |
Roche Holding A.G, through its ownership interests in Roche Finance Ltd (collectively, “Roche”), has a noncontrolling ownership interest in the Company. Revenue from Roche during each of the three and nine months ended September 30, 2020 was $
13. | Subsequent Events |
Equity Line of Credit with Energy Capital, LLC
On November 9, 2020, the Company, entered into an equity line agreement (the “Equity Line Agreement”) with Energy Capital, LLC, a Florida limited liability company (“Energy Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Energy Capital is committed to purchase up to an aggregate of
24
$
Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that the Company has less than $
The holders of Series B Preferred Stock generally will be entitled to vote with the holders of the shares of Common Stock and Series A Preferred Stock on all matters submitted for a vote of holders of shares of Common Stock (voting together with the holders of shares of Common Stock and Series A Preferred Stock as one class) on an as-converted basis. Additionally, certain matters will require the approval of the majority of the outstanding Series B Preferred Stock, voting as a separate class, including (i) altering or changing adversely the powers, privileges, preferences or rights of the Series B Preferred Stock, or (ii) amendments, modifications, repeal or waiver of any provision of the Company’s certificate of incorporation, bylaws or of the Certificate of Designations that would adversely affect the rights, preferences, privileges or powers of the Series B Preferred Stock.
Energy Capital has agreed that, during any time prior to the termination of the Equity Line Agreement, neither it nor any of its agents, representatives or affiliates shall engage in any direct or indirect short-selling or hedging of the Company’s Common Stock which establishes a net short position with respect to the Common Stock.
Concurrently with entry into the Equity Line Agreement, the Company issued a warrant to Energy Capital, exercisable beginning May 9, 2021, to purchase up to
Extension of Masters Capital Purchase Option
On November 9, 2020, the Company and Masters entered into a side letter extending the expiration date of Masters’ option to purchase up to $
Filed Amended and Restated Certificate of Incorporation
On October 22, 2020, the Company held a special meeting of stockholders (the “Special Meeting”). At the Special Meeting, stockholders approved the amendment to the Company’s Amended and Restated Certificate of Incorporation (the “Amendment”) to increase the authorized number of shares of common stock from
Following the approval by the Company’s stockholders of the Amendment, on October 26, 2020, the Company filed the Amendment with the Secretary of State of the State of Delaware.
25
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks, uncertainties, and assumptions, including the duration and severity of the COVID-19 pandemic and its impact on our business and financial performance, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those described below and elsewhere in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K, particularly in Part I – Item 1A, “Risk Factors,” and our other filings with the Securities and Exchange Commission. Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes for the year ended December 31, 2019, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2020, as amended on April 28, 2020. Unless otherwise indicated or the context otherwise requires, all references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section to the "Company," "we," "our," "ours," "us" or similar terms refer to Senseonics Holdings, Inc. and its subsidiary.
Overview and Business Updates
We are a medical technology company focused on the development and commercialization of long-term, implantable continuous glucose monitoring, or CGM, systems to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy. Our Eversense and Eversense XL CGM systems are designed to continually and accurately measure glucose levels in people with diabetes via a small under-the-skin sensor, a lightweight and rechargeable smart transmitter worn on the skin, and a convenient app for real-time glucose monitoring and management for a period of up to 90 and 180 days, respectively, as compared to seven to 14 days for non-implantable CGM systems.
The extended life Eversense XL CGM System, for use up to 180 days, is currently available in select markets in Europe, the Middle East, and Africa, or EMEA. The Eversense CGM System, for use up to 90 days, launched commercially in the United States in July 2019 and is currently available in the United States. We sell directly to our network of distributors and strategic fulfillment partners, who provide the Eversense system to healthcare providers and patients through a prescribed request and invoice insurance payors for reimbursement. Sales of our Eversense systems are widely dependent on the ability of patients to obtain coverage and adequate reimbursement from third-party payors or government agencies. We leverage and target regions where we have coverage decisions for patient device use and provider insertion and removal procedure payment. During the nine months ended September 30, 2020, we received positive payor coverage decisions from Cigna Corporation, who has more than 17 million medical customers and offers a Medicare Advantage plan in 17 states and Washington DC, Blue Cross and Blue Shield plans, and announced local coverage determinations, or LCD, proposals for implantable therapeutic CGMs such as Eversense by all the Medicare Administrative Contractors to enable Eversense to be used by Medicare beneficiaries as a Part B physician service. We continue to see momentum of broad national payor acceptance, including on August 3, 2020, the Centers for Medicare and Medicaid Services, or CMS, released its Calendar Year 2021 Medicare Physician Fee Schedule Proposed Rule that announces proposed policy changes for Medicare payments, including the proposed establishment of national payment amounts for the three CPT© Category III codes describing the insertion (CPT 0446T), removal (0447T), and removal
26
and insertion (0048T) of an implantable interstitial glucose sensor, which describes our Eversense CGM systems, as a medical benefit, rather than as part of the Durable Medical Equipment channel that includes other CGMs.
Development and Commercialization of Eversense
On August 9, 2020, we entered into a collaboration and commercialization agreement with Ascensia Diabetes Care Holdings AG pursuant to which we have granted Ascensia the exclusive right to distribute the Company’s 90-day Eversense continuous glucose monitoring system and our 180-day Eversense continuous glucose monitoring system worldwide, with the following initial exceptions: (i) until January 31, 2021, the territory does not include countries covered by our current distribution agreement with Roche Diagnostics International AG and Roche Diabetes Care GmbH, which are the Europe, Middle East and Asia, excluding Scandinavia and Israel, and 17 additional countries, including Brazil, Russia, India and China, as well as select markets in the Asia Pacific and Latin American regions; (ii) until September 13, 2021, the territory does not include countries covered by our distribution agreement with Rubin Medical, which are Sweden, Norway and Denmark; and (iii) until May 31, 2022, the territory does not include Israel. Pursuant to the Commercialization Agreement, Ascensia has agreed to begin actively marketing and selling Eversense and Eversense XL as follows: (i) for the United States, Eversense at a date to be agreed upon and Eversense XL upon receipt of marketing approval from the U.S. Food and Drug Administration, or FDA; (ii) for Germany, Italy and Switzerland, Eversense XL beginning on February 1, 2021; and (iii) for Sweden, upon the later of the receipt of both marketing approval from the U.S. Food and Drug Administration and a new CE mark approval for a new Eversense XL version, and October 1, 2021. Ascensia will receive a portion of net revenue at specified tiered percentages ranging from the mid-teens to the mid-forty’s based on levels of global net revenues. Ascensia is obligated to achieve specified minimum annual revenue targets and meet specified levels of sales and marketing spend. Ascensia will purchase Eversense and Eversense XL from us at prices to be negotiated based on parameters set forth in the commercialization agreement. We will be responsible for product development and manufacturing, including regulatory submissions, approvals and registrations, and Ascensia will be responsible for sales, marketing, market access, patient and provider onboarding and customer support. We have agreed to establish a joint marketing committee with equal representation from each party.
In December 2018, we initiated the PROMISE pivotal clinical trial to evaluate the safety and accuracy of Eversense XL for a period of up to 180 days in the United States. On September 30, 2019, we completed enrollment of the PROMISE trial and had our last patient complete their 180-day visit during the first quarter of 2020. The 181 participants in the trial had the Eversense sensor inserted subcutaneously at eight sites across the United States where the safety and efficacy of the system was evaluated over a 180-day period. In the trial, we observed performance matching that of the current Eversense 90-day product available in the United States, with a mean absolute relative difference, or MARD, of 8.5%-9.6%. This result was achieved with reduced calibration, down to one per day, while also doubling the sensor life to 180 days. Following the results of the PROMISE trial, on September 30, a Premarket Approval, or PMA, supplement application to extend the wearable life of the Eversense CGM System to 180 days was submitted to the FDA. If approved by the FDA, this new product would double sensor duration of Eversense in the United States, with half of the insertion and removal procedures required, and would provide more than 12 times longer sensor duration than other CGM systems available in the United States. We anticipate a decision in the first half of 2021, and if positive, we will begin transitioning patients in the United States to the new 180-day Eversense product. However, shelter-in-place orders and other impacts from the COVID-19 pandemic could alter or delay the timing of response by the FDA regarding our submission.
On February 26, 2020, we announced that the FDA approved a subgroup of PROMISE trial participants to continue for a total of 365 days to gather feasibility data on the safety and accuracy of a 365-day sensor. This sub-set of 30 participants who all had sensors with the modified chemistry will be left undisturbed for 365 days with the goal of measuring accuracy and longevity over the full 365 days. Following information gathered from this sub-set and continued development efforts, in the first half of 2021 we plan to seek Investigational Device Exemption, or IDE, from the FDA. If the IDE is approved, we would then begin enrollment of a clinical trial in the second half of 2021, which would also include a pediatric population.
In April 2020, we announced that we received regulatory approval in Europe such that the Eversense XL is no longer contraindicated for MRI, which means the sensor does not need to be removed from under the skin during MRI
27
scanning. We had previously obtained this indication for Eversense in the United States in 2019. This MRI approval is a first for the CGM category as all other sensors are required to be removed during an MRI scan.
COVID-19
On January 30, 2020, the World Health Organization, or the WHO, announced a global health emergency because of a new strain of coronavirus, or COVID-19, and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. In response to the pandemic, many states and jurisdictions have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus. The state of Maryland, where we are headquartered, has been affected by COVID-19. The Governor of Maryland issued an order closing all non-essential businesses, which took effect on March 23, 2020. Although the state of Maryland is gradually undergoing a phased reopening plan, substantially all of our workforce is still working from home either all or substantially all of the time. Additionally, because our sensor requires an in-clinic procedure, we saw a reduction in access to clinics and sensor insertions during the initial outbreak.
During the third quarter of 2020, reinsertion rates for existing patients on Eversense were more favorable than we originally anticipated at the start of the outbreak, leading to several new order requests from our distributors, and adjustments to concession allowances previously provided to some of our customers in the United States to reflect actual product usage. While these upward trends are promising, insertion volumes are still below pre-COVID-19 levels. Additionally, the recent COVID-19 pandemic infection rates in the United States have been increasing and it is difficult to predict the longevity and severity COVID-19 will have on our business.
Streamlined Operational Focus
As a result of the COVID-19 pandemic’s disruption to our operations, suppliers, employees, and the healthcare community in which we sell to and support, and our limited cash on hand after repayment of the Solar Loan Agreement (as defined below) in March 2020, we made significant reductions in our cost structure and operations to improve cash flow and generate future expenditure savings to ensure the long-term success of Eversense. Specifically, in the first quarter of 2020, we temporarily suspended commercial sales and marketing of the Eversense CGM System in the United States to new patients to solely focus our resources on supporting existing users, including ensuring broader insurance coverage for Eversense, and the development and regulatory submission of our new 180-day Eversense product in the United States. In connection with these actions, on March 26, 2020, we reduced our workforce by approximately 60%, over half of which were sales personnel. Associated one-time employee termination benefit costs in the amount of $1.4 million were paid and recorded in our accompanying unaudited condensed consolidated financial statements during the nine months ended September 30, 2020.
Net Revenue Impact
As a result of the COVID-19 pandemic, redistribution of country-specific government funding to COVID-19 efforts, overall excess inventory at our distributors, and the announcement of our streamlined focus in the first quarter of 2020, our net revenue for the three and nine months ended September 30, 2020 was significantly lower than the three and nine months ended September 30, 2019. We are uncertain as to the longevity or severity these factors may have on our future sales.
Under our exclusive distribution agreement with Roche Diagnostics International AG and Roche Diabetes Care GmbH, or collectively, Roche, we have granted Roche the exclusive right to market, sell and distribute Eversense in the EMEA, excluding Scandinavia and Israel. In addition, Roche has exclusive distribution rights in 17 additional countries, including Brazil, Russia, India and China, as well as select markets in the Asia Pacific and Latin American regions. This agreement expires in January 2021. During the three and nine months ended September 30, 2020, Roche did not place any commercial sales orders in accordance with their quarterly requirements or towards their annual binding minimum requirements for sensors and transmitters. Revenues for these corresponding periods in 2020 represent purchases for miscellaneous Eversense system components.
28
We extended payment terms and provided one-time COVID-19 pandemic relief concessions to some of our customers in the United States for allowances up to a specified amount of first quarter purchases if they are unable to sell through Eversense and related components on hand prior to expiry, which occurred in the third quarter of 2020 and we expect to continue to occur in the fourth quarter of 2020. In efforts to continue supporting our installed patient base, our Eversense Bridge Program remains available for eligible existing patients on Eversense and we have removed the two-sensor limit previously prescribed by the program.
Inventory
As a result of significant changes and uncertainty regarding our forecasted demand and related expiry concerns, $13.6 million of inventory and related assets is impaired at September 30, 2020 with a corresponding charge to cost of sales in our unaudited condensed consolidated results of operations and comprehensive loss of $15.1 million for the nine months ended September 30, 2020. We will continue to assess our inventory and supplier related assets for recoverability if conditions materially change or worsen.
Long-lived Assets
We reviewed our long-lived assets, including property and equipment and right-of-use assets, for recoverability, which resulted in a loss on disposal of property and equipment in the amount of $0.2 million for the nine months ended September 30, 2020, which we recorded to other income (expense) in our unaudited condensed consolidated statement of operations and comprehensive loss. The impairment mostly related to the uncertainty of conducting validation efforts to be able to place new manufacturing equipment into service.
The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.
Equity Line of Credit
On November 9, 2020, we entered into an equity line agreement, or the Equity Line Agreement, with Energy Capital, LLC, a Florida limited liability company, or Energy Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Energy Capital is committed to purchase up to an aggregate of $12.0 million of shares of our newly designated series B convertible preferred stock, or the Series B Preferred Stock, at our request from time to time during the 24-month term of the Equity Line Agreement.
August 2020 Financings
On August 9, 2020, we entered into a Collaboration and Commercialization Agreement with Ascensia Diabetes Care Holdings AG, or Ascensia, and entered into a financing agreement pursuant to which we issued $35.0 million in aggregate principal amount of Senior Secured Convertible Notes due in October 2024, or the 2024 Notes, to Ascensia’s parent company, PHC Holdings Corporation, or PHC, on or about August 14, 2020, or the Closing Date. We also issued PHC 2,941,176 shares of common stock to PHC as a financing fee. We also have the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon obtaining approval for the 180-day Eversense product for marketing in the United States before such date. Upon the closing of the 2024 Notes, we prepaid the First Lien Notes described below in full in the amount of approximately $17.6 million, which includes the discounted prepayment premium.
Additionally, on August 9, 2020, we entered into a Stock Purchase Agreement with Masters Special Situations, LLC and certain affiliates thereof, or Masters, pursuant to which we issued and sold to Masters 3,000 shares of convertible preferred stock, or the Series A Preferred Stock, at a price of $1,000.00 per share in an initial closing, expected to occur on the Closing Date. Masters also has the option to purchase up to an additional 27,000 shares of Series A Preferred Stock at a price of $1,000.00 per share in a subsequent closing on or before January 11, 2021, subject to the terms and conditions of the Stock Purchase Agreement.
29
On August 9, 2020, we entered into a First Amendment to Note Purchase and Exchange Agreement and Notes, or the Amendment, with Highbridge Capital Management, LLC, or Highbridge. Pursuant to the Amendment, effective as of the Closing Date, Highbridge agreed to an extension of the maturity date for the Second Lien Notes to August 2023. Additionally, the holders of the Second Lien Notes will have the right to convert the aggregate principal of the Second Lien Notes (together with any applicable prepayment premium) to common stock at a price per share equal to 90% of the greater of (i) the daily volume weighted average of the price per share of the common stock, on the conversion date, or if the conversion date is not a trading date, the trading day immediately prior to the conversion date and (ii) $0.33 per share. This conversion option has a daily limit of $1,000,000 in aggregate converted principal (inclusive of principal amount of First Lien Notes that are voluntarily converted).
Repayment of Solar Loan
On March 22, 2020, we and Solar Capital Ltd., or Solar, terminated our Loan and Security Agreement, dated as of July 16, 2019, or the Solar Loan Agreement. As previously disclosed in our Annual Report on Form 10-K, we expected to default on our obligations under the Solar Loan Agreement and were seeking a waiver from Solar of any default under the Solar Loan Agreement. Following discussions with Solar, we were unable to negotiate such a waiver and, as a result, it was determined to terminate the Solar Loan Agreement.
In connection with the termination, we paid $48.5 million representing all amounts outstanding under the Solar Loan Agreement, including the principal amount and interest of the loans, a payoff fee of 6.45% of the loans outstanding, a prepayment premium of 3.0% of the loans outstanding and other obligations owed to Solar thereunder. We issued warrants in connection with the Solar Loan Agreement to purchase an aggregate of 1,125,000 shares of our common stock with an exercise price of $1.20 per share, which are exercisable until July 25, 2029.
We recorded a loss on the extinguishment of debt in the amount of $4.5 million reflecting the difference between the repayment amount, excluding interest accrued and due, and the carrying value of the principal balance, accrued interest, unamortized debt issuance costs and unaccreted prepayment fee at March 22, 2020 in other income (expense) in our accompanying unaudited condensed consolidated statement of operations and comprehensive loss during the nine months ended September 30, 2020.
April 2020 Financings
On April 22, 2020, we received $5.8 million in loan funding from the Paycheck Protection Program, or PPP, established pursuant to the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, or the Flexibility Act, and administered by the U.S. Small Business Administration, or SBA, to support payroll, rent, and utilities incurred during a defined period.
On April 24, 2020, we received $15.0 million through the issuance and sale of First Lien Secured Notes due October 2021, or the First Lien Notes, pursuant to a Loan and Security Agreement, or the Highbridge Loan Agreement, with certain funds managed by Highbridge, as the lenders, together with the other lenders from time to time party thereto, or the Lenders, and Wilmington Savings Fund Society, SCB, as collateral agent. Under the terms of the Highbridge Loan Agreement, we may issue up to an additional $5.0 million in aggregate principal amount of First Lien Notes in a subsequent closing. In connection with the Highbridge Loan Agreement, we also issued 1,500,000 shares of common stock to the Lenders as a commitment fee.
Highbridge was current holders of $24.0 million principal amount of our convertible senior subordinated notes due 2025, or the 2025 Notes. In connection with the Highbridge Loan agreement, we entered into a Note and Purchase Exchange Agreement with the Lenders, pursuant to which those 2025 Notes were exchanged for (i) $15.7 million aggregate principal amount of newly issued Second Lien Secured Notes, or the Second Lien Notes, (ii) 11,026,086 shares of common stock, (iii) warrants to purchase up to 4,500,000 shares of our common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged.
These financing arrangements are further described under Liquidity and Capital Resources.
30
Going Concern
We believe that the transactions with Ascensia, PHC and Masters described above will provide the financial resources and mutual commitment to support manufacturing of Eversense and continued product development, including the expected launch of the new 180-day Eversense product. The timing and success of these collaborations and financings are dependent on certain events occurring in accordance with our plans, and may be influenced by uncontrollable external factors, including restrictions or impacts of COVID-19. As a result of these recent subsequent events and that the transactions have not yet closed, management’s doubt regarding our ability to continue as a going concern for the next twelve months from the date this Quarterly Report on Form 10-Q is filed is not yet alleviated.
Financial Overview
Revenue
We generate product revenue from sales of the Eversense system and related components and supplies at a fixed price to third-party distributors in the European Union and to a network of strategic fulfillment partners in the United States, or collectively, Customers, who then resell the products to health care providers and patients. We are paid for our sales directly to the Customers, regardless of whether or not the Customers resell the products to health care providers and patients. Under the terms of our distribution agreement with Roche, Roche is contractually obligated to make certain minimum purchases of Eversense XL systems from us and, accordingly, the revenue we recognize for any given period is not necessarily indicative of the level of sales to end users for that, or any other, period.
Revenue from product sales is recognized at a point in time when the Customers obtain control of our product based upon the delivery terms as defined in the contract at an amount that reflects the consideration which we expect to receive in exchange for the product. Contracts with our distributors contain performance obligations, mostly for the supply of goods, and is typically satisfied upon transfer of control of the product. Customer contracts do not include the right to return unless there is a product issue, in which case we may provide replacement product. Product conformity guarantees do not create additional performance obligations and are accounted for as warranty obligations in accordance with guarantee and loss contingency accounting guidance.
We recognize revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in a future period. Our contracts may contain some form of variable consideration such as prompt-pay discounts or tier-volume price discounts. Variable consideration, including reimbursements paid by us to our Customers in accordance with the Eversense Bridge Program initiated in March 2019 and to a lesser extent, other discounts, is treated as a reduction in revenue when the product sale is recognized. Depending on the variable consideration, we develop estimates for the expected value based on the terms of the agreements, historical data, insurance payor mix, reimbursement rates, and market conditions. In connection with the Eversense Bridge Program, we reimburse participating Customers an amount up to a fixed maximum for the difference in the cost of the Eversense CGM System and what they collect from insurance payors and the patient’s fee of $99. Our Customers are responsible for confirming patient insurance coverage, obtaining pre-authorizations, determining eligibility, and continuously provide us with data regarding which patient orders are under the program and which are not. We use this data, along with actual reimbursements that have been validated to patient claims, to support our expected reimbursement estimates. Estimated reimbursement payments for product shipped to Customers but not provided to a patient within the same reporting period are recorded within accrued expenses and other current liabilities in the accompanying consolidated balance sheets. Our estimates used in determining the variable consideration on a sale transaction may be adjusted each reporting period depending on actual results, provided a change does not reflect a modification to the original contract.
Contract assets consist of trade receivables from Customers and contract liabilities consist of amounts due to the Customers in connection with the Eversense Bridge Program, classified as patient access and incentive programs within accrued liabilities on the accompanying unaudited consolidated balance sheets. Trade receivables for customers in the United States are recorded at net realizable value, which is generally the contractual price but may be net of anticipated prompt-pay or promotional discounts.
31
Concentration of Revenue and Customers
For the three months ended September 30, 2020 and 2019, we derived 33% and 78% of our total net revenue, respectively, from one customer, Roche Diabetes Care GmbH. For the nine months ended September 30, 2020 and 2019, we derived 29% and 70% of our total net revenue, respectively, from one customer, Roche Diabetes Care GmbH. During the three and nine months ended September 30, 2020, Roche did not place commercial sales orders in accordance with their quarterly requirements or towards their annual binding minimum requirements for sensors. Revenues for these corresponding periods in 2020 represent purchases for transmitters and miscellaneous Eversense XL system components.
Revenue by Geographic Region
The following table sets forth net revenue derived from our two primary geographical markets, the United States and outside of the United States, based on the geographic location to which we deliver the product, for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended | Nine Months Ended | ||||||||||
September 30, 2020 | September 30, 2020 | ||||||||||
% | % | ||||||||||
(Dollars in thousands) | Amount | of Total | Amount | of Total | |||||||
Revenue, net: | |||||||||||
Outside of the United States | $ | 258 | 33.6 | % | $ | 325 | 30.5 | % | |||
United States | 509 | 66.4 | 739 | 69.5 | |||||||
Total | $ | 767 | 100.0 | % | $ | 1,064 | 100.0 | % | |||
Three Months Ended | Nine Months Ended | ||||||||||
September 30, 2019 | September 30, 2019 | ||||||||||
% | % | ||||||||||
(Dollars in thousands) | Amount | of Total | Amount | of Total | |||||||
Revenue, net: | |||||||||||
Outside of the United States | $ | 3,792 | 87.8 | % | $ | 9,908 | 80.2 | % | |||
United States | 527 | 12.2 | 2,441 | 19.8 | |||||||
Total | $ | 4,319 | 100.0 | % | $ | 12,349 | 100.0 | % | |||
Accounts Receivable
Accounts receivable consist of amounts due from our Customers and are recorded at net realizable value, which may include reductions for allowances for doubtful accounts at the time potential collection risk is identified or for promotional or prompt-pay discounts offered. We extended payment terms and provided one-time COVID-19 pandemic relief concessions to some of our customers in the United States for allowances up to a specified amount if they are unable to sell through Eversense and related components on hand prior to product expiry, which began to occur in the third quarter of 2020 and we expect to continue to occur in the fourth quarter of 2020. We do not have a history of collectability concerns; however, an immaterial allowance for uncollectible accounts was recorded as of September 30, 2020. There were no provisions for uncollectible accounts recorded against accounts receivable at December 31, 2019.
Use of Estimates
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. In our accompanying unaudited consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, recoverability of long-lived assets, deferred taxes and valuation allowances, derivative assets and liabilities, obsolete inventory, warranty obligations, variable consideration related to revenue, depreciable lives of property and equipment, and accruals for clinical study costs, which are accrued based on estimates of work performed under contract. We considered COVID-19 related impacts to
32
our estimates, as appropriate, within our unaudited condensed consolidated financial statements and there may be changes to those estimates in future periods due to the uncertainties surrounding the severity and duration of the COVID-19 pandemic. Actual results could differ from those estimates; however, we do not believe that such differences would be material.
Recent Accounting Pronouncements
Recently Adopted
In August 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements on fair value measurements. The new standard includes additional disclosure requirements regarding the range and weighted average to develop significant unobservable inputs within Level 3 fair value measurements. We adopted this on its effective date, January 1, 2020 and did not have a material impact on the consolidated financial statements and related disclosures.
Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities in unrealized loss positions, the new standard requires allowances to be recorded instead of reducing the amortized cost of the investment. We do not currently hold or plan to invest in available-for-sale securities and have not historically experienced collection issues or bad debts with trade receivables. Accordingly, we do not expect this to have a significant impact on our consolidated financial statements and related disclosures at this time. We will adopt this guidance on its effective date for smaller reporting companies, January 1, 2023.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact that this guidance will have on our consolidated financial statements.
33
Results of Operations
Comparison of the three months ended September 30, 2020 and 2019
The following table sets forth our results of operations for the three months ended September 30, 2020 and 2019 (in thousands):
Three Months Ended |
| |||||||||
September 30, | Period-to- |
| ||||||||
2020 | 2019 | Period Change |
| |||||||
(unaudited) | ||||||||||
Revenue, net |
| $ | 514 |
| $ | 959 |
| $ | (445) | |
Revenue, net - related parties | 253 | 3,360 | (3,107) | |||||||
Total revenue | 767 | 4,319 | (3,552) | |||||||
Cost of sales | (68) | 7,659 | (7,727) | |||||||
Gross profit (loss) | 835 | (3,340) | 4,175 | |||||||
Expenses: | ||||||||||
Sales and marketing expenses |
| 3,234 |
| 11,560 |
| (8,326) | ||||
Research and development expenses |
| 4,568 |
| 11,076 |
| (6,508) | ||||
General and administrative expenses |
| 5,501 |
| 5,388 |
| 113 | ||||
Operating loss |
| (12,468) |
| (31,364) |
| 18,896 | ||||
Other income, net: | ||||||||||
Interest income | 1 | 519 | (518) | |||||||
Loss on extinguishment and issuance of debt | (9,527) | (398) | (9,129) | |||||||
Interest expense |
| (3,632) |
| (3,460) |
| (172) | ||||
Debt issuance costs | (931) | (3,344) | 2,413 | |||||||
Gain on fair value and change in fair value of derivatives | 3,520 | 19,186 | (15,666) | |||||||
Other expense |
| (391) |
| (638) |
| 247 | ||||
Total other (expense) income, net |
| (10,960) |
| 11,865 |
| (22,825) | ||||
Net loss | $ | (23,428) | $ | (19,499) | $ | (3,929) | ||||
Revenue, net
Our net revenue decreased $3.6 million to $0.8 million for the three months ended September 30, 2020, compared to $4.3 million for the three months ended September 30, 2019. This decrease was a result of deferral of sales orders by Roche in the third quarter of 2020, and our decision to streamline our operational focus in March 2020 and temporarily suspend commercial sales to new patients in the United States.
Cost of sales
Our cost of sales decreased $7.7 million to $(0.1) million for the three months ended September 30, 2020, compared to $7.7 million for the three months ended September 30, 2019. The decrease was primarily due to the sales of previously impaired inventory, and the release of supplier allowances from the temporary suspension of manufacturing activities resulting from changes made to our operational focus.
Gross profit was $0.8 million and $(3.3) million for the three months ended September 30, 2020 and 2019, respectively. The increase in gross profit was primarily due to lower cost of sales.
Sales and marketing expenses
Sales and marketing expenses were $3.2 million for the three months ended September 30, 2020, compared to $11.6 million for the three months ended September 30, 2019, a decrease of $8.3 million. The decrease was primarily the result of our headcount reduction on March 26, 2020, which impacted the majority of the sales organization, resulting in
34
a decline in salary and personnel costs of $5.5 million and a decline of $2.8 million related to travel, trade shows, consultants and other marketing programs to market Eversense.
Research and development expenses
Research and development expenses were $4.6 million for the three months ended September 30, 2020, compared to $11.1 million for the three months ended September 30, 2019, a decrease of $6.5 million. The decrease was due to decrease of $2.1 million of consulting, outside services and other expenses resulting from our change in operational plans to focus on our regulatory submission for the new 180-day Eversense product in the United States, $3.6 million for clinical trial costs primarily related to the PROMISE trial and $0.8 million for salary and other personnel related costs following our reduction in workforce in March 2020.
General and administrative expenses
General and administrative expenses were $5.5 million for the three months ended September 30, 2020, compared to $5.4 million for three months ended September 30, 2019, an increase of $0.1 million. The increase was primarily due to an increase of $0.7 million for personnel costs related to stock-based compensation, offset by a reductions of $0.3 million for legal fees and $0.3 million of other administrative expenses resulting from our reduction in workforce in March 2020.
Total other (expense) income, net
Total other expense, net, was $11.0 million for the three months ended September 30, 2020, compared to other income, net, of $11.9 million for the three months ended September 30, 2019, a decrease of $22.8 million. The decrease was primarily due to a $9.1 million increase in loss on extinguishment and issuance of debt, a $15.7 million change in the fair value of our derivatives and a decrease of $0.5 million in interest income, offset by a $2.4 million decrease in debt issuance costs.
35
Comparison of the nine months ended September 30, 2020 and 2019
The following table sets forth our results of operations for the nine months ended September 30, 2020 and 2019 (in thousands):
Nine Months Ended |
| |||||||||
September 30, | Period-to- |
| ||||||||
2020 | 2019 | Period Change |
| |||||||
(in thousands) |
| |||||||||
Revenue, net |
| $ | 761 |
| $ | 3,678 |
| $ | (2,917) | |
Revenue, net - related parties | 303 | 8,671 | (8,368) | |||||||
Total revenue | 1,064 | 12,349 | (11,285) | |||||||
Cost of sales | 21,006 | 23,552 | (2,546) | |||||||
Gross loss | (19,942) | (11,203) | (8,739) | |||||||
Expenses: | ||||||||||
Sales and marketing expenses |
| 17,521 |
| 38,573 |
| (21,052) | ||||
Research and development expenses |
| 15,726 |
| 28,688 |
| (12,962) | ||||
General and administrative expenses |
| 15,635 |
| 17,321 |
| (1,686) | ||||
Operating loss |
| (68,824) |
| (95,785) |
| 26,961 | ||||
Other income (expense), net: | ||||||||||
Interest income | 173 | 1,556 | (1,383) | |||||||
Loss on extinguishment and issuance of debt | (20,458) |
| (398) |
| (20,060) | |||||
Interest expense |
| (11,560) |
| (7,459) |
| (4,101) | ||||
Debt issuance costs | (1,216) | (3,344) | 2,128 | |||||||
Gain on fair value and change in fair value of derivatives | 29,069 | 26,147 | 2,922 | |||||||
Other expense |
| (720) |
| (655) |
| (65) | ||||
Total other (expense) income, net |
| (4,712) |
| 15,847 |
| (20,559) | ||||
Net loss | $ | (73,536) | $ | (79,938) | $ | 6,402 | ||||
Revenue, net
Our net revenue decreased $11.3 million to $1.1 million for the nine months ended September 30, 2020, compared to $12.3 million for the nine months ended September 30, 2019. This decrease was a result of deferral of sales orders by Roche in the first nine months of 2020, and our decision to streamline our operational focus in March 2020 and temporarily suspend commercial sales to new patients in the United States.
Cost of sales
Our cost of sales decreased $2.5 million to $21.0 million for the nine months ended September 30, 2020, compared to $23.6 million for the nine months ended September 30, 2019. The decrease was primarily due to a decrease in cost of sales of $9.7 million related to lower customer sales and a decrease of $0.9 million related to lower personnel related costs, offset by an increase of $8.0 million for impairment charges, scrap and write-offs for inventory and related assets during the nine months ended September 30, 2020 due to uncertainty in demand forecasts from changes made to our operational focus and current economic conditions.
Gross profit was $(19.9) million and $(11.2) million for the nine months ended September 30, 2020 and 2019, respectively. The decrease in gross profit was primarily due to lower sales and impairment charges for inventory and related assets.
36
Sales and marketing expenses
Sales and marketing expenses were $17.5 million for the nine months ended September 30, 2020, compared to $38.6 million for the nine months ended September 30, 2019, a decrease of $21.1 million. The decrease was primarily the result of our headcount reduction on March 26, 2020, which impacted the majority of the sales organization, resulting in a decline in salary and personnel costs of $10.4 million and a decline of $10.6 million related to travel, trade shows, consultants and other marketing programs to market Eversense.
Research and development expenses
Research and development expenses were $15.7 million for the nine months ended September 30, 2020, compared to $28.7 million for the nine months ended September 30, 2019, a decrease of $13.0 million. The decrease was primarily due to decreases of $5.9 million for consulting expenses, outside services and other development expenses, $5.5 million related to PROMISE and other clinical studies and $1.6 million in personnel related costs following our reduction in workforce in March 2020.
General and administrative expenses
General and administrative expenses were $15.6 million for the nine months ended September 30, 2020, compared to $17.3 million for nine months ended September 30, 2019, a decrease of $1.7 million. The decrease was primarily due to a decrease of $1.3 million for net personnel related costs from higher severance costs in 2019 and our reduction in workforce in 2020, along with a net $0.4 million decrease for patents, legal and other administrative expenses in connection with operational changes and issues related to the COVID-19 pandemic.
Total other (expense) income, net
Total other expense, net, was $4.7 million for the nine months ended September 30, 2020, compared to other income, net, of $15.8 million for the nine months ended September 30, 2019, a decrease of $20.6 million. The decrease was primarily due to a $20.0 million increase in loss on extinguishment and issuance of debt, a $4.1 million increase of interest expense and a $1.4 million decrease to interest income, offset by a $2.9 million gain on fair value and change in fair value of derivatives and a $2.1 million decrease of debt issuance costs.
Liquidity and Capital Resources
Sources of Liquidity
To date, we have funded our operations principally through the issuance of preferred stock, common stock and debt. As of September 30, 2020, we had cash, cash equivalents, and restricted cash of $26.4 million.
On August 9, 2020, we entered into a financing agreement with Ascensia pursuant to which we issued $35.0 million in aggregate principal amount 2024 Notes, to Ascensia’s parent company, PHC, on the Closing Date. We also issued PHC 2,941,176 shares of common stock to PHC as a financing fee. We also have the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon obtaining approval for the 180-day Eversense product for marketing in the United States before such date. Upon the closing of the 2024 Notes, we prepaid the First Lien Notes in full in the amount of approximately $17.6 million, which includes the discounted prepayment premium.
Additionally, on August 9, 2020, we entered into a Stock Purchase Agreement with Masters, pursuant to which we issued and sold to Masters 3,000 shares of Series A Preferred Stock, at a price of $1,000.00 per share in an initial closing, expected to occur on the Closing Date. Masters also has the option to purchase up to an additional 27,000 shares of Series A Preferred Stock at a price of $1,000.00 per share in a subsequent closing on or before January 11, 2021, subject to the terms and conditions of the Stock Purchase Agreement. Each share of Series A Preferred Stock will initially be convertible into a number of shares of common stock equal to $1,000 divided by the conversion price of $0.476 per share, subject to customary anti-dilution adjustments, including in the event of any stock split. The Series A
37
Preferred Stock will rank senior to the common stock. Upon a liquidation, dissolution or winding up of the Company, each share of Series A Preferred Stock will be entitled to receive an amount per share equal to the greater of the purchase price paid and the amount that the holder would have been entitled to receive at such time if the Series A Preferred Stock were converted into common stock. The holders will also be entitled to participate in dividends declared or paid on the common stock on an as-converted basis. If we undergo a change of control, each holder has the right to cause us to redeem any or all of the Series A Preferred Stock for cash consideration equal to the liquidation amount. The holders of Series A Preferred Stock generally will be entitled to vote with the holders of the shares of common stock on all matters submitted for a vote of holders of shares of common stock (voting together with the holders of shares of common stock as one class) on an as-converted basis. Additionally, certain matters will require the approval of the majority of the outstanding Series A Preferred Stock, voting as a separate class, including (i) altering or changing adversely the powers, privileges, preferences or rights of the Series A Preferred Stock, or (ii) amendments, modifications, repeal or waiver of any provision of our certificate of incorporation, bylaws or of the certificate of designations that would adversely affect the rights, preferences, privileges or powers of the Series A Preferred Stock.
On November 9, 2020, we entered into an equity line agreement, or the Equity Line Agreement, with Energy Capital, LLC, a Florida limited liability company, or Energy Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Energy Capital is committed to purchase up to an aggregate of $12.0 million of shares of our newly designated series B convertible preferred stock, or the Series B Preferred Stock, at our request from time to time during the 24-month term of the Equity Line Agreement.
Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that we have less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), we have the right, in our sole discretion, to present Energy Capital with a purchase notice, or a Regular Purchase Notice, directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of our Series B Preferred Stock at a per share price, or the Purchase Price, equal to $1,000 per share of Series B Preferred Stock, with each share of Series B Preferred Stock initially convertible into common stock, beginning six months after the date of its issuance, at a conversion price of $0.3951 per share. The Equity Line Agreement provides that we shall not affect any Regular Purchase under the Equity Line Agreement on any date where the closing price of the common stock on the NYSE American is less than $0.25 without the approval of Energy Capital.
Concurrently with entry into the Equity Line Agreement, we issued a warrant to Energy Capital, exercisable beginning May 9, 2021, to purchase up to 10,000,000 shares of common stock at an exercise price of $0.3951 per share, or the Warrant. The Warrant expires, if unexercised, on November 9, 2030
Common Stock
In November 2019, we entered into an Open Market Sale Agreement with Jefferies LLC which allows us to issue and sell up to $50 million in gross proceeds of our common stock. As of September 30, 2020, we have received $0.1 million in net proceeds from the sale of 175,289 shares under this agreement.
Indebtedness
Term Loans
As described in our Overview and Business Updates, on March 22, 2020 we terminated our Loan and Security Agreement with Solar and repaid the $45.0 million principal balance in full.
PPP Loan
On April 22, 2020, we received $5.8 million in loan funding from the PPP pursuant to the CARES Act, as amended by the Flexibility Act, and administered by the SBA. The unsecured loan, or the PPP Loan, is evidenced by the PPP Note dated April 21, 2020, or the PPP Note, in the principal amount of $5.8 million with Silicon Valley Bank, or the Bank.
38
Under the terms of the PPP Note and the PPP Loan, interest accrues on the outstanding principal at a rate of 1.0% per annum. The term of the PPP Note is two years, though it may be payable sooner in connection with an event of default under the PPP Note. To the extent the loan amount is not forgiven under the PPP, we are obligated to make equal monthly payments of principal and interest, beginning after determination of forgiveness by the Bank. We may apply for forgiveness any time on or before the maturity date of the loan. If we do not apply for loan forgiveness within ten months after the last day of the covered period, the PPP loan is no longer deferred, and we must begin paying principal and interest.
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, we may apply for forgiveness for all or a part of our PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by us during the specified period after the loan origination for certain purposes including payroll costs, interest on debt obligations incurred prior to February 15, 2020, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered specified period will qualify for forgiveness. As a result of our workforce reduction, the amount of forgiveness will correspondingly decrease.
The PPP Note may be prepaid in part or in full, at any time, without penalty. The PPP Note provides for certain customary events of default, including (i) failing to make a payment when due under the PPP Note, (ii) failure to do anything required by the PPP Note or any other loan document, (iii) defaults of any other loan with the Bank, (iv) failure to disclose any material fact or make a materially false or misleading representation to the Bank or SBA, (v) default on any loan or agreement with another creditor, if the Bank believes the default may materially affect our ability to pay the PPP Note, (vi) failure to pay any taxes when due, (vii) becoming the subject of a proceeding under any bankruptcy or insolvency law, having a receiver or liquidator appointed for any part of our business or property, or making an assignment for the benefit of creditors, (viii) having any adverse change in financial condition or business operation that the Bank believes may materially affect our ability to pay the PPP Note, (ix) if we reorganize, merge, consolidate, or otherwise change ownership or business structure without the Bank’s prior written consent, or (x) becoming the subject of a civil or criminal action that the Bank believes may materially affect our ability to pay the PPP Note. Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require immediate payment of all amounts owed under the PPP Note, collect all amounts owing from us, and file suit and obtain judgment against us.
Highbridge Loan Agreement
On April 21, 2020, we entered into the Highbridge Loan Agreement, with certain funds managed by Highbridge Capital Management, LLC, or Highbridge, as the lenders (together with the other lenders from time to time party thereto, or the Lenders) and Wilmington Savings Fund Society, SCB, as collateral agent.
Pursuant to the Highbridge Loan Agreement, we borrowed an aggregate principal amount of $15.0 million on April 24, 2020 through the issuance and sale of First Lien Notes. In connection with the Highbridge Loan Agreement and receipt of the first tranche of borrowing, we issued 1,500,000 shares of our common stock to the Lenders as a commitment fee. Upon the closing of the 2024 Notes, we prepaid the First Lien Notes in full in the amount of approximately $17.6 million, which includes the discounted prepayment premium.
The First Lien Notes were secured, senior obligations that bear interest at the annual rate of 12% or, at our election, payment in kind at an annual rate of 13%, payable monthly in arrears. The First Lien Notes would have matured on October 24, 2021, or the First Lien Maturity Date, unless earlier repurchased, redeemed or converted in accordance with their terms. The obligations under the First Lien Notes were secured by substantially all our assets.
39
Exchange Agreement with Highbridge
On April 21, 2020 we entered into a Note Purchase and Exchange Agreement, or the Exchange Agreement, which we subsequently amended on August 9, 2020, with certain funds managed by Highbridge providing for the exchange of $24.0 million aggregate principal amount of our outstanding senior convertible notes due January 15, 2025, or the 2025 Notes, for (i) $15.7 million aggregate principal amount of newly issued Second Lien Secured Notes, or the Second Lien Notes, (ii) 11,026,086 shares of our common stock, (iii) warrants to purchase up to 4,500,000 shares of our common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged. The Exchange closed on April 24, 2020. The warrants may be exercised in cash or on a cashless basis at any time through the three year anniversary of the issuance date.
The Second Lien Notes are secured, senior obligations, junior only to the First Lien Notes. The Second Lien Notes bear interest in cash at the annual rate of 7.5% or, at our election, payment in kind at an annual rate of 8.25%, payable monthly in arrears. The Second Lien Notes mature on August 9, 2023 unless earlier repurchased, redeemed or converted in accordance with their terms. The obligations under the Second Lien Notes are secured by substantially all of our assets.
We have the right to prepay the Second Lien Notes at any time, subject to a prepayment premium, which in certain circumstances we may elect to pay in our common stock, equal to the aggregate amount of interest payments through maturity.
As amended by the Amendment, effective as of the Closing Date, the holders of the Second Lien Notes will have the right to convert the aggregate principal of the Second Lien Notes (together with any applicable prepayment premium) to common stock at a price per share equal to 90% of the greater of (i) the daily volume weighted average of the price per share of the common stock, on the conversion date, or if the conversion date is not a trading date, the trading day immediately prior to the conversion date and (ii) $0.33 per share. This conversion option has a daily limit of $1,000,000 in aggregate converted principal (inclusive of principal amount of First Lien Notes that are voluntarily converted). During the quarter ended September 30, 2020, Highbridge elected to convert a total of $3.6 million of outstanding principal on the Second Lien Notes for issuance of 9,328,955 shares of common stock, which included prepayment premiums and were based off of our election of PIK interest. As of November 6, 2020, approximately $5.7 million principal amount of Second Lien Notes remained outstanding.
Subject to certain conditions, if we retain or reinvest proceeds of an asset sale pursuant to the asset sale prepayment provisions in the Exchange Agreement, the Second Lien Notes Holders shall be entitled to convert additional Second Lien Notes and the Lenders shall be entitled to convert First Lien Notes in aggregate combined principal amount equal to 45% of such net proceeds retained or reinvested (together with any applicable prepayment premium).
The Exchange Agreement contains customary terms and covenants, including without limitation: financial covenants, such as maintaining a minimum cash balance; and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The Exchange Agreement also contains customary events of default, after which the Second Lien Notes may be due and payable immediately, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, material adverse changes, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against us, and change of control, termination of any guaranty, governmental approvals, and lien priority.
Convertible Notes
In July 2019, we issued $82.0 million in aggregate principal amount of the 2025 Notes. In connection with the Exchange on April 24, 2020, $24.0 million in aggregate principal of Highbridge’s outstanding 2025 Notes were exchanged for (i) $15.7 million aggregate principal amount of Second Lien Notes, (ii) 11,026,086 shares of our common stock, (iii) warrants to purchase up to 4,500,000 shares of our common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged.
40
In the first quarter of 2018, we issued $53.0 million in aggregate principal amount of senior convertible notes that will mature on February 1, 2023, or the 2023 Notes, of which $15.7 million in aggregate principal remains after some of the holders exchanged their 2023 Notes for 2025 Notes in July 2019. For additional information on the 2025 Notes and the 2023 Notes, see Note 7—Notes Payable, Preferred Stock and Stock Purchase Warrants in the accompanying unaudited consolidated financial statements.
The following table summarizes our outstanding notes payable at September 30, 2020:
Aggregate | Initial Conversion | Conversion Price | |||||||||||||||
Convertible | Issuance | Principal | Maturity | Rate per Share | per Share of | ||||||||||||
Note | Date | Coupon |
| (in millions) |
| Date |
| of Common Stock |
| Common Stock |
| ||||||
2023 Notes | January 2018 | 5.25% | $ | 15.7 | February 1, 2023 | 294.1176 | $ | 3.40 | |||||||||
2025 Notes | July 2019 | 5.25% | 57.7 | January 15, 2025 | 757.5758 | 1.32 | |||||||||||
2024 Notes | Aug-20 | 9.50% | 35.0 | November 1, 2024 | 186.74 | 0.54 | |||||||||||
Second Lien Notes | April 2020 | 8.25% | 6.4 | August 9, 2023 | n/a | 90% of daily VWAP or 0.33 | |||||||||||
PPP Loan | April 2020 | 1.00% | 5.8 | April 22, 2022 | n/a | n/a | |||||||||||
Total | $ | 120.6 | |||||||||||||||
2024 Notes
On August 9, 2020, we entered into a note purchase agreement with PHC, pursuant to which we agreed to borrow $35.0 million in aggregate principal through the issuance and sale of 2024 Notes on or prior to August 14, 2020. The 2024 Notes will be senior secured obligations and will be guaranteed on a senior secured basis by our wholly owned subsidiary, Senseonics, Incorporated. Interest at the annual rate of 9.5% will be payable semi-annually in cash or, at our option, payment in kind. The interest rate will decrease to 8.0% if we obtain approval for 180-day Eversense product for marketing in the United States, subject to certain conditions. The maturity date for the 2024 Notes will be October 31, 2024, provided that the maturity date will accelerate if we have not repaid our Second Lien Notes (other than an aggregate principal amount of up to $1.0 million) by 91 days prior to the maturity of the Second Lien Notes.
PHC will be entitled to convert the 2024 Notes to common stock at a conversion rate of 1,867.4136 shares per $1,000 principal amount of the 2024 Notes (including any interest added thereto as payment in kind), equivalent to a conversion price of approximately $0.54 per share, subject to specified anti-dilution adjustments, including adjustments for our issuance of equity securities on or prior to April 30, 2022 below the conversion price. In addition, following a notice of redemption or certain corporate events that occur prior to the maturity date, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such notice of redemption or corporate event. In certain circumstances, we will be required to pay cash in lieu of delivering make whole shares unless we obtain stockholder approval to issue such shares.
Subject to specified conditions, on or after October 31, 2022, the 2024 Notes are redeemable by us if the closing sale price of the common stock exceeds 275% of the conversion price for a specified period of time and subject to certain conditions upon 10 days prior written notice at a cash redemption price equal to the then outstanding principal amount (including any payment in kind interest which has been added to such amount), plus any accrued but unpaid interest. On or after October 31, 2023, the 2024 Notes are redeemable by us upon 10 days prior written notice at a cash redemption price equal to the then outstanding principal amount (including any payment in kind interest which has been added to such amount), plus any accrued but unpaid interest, plus a call premium of 130% if redeemed at least six months prior to the maturity date or a call premium of 125% if redeemed within six months of the maturity date.
The note purchase agreement contains customary terms and covenants, including financial covenants, such as operating within an approved budget and achieving minimum revenue and liquidity targets, and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily
41
restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The note purchase agreement also contains customary events of default, after which the 2024 Notes be due and payable immediately, including defaults related to payment compliance, material inaccuracy of representations and warranties, covenant compliance, material adverse changes, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against us, change of control or delisting events, termination of any guaranty, governmental approvals, and lien priority.
Funding Requirements and Outlook
The financing arrangements pending with PHC and Masters Capital could provide for a total of up to $42 million if successfully concluded. If we close on the sale of all of the equity contemplated by these arrangements, we project our available financial resources would fund operations through 2021.
New or additional financings may not be available to us on commercially acceptable terms, or at all, and may be impacted by new and current debt covenants. To the extent that we raise additional capital through debt or the sale of equity, 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 our existing common stockholders. If we are unable to raise additional funds through equity, debt financings, or achieve successful results from strategic agreements, including the Ascensia collaboration and commercialization agreement, we may be required to further delay, limit, reduce or terminate some of our operating plans.
Cash Flows
The following is a summary of cash flows for each of the periods set forth below (in thousands).
| Nine Months Ended | ||||||
| September 30, | ||||||
| 2020 | 2019 | |||||
Net cash used in operating activities |
| $ | (59,174) |
| $ | (101,486) | |
Net cash used in investing activities |
| (181) |
| (951) | |||
Net cash (used in) provided by financing activities |
| (10,191) |
| 96,224 | |||
Net decrease in cash, cash equivalents and restricted cash | $ | (69,546) | $ | (6,213) | |||
Net cash used in operating activities
Net cash used in operating activities was $59.2 million for the nine months ended September 30, 2020 and consisted of a net loss of $73.5 million, a net change in operating assets and liabilities of ($0.3) million mostly due to declines in accruals and accounts payables of $11.9 million reflecting reduced operational activities, partially offset by $9.9 million for collections of accounts receivable at December 31, 2019 and $3.2 reductions in inventory, net for increased impairment reserves, as well as net non-cash items of $14.6 million, primarily due to a change of $9.4 million for inventory obsolescence and net realizable value charges, $20.5 million for extinguishment and issuance losses on the notes and $13.8 million for interest expense, depreciation, disposal of fixed assets and stock-based compensation expense, partially offset by a decrease in fair value of derivatives of $29.1 million.
Net cash used in operating activities was $101.5 million for the nine months ended September 30, 2019, and consisted of a net loss of $79.9 million and a net change in non-cash items of $(10.1) million due to the change in the fair value of the derivatives on the 2025 Notes and 2023 Notes, offset by debt issuance fees associated with the modified convertible notes, and stock-based compensation costs, and changes related to operating assets and liabilities of $(11.4) million, mostly related to the build-up of inventory during the third quarter of 2019.
Net cash used in investing activities
Net cash used in investing activities was $0.2 million for the nine months ended September 30, 2020 and consisted of capital expenditures for laboratory equipment.
42
Net cash used in investing activities was $1.0 million for the nine months ended September 30, 2019 and consisted of capital expenditures for laboratory and production equipment at our contract manufacturers.
Net cash (used in) provided by financing activities
Net cash used in financing activities was $10.2 million for the nine months ended September 30, 2020 and primarily consisted of $66.0 million for the repayment of outstanding principal, final payoff fees and prepayment premiums of $48.4 million for Solar Loan Agreement and $17.6 million for First Lien Notes, offset by proceeds of $56.0 million from the PPP loan of $5.8 million, from the First Lien Notes of $14.4 million, from the 2024 Notes of $33.3 million and $2.5 million from the issuance of Series A preferred stock.
Net cash provided by financing activities was $96.2 million for the nine months ended September 30, 2019, and consisted of net proceeds from the issuance of common stock of $26.8 million, net proceeds of $77.7 million from the issuance of 2025 Notes, net proceeds from the Solar Term Loan of $43.0 million and proceeds from stock option and warrant exercises of $0.1 million, offset by repurchases of $37.0 million of 2023 Notes and repayment in full of $15.0 million of term loans.
Contractual Obligations
The following summarizes our contractual obligations as of September 30, 2020:
Payment due by period |
| |||||||||||||||
Remainder of | After |
| ||||||||||||||
Contractual Obligations | Total | 2020 | 2021-2022 | 2023-2024 | 2024 |
| ||||||||||
Operating lease obligations |
| $ | 2,757 |
| $ | 186 | 1,971 | 600 | - | |||||||
Principal payments under PPP Loan | 5,763 | - | 5,763 | - | - | |||||||||||
Interest payments under PPP Loan | 117 | - | 117 | - | - | |||||||||||
Principal payments under 2023 Notes | 15,700 | - | - | 15,700 | - | |||||||||||
Interest payments under 2023 Notes | 2,473 | 412 | 1,649 | 412 | - | |||||||||||
Principal payments under 2024 Notes | 35,000 | - | - | 35,000 | - | |||||||||||
Interest payments under 2024 Notes | 14,539 | - | 7,650 | 6,889 | - | |||||||||||
Principal payments under 2025 Notes | 57,700 | - | - | - | 57,700 | |||||||||||
Interest payments under 2025 Notes | 13,703 | 6,090 | 6,090 | 1,523 | ||||||||||||
Principal payments under Second Lien Notes | 8,111 | - | - | 8,111 | - | |||||||||||
Interest payments under Second Lien Notes(1) | 1,718 | - | - | 1,718 | - | |||||||||||
Other Commitments (2) | - | - | - | - | - | |||||||||||
Total contractual obligations | $ | 157,581 | $ | 598 | $ | 23,240 | $ | 74,520 | $ | 59,223 | ||||||
| (1) | We have elected for PIK interest on these notes. |
| (2) | Other commitments include, among other things, minimum payment obligations and other obligations that we cannot cancel or where we would be required to pay a fee for termination before the contractual period ended. |
Contingencies – Contract Manufacturer Obligations
As a result of the impact of the COVID-19 pandemic on the global healthcare community and our streamlined operational focus implemented at the end of the first quarter of 2020, we have been negotiating with certain of our major suppliers and contract manufacturers to pay for materials procured by these parties on our behalf or for costs incurred related to Eversense manufacturing activities that we paused or delayed. Some of these fees are dependent on whether the materials will expire prior to when we resume production at normal operating levels, or if further delays in manufacturing occur. We will record any fees contingent upon future manufacturing timing in our consolidated financial statements if, and when, it is probable such obligations will become due. When we resume manufacturing activities, some of the amounts paid for materials may be credited back to us upon consumption.
43
Off-Balance Sheet Arrangements
During the nine months ended September 30, 2020 we did not have any off-balance sheet arrangements as defined by SEC rules.
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of September 30, 2020, we had cash, cash equivalents, and restricted cash of $26.4 million. We generally hold our cash in interest-bearing money market accounts or short-term investments that meet our policy for cash equivalents. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents. The interest rates on our notes payable are all fixed. We do not currently engage in hedging transactions to manage our exposure to interest rate risk.
Foreign Currency Risk
The majority of our international sales are denominated in Euros. Therefore, our U.S. dollar value of sales is impacted by exchange rates versus the Euro. Currency fluctuations or a strengthening U.S. dollar can decrease our revenue from these Euro-denominated international sales. To date, foreign currency transaction gains and losses and exchange rate fluctuations have not been material to our consolidated financial statements, and we do not believe that the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would have had a material impact on our operating results or financial condition. We do not currently engage in any hedging transactions to manage our exposure to foreign currency exchange rate risk.
In addition, the uncertainty that exists with respect to the economic impact of the global COVID-19 pandemic has introduced significant volatility in the financial markets subsequent to our quarter ended September 30, 2020, which could increase our foreign currency and interest rate risk.
ITEM 4: Controls and Procedures
Changes to Smaller Reporting Company Requirements
On March 12, 2020, the SEC voted to adopt amendments to the “accelerated filer” and “large accelerated filer” definitions in Rule 12b-2 under the Securities Exchange Act of 1934, or the Exchange Act. The amendments more appropriately tailor the types of issuers that are included in the categories of accelerated and large accelerated filers and promote capital formation, preserve capital, and reduce unnecessary burdens and compliance costs for certain smaller issuers while maintaining investor protections. As a result, certain low-revenue issuers will not be required to have their management’s assessment of the effectiveness of internal control over financial reporting, or ICFR, attested to, and reported on, by an independent auditor, as required by Section 404(b) of the Sarbanes-Oxley Act, or SOX. However, those issuers will remain obligated, among other things, to establish and maintain ICFR and, as required by SOX Section 404(a), have management assess the effectiveness of ICFR. Additionally, the amendments revise certain transition thresholds for accelerated and large accelerated filers and add an ICFR auditor attestation check box to the cover page of Form 10-K.
The 2019 fiscal year was the first year we were required to have an auditor’s attestation report on our system of ICFR pursuant to SOX. As a result of these amendments, we are no longer required to have our independent auditor attest to our ICFR. We expect material savings in our audit fees for 2020 as a result of this change, which become effective on April 27, 2020 and apply to our annual report on Form 10-K for the year ended December 31, 2020.
44
Evaluation of Disclosure Controls and Procedures
Our management, with the assistance of our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, has reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2020. 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. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving such control objectives. Based on the evaluation of our disclosure controls and procedures as of September 30, 2020, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2020 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
From time to time, we are subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legal proceedings, and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results or financial condition.
ITEM 1A: Risk Factors
Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. Except as described below, our risk factors as of the date of this Quarterly Report on Form 10-Q have not changed materially from those described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 16, 2020, as amended on April 28, 2020.
Our collaboration and commercialization agreement with Ascensia to market Eversense may not be successful.
We have entered into a collaboration and commercialization agreement with Ascensia, pursuant to which we have granted Ascensia the exclusive right to distribute Eversense worldwide, subject to initial exceptions based on our other current exclusive distribution agreements. Pursuant to this agreement, our future success will be dependent on Ascensia effectively marketing and selling Eversense. We expect that the substantial majority of our future revenue will come pursuant to this agreement in future years. If Ascensia fails to perform satisfactorily under this agreement, our commercialization efforts and financial results would be directly and adversely affected.
The agreement is terminable by Ascensia under a number of circumstances, including if Eversense XL is not approved in the United States by August 31, 2021 or if we undergo a change of control. The agreement is terminable by either party if the other party materially breaches its obligations under the agreement; provided, however, that if Ascensia is unable to achieve the specified minimum spending or revenue targets described above, then we will only have the right to covert Ascensia’s exclusive rights to nonexclusive rights, which may make it difficult for us to successfully engage with another commercial partner. The agreement is also terminable by either party if the other party undergoes bankruptcy, dissolution or winding up.
We cannot guarantee this agreement with Ascensia will be successful, that it will continue, or that we will be able to maintain any particular volume of sales under the agreement or increase the volume of sales from this relationship in the future.
45
Our collaboration and commercialization agreement with Ascensia and the terms of our recent debt and preferred stock transactions may discourage a change of control of our company.
The terms of our agreements with Ascensia and PHC may discourage a third party from acquiring, or attempting to acquire, control of our company, even if a change of control was considered favorable by some or all of our stockholders. For example, because of the exclusivity of the distribution arrangements with Ascensia and the minimum five-year term of that exclusivity, prospective strategic acquirors may be unwilling to undertake an acquisition of our company. In addition, under the terms of the notes to be issued to PHC and the convertible preferred stock to be issued to MSS and, potentially, PHC, we would be required to make significant payments to redeem our these notes and to satisfy liquidation preference of our convertible preferred stock upon a change of control.
Our business, product sales and results of operations could be adversely affected by the effects of health epidemics, including the recent COVID-19 outbreak, in regions where we or third parties distribute our products or where we or third parties on which we rely have significant manufacturing facilities, concentrations, clinical trial sites or other business operations. The COVID-19 pandemic could materially affect our operations, including at our headquarters in Maryland and at our clinical trial sites, as well as the business or operations of our manufacturers, distributors or other third parties with whom we conduct business.
Our business could be adversely affected by health epidemics in regions where we have concentrations of clinical trial sites or other business operations and could cause significant disruption in the operations of third-party manufacturers and distributors upon whom we rely.
For example, in December 2019, a novel strain of coronavirus, SARS-CoV-2, causing a disease referred to as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States and several European countries. Our headquarters is located in Maryland, and our contract manufacturers are located in Germany, the United Kingdom and the United States. Our distributors are located in the United States and various countries in Europe.
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the U.S. government-imposed travel restrictions on travel between the United States, Europe and certain other countries. Further, the President of the United States declared the COVID-19 pandemic a national emergency, invoking powers under the Stafford Act, the legislation that directs federal emergency disaster response. Similarly, the Governor of Maryland has issued an order closing all non-essential businesses, which took effect on March 23, 2020. Substantially all of our workforce is now working from home either all or substantially all of the time. The effects of the Maryland order and our work-from-home policies may negatively impact productivity, disrupt our business and delay our clinical programs, regulatory and commercialization timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, operating results and financial condition.
Quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at third-party manufacturing facilities in the United States and other countries, or the availability or cost of materials, which would disrupt our supply chain. In particular, some of our suppliers of certain materials used in the production of our sensors and transmitters are located in Germany, the United Kingdom, China, Japan and the United States. For example, any manufacturing supply interruption of Eversense or future generation products, could adversely affect our ability to conduct planned clinical trials and commercialization activities.
Sales and demand for Eversense may be adversely affected by the global COVID-19 pandemic. Disruptions in the distributions of Eversense could result if patients are physically quarantined, if physicians restrict access to their facilities for a material period of time, if patients are unable or unwilling to visit health care providers, or if health care providers prioritize treatment of acute or communicable illnesses over diabetes management. We have begun to receive indications that insertions of Eversense have slowed during the pandemic, and this slowing could continue or worsen.
In addition, our clinical trials may be affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic. Some patients
46
may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. Similarly, our ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19 and adversely impact our clinical trial operations.
The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.
The global pandemic of COVID-19 continues to rapidly evolve. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, commercialization efforts, healthcare systems or the global economy as a whole. However, these effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.
Restrictive covenants under the indentures related to the 2023 Notes and the 2025 Notes, the Highbridge Loan Agreement, the Exchange Agreement and the PHC Note Purchase Agreement may limit the manner in which we operate.
The indentures related to the 2023 Notes and the 2025 Notes, the Exchange Agreement, the Highbridge Loan Agreement and the PHC Note Purchase Agreement contain, and any future indebtedness we incur may contain, various negative covenants that restrict, among other things, our ability to:
| ● | incur additional indebtedness, guarantee indebtedness or issue disqualified stock or, in the case of such subsidiaries, preferred stock; |
| ● | declare or pay dividends on, repurchase or make distributions in respect of, their capital stock or make other restricted payments; |
| ● | make investments or acquisitions; |
| ● | create liens; |
| ● | enter into agreements restricting certain subsidiaries' ability to pay dividends or make other intercompany transfers; |
| ● | consolidate, merge, sell or otherwise dispose of all or substantially all of our assets and the assets of our restricted subsidiaries; |
| ● | enter into transactions with affiliates; |
| ● | sell, transfer or otherwise convey certain assets; and |
| ● | prepay certain types of indebtedness. |
In addition, the Highbridge Loan Agreement and the Exchange Agreement have minimum liquidity requirements and the Highbridge Loan Agreement includes a covenant requiring the Company to operate within an approved budget. The PHC Note Purchase Agreement also contains covenants requiring us to operate within an approved budget and achieving minimum revenue and liquidity targets. Moreover, pursuant to our collaboration and commercialization agreement with Ascensia, we will have less ability to influence our revenues and ability to satisfy these revenue targets. Our obligations under the Highbridge Loan Agreement, the Exchange Agreement and the PHC Note Purchase Agreement are secured by substantially all of our assets. As a result, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities, repurchase shares of our common stock or finance future operations or capital needs.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control, including uncertainties related to the COVID-19 pandemic. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to
47
generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Despite our current debt levels, subject to certain conditions and limitations, we may still incur substantially more debt or take other actions which would intensify the risks discussed above.
Despite our current consolidated debt levels, subject to certain conditions and limitations in the indentures related to the 2023 Notes and the 2025 Notes, the Highbridge Loan Agreement, the Exchange Agreement, and the PHC Note Purchase Agreement, we may be able to incur substantial additional debt in the future, some of which may be secured debt. We may not be subject to any restrictions on incurrence of additional indebtedness under the terms of any future indebtedness. If new debt is added to our current debt levels, the related risks that we and they now face could intensify.
The issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plan, upon the conversion of our convertible senior subordinated notes or otherwise will dilute our existing stockholders.
Our certificate of incorporation authorizes us to issue up to 900,000,000 shares of common stock and up to 5,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue our shares of common stock, including by conversion of our convertible notes, in certain circumstances, conversion of our convertible preferred stock, in connection with a financing, acquisition, investment, our equity incentive plans or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.
The holders of the convertible preferred stock rank senior to our common stock upon a liquidation of our company.
In the event of a liquidation, dissolution or winding up of our company, our Series A convertible preferred stock, along with any convertible preferred stock that we may issue to PHC or Energy Capital, will rank senior to our common stock. Each share of preferred stock will be entitled to receive an amount per share equal to the greater of the purchase price paid and the amount that the holder would have been entitled to receive at such time if the convertible preferred stock were converted into common stock.
Until the holders of the convertible preferred stock have been paid their liquidation amount in full, no payment will be made to any holder of common stock. If our assets, or the proceeds from their sale, distributable among the holders of the convertible preferred stock are not sufficient to pay the liquidation amount in full, then those assets or proceeds will be distributed among the holders of the convertible preferred stock. In that case, there would be no assets or proceeds remaining to be distributed to holders of our common stock, which could impact the trading price of our common stock.
Shares of our convertible preferred stock and the PHC Notes are convertible into shares of our common stock and, upon conversion, will dilute your percentage of ownership.
Each share of our convertible preferred stock is convertible at any time at the option of the holder into 1,000 shares of our common stock (subject to customary anti-dilution adjustments, including in the event of any stock split). In addition, under the terms of our convertible preferred stock purchase agreement with MSS, MSS has the option to purchase up to an additional $27 million of convertible preferred stock having a conversion price per share equal to $0.476 per share of common stock (the closing price of our common stock on August 7, 2020) on or before January 11, 2021. Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that we have less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), we also have the right, in our sole discretion, to present Energy Capital with a purchase notice directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of
48
$1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of our Series B Preferred Stock.
The PHC Notes are also convertible into our common stock at the option of the holder. Accordingly, any conversion of convertible preferred stock or the PHC Notes would dilute the ownership of our holders of common stock. The potential dilutive effect of the conversion of shares of convertible preferred stock or convertible notes may also adversely affect our ability to obtain additional financing on favorable terms or at all.
Holders of the convertible preferred stock and convertible notes have the ability exert substantial influence over us in a manner adverse to your interests.
Subject to maintaining specified ownership thresholds, the holders of convertible preferred stock and the PHC Notes have the ability to designate, in the aggregate, up to three members of our board of directors.
The holders of convertible preferred stock generally are entitled to vote with the holders of the shares of common stock on all matters submitted for a vote of holders of shares of common stock (voting together with the holders of shares of common stock as one class) on an as-converted basis. Additionally, certain matters require the approval of the majority of the outstanding convertible preferred stock, voting as a separate class, including (i) altering or changing adversely the powers, privileges, preferences or rights of the convertible preferred stock, or (ii) amendments, modifications, repeal or waiver of any provision of our certificate of incorporation or of the certificate of designations that would adversely affect the rights, preferences, privileges or powers of the convertible preferred stock.
As a result, the holders of our convertible preferred stock and the PHC Notes are able to influence our decisions, including the election and removal of directors, any merger, consolidation, sale of all or substantially all of our assets, or other significant corporate transactions. Some of these persons or entities may have interests different the interests of the holders of our common stock.
The future funding pursuant to agreements to sell convertible preferred stock to PHC, Masters and Energy Capital is not guaranteed.
We have entered into agreements with Masters, PHC and Energy Capital that, collectively, provide for our receipt of up to $54 million of funding pursuant to the sale of convertible preferred stock to Masters, PHC and Energy Capital. Pursuant to our agreement with PHC, we have the option to sell and issue to PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon our obtaining FDA approval for the 180-day Eversense product for marketing in the United States before such date. Additionally, on August 9, 2020, we entered into a Stock Purchase Agreement with Masters pursuant to which we issued and sold to Masters $3 million of shares of convertible preferred stock per share in an initial closing, and provided Masters with an option to purchase up to an additional $27 million of shares of convertible preferred stock in a subsequent closing on or before January 11, 2021, subject to the terms and conditions of the stock purchase agreement. On November 9, 2020, we entered into the Equity Line Agreement with Energy Capital. Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that we have less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), we have the right, in our sole discretion, to present Energy Capital with a purchase notice directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of our Series B Preferred Stock. Because of the contingencies of each transaction, there can be no guarantee that we will be able to sell the additional convertible preferred stock to PHC, Masters or Energy Capital. If we are unable to do so, we may be forced to seek to raise additional capital on less advantageous terms, if available at all, which would likely have a material adverse effect on our liquidity and the trading price of our common stock.
We may not be entitled to forgiveness of our recently received PPP Loan, and our application for the PPP Loan could in the future be determined to have been impermissible or could result in damage to our reputation.
On April 22, 2020 we received proceeds of $5.8 million from a loan under the Paycheck Protection Program of the CARES Act, a portion of which may be forgiven, which we intend to use to retain current employees, maintain payroll and make lease and utility payments. The PPP Loan matures on April 21, 2022 and bears annual interest at a rate of 1.0%. A portion of the PPP Loan may be forgiven by the SBA upon our application within ten months of the deferral
49
period ending, but not later than December 31, 2020. Monthly payments of interest and principal will be required once approval of forgiveness is obtained. Under the CARES Act, as amended by the Flexibility Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight-week period beginning on the date of loan approval. Not more than 40% of the forgiven amount may be for non-payroll costs. The amount of the PPP Loan eligible to be forgiven is limited because of certain headcount reductions that we implemented in March 2020 and will be reduced if our full-time headcount declines further, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, in accordance with the amortization schedule described above, and we cannot provide any assurance that we will be eligible for loan forgiveness, that we will ultimately apply for forgiveness, or that any amount of the PPP Loan will ultimately be forgiven by the SBA. Furthermore, on April 28, 2020, the Secretary of the U.S. Department of the Treasury stated that the SBA will perform a full review of any PPP loan over $2.0 million before forgiving the loan. In accordance with the Flexibility Act, PPP loans received prior to June 5, 2020 may be extended to a five-year maturity if both the lender and the recipient agree. There can be no assurances made that we will seek a term or if we ask for a five-year term, that it will be agreed upon and granted by the lender.
In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the broad objectives of the Paycheck Protection Program of the CARES Act, as amended by the Flexibility Act. The certification described above does not contain any objective criteria and is subject to interpretation. On April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. Subsequently, on April 29, 2020 the SBA issued guidance that it will review all PPP loans of more than $2 million, following the lender’s submission of the borrower’s loan forgiveness application. The lack of clarity regarding loan eligibility under the Paycheck Protection Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that given our Company's circumstances we satisfied all eligible requirements for the PPP Loan, we are later determined to have violated any of the laws or governmental regulations that apply to us in connection with the PPP Loan, such as the False Claims Act, or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be subject to penalties, including significant civil, criminal and administrative penalties and could be required to repay the PPP Loan in its entirety. In addition, receipt of a PPP Loan may result in adverse publicity and damage to reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources. Should we be audited or reviewed by federal or state regulatory authorities as a result of filing an application for forgiveness of the PPP Loan or otherwise, such audit or review could result in the diversion of management’s time and attention and legal and reputational costs. If we were to be audited or reviewed and receive an adverse determination or finding in such audit or review, we could be required to return the full amount of the PPP Loan. Any of these events could have a material adverse effect on our business, results of operations and financial condition.
ITEM 2: Unregistered Sales of Equity and Securities and Use of Proceeds
Between July 1, 2020 and September 30, 2020, Highbridge voluntarily converted a total of $3.6 million of outstanding principal amount of the Second Lien Notes for 9,328,955 shares of common stock, which included prepayment premiums in accordance with the terms of the Second Lien Notes. These conversions were exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act as a conversion of securities by our existing security holders in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such conversion.
ITEM 3: Defaults Upon Senior Securities
Not applicable.
50
ITEM 4: Mine Safety Disclosures
Not applicable.
ITEM 5: Other Information
None.
ITEM 6: Exhibits
The exhibits listed on the Exhibit Index hereto are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.
Exhibit No. | Document | |
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
10.1+ | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | ||
10.7 | ||
31.1* | Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act. | |
31.2* | Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act. | |
32.1** | ||
51
101.INS* | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document) | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
** These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
+ | Certain portions of this exhibit, indicated by asterisks, have been omitted pursuant to Item 601(b)(10) of Regulation S-K because they are not material and would likely cause competitive harm to the registrant if publicly disclosed. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SENSEONICS HOLDINGS, INC. | ||
Date: November 9, 2020 | By: | /s/Nick B. Tressler |
Nick B. Tressler | ||
Chief Financial Officer | ||
(Principal Financial Officer) | ||
52