Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


 

FORM 10-Q

 

 

(Mark One)

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

 

For the Quarterly Period Ended September 30, 2019March 31, 2020

or

 

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

For the transition period from ______ to ______

Commission file number: 001-37717


Senseonics Holdings, Inc.

(Exact name of registrant as specified in its charter)


 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

3841
(Primary Standard Industrial
Classification Code Number)

47‑1210911
(I.R.S. Employer
Identification Number)

 

20451 Seneca Meadows Parkway

Germantown, MD 20876‑7005

(301) 515‑7260

 

(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:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

SENS

NYSE American

 

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

 

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

 

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. 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

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  No ☒

 

There were 203,452,603227,641,604 shares of common stock, par value $0.001, outstanding as of November 7, 2019.June 5, 2020.

 

 

 

 

Table of Contents

TABLE OF CONTENTS

 

PART I: Financial Information

 

 

 

ITEM 1:  Financial Statements

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019March 31, 2020 (Unaudited) and December 31, 20182019 

23

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for three and nine months ended September 30,March 31, 2020 and 2019 and 2018 

34

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30,March  31, 2020 and 2019 and 2018 

45

Unaudited Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 

56

Notes to Unaudited Condensed Consolidated Financial Statements 

67

 

 

ITEM 2:  Management Discussion and Analysis of Financial Condition and Results of Operations

2422

 

 

ITEM 3:  Quantitative and Qualitative Disclosures about Market Risk

3735

 

 

ITEM 4:  Controls and Procedures

3736

 

 

PART IIOther Information

3836

 

 

ITEM 1:  Legal Proceedings

3836

 

 

ITEM 1A:  Risk Factors

3836

 

 

ITEM 2:  Unregistered Sales of Equity and Securities and Use of Proceeds

3940

 

 

ITEM 3:  Defaults Upon Senior Securities

3940

 

 

ITEM 4:  Mine Safety Disclosures

40

 

 

ITEM 5:  Other Information

40

 

 

ITEM 6:  Exhibits

41

 

 

SIGNATURES 

4342

 

 

 

 

1

Table of Contents

Explanatory Note

Senseonics Holdings, Inc. (the “Company”) relied on the Securities and Exchange Commission’s Order under Section 36 of the Securities Exchange Act of 1934, as amended, Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies dated March 25, 2020 (Release No. 34-88465) (the “Order”) to delay the filing of its quarterly report on Form 10-Q for the quarter ended March 31, 2020 (the “Form 10-Q”) due to circumstances related to the coronavirus disease (“COVID-19”).

The Company’s operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19 pandemic. The state of Maryland, where the Company is headquartered, has been affected by COVID-19. The Governor of Maryland has issued an order closing all non-essential businesses, which took effect on March 23, 2020. Substantially all of the Company’s workforce is currently working from home either all or substantially all of the time, including the Company’s limited number of general administrative and finance personnel. These safety measures have restricted access to the Company’s facilities and records, and have disrupted routine interactions among the Company’s staff, advisors and third parties involved in the preparation of the Form 10-Q.

In addition, the Company’s personnel who are primarily responsible for preparing its Form 10-Q have been mobilized on key business continuity efforts that have emerged in part as a result of COVID-19, including financing activities and cost-reduction initiates (including significant headcount reductions), following the Company’s payment of all amounts outstanding under its loan and security agreement with Solar Capital Ltd. on March 22, 2020. These factors resulted in  a delay in the Company’s ability to complete its quarterly review processes in time to file the Form 10-Q by May 11, 2020. The Company is filing the Form 10-Q within 45 days after the standard filing deadline as permitted by the Order.

 

 

12

Table of Contents

 

Senseonics Holdings, Inc.

 

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

 

 

2020

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

    

 

 

    

 

 

 

    

 

 

    

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

130,580

 

$

136,793

 

 

$

18,605

 

$

95,938

 

Accounts receivable

 

 

2,800

 

 

830

 

Restricted cash

 

 

200

 

 

 —

 

Accounts receivable, net

 

 

991

 

 

3,239

 

Accounts receivable - related parties

 

 

3,468

 

 

6,267

 

 

 

 5

 

 

7,140

 

Inventory, net

 

 

19,862

 

 

10,231

 

 

 

4,995

 

 

16,929

 

Prepaid expenses and other current assets

 

 

4,862

 

 

3,985

 

 

 

5,740

 

 

4,512

 

Total current assets

 

 

161,572

 

 

158,106

 

 

 

30,536

 

 

127,758

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits and other assets

 

 

3,108

 

 

117

 

 

 

2,930

 

 

3,042

 

Property and equipment, net

 

 

2,366

 

 

1,750

 

 

 

1,803

 

 

2,001

 

Total assets

 

$

167,046

 

$

159,973

 

 

$

35,269

 

$

132,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,253

 

$

4,407

 

 

$

2,490

 

$

4,285

 

Accrued expenses and other current liabilities

 

 

18,705

 

 

13,851

 

 

 

15,371

 

 

18,636

 

Deferred revenue

 

 

 —

 

 

628

 

Term Loans, current portion

 

 

 —

 

 

10,000

 

Term Loans, net of discount

 

 

 —

 

 

43,434

 

2025 Notes, net of discount

 

 

 —

 

 

60,353

 

Total current liabilities

 

 

21,958

 

 

28,886

 

 

 

17,861

 

 

126,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loans, net of discount and current portion

 

 

43,092

 

 

4,783

 

2023 Notes, net of discount

 

 

11,529

 

 

36,103

 

 

 

12,412

 

 

12,464

 

2025 Notes, net of discount

 

 

35,668

 

 

 —

 

 

 

51,868

 

 

 —

 

Derivative liabilities

 

 

26,988

 

 

17,091

 

Other liabilities

 

 

2,464

 

 

1,849

 

 

 

2,089

 

 

2,278

 

Total liabilities

 

 

141,699

 

 

88,712

 

 

 

84,230

 

 

141,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value per share; 450,000,000 shares authorized; 203,365,624 and 176,918,381 shares issued and outstanding as of September 30, 2019 and December 31, 2018

 

 

203

 

 

177

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Common stock, $0.001 par value per share; 450,000,000 shares authorized; 204,444,835 and 203,452,812 shares issued and outstanding as of March 31, 2020 and December 31, 2019

 

 

204

 

 

203

 

Additional paid-in capital

 

 

462,876

 

 

428,878

 

 

 

466,771

 

 

464,491

 

Accumulated deficit

 

 

(437,732)

 

 

(357,794)

 

 

 

(515,936)

 

 

(473,343)

 

Total stockholders' equity

 

 

25,347

 

 

71,261

 

Total liabilities and stockholders’ equity

 

$

167,046

 

$

159,973

 

Total stockholders' deficit

 

 

(48,961)

 

 

(8,649)

 

Total liabilities and stockholders’ deficit

 

$

35,269

 

$

132,801

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

23

Table of Contents

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

 

 

Three Months Ended

 

 

September 30, 

 

September 30, 

 

 

March 31, 

 

    

2019

    

2018

    

2019

    

2018

 

    

2020

    

2019

 

Revenue, net

 

$

959

    

$

837

 

$

3,678

    

$

1,768

 

 

$

31

    

$

1,243

 

Revenue, net - related parties

 

 

3,360

 

 

4,321

 

 

8,671

 

 

9,960

 

 

 

 5

 

 

2,180

 

Total revenue

 

 

4,319

 

 

5,158

 

 

12,349

 

 

11,728

 

 

 

36

 

 

3,423

 

Cost of sales

 

 

7,659

 

 

7,742

 

 

23,552

 

 

14,889

 

 

 

19,670

 

 

6,733

 

Gross profit

 

 

(3,340)

 

 

(2,584)

 

 

(11,203)

 

 

(3,161)

 

 

 

(19,634)

 

 

(3,310)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing expenses

 

 

11,560

 

 

7,851

 

 

38,573

 

 

17,469

 

 

 

11,145

 

 

12,834

 

Research and development expenses

 

 

11,076

 

 

7,402

 

 

28,688

 

 

23,805

 

 

 

7,362

 

 

7,108

 

General and administrative expenses

 

 

5,388

 

 

5,138

 

 

17,321

 

 

14,531

 

 

 

5,690

 

 

6,516

 

Operating loss

 

 

(31,364)

 

 

(22,975)

 

 

(95,785)

 

 

(58,966)

 

 

 

(43,831)

 

 

(29,768)

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net:

 

 

 

 

 

 

 

Interest income

 

 

519

 

 

820

 

 

1,556

 

 

1,245

 

 

 

209

 

 

627

 

Loss on extinguishment of debt

 

 

(398)

 

 

 —

 

 

(398)

 

 

 —

 

 

 

(4,546)

 

 

 —

 

Interest expense

 

 

(3,460)

 

 

(2,170)

 

 

(7,459)

 

 

(6,177)

 

 

 

(4,373)

 

 

(2,034)

 

Debt issuance costs

 

 

(3,344)

 

 

 —

 

 

(3,344)

 

 

 —

 

Change in fair value of derivative liabilities

 

 

19,186

 

 

(7,513)

 

 

26,147

 

 

(22,526)

 

 

 

10,311

 

 

2,072

 

Other income (expense)

 

 

(638)

 

 

(43)

 

 

(655)

 

 

(226)

 

Total other income (expense), net

 

 

11,865

 

 

(8,906)

 

 

15,847

 

 

(27,684)

 

Other expense

 

 

(363)

 

 

(262)

 

Total other income, net

 

 

1,238

 

 

403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(19,499)

 

 

(31,881)

 

 

(79,938)

 

 

(86,650)

 

 

 

(42,593)

 

 

(29,365)

 

Total comprehensive loss

 

$

(19,499)

 

$

(31,881)

 

$

(79,938)

 

$

(86,650)

 

 

$

(42,593)

 

$

(29,365)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.10)

 

$

(0.18)

 

$

(0.43)

 

$

(0.57)

 

 

$

(0.21)

 

$

(0.17)

 

Basic and diluted weighted-average shares outstanding

 

 

197,223,419

 

 

176,332,575

 

 

183,804,257

 

 

150,866,978

 

 

 

203,745,974

 

 

176,954,116

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

 

34

Table of Contents

Senseonics Holdings, Inc.

 

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Stockholders'

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Stockholders'

 

  

Shares

  

Amount

  

Capital

  

Deficit

  

Equity

 

  

Shares

  

Amount

  

Capital

  

Deficit

  

Equity (Deficit)

 

Three months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2018

 

176,242

 

$

177

 

$

424,130

 

$

(318,592)

 

$

105,715

 

Issued shares of common stock

 

735

 

 

 

 

 

(54)

 

 

 —

 

 

(54)

 

Balance, December 31, 2018

 

176,918

 

$

177

 

$

428,878

 

$

(357,794)

 

$

71,261

 

Exercise of stock options for cash and warrants

 

390

 

 

 —

 

 

1,205

 

 

 —

 

 

1,205

 

 

15

 

 

 —

 

 

23

 

 

 —

 

 

23

 

Conversion of 2023 Notes

 

(661)

 

 

 —

 

 

 1

 

 

 —

 

 

 1

 

Stock-based compensation expense and vesting of RSUs

 

20

 

 

 —

 

 

1,618

 

 

 —

 

 

1,618

 

 

25

 

 

 —

 

 

2,025

 

 

 —

 

 

2,025

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(31,881)

 

 

(31,881)

 

 

 —

 

 

 —

 

 

 —

 

 

(29,365)

 

 

(29,365)

 

Balance, September 30, 2018

 

176,726

 

$

177

 

$

426,900

 

$

(350,473)

 

$

76,604

 

Balance, March 31, 2019

 

176,958

 

$

177

 

$

430,926

 

$

(387,159)

 

$

43,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

136,883

 

$

137

 

$

270,953

 

$

(263,823)

 

$

7,267

 

Issued shares of common stock

 

38,076

 

 

38

 

 

149,004

 

 

 —

 

 

149,042

 

Exercise of stock options and warrants

 

1,602

 

 

 1

 

 

2,018

 

 

 —

 

 

2,019

 

Conversion of 2023 Notes

 

74

 

 

 1

 

 

250

 

 

 —

 

 

251

 

Stock-based compensation expense and vesting of RSUs

 

91

 

 

 —

 

 

4,675

 

 

 —

 

 

4,675

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(86,650)

 

 

(86,650)

 

Balance, September 30, 2018

 

176,726

 

$

177

 

$

426,900

 

$

(350,473)

 

$

76,604

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2019

 

177,031

 

$

177

 

$

433,228

 

$

(418,233)

 

$

15,172

 

Issued shares of common stock

 

26,136

 

 

26

 

 

26,731

 

 

 —

 

 

26,757

 

Exercise of stock options for cash and warrants

 

179

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock-based compensation expense and vesting of RSUs

 

20

 

 

 —

 

 

2,194

 

 

 —

 

 

2,194

 

Issuance of warrants related to debt

 

 —

 

 

 —

 

 

723

 

 

 —

 

 

723

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(19,499)

 

 

(19,499)

 

Balance, September 30, 2019

 

203,366

 

$

203

 

$

462,876

 

$

(437,732)

 

$

25,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

176,918

 

$

177

 

$

428,878

 

$

(357,794)

 

$

71,261

 

Balance, December 31, 2019

 

203,453

 

$

203

 

$

464,491

 

$

(473,343)

 

$

(8,649)

 

Issued shares of common stock

 

26,136

 

 

26

 

 

26,731

 

 

 —

 

 

26,757

 

 

175

 

 

 —

 

 

(86)

 

 

 —

 

 

(86)

 

Exercise of stock options and warrants

 

230

 

 

 —

 

 

93

 

 

 —

 

 

93

 

 

754

 

 

 1

 

 

497

 

 

 —

 

 

498

 

Stock-based compensation expense and vesting of RSUs

 

82

 

 

 —

 

 

6,451

 

 

 —

 

 

6,451

 

 

63

 

 

 —

 

 

1,869

 

 

 —

 

 

1,869

 

Issuance of warrants related to debt

 

 

 

 

 

 

 

723

 

 

 

 

 

723

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(79,938)

 

 

(79,938)

 

 

 —

 

 

 —

 

 

 —

 

 

(42,593)

 

 

(42,593)

 

Balance, September 30, 2019

 

203,366

 

$

203

 

$

462,876

 

$

(437,732)

 

$

25,347

 

Balance, March 31, 2020

 

204,445

 

$

204

 

$

466,771

 

$

(515,936)

 

$

(48,961)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

45

Table of Contents

Senseonics Holdings, Inc.

 

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2019

    

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(79,938)

 

$

(86,650)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

335

 

 

178

 

Non-cash interest expense (debt discount and deferred costs)

 

 

6,798

 

 

2,415

 

Change in fair value of derivative liabilities

 

 

(26,147)

 

 

22,525

 

Stock-based compensation expense

 

 

6,452

 

 

4,676

 

Provision for lower of cost or net realizable value

 

 

(121)

 

 

133

 

Provision for inventory obsolescence

 

 

2,198

 

 

 —

 

Non-cash lease expense

 

 

336

 

 

 —

 

Net realized gain on marketable securities

 

 

 —

 

 

(112)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

829

 

 

(719)

 

Prepaid expenses and other current assets

 

 

(877)

 

 

(2,631)

 

Inventory

 

 

(11,708)

 

 

(7,143)

 

Deposits and other assets

 

 

(4)

 

 

57

 

Accounts payable

 

 

(1,154)

 

 

(3,842)

 

Accrued expenses and other current liabilities

 

 

3,998

 

 

3,446

 

Deferred revenue

 

 

(628)

 

 

 —

 

Term Loans, accrued interest

 

 

(908)

 

 

560

 

Deferred rent

 

 

 —

 

 

10

 

Other

 

 

(947)

 

 

 —

 

Net cash used in operating activities

 

 

(101,486)

 

 

(67,097)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(951)

 

 

(683)

 

Purchases of marketable securities

 

 

 —

 

 

(7,935)

 

Sales and maturities of marketable securities

 

 

 —

 

 

22,350

 

Net cash (used in) provided by investing activities

 

 

(951)

 

 

13,732

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

26,757

 

 

149,044

 

Proceeds from exercise of stock options and stock warrants

 

 

94

 

 

2,018

 

Proceeds from 2023 Notes, net of costs

 

 

 —

 

 

50,705

 

Proceeds from 2025 Notes, net of costs

 

 

77,699

 

 

 —

 

Proceeds from Solar Term Loan, net of costs

 

 

42,951

 

 

 —

 

Proceeds from issuance of warrants, net of costs

 

 

723

 

 

 —

 

Repayment of Oxford and SVB Term Loan

 

 

(15,000)

 

 

 —

 

Repurchase of 2023 notes

 

 

(37,000)

 

 

(7,500)

 

Principal payments under capital lease obligations

 

 

 —

 

 

(20)

 

Net cash provided by financing activities

 

 

96,224

 

 

194,247

 

Net (decrease) increase in cash and cash equivalents

 

 

(6,213)

 

 

140,882

 

Cash and cash equivalents, at beginning of period

 

 

136,793

 

 

16,150

 

 

 

$

130,580

 

$

157,032

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

4,200

 

$

2,768

 

Lease liabilities arising from obtaining right-of-use assets

 

 

3,109

 

 

 —

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable and accrued expenses

 

$

182

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

2019

 

Cash flows used in operating activities

 

 

 

 

 

 

 

Net loss

 

$

(42,593)

 

$

(29,365)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

288

 

 

200

 

Non-cash interest expense (debt discount and deferred costs)

 

 

2,191

 

 

909

 

Loss on extinguishment of debt

 

 

4,546

 

 

 —

 

Change in fair value of derivative liabilities

 

 

(10,311)

 

 

(2,072)

 

Stock-based compensation expense

 

 

1,869

 

 

2,025

 

Provision for inventory obsolescence and net realizable value

 

 

12,551

 

 

56

 

Loss on disposal of assets

 

 

181

 

 

 —

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

9,384

 

 

4,730

 

Prepaid expenses and other current assets

 

 

(1,229)

 

 

(713)

 

Inventory

 

 

(617)

 

 

(4,195)

 

Deposits and other assets

 

 

(57)

 

 

 3

 

Accounts payable

 

 

(1,795)

 

 

(1,133)

 

Accrued expenses and other liabilities

 

 

(2,305)

 

 

(97)

 

Deferred revenue

 

 

 —

 

 

(628)

 

Accrued interest

 

 

(1,151)

 

 

128

 

Net cash used in operating activities

 

 

(29,048)

 

 

(30,152)

 

Cash flows used in investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(100)

 

 

(392)

 

Payments on right of use liability, building

 

 

 —

 

 

(98)

 

Net cash used in investing activities

 

 

(100)

 

 

(490)

 

Cash flows used in financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

117

 

 

 —

 

Common stock issuance costs

 

 

(204)

 

 

 —

 

Proceeds from exercise of stock options and stock warrants

 

 

498

 

 

23

 

Repayment of term loans

 

 

(48,396)

 

 

(2,499)

 

Net cash used in financing activities

 

 

(47,985)

 

 

(2,476)

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(77,133)

 

 

(33,118)

 

Cash, cash equivalents and restricted cash, at beginning of period

 

 

95,938

 

 

136,793

 

Cash, cash equivalents and restricted cash, at ending of period

 

$

18,805

 

$

103,675

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

3,344

 

$

1,705

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable and accrued expenses

 

$

48

 

$

 —

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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 design, 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-ownedwholly 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.Liquidity2.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 incurredsuffered substantial operating losses, principally from expenses associated with the Company’s research and development programs.programs and commercial launch of Eversense® CGM System (for use up to 90 days) in the United States and the Eversense CGM and Eversense XL CGM Systems (for use up to 180 days) in Europe, the Middle East, and Africa. The Company has not generated significant revenue from the sale of products and its ability to generate revenue and achieve profitability largely depends on the Company’s ability alone or with others, to completesuccessfully expand the commercialization of Eversense, continue the development of its products orand product candidates,upgrades, and to obtain necessary regulatory approvals for the manufacture, marketing and salessale of those products.products, including approval by the FDA for the extended Eversense XL CGM system in the United States. These activities will require significant uses of working capital through the remainder of 20192020 and beyond.

 

At September 30, 2019,The Company generated a net loss of $42.6 million for the three months ended March 31, 2020 and had an accumulated deficit of $515.9 million at March 31, 2020. Following the repayment in full of its term loan with Solar Capital Ltd. (“Solar”) in the amount of $48.5 million on March 22, 2020, the Company had $130.6$18.8 million inof cash, cash equivalents and restricted cash equivalents. In July 2019, the Company completed financing and debt transactions totaling gross proceeds of over $100 million, after repayment of the Term Loans (as defined below) and a portion of the Company’s convertible senior subordinated notes due 2023 (the “2023 Notes”).at March 31, 2020. As a result, and in consideration of these transactions, management has concluded that, basedthe evolving impact of the coronavirus (“COVID-19”) pandemic, the Company made reductions in its cost structure to improve operating cash flow and generate future capital expenditure savings to ensure the long-term success of Eversense. Specifically, the Company temporarily suspended commercial sales of the Eversense CGM system in the United States to new patients and streamlined its operational strategy to focus on the Company’s current operating plans, includingdevelopment and regulatory submission efforts for its Eversense XL CGM system, for use for up to 180 days, in the restructuringUnited States. In connection with these actions, on March 26, 2020, the Company reduced its workforce by approximately 60%, over half of which were sales personnel.  

The Company is pursuing strategic alternatives and has been in discussions with new financing sources. Additional financing could include issuing additional equity (including through the Open Market Sales agreement with Jefferies) or either secured or unsecured indebtedness or a combination of both.

Given its limited cash resources, and after inclusion of its subsequent financings described in Note 13 – Subsequent Events, and its existing cashalso considering the economic and cash equivalents, will be sufficient to meet the Company’s anticipated operating needs through the end of 2020.

Historically,market uncertainty resulting from COVID-19, the Company has financedsubstantial doubt regarding its operating activities throughability to meet its obligations as they become due in the saleordinary course of equity and equity linked securities and the issuance of debt. The Company plans to continue financing its operations with external capitalbusiness for the foreseeable future. However,next twelve months from the Companydate of this Quarterly Report on Form 10-Q. The Company’s ability to generate enough cash to meet its streamlined working capital requirements is dependent on its ability to achieve additional capital sources and favorable outcomes from potential strategic alternatives currently being explored. New financings may not be ableavailable to raise additional fundsthe Company on commercially acceptable terms, or at all. If the Company is unable to secure sufficient capital to fund its researchall, and development and other operating activities, the Company may be requiredimpacted by the current debt covenants. The Company’s plans to delayalleviate its substantial doubt about its ability to continue as a going concern assume that there will be no material adverse development in its business, liquidity, or suspend operations, enter into collaboration agreements with partners that could require the Company to share commercial rights to its products to a greater extentcapital requirements, or at earlier stages in the product development process than is currently intended, merge or consolidate with other entities, or liquidate.additional material adverse impacts from COVID-19.  

 

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Table of Contents

3.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In for interim financial information and the Company’s opinion,instructions to Form 10-Q and Article 10 of Regulation S-X. Although the accompanyingCompany considers the disclosures in these unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly its financial position, results of operations, and cash flows. The consolidated balance sheet at December 31, 2018, has been derived from audited financial statements as of that date. The interim condensed consolidated results of operations arebe adequate to make the information presented not necessarily indicative of the results that may occur for the full fiscal year. Certainmisleading, certain information andor footnote disclosureinformation normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to instructions,as permitted under the rules and regulations prescribed byof the U.S.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 March 31, 2020 and December 31, 2019 and results of operations for the three months ended March 31, 2020 and 2019, and cash flows for the three months ended March 31, 2020 and 2019 have been included. The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim condensed consolidated financial statements areshould be read in conjunction with the audited financial statements and notes previously included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019, as filed with the SEC on March 16, 2020, and amended on April 28, 2020. The interim results for March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future interim periods.

6

TableThe consolidated financial statements reflect the accounts of Contents

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, estimates are used for, but not limited to, stock-based compensation, recoverability of long-lived assets, deferred taxes and valuation allowances, derivative liabilities, obsolete inventory, product returns, patient access program costs,warranty obligations, variable consideration related to revenue, depreciable lives of property and equipment, and estimated accruals for clinical study costs, which are accrued based on estimates of work performed under contract.contract. The Company considered COVID-19 related impacts to its estimates, as appropriate, within its unaudited 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 one segment, glucose monitoring products.

 

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,March 31, 2020 and 2019, and 2018, the Company’s net loss equaled its comprehensive loss and, accordingly, no additional disclosure is presented.

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Table of Contents

Cash and Cash Equivalents and Concentration of Credit Risk

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

    

 

 

 

 

 

    

2020

    

2019

 

Cash ⁽¹⁾

 

 

 

 

 

 

 

 

 

 

 

$

12,308

 

$

38,043

 

Money market funds

 

 

 

 

 

 

 

 

 

 

 

 

1,500

 

 

37,769

 

Commercial paper

 

 

 

 

 

 

 

 

 

 

 

 

4,797

 

 

13,870

 

Corporate bonds

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

 

6,256

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

$

18,605

 

$

95,938

 

⁽¹⁾ Includes overnight repurchase agreements

Restricted Cash

 

The Company’s restricted cash andincludes pledged cash equivalents potentially subject the Companyas collateral related to its credit and liquidity risk. The Company maintains cash deposits at major financial institutionscard program with high credit quality and, at times, the balances of those deposits may exceed the Federal Deposit Insurance Corporation limits of $250,000. The Company has not experienced and does not anticipate any losses on deposits with commercial banks and financial institutions that exceed the federally insured amounts.

Concentration of Revenue and Customers

At any given time, the Company’s trade receivables are concentrated among a small number of principal customers. If any of the Company’s customers fail to pay their obligations under the terms of these financial instruments, the Company’s maximum exposure to potential losses would be equal to amounts reported on its consolidated balance sheets.

During the three and nine months ended September 30, 2019 and 2018, the Company derived a majority of its total net revenue from one customer, who is also a related party. During the three months ended September 30, 2019 and 2018, the Company derived 78 percent and 84 percent of its total net revenue from this customer, respectively. During the nine months ended September 30, 2019 and 2018, the Company derived 70 percent and 85 percent of its total net revenue from this one customer, respectively.

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Revenue by geographic region

Silicon Valley Bank. The following table sets forth net revenue derived fromprovides a reconciliation of cash, cash equivalents and restricted cash reported within the Company’s two primary geographical markets,consolidated balance sheets that sum to the United States and outsidetotal of the United States, based onsame such amounts shown in the geographic location to which the Company delivers the product, for the three and nine months ended September 30, 2019 and 2018.statement of cash flows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 2018

 

 

September 30, 2018

 

 

 

 

%

 

 

 

 

%

 

(Dollars in thousands)

Amount

 

of Total

 

 

Amount

 

of Total

 

Revenue, net:

 

 

 

 

 

 

 

 

 

 

 

Outside of the United States

$

4,658

 

90.0

%

 

$

11,228

 

96.0

%

United States

 

500

 

10.0

 

 

 

500

 

4.0

 

Total

$

5,158

 

100.0

%

 

$

11,728

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

 

 

 

 

 

    

2020

    

2019

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

$

18,605

 

$

95,938

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

200

 

 

 —

Cash, cash equivalents and restricted cash

 

 

 

 

 

 

 

 

 

 

 

$

18,805

 

$

95,938

 

Inventory

Inventory is valued at the lower of cost or net realizable value. Cost is determined using the standard cost method that approximates first in, first out. The Company periodically reviews inventory to determine if a write-down is necessary for inventory that has become obsolete, inventory that has a cost basis less than net realizable value, and inventory in excess of future demand taking into consideration the product shelf life.

Accounts Receivable

The Company grants credit to various customers in the normal course of business. Accounts receivable consist of amounts due from distributors. The Company records an allowance for doubtful accounts at the time potential collection risk is identified. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed by use of the straight-line method over the estimated useful lives of the assets, which is between three to five years for laboratory equipment, between five to seven years for office furniture and equipment, and the shorter of lease term or useful life for leasehold improvements. Upon disposition of the assets, the costs and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. Repairs and maintenance costs are included as expense in the accompanying statement of operations.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. RecoverabilityAs a result of COVID-19 and the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying amount, the impairment to be recognized is measured

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Table of Contents

by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Management did not identify any indicators of impairment through September 30, 2019.

Derivative Financial Instruments

In July 2019,events described above in Note 2, the Company issued $82.0 million in aggregate principal amount of convertible senior subordinated notes due 2025 (the “2025 Notes”).  In connection with the 2025 Notes, the Company bifurcated the embedded conversion option along with the fundamental change make-whole provision and the cash settled fundamental make-whole shares provision, and recordedconcluded the fair value of these embedded features assome of its property and equipment did not exceed its carrying values. Accordingly, a derivative liabilityloss on disposal of property and equipment in the amount of $0.2 million for the three months ended March 31, 2020 was recorded in the Company’s consolidated balance sheets in accordance with Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging.

In connection with the Company’s issuance of the 2023 Notes in January 2018, the Company bifurcated the embedded conversion option, along with the interest make-whole provision and make-whole fundamental change provision, and recorded the embedded conversion option as a derivative liability in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging.  

The two financial instruments above are remeasured at the end of each reporting period with changes in fair value recorded in the consolidated statementsstatement of operations in other income (expense) as a change in fair value of the derivative liability.

Warranty Reserve

The Company may replace Eversense system components that do not function in accordance with the product specifications. Estimated replacement costs are recorded at the time of shipment and are developed by analyzing historical replacement experience and product performance.comprehensive loss.

 

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition, for arrangements that an entity determines are within the scope of ASC Topic 606, 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, once the contract is determined to be within the scope of ASC Topic 606, 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 product revenue from sales of the Eversense CGM 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 (collectively, “Customers”) who then resell the products to health care providers and patients. The Company is

9

Table of Contents

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 include the right to return.

Revenue from product sales is recognized, at a point in time, when the Customers obtain control of the Company’s product which occurs at a point in time, 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 conditions of the Customers vary, but the Company is typically paid within 60 days of invoicing subsequent to the Customers obtaining control of the Company’s product.

9

TableRevenue is recognized only to the extent that it is probable that a significant reversal in the amount of Contents

Product sales are recorded net of estimated costs for patient access and sales incentive programs.  In March 2019,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 introducedto its Customers in accordance with the Eversense Bridge Program (the “program”)initiated in the United States.  Under the program, the Company provides financial assistance, in the form of reimbursement,March 2019 and to eligible patients based on their insurance coverage. Reimbursement payments to the patient under the program area 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 revenuethe 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 period incost of the Eversense System and what they collect from insurance payors and the patient’s fee of $99. The Customers are responsible for confirming patient insurance coverage, obtaining pre-authorizations, determining eligibility, and continuously provide the Company with data regarding which patient orders are under the corresponding gross revenue is recognized.program and which are not. Customer supplied data, along with actual reimbursements that have been validated to patient claims, are used to support expected reimbursement estimates. Estimated reimbursement payments for product shipped to the Company’s customersCustomers but not provided to a patient within the same reporting period is based on historical experience andare recorded within accrued expenses and other current liabilities in the accompanying consolidated balance sheets. Because of the limited experience with the program as of September 30, 2019,Eversense Bridge Program, the Company’s estimated reimbursement rates with respect to such shipped, but unsold, productsestimates used in determining the variable consideration on a sale transaction could change in future periods, and such changes could be material. The Company also, at its discretion, offers discounts

Contract assets consist of trade receivables from Customers and other allowances under defined promotional or prompt paycontract liabilities consist of amounts due to Customers in connection with the Eversense Bridge Program, classified as patient access and incentive programs towithin accrued liabilities on the Customers which resultaccompanying unaudited consolidated balance sheets. Trade receivables for customers in the establishmentUnited States are recorded at net realizable value, which is generally the contractual price but may be net of reserves against product revenue, however, to date these amounts have been immaterial. anticipated prompt-pay or promotional discounts.

 

CostConcentration of SalesRevenue and Customers

For the three months ended March 31, 2020 and 2019, the Company derived 0% and 59%, respectively, from one customer, Roche Diabetes Care GmbH.

Revenue by Geographic Region

 

The Company uses third-party contract manufacturers to manufacture Eversense and related components and supplies. Cost of sales consists primarily of raw materials, contract manufacturing service fees, expected warranty costs, recall costs, product obsolescence, scrap, warehousing indirect personnel costs and shipping and handling expenses associated with product delivery.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of salaries, commissions, and other related costs, including stock-based compensation, for personnel who perform sales, marketing, and customer support functions. Other significant costs include marketing programs, website design and advertising, educational and promotional materials, consultants, and tradeshow expenses.

Research and Development Expenses

Research and development expenses consist of expenses incurred in performing research and development activities in developing Eversense, including clinical trials and feasibility studies, and partnerships for strategic initiatives including insulin delivery and new indications. Research and development expenses include compensation and benefits for research and development employees including stock‑based compensation, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to contract research organizations and other consultants, and other outside expenses. Research and development expenses are expensed as incurred.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock‑based compensation, for personnel infollowing table sets forth net revenue derived from the Company’s executive, finance, accounting, business development, information technology,two primary geographical markets, the United States and human resources functions. Other significant costs include information technology, facility costs, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

Stock‑Based Compensation

The Company recognizesoutside of the cost of employee services received in exchange for awards of equity instruments, such as stock options,United States, based on the fair value of those awards atgeographic location to which the date of grant. The estimated fair value of stock options onCompany delivers the date of grant is amortized on a straight‑line basis overproduct, for the requisite service period for each separately vesting portion of the award for those awards with service conditions only. For awards that also contain performance conditions, expense is recognized beginning at the time the performance condition is considered probable of being met over the remaining vesting period. The Company accounts for forfeitures in the period in which they occur.three months ended March 31, 2020 and 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

March 31, 2019

 

 

 

 

%

 

 

 

 

%

 

(Dollars in thousands)

Amount

 

of Total

 

 

Amount

 

of Total

 

Revenue, net:

 

 

 

 

 

 

 

 

 

 

 

Outside of the United States

$

12

 

33.3

%

 

$

2,607

 

76.2

%

United States

 

24

 

66.7

 

 

 

816

 

23.8

 

Total

$

36

 

100.0

%

 

$

3,423

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

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The Company uses the Black‑Scholes option pricing model to determine the fair value of stock‑option awards. Valuation of stock awards requires management to make assumptions and to apply judgment to determine the fair value of the awards. These assumptions and judgments include estimating the fair value of the Company’s common stock, future volatility of the Company’s stock price, dividend yields, future employee turnover rates, and future employee stock option exercise behaviors. Changes in these assumptions can affect the fair value estimate.Accounts Receivable

 

Under ASC Topic 718,Accounts receivable consist of amounts due from the cumulative amount of compensation cost recognizedCompany’s Customers and are recorded at net realizable value, which may include reductions for instruments classified as equity that ordinarily would result in a future tax deduction under existing tax law shall be considered to be a deductible difference in applying ASC Topic 740, Income Taxes. The deductible temporary differenceallowances for doubtful accounts at the time potential collection risk is based on the compensation cost recognizedidentified or for financial reporting purposes; however, these provisions currently do not impact the Company, as all the deferred tax assets have a full valuation allowance.

Since the Company had net operating loss (“NOL”) carryforwards as of September 30, 2019, no excess tax benefits for the tax deductions related to stock-based awards were recognized in the statements of operations and comprehensive loss.

Income Taxes

promotional or prompt-pay discounts offered. The Company uses the asset and liability methodprovided one-time COVID-19 pandemic relief concessions to some of accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Management uses a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return, as well as guidance on derecognition, classification, interest and penalties and financial statement reporting disclosures. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. In the ordinary course of business, transactions occur for which the ultimate outcome may be uncertain. Management does not expect the outcome related to accrued uncertain tax provisions to have a material adverse effect on the Company’s financial position, results of operations or cash flows.  The Company recognizes interest and penalties accrued on any unrecognized tax exposures as a component of income tax expense. The Company did not have any amounts accrued relating to interest and penalties as of September 30, 2019 and December 31, 2018.

The Company is subject to taxation in various jurisdictionsits customers in the United States for allowances up to a specified amount if they are unable to sell through Eversense and remains subjectrelated components on hand prior to examinationexpiry, which the Company expects to occur in the third and fourth quarters of 2020. The Company’s net revenues and corresponding accounts receivables were reduced by taxing jurisdictions$1.2 million for the year 1998these allowances at March 31, 2020. The Company does not have a history of collectability concerns and all subsequent periods due to the availability of NOL carryforwards. In addition, all of the NOLs and research and development credit carryforwards that may be used in future years are still subject to adjustment.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents,there have been no provisions for uncollectible accounts recorded against accounts receivable accounts payable, and accrued expenses approximate fair value because of their short maturities. The Company’s 2025 Notes and 2023 Notes are recorded at historical cost, net of discounts, and are not remeasured at fair value.March 31, 2020 or December 31, 2019.

 

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.

 

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. At September 30, 2019 and 2018, theThe total number of anti-dilutive

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shares at March 31, 2020 and 2019, consisting of common stock options and stock purchase warrants, and the 2025 Notes and 2023 Notes using the if-converted method, which have been excluded from the computation of diluted net loss per share, werewas as follows:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

March 31, 

    

2019

    

2018

    

2020

    

2019

Stock-based awards

 

25,684,676

 

21,006,058

 

18,918,008

 

27,518,174

2023 Notes

 

6,672,500

 

15,499,998

 

6,672,500

 

20,017,048

2025 Notes

 

63,565,883

 

 —

 

63,018,091

 

 —

Warrants

 

5,196,581

 

4,068,581

 

5,196,581

 

4,071,581

Total anti-dilutive shares outstanding

 

101,119,640

 

40,574,637

 

93,805,180

 

51,606,803

 

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 and stock purchase warrants and employee stock purchases using the treasury stock method, and the 2025 Notes and 2023 Notes using the if-converted method.

 

Recent Accounting PronouncementsExit or Disposal Costs

 

Recently Adopted

In February 2016,Costs associated with exit or disposal activities, such as restructuring, sale or termination of a line of business, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”). The guidance requires lessees to recognize assetsclosure of business activities in a particular location, the relocation of business activities, changes in management structure and liabilities related to long-term leases ona fundamental reorganization that affects the balance sheetnature and expands disclosure requirements regarding leasing arrangements. In July 2018, the FASB issued ASU 2018-11 to provide another transition method, allowing a cumulative effect adjustment to the opening balancefocus of retained earningsoperations, are recognized and measured initially at their fair values during the period in which an obligation meets the definition of adoption. The guidance is effective for annual reporting periods beginning after December 15, 2018, subjecta liability. As a result of the Company’s financial condition following the repayment in full of its term loan with Solar on March 22, 2020, further described above in Note 2 – Going Concern and Liquidity Update, and in consideration of the economic uncertainty due to early adoption. Thethe COVID-19 pandemic, the Company adoptedmade reductions in its cost structure and operational focus to improve operating cash flow and generate future capital expenditure savings to ensure the new standard effective January 1, 2019 using the modified retrospective approach. The Companylong-term success of Eversense. These cost reductions included a reduction in force by approximately 60%, which was communicated to employees on March 26, 2020 and did not electpermit continuation of service past March 31, 2020. Associated one-time employee termination benefit costs in the transition option, but elected certain practical expedients, including not separating lease components from nonlease components for all classesamount of underlying assets. Additionally, all leases with a term at commencement of 12 months or less will be excluded from analysis under ASC 842.  The standard did not materially affect$1.6 million were accrued and recorded in the Company’s accompanying unaudited consolidated net loss or cash flows.

Impactfinancial statements as of Adopting ASC 842 on the Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2019

 

 

 

 

January 1, 2019

 

  

Prior to ASC

  

 

  

 

 

 

842 Adoption

 

ASC 842 Adoption

 

As Adjusted

Consolidated Balance Sheet Data (in thousands)

 

 

 

 

 

 

 

 

 

Operating lease assets (1)

 

$

 —

 

$

2,235

 

$

2,235

Deferred rent non-current (2)

 

$

84

 

$

(84)

 

$

 —

Operating lease liabilities (3)

 

$

 —

 

$

417

 

$

417

Non-current operating lease liabilities (3)

 

$

 —

 

$

1,902

 

$

1,902


(1)    Represents capitalization of operating lease assets, including reclassification of deferred rent to operating lease assets.

(2)    As of DecemberMarch 31, 2018, the deferred rent balance was $84.

(3)    Represents recognition of operating lease liabilities.

The Company has evaluated all other issued unadopted ASUs and believes the adoption of these standards will not have a material impact on its consolidated statements of earnings, balance sheets, or cash flows.2020.

 

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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. 

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, 

    

March 31, 

    

December 31, 

 

2019

    

2018

 

2020

    

2019

Finished goods

    

$

4,312

    

$

1,457

    

$

1,043

    

$

3,944

Work-in-process

 

 

12,571

 

 

7,211

 

 

1,282

 

 

10,938

Raw materials

 

 

2,979

 

 

1,563

 

 

2,670

 

 

2,047

Total

 

$

19,862

 

$

10,231

 

$

4,995

 

$

16,929

The Company charged $15.0 million and $0.1 million to cost of sales for the three months ended March 31, 2020 and 2019, respectively, to reduce the value of inventory for items that are potentially obsolete, in excess of product demand, or to adjust costs to their net realizable value.

 

 

 

5.  Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2019

    

2018

Contract manufacturing

 

$

3,359

 

$

2,962

Clinical and preclinical

 

 

193

 

 

111

Marketing and sales

    

 

416

 

 

287

IT and software

 

 

144

 

 

244

Insurance

 

 

333

 

 

 —

Interest receivable

 

 

 2

 

 

239

Other receivables

 

 

235

 

 

 —

Other

 

 

180

 

 

142

Total prepaid expenses and other current assets

 

$

4,862

 

$

3,985

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2020

    

2019

Contract manufacturing

 

$

3,723

 

$

3,043

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Insurance

 

 

1,040

 

 

44

Marketing and sales

    

 

534

 

 

605

Clinical and preclinical

 

 

216

 

 

240

IT and software

 

 

202

 

 

294

Interest receivable

 

 

18

 

 

107

Other

 

 

 7

 

 

179

Total prepaid expenses and other current assets

 

$

5,740

 

$

4,512

 

 

 

6.Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

March 31, 

 

December 31, 

 

2019

    

2018

 

2020

    

2019

Compensation and benefits⁽¹⁾

 

$

3,496

 

$

5,630

Contract manufacturing

 

$

4,192

 

$

6,068

 

 

3,274

 

 

2,452

Compensation and benefits

 

 

4,363

 

 

3,685

Product warranty and replacement obligations

 

 

2,157

 

 

2,197

Professional & administration services

 

 

1,856

 

 

1,384

Research and development

 

 

1,140

 

 

1,956

Patient access programs

 

 

1,053

 

 

1,578

Interest on notes payable

    

 

1,001

    

 

2,153

Operating lease

 

 

719

 

 

696

Sales and marketing services

 

 

816

 

 

738

 

 

625

 

 

553

Professional & administration services

 

 

2,576

 

 

727

Interest on notes payable

 

 

856

 

 

1,268

Research and development

 

 

2,504

 

 

147

Product warranty and replacement obligations

    

 

1,405

    

 

816

Patient access and incentive programs

 

 

1,299

 

 

 —

Operating lease

 

 

647

 

 

 —

Other

 

 

47

 

 

402

 

 

50

 

 

37

Total accrued expenses and other current liabilities

 

$

18,705

 

$

13,851

 

$

15,371

 

$

18,636

 

 

⁽¹⁾Includes $1.6 million for one-time employee termination benefits associated with the Company’s reduction in force on March 26, 2020

 

7.Leases7.Notes Payable and Stock Purchase Warrants

 

The Company evaluates whether contractual arrangements contain leases at the inceptionRepayment of such arrangements.  Specific considerations include whether the Company can control the underlying asset and has the right to obtain substantially all of the economic benefits or outputs from the asset.  Substantially all of the Company’s leases are long-term operating leases with fixed payment terms.  The Company currently does not have financing leases.  Right-of-use (“ROU”) operating lease assets represent the Company’s right-to-use an underlying asset for the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments. Operating lease expense is

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recognized on a straight-line basis over the lease term and is included in general and administrative expenses on the Company’s consolidated statement of operations and comprehensive loss.  Options to extend the leases or terminate the leases early are only included in the lease term when it is reasonably certain that the option will be exercised.

The Company recognizes a ROU operating lease asset and liability as of the lease commencement date at the present value of the lease payments over the lease term.  If the discount rate in the lease agreement is not implicit, the Company estimates the incremental borrowing rate based on the rate of interest the Company would have to pay to borrow a similar amount on a collateralized basis over a similar term.  Lease and non-lease components are accounted for as a single component.  Leases with an initial term of 12 months or less are expensed to rent expense over the related term.

The Company leases approximately 33,000 square feet of research and office space for its corporate headquarters under a non-cancelable operating lease expiring in 2023. The Company has an option to renew the lease for one additional five year term. With the adoption of ASC 842, the Company has recorded a right-of-use asset and corresponding lease liability, and does not include the additional five year term under the option.

The Company leases approximately 12,000 square feet of office space under a cancelable operating lease that expired on June 30, 2019 and subsequently became a month-to-month lease. The Company elected to account for this lease in accordance with the policy of not recording leases with an initial term of 12 months or less on the balance sheet. This lease terminated on October 31, 2019.Solar Term Loan

 

On September 2, 2019,March 22, 2020, the Company entered into a new non-cancellable operating lease agreement for approximately 30,500 square feet of office space expiring in 2023. The Company does not have the option to renew the lease for an additional term. The Company did not have any lease related payments made to the lessor before the commitment date, lease incentives received from the lessor or initial direct cost adjustments to be added to the initial measurement of the liability. The Company recorded $1.1 million of associated right-of-use assets and lease liabilities inSolar terminated its consolidated balance sheet at September 30, 2019. 

Operating lease expense for the three and nine months ended September 30, 2019 was $0.2 million and $0.5 million, respectively. Short-term lease expense is included in total lease expense. For the nine months ended September 30, 2019, short term lease expense was $0.1 million and for the three months ended September 30, 2019 the short term lease expense amount was not significant.

Operating lease expense was $0.2 million and $0.5 million for the three and nine months ended September 30, 2018, respectively.

The following table summarizes the lease assets and liabilities as of September 30, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Lease Assets and Liabilities

 

Balance Sheet Classification

 

Amount

Assets

  

 

 

 

 

 

Operating lease ROU assets

 

 

Deposits and other assets

 

$

2,987

Liabilities

 

 

 

 

 

 

 Current operating lease liabilities

 

 

Accrued expenses and other current liabilities

 

$

647

 Non-current operating lease liabilities

 

 

Other non-current liabilities

 

 

2,462

Total operating lease liabilities

 

 

 

 

$

3,109

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Table of Contents

The following table summarizes the maturity of undiscounted payments due under lease liabilities and the present value of those liabilities as of September 30, 2019 (in thousands):

 

 

 

 

 

 

 

2019 (remaining 3 months)

  

$

206

 

 

 

2020

 

 

938

 

 

 

2021

 

 

969

 

 

 

2022

 

 

1,002

 

 

 

2023

 

 

600

 

 

 

Total

 

 

3,715

 

 

 

Present value adjustment

 

 

(606)

 

 

 

Present value of lease liabilities

 

$

3,109

 

 

 

The following table summarizes the weighted-average lease term and weighted-average discount rate as of September 30, 2019:

Remaining lease term (years)

Operating leases

3.9

Discount rate

Operating leases

9.1

%

During the nine months ended September 30, 2019, the Company made cash payments of $0.5 million under its operating leases, which are included in cash flows used in operating activities in the consolidated statement of cash flows.

8.Notes Payable

Term Loans

Solar Loan Agreement

On July 16, 2019, the Company entered into a Loan and Security Agreement, dated as of July 16, 2019 (the “Solar Loan Agreement”) with Solar Capital, Ltd. (“Solar”). PursuantAs previously disclosed in the Company’s Annual Report on Form 10-K, the Company expected to default on its obligations under the Solar Loan Agreement on July 25, 2019,and was seeking a waiver from Solar of any default under the Company borrowed term loans in an aggregate principal amount of $45.0 million (the “Solar Term Loan”), of whichSolar Loan Agreement. Following discussions with Solar, the Company used $11.6 million parties were unable to repay in fullnegotiate such a waiver and, as a result, the Term Loans andparties determined to terminate the Amended and Restated Loan and Security Agreement with Oxford and SVB described below.

Interest on the Solar Term Loan is payable monthly at a floating annual rate of 6.50% plus the greater of (i) the rate per annum rate published by the Intercontinental Exchange Benchmark Administration Ltd. and (ii) 2.48%, provided that the minimum floor interest rate is 8.98%. The maturity date for the Solar Term Loan is July 1, 2024 (the “Solar Maturity Date”). Commencing on August 1, 2021, the Company will be required to make monthly principal amortization payments; provided that the interest only period may be extended to (i) August 1, 2022 if the Company’s product revenue is greater than or equal to $40.0 million on a trailing six-month basis prior to the second anniversary of the effective date and (ii) August 1, 2023 if the Company’s product revenue is greater than or equal to $75.0 million on a trailing six-month basis after the achievement of the first extension.

The Company may elect to prepay the Solar Term Loan prior to the Solar Maturity Date subject to a prepayment fee equal to 3.00% if the prepayment occurs within one year of the effective date, 2.00% if the prepayment occurs during the second year following the effective date, and 1.00% if the prepayment occurs more than two years after the effective date and prior to the Solar Maturity Date.

The Solar Loan Agreement contains customary events of default, including bankruptcy, the failure to make payments when due, the occurrence of a material impairment on the Solar Lenders’ security interest over the collateral, a

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material adverse change, the occurrence of a default under certain other agreements entered into by the Company and its subsidiaries, the rendering of certain types of judgments against the Company and its subsidiaries, the revocation of certain government approvals, violation of covenants, and incorrectness of representations and warranties in any material respect. Upon the occurrence of an event of default, subject to specified cure periods, all amounts owed by the Company would begin to bear interest at a rate that is 5.00% above the rate effective immediately before the event of default, and may be declared immediately due and payable by the Solar Lenders.

The Solar Term Loan is secured by substantially all of the Company and its subsidiaries’ assets. The Solar Loan Agreement also contains specified financial covenants related to the Company’s liquidity and trailing six-month revenue.

The Solar Loan Agreement also contains certain restrictive covenants that limit the Company’s ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions, as well as financial reporting requirements.

A final fee (“Final Fee”), which is equal to $2.9 million (6.45% of the Solar Term Loan), is due and payable on the earliest to occur of (i) Solar Maturity Date, (ii) the acceleration of the Solar Term Loan including, upon the occurrence of a bankruptcy or insolvency event, or (iii) prepayment, refinancing, substitution or replacement of the Solar Term Loan.  The fee is accreted to interest expense over the term of the loan to the Final Fee amount.Agreement.

 

In connection with the Solar Term Loan,termination, the Company incurred issuance costs inpaid $48.5 million representing all amounts outstanding under the Solar Loan Agreement, including the principal amount and interest of $0.4 million,the loans, a payoff fee of 6.45% of the loans outstanding, a prepayment premium of 3.0% of the loans outstanding and paid feesother obligations owed to Lenders (as defined below) in the amount of $0.9 millionSolar thereunder. The Company issued warrants in connection with the repayment of the Term Loans, which are netted against the principal balance ofto the Solar Term Loan and amortized as additional interest expense over the term of the Solar Term Loan using the effective interest method.  Unamortized debt issuance costs and additional prepayment fees in the amount of $0.4 million associated with the repayment of the Term Loans were recorded as a loss on the extinguishment of debt in other income (expense) in the Company’s consolidated statements of operations and comprehensive loss as of September 30, 2019.

Additionally, the Company issued Solar warrantsAgreement to purchase an aggregate of 1,125,000 shares of the Company’s common stock with an exercise price of $1.20 per share, (the “Solar Warrants”).  The Solar Warrantswhich are exercisable until July 25, 2029. The proceeds from

A loss on the Solar Term Loan were allocatedextinguishment of debt in the amount of $4.5 million reflecting the difference between the debtrepayment amount and the Solar Warrants based on their respective faircarrying value of $0.7 million,the principal balance, accrued interest, unamortized debt issuance costs and wereunaccreted prepayment fee at March 22, 2020 was recorded within equity resultingto other income (expense) in a debt discount that is being amortized as additional interest expense over the termCompany’s unaudited consolidated statement of operations and comprehensive loss during the Solar Term Loan using the effective interest method.three months ended March 31, 2020.

 

Oxford and Silicon Valley Bank Term LoansConvertible Notes

 

On June 30, 2016, the Company entered into an Amended and Restated Loan and Security Agreement with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB” and together with Oxford, the “Lenders”). Pursuant to the Amended and Restated Loan and Security Agreement, the Company borrowed an aggregate principal amount of $25.0 million in the following three tranches: $15.0 million (“Tranche 1 Term Loan”); $5.0 million (“Tranche 2 Term Loan”); and $5.0 million (“Tranche 3 Term Loan”) (each, a “Term Loan,” and collectively, the “Term Loans”). The funding conditions for the Tranche 1 Term Loan were satisfied as of June 30, 2016. Therefore, the Company issued secured notes to the Lenders for aggregate gross proceeds of $15.0 million (the “Oxford/SVB Notes”) on June 30, 2016. The Company used approximately $11.0 million from the proceeds from the Oxford/SVB2025 Notes to repay the outstanding balance under the Company’s previously existing Loan and Security Agreement with Oxford. The Company borrowed the Tranche 2 Term Loan and Tranche 3 Term Loan in November 2016 and March 2017, respectively. The maturity date for all Term Loans was June 1, 2020.  The Company was also required to make a final payment equal to 9.00% of the aggregate principal balances of the funded Term Loans and was being accrued as additional interest expense over the term of the Oxford/SVB Notes using the effective interest method. 

 

Proceeds from the Solar Term Loan were used to repay the remaining balance of the Oxford and SVB Term Loans, which were subject to a prepayment fee equal to $0.1 million.

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Convertible Notes

2025 Notes

In July 2019, the Company issued $82.0 million in aggregate principal amount of 2025 Notes. The 2025 Notes are general, unsecured, senior subordinated obligations of the Company and bear interest at a rate of 5.25% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The 2025 Notesconvertible notes that will mature on January 15, 2025, unless earlier repurchased or converted.

The Company used $37.9 million of the net proceeds from the issuance of the 2025 Notes to repurchase $37.0 million aggregate principal amount of the Company’s outstanding 2023 Notes, at a purchase price equal to the principal amount thereof, plus accrued and unpaid interest thereonconverted (the “2025 Notes”).

The 2025 Notes are convertible, at the option of the holders, into shares of the Company’s common stock, at an initial conversion rate of 757.5758 shares per $1,000 principal amount of the 2025 Notes (equivalent to an initial conversion price of approximately $1.32 per share).

 

The Company may redeem for cash all or part of the 2025 Notes, at its option, if (1) the last reported sale price of the Company’s common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption and (2) a registration statement covering the resale of the shares of the Company’s common stock issuable upon conversion of the 2025 Notes is effective and available for use and is expected to remain effective and available for use during the redemption period as of the date of the redemption notice date. The redemption price will be equal to 100% of the principal amount of the 2025 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.

If the Company undergoes a fundamental change, such as a merger, sale, greater than 50% ownership change, liquidation, dissolution or delisting, holders may require the Company to repurchase for cash all or any portion of their 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following a notice of redemption or certain corporate events that occur prior to the maturity date, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2025 Notes in connection with such notice of redemption or corporate event. In certain circumstances, the Company will be required to pay cash in lieu of delivering make whole shares unless the Company obtains stockholder approval to issue shares.

The 2025 Notes are guaranteed on a senior unsecured basis by the Company’s wholly-owned subsidiary, Senseonics, Incorporated, and may be guaranteed by certain future subsidiaries. The subsidiary guarantor is 100% owned, the guarantee is full and unconditional and joint and several and the parent company has no independent assets or operations and any subsidiaries of the parent company other than the subsidiary guarantor are minor.

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In connection with the issuance of the 2025 Notes, the Company incurred $4.3 million in debt issuance costs and debt discounts. Several note holders of the 2025 Notes were also note holders of the 2023 Notes, and as a result, these transactions qualified as loan modifications.  The associated debt issuance costs were allocated between the portion of 2025 Notes purchased by new note holders, and of 2025 Notes purchased by existing 2023 Note holders.  Loan modifications require third-party debt related costs to be expensed immediately, whereas fees paid to lenders of the modified loans are deferred.  The third-party costs associated with the new note holders are also deferred as discounts that are amortized as additional interest expense over the term of the notes.  Of the $4.3 million, $3.3 million were expensed for loan modifications and $1.0 million were deferred as discounts to the debt. 

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 Company recorded the fair value of the embedded features in the amount of $36.0 million as a debt discount and derivative liability in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging. 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.

 

Based upon recent trading prices (Level 2 — market approach) and other observable inputs, including the Company’s common stock, implied volatility, interest rates and credit spreads, the fair value of the Company’s 2025 Notes, excluding the embedded features, were $57 million as of September 30, 2019. 

2023 Notes

 

In Januarythe first quarter of 2018, the Company issued $50.0$53.0 million in aggregate principal amount of the 2023 Notes. In February 2018, the Company issued an additional $3.0 million in aggregate principal amount of the 2023 Notes, pursuant to the partial exercise of the overallotment option by the underwriter. The net proceeds from the issuance of the 2023 Notes, after deducting transaction costs, were $50.7 million. The 2023 Notes are general, unsecured, senior subordinated obligations of the Company. The Company pays interest semiannually in arrears onconvertible notes due February 1, and August 1 of each year, beginning on August 1, 2018.2023 (the “2023 Notes”). In July 2019, the Company used the net proceeds from the issuance of the 2025 Notes to repurchase $37.0 million aggregate principal amount of the outstanding 2023 Notes. As the 2023 Notes have a maturity date of February 1, 2023, they are classified as a long-term liability on the Company’s consolidated balance sheet at September 30, 2019.

Each $1,000 of principal of the 2023 Notes is initially convertible into 294.1176 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $3.40 per share, subject to adjustment upon the occurrence of specified events. Holders may convert at any time prior to February 1, 2023. Holders who convert on or after the date that is six months after the last date of original issuance of the 2023 Notes but prior to February 1, 2021, may also be entitled to receive, under certain circumstances, an interest make-whole payment payable in shares of common stock. If specific corporate events occur prior to the maturity date, the Company would increase the conversion rate pursuant to the make-whole fundamental change provision for a holder who elects to convert their 2023 Notes in connection with such an event in certain circumstances. Additionally, if a fundamental change occurs prior to the maturity date, holders of the 2023 Notes may require the Company to repurchase all or a portion of their 2023 Notes for cash at a repurchase price equal to 100% of the principal amount plus any accrued and unpaid interest.

 

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The Company bifurcated the embedded conversion option, along with the interest make-whole provision and make-whole fundamental change provision and in January 2018 recorded the embedded features as a debt discount and derivative liability in the Company’s consolidated balance sheets at its initial fair value of $17.3 million. Additionally, the Company incurred transaction costs of $2.2 million. The debt discount and transaction costs are being amortized to interest expense over the term of the 2023 Notes at an effective interest rate of 9.30%.liability. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded to other income/income (expense) in the Company’s consolidated statement of operations and comprehensive loss.

 

Based upon recent trading prices (Level 2 — market approach) and other observable inputs, including the Company’s common stock, implied volatility, interest rates and credit spreads, the fair value of the Company’s 2023 Notes, excluding the embedded features, was $13.4 million as of September 30, 2019 and $41 million at December 31, 2018. 

In the nine months ended September 30, 2018, the Company issued 73,529 shares of common stock upon the conversion of $250,000 in aggregate principal amount of the 2023 Notes. There were no conversions of 2023 Notes in the three months ended September 30, 2018 and 2019, or the nine months ended September 30, 2019.

The following carrying amounts arewere outstanding under the Company’s notes payable as of September 30, 2019March 31, 2020 and December 31, 20182019 (in thousands):

 

 

 

 

 

 

 

 

March 31, 2020

Principal ($)

 

Debt Discount ($)

 

Issuance Costs ($)

 

Carrying Amount ($)

2023 Notes

15,700

 

(3,624)

 

 -

 

12,076

2025 Notes

82,000

 

(45,006)

 

(686)

 

36,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

December 31, 2019

Principal ($)

 

Debt Discount ($)

 

Issuance Costs ($)

 

Warrants ($)

 

Carrying Amount ($)

 

Principal ($)

 

Debt Discount ($)

 

Issuance Costs ($)

 

Warrants ($)

 

Carrying Amount ($)

Principal ($)

 

Debt Discount ($)

 

Issuance Costs ($)

 

Carrying Amount ($)

Solar Term Loan

45,000

 

(834)

 

(328)

 

(746)

 

43,092

 

 -

 

 -

 

 -

 

 -

 

 -

45,000

 

(1,466)

 

(100)

 

43,434

Oxford / SVB Term

 -

 

 -

 

 -

 

 -

 

 -

 

15,000

 

(113)

 

(103)

 

 -

 

14,784

2023 Notes

15,700

 

(4,171)

 

 

 

 

 

11,529

 

52,700

 

(16,597)

 

 -

 

 

 

36,103

15,700

 

(3,900)

 

 -

 

11,800

2025 Notes

82,000

 

(45,603)

 

(729)

 

 

 

35,668

 

 -

 

 -

 

 -

 

 -

 

 -

82,000

 

(46,482)

 

(708)

 

34,810

 

Interest expense related to the notes payable for the periods presented below isthree months ended March 31, 2020 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

 

 

 

Nine Months Ended September 30, 2019

 

Effective Interest Rate

 

Interest ($)

 

Debt Discount & Fees ($)

 

Loss on Extinguishment of Debt ($)

 

Total Interest Expense ($)

 

 

 

 

 

Effective Interest Rate

 

Interest ($)

 

Debt Discount & Fees ($)

 

Loss on Extinguishment of Debt ($)

 

Total Interest Expense ($)

Solar Term Loan

8.98%

 

772

 

60

 

 -

 

832

 

 

 

 

 

8.98%

 

772

 

60

 

 -

 

832

Oxford / SVB Term

7.37%

 

68

 

 

 

 -

 

68

 

 

 

 

 

7.37%

 

900

 

56

 

 -

 

955

2023 Notes

5.25%

 

708

 

176

 

398

 

1,282

 

 

 

 

 

5.25%

 

1,924

 

1,888

 

398

 

4,210

2025 Notes

5.25%

 

761

 

915

 

 -

 

1,676

 

 

 

 

 

5.25%

 

943

 

915

 

 -

 

1,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

Nine Months Ended September 30, 2018

 

Effective Interest Rate

 

Interest ($)

 

Debt Discount & Fees ($)

 

Loss on Extinguishment of Debt ($)

 

Total Interest Expense ($)

 

 

 

 

 

Effective Interest Rate

 

Interest ($)

 

Debt Discount & Fees ($)

 

Loss on Extinguishment of Debt ($)

 

Total Interest Expense ($)

Oxford / SVB Term

7.37%

 

361

 

88

 

 -

 

449

 

 

 

 

 

7.37%

 

1,211

 

292

 

 -

 

1,503

2023 Notes

5.25%

 

694

 

1,027

 

 -

 

1,721

 

 

 

 

 

5.25%

 

1,853

 

4,655

 

 -

 

6,508

The following are the scheduled maturities of the Solar Term Loan, 2025 Notes, and 2023 Notes as of September 30, 2019 (in thousands):

 

 

 

 

 

2019 (remaining three months)

    

$

 —

 

2020

 

 

 —

 

2021

 

 

6,250

 

2022

 

 

15,000

 

2023

 

 

30,700

 

Thereafter

 

 

90,750

 

Total

    

$

142,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2020

 

Effective Interest Rate

 

Interest ($)

 

Debt Discount & Fees ($)

 

Issuance Costs ($)

 

Final Payment Fee ($)

 

Total Interest Expense ($)

Solar Term Loan

8.98%

 

887

 

139

 

36

 

240

 

1,302

2023 Notes

5.25%

 

1,087

 

1,476

 

22

 

 -

 

2,585

2025 Notes

5.25%

 

206

 

276

 

 -

 

 -

 

482

Total

 

 

2,180

 

1,891

 

58

 

240

 

4,369

 

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9.Stockholders’ EquityThe following are the scheduled maturities of the 2025 Notes and 2023 Notes as of March 31, 2020 (in thousands):

 

 

 

 

 

 

2020 (remaining nine months)

    

$

 —

 

2021

 

 

 —

 

2022

 

 

 —

 

2023

 

 

15,700

 

2024

 

 

 —

 

Thereafter

 

 

82,000

⁽¹⁾

Total

    

$

97,700

 

Preferred Stock

As⁽¹⁾ On April 21, 2020 the Company entered into a Note Purchase and Exchange Agreement with certain funds managed by Highbridge Capital Management, LLC providing for the exchange of September 30, 2019 and December 31, 2018,$24.0 million aggregate principal amount of the Company’s authorized capital stock included 5,000,000outstanding 2025 Notes for (i) $15.7 million aggregate principal amount of newly issued Second Lien Secured Notes due January 2022, (ii) 11,026,086 shares of undesignated preferred stock, par value $0.001 per share.  No shares of preferred stock were outstanding as of September 30, 2019 or December 31, 2018.

Common Stock,

In July 2019, pursuant to an underwriting agreement with Jefferies LLC, the Company closed a follow-on public offering of 26,136,363 shares of its common stock at a price of $1.10 per share, which included the exercise in full by Jefferies LLC of its option (iii) warrants to purchase up to 3,409,090 additional shares. The Company received net proceeds of $26.9 million from the offering, after deducting underwriting discounts and offering expenses.

As of September 30, 2019 and December 31, 2018, the Company’s authorized capital stock included 450,000,0004,500,000 shares of common stock, par value $0.001 per share. The Company had 203,365,624 and 176,918,381 shares of common stock issued and outstanding at September 30, 2019 and December 31, 2018, respectively.

Common Stock Purchase Warrants

Additionally, the Company issued the Solar Warrants to purchase an aggregate of 1,125,000 shares of the Company’s common stock with an exercise price of $1.20 per share. The Solar Warrants are exercisable until July 25, 2029.  The proceeds from the Solar Term Loan were allocated between the debt and the Solar Warrants based on their fair value of $0.7 million, and were recorded within equity resulting in a discount to the Solar Term Loan.

In connection with the issuance of the Oxford/SVB Notes, the Company issued to the Lenders 10-year stock purchase warrants to purchase an aggregate of 116,581,  63,025 and 80,645 shares of common stock at an exercise price of $3.86,  $2.38 and $1.86$0.66 per share, respectively. The cumulative fair value ofand (iv) $0.3 million in accrued and unpaid interest on the warrants, which2025 Notes being exchanged. See Note 13 below for more details.

8.Stockholders’ Deficit

In November 2019, the Company estimated to be $0.5 million, resulted in a discount to the Oxford/SVB Notes. These warrants expire on June 30, 2026, November 22, 2026, and March 29, 2027, respectively, and are classified in equity.

In connection with the Company’s original Loan and Securityentered into an Open Market Sale Agreement with Oxford in 2014,Jefferies LLC which allows the Company issued to Oxford 10-year stock purchase warrantsissue and sell up to purchase an aggregate$50 million in gross proceeds of 167,570its common stock. During the three months ended March 31, 2020 the Company sold 175,089 shares of common stock at an exercise priceresulting in gross proceeds of $1.79 per share. The fair value of the warrants, which the Company estimated to be $0.2 million, resulted in a discount to the promissory notes issued to Oxford in connection with the original Loan and Security Agreement. These warrants expire on November 2, 2020, July 14, 2021 and August 19, 2021, and are classified in equity.$0.1 million.

 

The unamortized deferred financing fees and debt discount related to the notes rollover amount was being amortized along with the deferred financing costs and the discount created by the new issuance of the Solar Warrants over the term of the loan using the effective interest method.  In connection with the repayment of the Term Loans, the unamortized discount and additional prepayment fee of $0.4 million was recorded as a loss on extinguishment of debt in other income (expense) in the Company’s consolidated statements of operations and comprehensive loss.9.  Stock‑Based Compensation

 

Stock‑Based Compensation2015 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 awardsunits may be granted to the Company’s employees and certain other persons in accordance with the 2015 Plan provisions.provisions, such as officers and directors. In connection with the MarchFebruary 2016, Offering, the Company’s boardBoard of directorsDirectors adopted and the Company’s stockholders approved an Amended and Restated 2015 Equity Incentive Plan (the “amended and restated 2015 Plan”). The amended and restated 2015 Plan, which became effective as of the date of the pricing of theon March 2016 Offering.17, 2016. The Company’s board of directors may

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terminate the amended and restated 2015 Plan at any time. Options granted under the amended and restated 2015 Plan expire ten years after the date of grant.

 

Pursuant to the amended and restated 2015 Plan, the number of shares initially reserved for issuance pursuant to equity awards was 17,251,115 shares, representing 8,000,000 shares plus up to an additional 9,251,115 shares in the event that options that were outstanding under the Company’s equity incentive plans as of February 16, 2016 expire or otherwise terminate without having been exercised (in such case, the shares not acquired will revert to and become available for issuance under the amended and restated 2015 Plan). The number of shares of the Company’s common stock reserved for issuance under the amended and restated 2015 Plan will automatically increaseincreases on January 1 of each year, beginning on January 1, 2017 and ending on January 1, 2026, by 3.5% of the total number of shares of the Company’sits common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Company’sits board of directors. As of September 30, 2019, 3,343,444March 31, 2020, 17,261,319 shares remained available for grant under the amended and restated 2015 Plan.

Inducement Plan

 

On May 30, 2019, the Company adopted the Senseonics Holdings, Inc. Inducement Plan (the “Inducement Plan”), pursuant to which the Company reserved 1,800,000 shares of the Company’s common stock for issuance. The only persons eligible to receive grants of Awards (as defined below)awards under the Inducement Plan are individuals who satisfy the standards for inducement grants in accordance with NYSE American Company Guide Section 711(a), including individuals who were not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to such persons entering into employment with the Company. An “Award” is any right to receive the Company’s common stock pursuant to the Inducement Plan, consisting of nonstatutorynon-statutory options, restricted stock unit awards and other equity incentive awards. As of September 30, 2019, 1,031,458March 31, 2020, 1,229,132 shares remained available for grant under the Inducement Plan.

 

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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 800,000 shares and automatically increases on January 1 of each year, ending on and including January 1, 2026, by 1.0% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; provided, however, the Board of Directors may act prior to the first day of any calendar year to 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 March 31, 2020 there were 6,341,661 shares of common stock available for issuance under the 2016 ESPP.   

The 2016 ESPP permits participants to purchase shares of the Company’s common stock through payroll deductions of up to 15% of their earnings. Unless otherwise determined by the administrator, the purchase price of the shares will be 85% of the lower of the fair market value of common stock on the first day of an offering or on the date of purchase. Participants may end their participation at any time and deductions not yet used in a purchase are refundable upon employment termination. The Company initiated its first 2016 ESPP offering period on August 1, 2019 and new offering periods occur every six months thereafter, each consisting of two purchase periods of six months in duration ending on or about January 31st and July 31st of each year. A participant may only be in one offering at a time. On February 1, 2020, there were 566,573 shares purchased in connection with the initial offering period. The 2016 ESPP contains an offering reset provision whereby if the fair market value of a share on offering date of an ongoing offering is less than or equal to the fair market value of a share on a new offering date, the ongoing offering will terminate immediately after the purchase date and rolls over to the new offering. During the three months ended March 31, 2020, 40 participants in the initial offering were automatically rolled over to the subsequent new offering as a result this reset provision and an incremental cost of less than $0.1 million.

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‑qualifiednon-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 6,253,3013,515,817 shares of the Company’s common stock underlying options have vested or are expected to vest under the 1997 Plan. Upon the effectiveness of the 2015 Plan, the Company no longer grants any awards under the 1997 Plan.

PlanThe Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options, based on the fair value of those awards at the date of grant. The estimated fair value of stock options on the date of grant is amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award for those awards with service conditions only. For awards that also contain performance conditions, expense is recognized beginning at the time the performance condition is considered probable of being met over the remaining vesting period.. 

10.Fair Value Measurements

The Company accounts for recurring and non-recurring fair value measurements in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value, and requires expanded disclosures about fair value measurements. The ASC 820 hierarchy ranks the quality of reliability of inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

·

Level 1—Quoted prices for identical assets or liabilities in active markets.

·

Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·

Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

 

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Financial Assets and Liabilities Measured at Fair10.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 March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

March 31, 2020

 

   

Total

   

Level 1

   

Level 2

   

Level 3

 

   

Total

   

Level 1

   

Level 2

   

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

923

 

$

923

 

$

 —

 

$

 —

 

Money market funds⁽¹⁾

 

$

1,501

 

$

1,501

 

$

 —

 

$

 —

 

Commercial paper⁽¹⁾

 

 

4,797

 

 

 —

 

 

4,797

 

 

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Embedded features of the 2023 Notes

 

$

336

 

$

 —

 

$

 —

 

$

336

 

Embedded features of the 2025 Notes

 

$

26,201

 

$

 —

 

$

 —

 

$

26,201

 

 

$

15,560

 

$

 —

 

$

15,560

 

$

 —

 

Embedded features of the 2023 Notes

 

$

787

 

$

 —

 

$

 —

 

$

787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

December 31, 2019

 

   

Total

   

Level 1

   

Level 2

   

Level 3

 

   

Total

   

Level 1

   

Level 2

   

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

122,859

 

$

122,859

 

$

 —

 

$

 —

 

Money market funds⁽¹⁾

 

$

37,769

 

$

37,769

 

$

 —

 

$

 —

 

Commercial paper⁽¹⁾

 

 

13,870

 

 

 —

 

 

13,870

 

 

 —

 

Corporate bonds

 

 

6,256

 

 

 —

 

 

6,256

 

 

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Embedded features of the 2023 Notes

 

$

17,091

 

$

 —

 

$

 —

 

$

17,091

 

 

$

664

 

$

 —

 

$

 —

 

$

664

 

Embedded features of the 2025 Notes

 

 

25,543

 

 

 —

 

 

25,543

 

 

 —

 

The inputs used in measuring the fair value of the Company’s money market funds included in⁽¹⁾ Classified as cash and cash equivalents are considereddue to be Level 1 in accordance with the three-tier fair value hierarchy. The fair market values are based on period-end statements supplied by the various banks and brokers that held the majority of the funds.their short-term maturity

 

The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3) (in thousands):

 

 

 

 

 

 

 

Embedded

 

 

Features of the

 

   

the Notes

December 31, 2018

 

$

17,091

Initial fair value of embedded features of 2025 Notes

 

 

36,044

Change in derivative liabilities (including the partial settlement of the 2023 Notes)

 

 

(26,147)

September 30, 2019

 

$

26,988

 

 

 

 

 

 

Embedded

 

 

Features of the

 

   

the Notes

December 31, 2019

 

$

664

Change in derivative liabilities

 

 

(328)

March 31, 2020

 

$

336

 

DuringThe recurring Level 3 fair value measurements of the nine months ended September 30, 2019 and 2018,embedded features of the Company did not have any transfers between levels.2023 Notes include the following significant unobservable inputs at March 31, 2020:

Unobservable Inputs

Assumptions

Risky (bond) rate

25.7

%

Stock price volatility

75.8 % - 99.1

%

Probabilities of make-whole provision

6.0 % - 83.1

%

Time period until maturity (yrs)

.25 - 2.84

Dividend yield

 —

%

11.Income Taxes

 

The Company has not recorded any tax provision or benefit for the ninethree months ended September 30, 2019March 31, 2020 or September 30, 2018.March 31, 2019. The Company has provided a valuation allowance for the full amount of its net deferred tax assets since realization of any future benefit from deductible temporary differences, NOL carryforwards and research and development credits is not more-likely-than-not to be realized at September 30, 2019March 31, 2020 and December 31, 2018.2019.

 

12. RelatedOn March 27, 2020, Congress enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)

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to provide certain relief as a result of the COVID-19 pandemic. The enactment of the CARES Act did not result in any material adjustments to the Company’s income tax provision or net deferred tax assets for the three months ended March 31, 2020.

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 the three months ended March 31, 2020 was less than $0.1 million. For the three months ended September 30,March 31, 2019, and 2018, revenue from Roche was $3.4$2.2 million. Amounts due from Roche were less than $0.1 million at March 31, 2020 and $4.3$7.1 million respectively. Forat December 31, 2019. At each of March 31, 2020 and December 31, 2019, the nineCompany had committed replacement obligations under warranties of $0.6 million.  

13.Subsequent Events

April 2020 Financings

PPP Loan

On April 22, 2020, the Company received $5.8 million in loan funding from the Paycheck Protection Program (“PPP”), established pursuant to the CARES Act and administered by the SBA. The unsecured loan (the “PPP Loan”) is evidenced by a promissory note of the Company dated April 21, 2020 (the “PPP Note”) in the principal amount of $5.8 million with Silicon Valley Bank (the “Bank”).

Under the terms of the PPP Note and the PPP Loan, interest accrues on the outstanding principal at the 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, the Company is obligated to make equal monthly payments of principal and interest, beginning seven months ended September 30, 2019from the date of the PPP Note, until the maturity date.

The CARES Act and 2018,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 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 certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 75% 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 specified period will qualify for forgiveness. As a result of the Company’s workforce reduction, the amount of forgiveness will correspondingly decrease, unless the Company is able to rehire impacted employees.

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

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revenueremedies and may, among other things, require immediate payment of all amounts owed under the PPP Note, collect all amounts owing from Roche was $8.7 millionthe Company, and $9.9 million, respectively. Amounts due from Roche as of September 30, 2019file suit and December 31, 2018 were $3.5 million and $6.3 million, respectively.  obtain judgment against the Company.

13.Subsequent Events

Highbridge Loan Agreement

On November 7, 2019,April 21, 2020, the Company implementedentered into a restructuring designedLoan and Security Agreement (the “Highbridge Loan Agreement”), with certain funds managed by Highbridge Capital Management, LLC, (“Highbridge”), as the lenders, together with the other lenders from time to meet time party thereto (“the following objectives:

-

Reset strategic goals based on learnings from the Company’s first year of U.S. commercial launch;

-

Enhance the customer experience with the Company’s Eversense CGM system, including outcomes, longevity, reliability, access, support, and training;

-

Focus on executing pathways  to successful launch of the 180-day product in the United States; and

-

Reduce cash burn to support these activities while minimizing near-term dilution and ensuring the best allocation of capital

Lenders”) and Wilmington Savings Fund Society, SCB, as collateral agent.

Pursuant to the restructuring,Highbridge Loan Agreement, the Company also immediately reduced its current, openmay borrow up to an aggregate of $20.0 million in aggregate principal through the issuance and planned workforce by approximately 30%sale of First Lien Notes due October 2021 (the “First Lien Notes”). The Company received the first tranche of borrowing in the aggregate principal amount of $15.0 million on April 24, 2020. Under the terms of the Highbridge Loan Agreement, the Company 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 and receipt of the first tranche of borrowing, the Company issued 1,500,000 shares of its common stock to the Lenders as a commitment fee. 

The First Lien Notes are secured, senior obligations that bear interest at the annual rate of 12% or, at the Company’s election, payment in kind at an annual rate of 13%, payable monthly in arrears. The First Lien Notes will mature on October 24, 2021 (the “First Lien Maturity Date”) unless earlier repurchased, redeemed or converted in accordance with their terms. The obligations under the First Lien Notes are secured by substantially all the Company’s assets.

The Company has the right to prepay the First Lien Notes at any time, subject to a prepayment premium, which in certain circumstances the Company may elect to pay in its common stock, equal to the aggregate amount of interest payments through maturity. However, if the date of payment in cash of such prepayment premium is on or before August 22, 2020, the prepayment premium will be reduced by 25%.  

Subject to certain conditions, if the Company retains or reinvests proceeds of an asset sale pursuant to the asset sale prepayment provisions in the Highbridge Loan Agreement, the Lenders shall be entitled to convert First Lien Notes and Holders (defined below) shall be entitled to convert Second Lien Notes in aggregate combined principal amount equal to 45% of such net proceeds retained or reinvested (together with any applicable prepayment premium) to the Company’s 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) $0.57 per share. This conversion option has a daily limit of $1.0 million in aggregate converted principal (inclusive of principal amount of Second Lien Notes that are voluntarily converted by the Holders).

From and after a strategic transaction announcement (as defined in the form of First Lien Note), the Company may elect to convert up to $9.4 million in aggregate principal of the First Lien Notes to its 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) $0.57 per share of its common stock. This conversion option has a daily limit of $0.3 million in aggregate converted principal. If the Company or the Lenders elect to convert any of the First Lien Notes, the amount converted will be equal to the principal and unpaid accrued interest plus the applicable prepayment premium.  

The Highbridge Loan Agreement contains customary terms and covenants, including without limitation: financial covenants, such as operating within an approved budget and 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 Highbridge Loan Agreement also contains customary events of default, after which the First Lien Notes may be due and payable immediately, including, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, material adverse changes, bankruptcy and insolvency

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proceedings, cross-defaults to certain other agreements, judgments against the Company, and change of control, termination of any guaranty, governmental approvals, and lien priority.

Exchange Agreement with Highbridge

On April 21, 2020 the Company entered into a Note Purchase and Exchange Agreement (the “Exchange Agreement”) with certain funds managed by Highbridge providing for the exchange (the “Exchange”) of $24.0 million aggregate principal amount of the Company’s outstanding 2025 Notes for (i) $15.7 million aggregate principal amount of newly issued Second Lien Secured Notes due January 2022 (the “Second Lien Notes” and, together with the First Lien Notes, the “Senior Notes”), (ii) 11,026,086 shares of common stock, (iii) warrants (the “Warrants”) to purchase up to 4,500,000 shares of 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 of the Company, junior only to the First Lien Notes. Interest in cash at the annual rate of 7.5% or, at the Company’s option, payment in kind at an annual rate of 8.25%, on the Second Lien Notes will be payable monthly in arrears. The maturity date for the Second Lien Notes will be January 24, 2022 (the “Second Lien Maturity Date”), unless earlier repurchased, redeemed or converted in accordance with their terms. The obligations under the Second Lien Notes are secured by substantially all of the Company’s assets.

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. However, if the date of payment in cash of such prepayment premium is on or before August 22, 2020, the prepayment premium will be reduced by 25%.

The holders of the Second Lien Notes (the “Holders”) will have the right to convert up to $7.0 million 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) $0.57 per share. This conversion option has a daily limit of $1.0 million in aggregate converted principal (inclusive of principal amount of First Lien Notes that are voluntarily converted by the Lenders). Subject to certain conditions, if the Company retains or reinvests proceeds of an asset sale pursuant to the Asset Sale Prepayment Provisions in the Exchange Agreement, the 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). As of June 5, 2020, the Holders have converted $4.8 million for issuance of 10,502,291 shares of common stock.

From and after a strategic transaction announcement, the Company may elect to convert up to $8.7 million in aggregate principal of the Second Lien Notes 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) $0.57 per share. This conversion option has a daily limit of $0.3 million in aggregate converted principal. If the Company or the Holders elect to convert any of the Second Lien Notes, the amount converted will be equal to the principal and unpaid accrued interest plus the applicable 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.

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The Company may not issue shares of its common stock, net of the 18,181,818 shares underlying the 2025 Notes exchanged in the Exchange, in excess of 19.99% of the common stock outstanding on April 21, 2020; this restriction is subject to removal upon approval by stockholders of the Company (the “Stockholder Approval”). The Company intends to seek the Stockholder Approval at the Company’s 2020 Annual Meeting of Stockholders on June 30, 2020.

Supplier and Contract Manufacturer Obligations

As a result of the impact of the COVID-19 pandemic on the global healthcare community and the Company’s streamlined operational focus implemented at the end of the first quarter of 2020, the Company has been negotiating with certain of its major suppliers and contract manufacturers to pay for materials procured by these parties on the Company’s behalf or for costs incurred related to Eversense manufacturing activities that were paused or delayed by the Company. Some of these fees may also be dependent on whether the materials will expire prior to when the Company resumes production at normal operating levels, or if further delays in manufacturing occur. As of June 9, 2020, the Company expects to incur one-time restructuringhave to pay approximately $1.9 million for costs related to severance expensespausing manufacturing activities and $0.6 million if certain manufacturing timelines are not met within a specified period. The Company will record any fees contingent upon future manufacturing in its consolidated financial statements if, and when, it is probable such obligations will become due. When the Company resumes manufacturing activity, some of approximately $0.8 million in the fourth quarter of 2019.amounts paid for materials may be credited back to the Company upon consumption.

 

 

 

 

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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 uncertainties,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, 2018,2019, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2019.16, 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 design, development and commercialization of long-term, implantable continuous glucose monitoring, productsor CGM, systems to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy. Our continuous glucose monitoring, or CGM, systems, Eversense and Eversense XL are reliable, long‑term, implantable CGM systems that we haveare designed to continually and accurately measure glucose levels in people with diabetes via an under-the-skin sensor, a removable and rechargeable smart transmitter, 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 sixseven to fourteen14 days for non-implantable CGM systems.

The original Eversense CGM system received its CE mark in June 2016, which marked the first approval for the product to be sold within the European Economic Area. Subsequently, the extended life Eversense XL CGM system received its CE mark in September 2017 and is currently available CGM systems. We believe Eversense and Eversense XL will provide people with diabetes with a more convenient method to monitor their glucose levels in comparison with the traditional method of self‑monitoring of blood glucose, or SMBG, as well as currently available CGM systems. In our U.S. pivotal clinical trial, we observed that Eversense measured glucose levels over 90 days with a degree of accuracy superior to that of other currently available CGM systems. Our Eversense XL system is availableselect markets in Europe, the Middle East, and Africa, (EMEA)or EMEA. In June 2018, the U.S. Food and ourDrug Administration, or FDA, approved the Eversense CGM system and it is currently available throughout the United States. In June 2019, we received FDA approval for the non-adjunctive indication (dosing claim) for the Eversense system. With this approval and the availability of a new app in December 2019, the Eversense system is currently approved for salecan be used as a therapeutic CGM in the United States.States to replace fingerstick blood glucose measurement to make treatment decisions, including insulin dosing.  

 

Recent DevelopmentsOur net revenues are derived from sales of the Eversense CGM system which is sold in two separate kits: the disposable Eversense Sensor Pack which includes the sensor, insertion tool, and adhesive patches, and the durable Eversense Smart Transmitter Pack which includes the transmitter and charger. 

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 the Eversense system 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 quarter

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ended March 31, 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. In May 2020, we received positive payor coverage by additional Blue Cross and Blue Shield plans, and announced local coverage determinations (LCD) proposals for implantable therapeutic CGMs such as Eversense by three Medicare Administrative Contractors to enable Eversense to be used by Medicare beneficiaries as a Part B physician service.

Development and Commercialization of Eversense

In December 2018, we initiated the third quarterPROMISE 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 PROMISElast patient complete their 180-day U.S. pivotal clinical trialvisit during the first quarter of Eversense XL with 208 subjects enrolled across eight clinical sites.2020. We expectplan to report toplineanalyze data from the PROMISE trial, in the first half of 2020.  Ifand if the data from the PROMISE trial areis positive, we intend to use the data in a regulatory submission to the FDA in late summer of 2020 to potentially expand the Eversense system use for up to 180 days in the United States. We expect such approval will happenIf approved by the endFDA, Eversense XL will double sensor duration of 2020.Eversense in the United States, with half of the insertion and removal procedures required, and will provide more than 12 times longer sensor duration than other CGM systems available in the United States. However, shelter-in-place orders and other impacts from the coronavirus, or COVID-19, pandemic could alter or delay the timing of response by the FDA regarding our submission. We also intend to use data from the first 90 days of the PROMISE trial, if positive, to support a supplementalregulatory submission to the FDA for an integrated, or iCGM, , designation for our currentin the second half of 2020. This would allow Eversense 90-day system, whichto integrate with other compatible medical devices and electronic interfaces, such as automated insulin dosing systems, insulin pumps, and blood glucose meters. On February 26, 2020, we announced that the FDA could potentially approve inapproved a subgroup of PROMISE trial participants to continue for a total of 365 days to gather feasibility data on the first halfsafety and accuracy of 2020.a 365-day sensor. This sub-set of more than 35 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.

In September 2019, Senseonics issued a voluntary recall of specificApril 2020, we announced that we received regulatory approval in Europe such that the Eversense sensorsXL is no longer contraindicated for MRI, which means the sensor does not need to be removed from doctors’ offices and distributorsunder the skin during MRI 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.

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 small number (1.4% of inserted Sensors overresult, it was determined to terminate the affected period) of sensors had prematurely stopped functioning due to inadequate hydrationSolar 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 sensor’s glucose-sensing membrane.  There were 844 Eversense CGM Sensors recalled under this field action. No action was needed from patients regarding thisloans, 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 consolidated statement of operations and comprehensive loss during the three months ended March 31, 2020.

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

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voluntary recall.  The costglobally. 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 recall was $0.4 millioncoronavirus. The state of Maryland, where we are headquartered, has been affected by COVID-19. 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 currently working from home either all or substantially all of the time. Additionally, because our sensor requires an in-clinic procedure, we have seen a reduction in access to clinics and sensor insertions during the outbreak. It is recordeddifficult to predict the longevity and severity COVID-19 will have on a smaller business like ours still in costthe early stages of sales on the consolidated statements of operations and comprehensive loss at September 30, 2019.commercialization.  

In November 2019, we implemented a restructuring, or the Restructuring, designed to meet the following objectives:

·

Reset strategic goals based on learnings from our first year of U.S. commercial launch;

·

Enhance the customer experience with our Eversense CGM system, including outcomes, longevity, reliability, access, support and training;

·

Focus on executing the pathway to successful launch of our 180-day product in the United States; and 

·

Reduce cash burn to support these activities while minimizing near-term dilution and ensuring the best allocation of capital.

 

PursuantNet Revenue Impact

As a result of the COVID-19 pandemic, redistribution of country-specific government funding to COVID-19 efforts, and overall excess inventory at our distributors, our net revenue for the three months ended March 31, 2020 was significantly lower than expected and we are uncertain as to the Restructuring, we also immediately reducedlongevity or severity of the impact on our current, open and planned workforce by approximately 30%.  We expect to incur one-time restructuring costs related to severance expenses of approximately $0.8 million in the fourth quarter of 2019.

European Commercialization of Eversense

In September 2015, we entered into a distribution agreement with Rubin Medical, or Rubin, pursuant to which we granted Rubin thefuture sales. Under our exclusive right to market, sell and distribute Eversense in Sweden, Norway and Denmark through September 2020. Rubin markets and sells medical products for diabetes treatment in the Scandinavian region, including as the exclusive Scandinavian distributor for the insulin pump manufacturer Tandem Corporation. Under the agreement, Rubin is obligated to purchase from us specified minimum volumes of Eversense components at pre-determined prices.

In May 2016, we entered into a distribution agreement with Roche Diagnostics International AG and Roche Diabetes Care GmbH, together referred to asor collectively, Roche, pursuant to which we have granted Roche the exclusive right to market, sell and distribute Eversense in Germany, Italy and the Netherlands. Under the agreement, Roche is obligated to purchase from us specified minimum volumes of Eversense components at pre-determined prices. We began distributing Eversense through Roche in Germany in September 2016 and in Italy and the Netherlands in the fourth quarter of 2016. In November 2016, we entered into an amendment to the distribution agreement with Roche granting Roche the exclusive right to market, sell and distribute Eversense in Europe, the Middle East and Africa,EMEA, excluding Sweden, Norway, Denmark, FinlandScandinavia and Israel. In January 2019, we entered into an additional amendment to the distribution agreement withaddition, Roche to extend the agreement through January 31, 2021. Pursuant to the amendment to the agreement, Roche has agreed to certain purchase levels of Eversense systems and pricing terms through the extended term of the agreement. In addition, under the amendment, Roche’s role as the exclusive distributor of Eversense was expanded to provide Roche with 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. To date,Roche did not place any commercial sales orders in accordance with their distribution agreement during the three months ended March 31, 2020. We 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 we have begun distributingexpect to occur in the third and fourth quarters of 2020. Our net revenues and corresponding accounts receivables were reduced for these allowances at March 31, 2020. We are continuing our Eversense Bridge Program for existing patients on Eversense.  

Inventory

As a result of significant changes and uncertainty regarding our forecasted demand and related expiry concerns, we impaired $15.0 million of inventory and related assets at March 31, 2020 with a corresponding charge to cost of sales in an aggregateour unaudited consolidated results of 14 European countriesoperations and South Africa through Rubincomprehensive loss for the three months ended March 31, 2020. We will continue to assess our inventory and Roche.supplier related assets for recoverability if conditions materially change or worsen.

In September 2017,

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 three months ended March 31, 2020, which we receivedrecorded to other income (expense) in our unaudited consolidated statement of operations and comprehensive loss. The impairment mostly related to the CE mark foruncertainty 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. 

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 at March 31, 2020 after repayment of the Solar Loan Agreement, 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, 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 and the development and regulatory submission of our Eversense XL which is indicatedCGM system for a sensor life ofuse for up to 180 days. Eversense XL began commercialization in Europe in the fourth quarter of 2017. All such commercialization and marketing activities remain subject to applicable government approvals.

United States Development and Commercialization of Eversense

In 2016, we completed our PRECISE II pivotal clinical trial in the United States. This trial, which was fully enrolled with 90 subjects, was conducted at eight sitesdays 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

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termination benefit costs in the trial,amount of $1.6 million were accrued and recorded in our accompanying unaudited consolidated financial statements as of March 31, 2020.  

Exploring Strategic Alternatives

Our Board of Directors has been and is continuing to explore potential strategic alternatives to enhance stakeholder value and we measuredhave been in discussions with new financing sources.  

April 2020 Financings

On April 22, 2020, we received $5.8 million in loan funding from the accuracyPaycheck Protection Program, or PPP, established pursuant to the Coronavirus Aid, Relief, and Economic Security Act, or the CARES 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 Eversense measurements through 90 days after insertion. WeFirst 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 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. 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 assessed safety through 90 days after insertionissued 1,500,000 shares of common stock to the Lenders as a commitment fee.

The Lenders were current holders of $24.0 million of our convertible senior subordinated notes due 2025, or through sensor removal.the 2025 Notes. In connection with the trial,Highbridge Loan agreement, we observedentered into a mean absolute relative difference,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 due January 2022, or MARD,the Second Lien Notes, (ii) 11,026,086 shares of 8.5% utilizing two calibration points for Eversense across the 40-400 mg/dL range when comparedcommon stock, (iii) warrants to YSI blood reference values during the 90-day continuous wear period. Basedpurchase 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 data2025 Notes being exchanged.

These credit facilities are further described under Liquidity and Capital Resources.

Going Concern

Given our limited cash resources, and after inclusion of our subsequent financings, and considering the economic and market uncertainty resulting from the COVID-19 pandemic, management has substantial doubt regarding our ability to meet obligations as they become due in the ordinary course of business for the next twelve months from the date of this trial,Quarterly Report on Form 10-Q. Our ability to generate enough cash to meet our streamlined working capital requirements is dependent on our ability to achieve additional capital sources and favorable outcomes from potential strategic alternatives. New financings may not be available to us on commercially acceptable terms, or at all, and may be impacted by our current debt covenants.

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 October 2016 we submittedthe European Union and to a pre-market approval, or PMA, application to the FDA to market Eversensenetwork 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 90-day use. On June 21, 2018, we received PMA approval fromour sales directly to the FDA forCustomers, regardless of whether or not the Eversense system. In July 2018, we began distributingCustomers resell the Eversense systemproducts to health care providers and patients. Under the terms of our distribution agreement with Roche, Roche is contractually obligated to make certain

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directly inminimum purchases of Eversense systems from us and, accordingly, the United States through our own direct sales and marketing organization. We have received Category III CPT codesrevenue we recognize for the insertion and removalany given period is not necessarily indicative of the Eversense sensor. We intendlevel of sales to pursue a Category I CPT code.

In December 2018, we initiated the PROMISE pivotal clinical trial to evaluate the safety and accuracy of Eversenseend users for a period of up to 180 days in the United States. As described above during the quarter ended September 30, 2019, we completed enrollment of the PROMISE trial.   We expect to report topline data from the PROMISE trial in the first half of 2020.  If the data from the PROMISE trial are positive, we intend to use the data in a regulatory submission to the FDA to expand the Eversense system use to 180 days in the United States.  We also intend to use data from the first 90 days of the PROMISE trial, if positive, to support a supplemental submission to the FDA for an integrated,that, or iCGM, designation for our current Eversense 90-day system, which the FDA could potentially approve in the first half of 2020.

In March 2019, we launched a patient access program, the Eversense Bridge Program, to assist those patients who do not have insurance coverage for Eversense, or whose insurance is denied or insufficient. Pursuant to this program, we are providing financial assistance to eligible patients purchasing Eversense to enable more patients to access the Eversense system. The amount of assistance that we provide depends on a patient’s insurance coverage. The program establishes maximum limits per patient and excludes certain patients as ineligible, including government-insured patients and residents of certain states. We continue to experience increasing interest and activity across patients and providers. The program provides opportunities to engage both regional and national payors, which we expect will lead to additional positive payor coverage decisions for the Eversense system.

In June 2019, we received FDA approval for the non-adjunctive indication (dosing claim) for the Eversense system. With this approval, the Eversense system can now be used as a therapeutic CGM to replace fingerstick blood glucose measurement for dosing decisions. We plan to roll out a new Eversense application with this expanded indication in the United States in the fourth quarter of 2019.

We have never been profitable and our net losses were $19.5 million and $31.8 million for the three months ended September 30, 2019 and 2018, respectively, and $79.9 million and $86.7 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, our accumulated deficit totaled $437.7 million, primarily as a result of expenses incurred in connection with our research and development programs and manufacturing costs associated with developing the Eversense system. We expect to continue to incur net losses for the foreseeable future.

We will need to obtain additional funding in connection with our continuing operations through debt financings, public or private equity orany other, sources, which may include collaborations with third parties. However, we may be unable to raise additional funds when needed on favorable terms or at all. Our failure to raise such capital as and when needed would have a negative impact on our financial condition and our ability to successfully commercialize Eversense and develop and commercialize future products and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so.

Financial Overview

Revenueperiod.

 

Revenue from product sales is recognized at a point in time when the customersCustomers obtain control of our product which occurs at a point in time, based upon the delivery terms as defined in the contract. 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 include the right to return.

We are typically paid within 60 days of invoicing subsequentrecognize revenue only to the customers obtaining controlextent 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 product.

Product sales are recorded net of estimated costs for patient access and sales incentive programs.  In March 2019, we introducedCustomers 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 United States.  Underproduct 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 provide financial assistance,reimburse participating Customers an amount up to a fixed maximum for the difference in the formcost of reimbursement, to eligible patients based on theirthe Eversense System and what they collect from insurance coverage. Reimbursement payments topayors 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 Eversense Bridge Programprogram and which are treated as a reduction of revenue in the period in which the corresponding gross revenue is recognized.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 our customersCustomers 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. Because of our limited experience with the Eversense Bridge Program, our estimates used in determining the variable consideration on a sale transaction could change in future periods, and such changes could be material.

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.  

Concentration of Revenue and Customers

For the three months ended March 31, 2020 and March 31, 2019, we derived less than 1% and 59%, respectively, of our net revenues from one customer, Roche.  

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 historical experiencethe geographic location to which we deliver the product, for the three months ended March 31, 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

March 31, 2019

 

 

 

 

%

 

 

 

 

%

 

(Dollars in thousands)

Amount

 

of Total

 

 

Amount

 

of Total

 

Revenue, net:

 

 

 

 

 

 

 

 

 

 

 

Outside of the United States

$

12

 

33.3

%

 

$

2,607

 

76.2

%

United States

 

24

 

66.7

 

 

 

816

 

23.8

 

Total

$

36

 

100.0

%

 

$

3,423

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

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Accounts Receivable

Accounts receivable consist of amounts due from our Customers and are recorded within accrued expenses and other current liabilitiesat net realizable value, which may include an allowance for doubtful accounts at the time potential collection risk is identified or for promotional or prompt-pay discounts offered. We provided one-time COVID-19 pandemic relief concessions to some of our customers in the accompanying consolidated balance sheets. BecauseUnited States for allowances up to a specified amount of the limited experience with the program as of September 30, 2019, our estimated reimbursement rates with respectfirst quarter purchases if they are unable to such shipped, but unsold, products could change in future periods, and such changes could be material. We also, at our discretion, offer discounts and other allowances under defined promotional or prompt pay programs to our customers which result in the establishment of reserves against product revenue, however, to date these amounts have been immaterial

Cost of Sales

We use third-party contract manufacturers to manufacturesell through Eversense and related components on hand prior to expiry, which we expect to occur in the third and supplies. Costfourth quarters of sales consists primarily2020. Our net revenues and corresponding accounts receivables were reduced by $1.2 million for these allowances at March 31, 2020. We do not have a history of raw materials, contract manufacturing service fees, expected warranty costs, recall costs, product obsolescence, scrap, warehousing indirect personnel costscollectability concerns and shipping and handling expenses associated with product delivery.there have been no provisions for uncollectible accounts recorded against accounts receivable at March 31, 2020 or December 31, 2019.

 

Sales and Marketing ExpensesUse of Estimates

 

SalesThe preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and marketingassumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses consist primarily of salaries, commissions, and other related costs, includingduring the reporting period. In our accompanying unaudited consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, for personnel who perform sales, marketing,recoverability of long-lived assets, deferred taxes and customer support functions. Other significant costs include marketing programs, website design and advertising, educational and promotional materials, consultants, and tradeshow expenses.

Research and Development Expenses

Research and development expenses consist of expenses incurred in performing research and development activities in developing Eversense, including clinical trials and feasibility studies, and partnerships for strategic initiatives including insulin delivery and new indications. Research and development expenses include compensation and benefits for research and development employees including stock-based compensation, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costsvaluation allowances, derivative liabilities, obsolete inventory, warranty obligations, variable consideration related to regulatory operations, fees paidrevenue, 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 contract research organizationsour estimates, as appropriate, within our unaudited consolidated financial statements and other consultants,there may be changes to those estimates in future periods due to the uncertainties surrounding the severity and other outside expenses. Research and development expenses are expensed as incurred.

General and Administrative Expenses

General and administrative expenses consist primarilyduration of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, accounting, business development, information technology, and human resources functions. Other significant costs include information technology, facility costs, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

Other Income (Expense), Net

Interest income consists of interest earned on our cash equivalents. Interest expense primarily consists of interest expense on our notes payable and amortization of associated debt issuance costs and debt discounts.  Our embedded derivate instruments associated with the 2025 Notes and 2023 Notes (as defined below) are remeasured at the end of each reporting period and the changes in fair value are reported in other income (expense) in our consolidated statements of operations and comprehensive loss.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

 

See “Note 3―SummaryIn June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of SignificantCredit 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 Policies” includedfor 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 Notes to Consolidated Financial Statements (under the caption “Recent Accounting Pronouncements”).consolidated financial statements.

 

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Results of Operations

 

Comparison of the three months ended September 30,March 31, 2020 and 2019 and 2018

 

The following table sets forth our results of operations for the three months ended September 30,March 31, 2020 and 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

Three Months Ended

 

 

 

 

 

September 30, 

 

Period-to-

 

 

March 31, 

 

Period-to-

 

 

2019

 

2018

 

Period Change

 

 

2020

 

2019

 

Period Change

 

 

(unaudited)

 

 

 

 

 

(unaudited)

 

 

 

 

Revenue, net

    

$

959

    

$

837

    

$

122

 

    

$

31

    

$

1,243

    

$

(1,212)

 

Revenue, net - related parties

 

 

3,360

 

 

4,321

 

 

(961)

 

 

 

 5

 

 

2,180

 

 

(2,175)

 

Total revenue

 

 

4,319

 

 

5,158

 

 

(839)

 

 

 

36

 

 

3,423

 

 

(3,387)

 

Cost of sales

 

 

7,659

 

 

7,742

 

 

(83)

 

 

 

19,670

 

 

6,733

 

 

12,937

 

Gross profit

 

 

(3,340)

 

 

(2,584)

 

 

(756)

 

 

 

(19,634)

 

 

(3,310)

 

 

(16,324)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing expenses

 

 

11,560

 

 

7,851

 

 

3,709

 

 

 

11,145

 

 

12,834

 

 

(1,689)

 

Research and development expenses

 

 

11,076

 

 

7,402

 

 

3,674

 

 

 

7,362

 

 

7,108

 

 

254

 

General and administrative expenses

 

 

5,388

 

 

5,138

 

 

250

 

 

 

5,690

 

 

6,516

 

 

(826)

 

Operating loss

 

 

(31,364)

 

 

(22,975)

 

 

(8,389)

 

 

 

(43,831)

 

 

(29,768)

 

 

(14,063)

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

Other income, net:

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

519

 

 

820

 

 

(301)

 

 

 

209

 

 

627

 

 

(418)

 

Loss on extinguishment of debt

 

 

(398)

 

 

 —

 

 

(398)

 

 

 

(4,546)

 

 

 —

 

 

(4,546)

 

Interest expense

 

 

(3,460)

 

 

(2,170)

 

 

(1,290)

 

 

 

(4,373)

 

 

(2,034)

 

 

(2,339)

 

Debt issuance costs

 

 

(3,344)

 

 

 —

 

 

(3,344)

 

Change in fair value of derivative liabilities

 

 

19,186

 

 

(7,513)

 

 

26,699

 

 

 

10,311

 

 

2,072

 

 

8,239

 

Other income (expense)

 

 

(638)

 

 

(43)

 

 

(595)

 

Total other income (expense), net

 

 

11,865

 

 

(8,906)

 

 

20,771

 

Other expense

 

 

(363)

 

 

(262)

 

 

(101)

 

Total other income, net

 

 

1,238

 

 

403

 

 

835

 

Net loss

 

$

(19,499)

 

$

(31,881)

 

$

12,382

 

 

$

(42,593)

 

$

(29,365)

 

$

(13,228)

 

 

Revenue, net

 

Our net revenue decreased $0.8$3.4 million to $4.3less than $0.1 million for the three months ended September 30, 2019,March 31, 2020, compared to $5.2$3.4 million for the three months ended September 30, 2018. Although sales volumes increased year-over-year asMarch 31, 2019. This decrease was a result of increased U.S. commercializationdeferral of Eversense, this growth did not translate into a net revenue increase due to gross to net reductions to revenue for the Eversense Bridge Program, which begansales orders by Roche in the first quarter of 2019.  We expect that2020, and reductions for significant one-time COVID-19 relief concessions and allowances up to a specified amount of first quarter purchases provided to some of our revenue from global net product sales will increaselarger customers in the remainder of 2019United States and future years as we continue our commercialization efforts.costs for the Eversense Bridge Program.

 

Cost of sales

 

Our cost of sales remained consistent at $7.7increased $12.9 million to $19.7 million for the three months ended September 30, 2019 and the three months ended September 30, 2018.

Gross profit was $(3.3) million and $(2.6)March 31, 2020, compared to $6.7 million for the three months ended September 30, 2019 and 2018, respectively.March 31, 2019. The decreaseincrease was primarily due to impairment charges, scrap and write-offs of $16.3 million for inventory and related assets due to uncertainty in demand forecasts from changes made to our operational focus and current economic conditions, offset by lower sales to our customers.

Gross profit was $(19.6) million and $(3.3) million for the Eversense Bridge Program gross to net reductions..three months ended March 31, 2020 and 2019, respectively. Gross profit as a percentage of revenue, or gross margin, was (77)(545.4)% and (50)(96.7)% for the three months ended September 30,March 31, 2020 and 2019, respectively. The decrease in gross profit was primarily due to lower sales, inventory impairment charges and 2018, respectively.  We expect overall gross marginreductions for one-time COVID-19 relief concessions and allowances offered to improve oversome of our larger customers in the long term, as our sales increase, we continue to improve yields, and we have more opportunities to leverage our costs over larger production volumes.United States.

 

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Sales and marketing expenses

 

Sales and marketing expenses were $11.6$11.1 million for the three months ended September 30, 2019,March 31, 2020, compared to $7.9$12.8 million for the three months ended September 30, 2018, an increaseMarch 31, 2019, a decrease of $3.7$1.7 million. The increasedecrease was primarily due to a $3.0$2.1 million increase related tofor consulting expenses incurred in the buildoutfirst quarter of the U.S. sales force and a $0.7 million increase associated2019 in connection with commercialization activities to supportsupporting the U.S. launch of Eversense.  We anticipate thatEversense, and $0.3 million for travel and associated field sales expenses, partially offset by a net $0.7 million increase in personnel related costs primarily related to severance expenses in connection with our sales and marketing expenses will decreasereduction in the next year as a result of the implementation of the Restructuring, which we expect will align our efforts with anticipated sales and market opportunities.workforce on March 26, 2020.

 

Research and development expenses

 

Research and development expenses were $11.1 million for the three months ended September 30, 2019, compared to $7.4 million for the three months ended September 30, 2018, an increase of $3.7 million. The increase was primarily dueMarch 31, 2020, compared to a $3.4 million increase in expenses related to clinical studies, and a $0.3 million increase for salaries and personnel related costs.  We expect to decrease our overall research and development expenses in the next year as the PROMISE trial concludes and we seek U.S. regulatory approval to market the 180-day product.

General and administrative expenses

General and administrative expenses increased $0.3 million to $5.4$7.1 million for the three months ended September 30,March 31, 2019, compared to $5.1 million for the three months ended September 30, 2018.an increase of $0.3 million. The increase was primarily due to increases in software licenses and information technology service feesa result of $0.2 million and legal fees of $0.1 million.  We expect general and administrative expenses to decrease in the next year as we implement the Restructuring.

Total other income (expense), net

Total other income, net, was $11.9$0.4 million for the three months ended September 30, 2019, compared to total other expense, net of $8.9clinical trial costs, $0.4 million for the three months ended September 30, 2018, an increase of $20.8 million. This increase was primarily due to a ($19.2) million decrease in the fair value of the derivative liabilities for the three months ended September 30, 2019, compared to a $7.5 million increase in the 2018 period.  This increase was partially offset by  $3.3 million of fees recognizedpersonnel related costs, including severance expenses in connection with the modification of the 2023 Notes, and a $1.3 million increaseour reduction in interest expense for the three months ended September 30, 2019.  

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Table of Contents

Comparison of the nine months ended September 30, 2019 and 2018

The following table sets forth our results of operations for the nine months ended September 30, 2019 and 2018 (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

September 30, 

 

Period-to-

 

 

 

2019

 

2018

 

Period Change

 

 

 

(in thousands)

 

 

 

 

Revenue, net

    

$

3,678

    

$

1,768

    

$

1,910

 

Revenue, net - related parties

 

 

8,671

 

 

9,960

 

 

(1,289)

 

Total revenue

 

 

12,349

 

 

11,728

 

 

621

 

Cost of sales

 

 

23,552

 

 

14,889

 

 

8,663

 

Gross profit

 

 

(11,203)

 

 

(3,161)

 

 

(8,042)

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

Sales and marketing expenses

 

 

38,573

 

 

17,469

 

 

21,104

 

Research and development expenses

 

 

28,688

 

 

23,805

 

 

4,883

 

General and administrative expenses

 

 

17,321

 

 

14,531

 

 

2,790

 

Operating loss

 

 

(95,785)

 

 

(58,966)

 

 

(36,819)

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,556

 

 

1,245

 

 

311

 

Loss on extinguishment of debt

 

 

(398)

 

 

 —

 

 

(398)

 

Interest expense

 

 

(7,459)

 

 

(6,177)

 

 

(1,282)

 

Debt issuance costs

 

 

(3,344)

 

 

 —

 

 

(3,344)

 

Change in fair value of derivative liabilities

 

 

26,147

 

 

(22,526)

 

 

48,673

 

Other income (expense)

 

 

(655)

 

 

(226)

 

 

(429)

 

  Total other income (expense), net

 

 

15,847

 

 

(27,684)

 

 

43,531

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(79,938)

 

$

(86,650)

 

$

6,712

 

Revenue, net

Our net revenue increased $0.6 million to $12.3 million for the nine months ended September 30, 2019, compared to $11.7 million for the nine months ended September 30, 2018. This increase was primarily due to increased revenue from sales of Eversense in the United States in the nine months ended September 30, 2019 following our U.S. launch in July 2018.

Cost of sales

Our cost of sales increased $8.7 million to $23.6 million for the nine months ended September 30, 2019, compared to $14.9 million for the nine months ended September 30, 2018. The increase was primarily due to an increase of $3.4 million for impairment charges for obsolete inventory, including product design changes, an increase of $2.1 million in warranty expense and obligations as a result of the January 2019 amendment of the Roche distribution agreement, and increased volumes shipped to customers, $1.1 million for scrap charges related to product non-conformity at our contract manufacturers, an increase of $1.7 million for salaries and personnel costs associated with manufacturing and supply chain, and an increase of $0.3 million for lab supplies.

Our gross profit was $(11.2) million and $(3.2) million for the nine months ended September 30, 2019 and 2018, respectively. The decrease was primarily related to the Eversense Bridge Program gross to net reductions, impairment charges for obsolete inventory, and scrap charges.  Gross profit as a percentage of revenue, or gross margin, was (91)% and (27)% in the nine months ended September 30, 2019 and 2018.

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Sales and marketing expenses

Sales and marketing expenses were $38.6 million for the nine months ended September 30, 2019, compared to $17.5 million for the nine months ended September 30, 2018, an increase of $21.1 million. The $21.1 million increase was primarily due to a $11.9 million increase in salaries and payroll related costs for additional headcount, an increase of $4.7 million in selling related costs including marketing programs and materials, customer support, travel and trade shows, and an increase of $4.4 million in consulting fees in connection with the U.S. launch and commercialization of Eversense

Research and development expenses

Research and development expenses were $28.7 million for the nine months ended September 30, 2019, compared to $23.8 million for the nine months ended September 30, 2018, an increase of $4.9 million. The increase of $4.9 million was primarily due to an increase of $6.3 million in expenses related to clinical studies, partiallyworkforce on March 26, 2020, offset by a $0.5 million decline of $1.5 million in expenses related to productgeneral research and development efforts at our contract manufacturers.activities.

 

General and administrative expenses

 

General and administrative expenses were $17.3$5.7 million for the ninethree months ended September 30, 2019,March 31, 2020, compared to $14.5$6.5 million for the ninethree months ended September 30, 2018, an increaseMarch 31, 2019, a decrease of $2.8$0.8 million. The increasedecrease was primarily due to a $1.1$0.7 million increase in salaries andfor personnel related costs for additional headcount,  a $1.0 million increase for occupancy, insurance, consulting fees,from higher severance expenses incurred in the first quarter of 2019 and legal fees, and a  $0.7 million increase in software and information technology services costs.lower stock-based compensation.

 

Total other income, (expense), net

 

Total other income, net, was $15.8$1.2 million for the ninethree months ended September 30, 2019,March 31, 2020, compared to total other expense, net of $27.7$0.4 million for the ninethree months ended September 30, 2018,March 31, 2019, an increase of $43.5$0.8 million. The increase was primarily due to an $8.2 million increase in the change in the fair value of theour derivative liabilities, partially offset by a $4.5 million loss on extinguishment of $48.7our Loan and Security Agreement with Solar, $2.3 million for the nine months ended September 30, 2019 comparedof additional interest expense due to the nine months ended September 30, 2018 included the change in the fair value of the embedded features on the 2025 Notes entered into in July 2019, a decline in interest income of $0.4 million and 2023 Notes.    This increase was partially offset by $3.3 million of fees recognized in connection with the modification of the 2023 Notes, and a $1.3 millionan increase in interestother expense for the nine months ended September 30, 2019.of $0.1 million.  

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

ToFrom our founding in 1996 until 2010, we devoted substantially all of our resources to researching various sensor technologies and platforms. Beginning in 2010, we narrowed our focus to developing and refining a commercially viable glucose monitoring system. However, to date, we have incurred substantial lossesnot generated significant revenue from the sale of our products and cumulative negative cash flows from operations since our inceptionability to generate revenue and achieve profitability largely depends on our ability to successfully expand the commercialization of Eversense, continue the development of our products and product upgrades, and to obtain necessary regulatory approvals for the sale of those products, including approval by the FDA for the extended Eversense XL CGM system in October 1996.the United States. These activities will require significant uses of working capital through 2020 and beyond. We have never been profitable, and our net losses were $79.9$42.6 million and $86.7$29.4 million for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. As of September 30, 2019, ourMarch 31, 2020, we had an accumulated deficit totaled $437.7of $515.9 million.

 

To date, we have funded our operations principally through the issuance of preferred stock, common stock and debt. As of September 30, 2019,March 31, 2020, we had cash, and cash equivalents, and restricted cash of $130.6$18.8 million.

 

We are pursuing strategic alternatives and have been in discussions with new financing sources, including subsequent financings received during April 2020 described under Indebtedness below. We plan to continue to seek additional financing, which could include issuing additional equity (including through the Open Market Sales agreement

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with Jefferies) or either secured or unsecured indebtedness or a combination of both.

Common Stock

In JulyNovember 2019, we entered into a Loan and Security Agreement, or the Solar Loanan Open Market Sale Agreement with Solar Capital, Ltd. a Maryland corporation, or Solar, pursuantJefferies LLC which allows us to which we borrowed an aggregate principal amountissue and sell up to $50 million in gross proceeds of $45.0our common stock. As of March 31, 2019, the company has received $0.1 million or the Solar Term Loan of which we used $11.6 million ofin net proceeds to repayfrom the sale of 175,089 shares under this agreement.

Indebtedness

Term Loans

As described in full our existing term loan with Oxford Finance LLC, or Oxford,Overview and Silicon Valley Bank, or SVB, and terminateBusiness Updates, on March 22, 2020 we terminated our Amended and Restated Loan and Security Agreement with OxfordSolar and SVB.  Net proceeds fromrepaid the Solar Term Loan, after the deduction of debt discounts and issuance costs were $34.5 million.$45.0 million principal balance in full.  

Convertible Notes

 

In July 2019, we issued $82.0 million in aggregate principal amount of the 2025 Notes. 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. For additional information on the 2025 Notes and the 2023 Notes, see Note 7—Notes Payable and Stock Purchase Warrants in the accompanying unaudited consolidated financial statements.

The following table summarizes our 5.25% Convertible Senioroutstanding senior convertible note obligations at March 31, 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%

 

 

82.0

 

 

January 15, 2025

 

 

757.5758

 

 

1.32

 

Total

 

 

 

 

 

$

97.7

 

 

 

 

 

 

 

 

 

 

PPP Loan

On April 22, 2020, we received $5.8 million in loan funding from the PPP pursuant to the CARES 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.

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 seven months from the date of the PPP Note, until the maturity date.

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 75% 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, unless we are able to rehire impacted employees during the specified period.

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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 may borrow up to an aggregate of $20.0 million in aggregate principal through the issuance and sale of the First Lien Notes. We received the first tranche of borrowing in the aggregate principal amount of $15.0 million on April 24, 2020. 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 duein a subsequent closing. 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.

The First Lien Notes are 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 will mature 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 are secured by substantially all our assets.

We have the right to prepay the First 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. However, if the date of payment in cash of such prepayment premium is on or before August 22, 2020, the prepayment premium will be reduced by 25%.

Subject to certain conditions, if we retain or reinvest proceeds of an asset sale pursuant to the asset sale prepayment provisions in the Highbridge Loan Agreement, the Lenders shall be entitled to convert First Lien Notes and Holders (defined below) shall be entitled to convert Second Lien Notes in aggregate combined principal amount equal to 45% of such net proceeds retained or reinvested (together with any applicable prepayment premium) to our 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 our 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) $0.57 per share. This conversion option has a daily limit of $1.0 million in aggregate converted principal (inclusive of principal amount of Second Lien Notes that are voluntarily converted by the Holders).

From and after a strategic transaction announcement (as defined in the form of First Lien Note), we may elect to convert up to $9.4 million in aggregate principal of the First Lien Notes to our 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) $0.57 per share of our common stock. This conversion option has a daily limit of $0.3 million in aggregate converted principal. If we or the Lenders elect to convert any of the First Lien Notes, the amount converted will be equal to the principal and unpaid accrued interest plus the applicable prepayment premium.

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2025,

The Highbridge Loan Agreement contains customary terms and covenants, including without limitation: financial covenants, such as operating within an approved budget and 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 Highbridge Loan Agreement also contains customary events of default, after which the First Lien Notes may be due and payable immediately, including, 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.

Exchange Agreement with Highbridge

On April 21, 2020 we entered into a Note Purchase and Exchange Agreement, or the 2025 Notes, to Jefferies LLC asExchange Agreement, with certain funds managed by Highbridge providing for the initial purchaser, who subsequently resold the 2025 Notes to qualified institutional buyers in reliance on the exemption from registration provided by Rule 144A under the Securities Actexchange of 1933, as amended. We used $37.9 million of the net proceeds from the offering of the 2025 Notes to repurchase $37.0$24.0 million aggregate principal amount of our outstanding 5.25% convertible senior subordinated notes2025 Notes for (i) $15.7 million aggregate principal amount of newly issued Second Lien Secured Notes due 2023,January 2022, or the 2023Second Lien Notes, at aand, together with the First Lien Notes, the Senior Notes, (ii) 11,026,086 shares of our common stock, (iii) warrants to purchase price equalup to the principal amount thereof, plus accrued and unpaid interest thereon. Net proceeds from the offering of the 2025 Notes, after the deduction of debt issuance costs, lender fees, and the repurchase of the 2023 Notes were $40.7 million.

In July 2019, pursuant to an underwriting agreement with Jefferies LLC, we closed a follow-on public offering of 26,136,3634,500,000 shares of our common stock at aan exercise price of $1.10$0.66 per share, which includedand (iv) $0.3 million in accrued and unpaid interest on the exercise2025 Notes being exchanged. The Exchange closed on April 24, 2020. The Warrants may be exercised in full by Jefferies LLCcash or on a cashless basis at any time through the three year anniversary of its option to purchase up to 3,409,090 additional shares. We received net proceeds of $26.8 million from the offering, after deducting underwriting discounts and offering expenses.issuance date.

 

On June 28, 2018,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 January 24, 2022 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. However, if the date of payment in cash of such prepayment premium is on or before August 22, 2020, the prepayment premium will be reduced by 25%.

The holders of the Second Lien Notes, or the Second Lien Notes Holders, will have the right to convert up to $7.0 million aggregate principal of the Second Lien Notes (together with any applicable prepayment premium) to our 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 our 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) $0.57 per share. This conversion option has a daily limit of $1.0 million in aggregate converted principal (inclusive of principal amount of First Lien Notes that are voluntarily converted by the Lenders). Subject to certain conditions, if we retain or reinvest proceeds of an asset sale pursuant to an underwriting agreementthe 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 BTIG, LLC,any applicable prepayment premium). As of June 5, 2020, the Holders have converted $4.8 million of principal for issuance of 10,502,291 shares of our common stock.

From and after a strategic transaction announcement, we closed public offeringmay elect to convert up to $8.7 million in aggregate principal of 38,076,561the Second Lien Notes to our 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 our 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) $0.57 per share. This conversion option has a daily limit of $0.3 million in aggregate converted principal. If we or the Second Lien Notes Holders elect to convert any of the Second Lien Notes, the amount converted will be equal to the principal and unpaid accrued interest plus the applicable premium.

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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.

We may not issue shares of our common stock, including BTIG, LLC’s exercisenet of the 18,181,818 shares underlying the 2025 Notes exchanged in fullthe Exchange, in excess of its option19.99% of our common stock outstanding on April 21, 2020; this restriction is subject to purchase additional shares,removal upon approval by our stockholders. We intend to seek this approval at a priceour 2020 Annual Meeting of $3.93 per share, orStockholders on June 30, 2020.

Funding Requirements and Outlook

Given our limited cash resources, and after inclusion of our subsequent financings, and considering the June 2018 Offering. We received aggregate net proceeds of $149.0 millioneconomic and market uncertainty resulting from the June 2018 Offering.

COVID-19 pandemic, management has substantial doubt regarding our ability to meet our obligations as they become due in the ordinary course of business for the next twelve months from the date of this Quarterly Report on Form 10-Q. Our ability to generate revenue and achieve profitability dependsenough cash to meet our streamlined working capital requirements is dependent on our completion of the development of Eversense and future product candidates and obtaining and maintaining the necessary regulatory approvals for the manufacture, marketing and sales of those products. These activities, including our planned significant research and development efforts, will require significant uses of working capital through 2020 and beyond.

We expect our existing cash and cash equivalents, will be sufficientability to fund our operations through the end of 2020. We have based this estimate on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we currently expect. Additionally, the process of clinical and regulatory development of medical devices is costly, and the timing of progress of these efforts is uncertain.

We anticipate that we will continue to incur losses for the foreseeable future. As a result, we anticipate needingachieve additional capital to fund our operations. Until such time, if ever, as we can generate substantial revenuesources and cash flow from operations, we expect to finance our cash needs through a combination of debt financings, equity offerings, and revenuefavorable outcomes from potential researchstrategic alternatives currently being explored. New financings may not be available to us on commercially acceptable terms, or at all, and developmentmay be impacted by new and other collaboration agreements.current debt covenants. To the extent that we raise additional capital through debt or the future 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 raise additional funds in the future,or enter into strategic development, distribution, or licensing arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity, or debt financings, when needed,or strategic alliances, we may be required to further delay, limit, reduce or terminate our product development or future commercialization efforts or grant licenses to develop and market products that we would otherwise prefer to develop and market ourselves.

Indebtedness

Term Loans

On June 30, 2016, we entered into an Amended and Restated Loan and Security Agreement with Oxford and SVB. Pursuant to the Amended and Restated Loan and Security Agreement, we borrowed an aggregate principal amount of $25.0 million. We refer to these borrowings as the Oxford/SVB Term Loans. In July 2019, we used $11.6 million of the Solar Term Loan to repay in full the Oxford/SVB Term Loans and terminate our Amended and Restated Loan and Security Agreement with Oxford and SVB.

The Oxford/SVB Term Loans bore interest at a floating annual rate of 6.31% plus the greater of (i) 90-day U.S. Dollar LIBOR reported in the Wall Street Journal or (ii) 0.64%, provided that the minimum floor interest rate is 6.95%, and require monthly payments. The monthly payments initially consisted of interest-only through December 31, 2017. In January 2018, we began to make monthly principal payments.

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In connection with the Solar Term Loan Agreement described below, we elected to prepay all Oxford/SVB Term Loans prior to the Maturity Date subject to a prepayment fee equal to 1.00%.

Pursuant to the Amended and Restated Loan and Security Agreement, we also issued to Oxford and SVB10-year stock purchase warrants to purchase an aggregate of 116,581, 63,025 and 80,645 shares of common stock with exercise prices of $3.86, $2.38, and $1.86 per share, respectively.

We incurred issuance costs related to the Oxford/SVB Term Loans of approximately $0.6 million that were being amortized as additional interest expense over the term of the Oxford/SVB Term Loans using the effective interest method. The fair value of the stock purchase warrants, which was estimated to be $0.5 million, was recorded as a discount to the Oxford/SVB Term Loans and was also being amortized as additional interest expense over the term of the Oxford/SVB Terms Loans. The remaining unamortized interest expense was written off upon the repayment of the Oxford/SVB Term Loans in July 2019.

We were also required to make a final payment equal to 9.00% of the aggregate principal balances of the funded Oxford/SVB Term Loans.  This fee was accrued as additional interest expense over the term of the Oxford/SVB Term Loans and the remainder was recognized as additional interest expense upon the repayment of the Oxford/SVB Term Loans in July 2019.

On July 16, 2019, we entered into the Solar Loan Agreement with the Lenders. Pursuant to the Solar Loan Agreement, on July 25, 2019, we borrowed the Solar Term Loan in an aggregate principal amount of $45.0 million. We used $11.6 million of the Solar Term Loan to repay in full the Oxford/SVB Term Loans and terminate our Amended and Restated Loan and Security Agreement with Oxford and SVB.

Interest on the Solar Term Loan will be payable monthly at a floating annual rate of 6.50% plus the greater of (i) the rate per annum rate published by the Intercontinental Exchange Benchmark Administration Ltd. and (ii) 2.48%, provided that the minimum floor interest rate is 8.98%. The maturity date for the Solar Term Loan will be July 1, 2024, or the Solar Maturity Date. Commencing on August 1, 2021, we will be required to make monthly principal amortization payments; provided that the interest only period may be extended to (i) August 1, 2022 if our product revenue is greater than or equal to $40.0 million on a trailing six-month basis prior to the second anniversary of the effective date and (ii) August 1, 2023 if our product revenue is greater than or equal to $75.0 million on a trailing six-month basis after the achievement of the first extension.

We may elect to prepay the Solar Term Loan prior to the Solar Maturity Date subject to a prepayment fee equal to 3.00% if the prepayment occurs within one year of the effective date, 2.00% if the prepayment occurs during the second year following the effective date, and 1.00% if the prepayment occurs more than two years after the effective date and prior to the Solar Maturity Date.

The Solar Loan Agreement contains customary events of default, including bankruptcy, the failure to make payments when due, the occurrence of a material impairment on the Lenders’ security interest over the collateral, a material adverse change, the occurrence of a default under certain other agreements entered into by us, the rendering of certain types of judgments against us, the revocation of certain government approvals, violation of covenants, and incorrectness of representations and warranties in any material respect. Upon the occurrence of an event of default, subject to specified cure periods, all amounts owed by us would begin to bear interest at a rate that is 5.00% above the rate effective immediately before the event of default, and may be declared immediately due and payable by the Lenders.

The Solar Term Loan is secured by substantially allsome of our assets. The Solar Loan Agreement also contains specified financial covenants related to our liquidity and trailing six-month revenues.

The Solar Loan Agreement also contains certain restrictive covenants that limit our ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions, as well as financial reporting requirements.

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Convertible Notes

In January 2018, we issued $50.0 million in aggregate principal amount of 2023 Notes, and in February 2018, we issued an additional $3.0 million in aggregate principal amount of 2023 Notes. The 2023 Notes are general, unsecured, senior subordinated obligations and bear interest at a rate of 5.25% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2018. The 2023 Notes will mature on February 1, 2023, unless earlier repurchased or converted. Payment of the principal of, and accrued and unpaid interest, if any, on the maturity date, and the fundamental change repurchase price of (excluding cash payable in lieu of delivering fractional shares of our common stock), the 2023 Notes is subordinated to the prior payment in full in cash or other payment satisfactory to the holders of senior debt, of all existing and future senior debt, which includes our indebtedness under the Amended and Restated Loan and Security Agreement with Oxford and SVB and any refinancing thereof.

The 2023 Notes are convertible into shares of our common stock at the option of the holders at any time prior to the close of business on the business day immediately preceding the maturity date. The conversion rate is initially 294.1176 shares of common stock per $1,000 principal amount of 2023 Notes (equivalent to an initial conversion price of approximately $3.40 per share of common stock), subject to customary adjustments. Holders who convert on or after the date that is six months after the last date of original issuance of the 2023 Notes but prior to February 1, 2021, may also be entitled to receive, under certain circumstances, an interest make-whole payment payable in shares of our common stock. In addition, following 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 2023 Notes in connection with such a corporate event. 

As of September 30, 2019, the aggregate outstanding principal amount of the 2023 Notes was $15.7 million.

In July 2019, we issued $82.0 million in aggregate principal amount of 2025 Notes. The 2025 Notes are general, unsecured, senior subordinated obligations and bear interest at a rate of 5.25% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The 2025 Notes will mature on January 15, 2025, unless earlier repurchased or converted.

We used $37.9 million of the net proceeds from the issuance of the 2025 Notes to repurchase $37.0 million aggregate principal amount of outstanding 2023 Notes, at a purchase price equal to the principal amount thereof, plus accrued and unpaid interest thereon.

The 2025 Notes are convertible, at the option of the holders, into shares of our common stock, at an initial conversion rate of 757.5758 shares per $1,000 principal amount of the 2025 Notes (equivalent to an initial conversion price of approximately $1.32 per share).

We may redeem for cash all or part of the 2025 Notes, at our option, if (1) the last reported sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption and (2) a registration statement covering the resale of the shares of our common stock issuable upon conversion of the 2025 Notes is effective and available for use and is expected to remain effective and available for use during the redemption period as of the date of the redemption notice date. The redemption price will be equal to 100% of the principal amount of the 2025 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.

If we undergo a fundamental change, such as a merger, sale, greater than 50% ownership change, liquidation, dissolution, or delisting, holders may require us to repurchase for cash all or any portion of their 2025 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. 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 2025 Notes in connection with such notice of redemption or

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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 shares.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, 

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

Net cash used in operating activities

    

$

(101,486)

    

$

(67,097)

 

Net cash (used in) provided by investing activities

 

 

(951)

 

 

13,732

 

Net cash (used in) provided by financing activities

 

 

96,224

 

 

194,247

 

Net (decrease) increase in cash and cash equivalents

 

$

(6,213)

 

$

140,882

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

 

2020

 

2019

 

Net cash used in operating activities

    

$

(29,048)

    

$

(30,152)

 

Net cash used in investing activities

 

 

(100)

 

 

(490)

 

Net cash used in financing activities

 

 

(47,985)

 

 

(2,476)

 

Net decrease in cash, cash equivalents and restricted cash

 

$

(77,133)

 

$

(33,118)

 

 

Net cash used in operating activities

 

Net cash used in operating activities was $101.5$29.0 million for the ninethree months ended September 30, 2019,March 31, 2020 and consisted of a net loss of $79.9$42.6 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)$4.1 million mostly relateddue to collections of accounts receivable at December 31, 2019 collected from Roche in the build-up of inventory during the thirdfirst quarter of 2019.2020 and reductions in inventory, net for increased impairment reserves, as well as net non-cash items of $10.0 million, including a change of $12.5 million for inventory net realizable value charges, and a $4.5 million extinguishment loss on the Solar Loan Agreement, offset by a $8.2 million change in fair value of the embedded derivatives on the 2023 and 2025 Notes over the prior period. 

 

Net cash used in operating activities was $67.1$30.2 million for the ninethree months ended September 30, 2018,March 31, 2019 and

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consisted of a net loss of $86.7$29.4 million and a net change in operating assets and liabilities of $(10.2)$1.9 million, (consistingpartially offset by net non-cash items of $1.1 million. Net change in operating assets and liabilities consisted of a net$4.2 million increase in inventory, a $1.1 million decrease in accounts receivable,payable, a $0.7 million increase in prepaid expenses and other current assets inventory, and deposits and other assets of $10.4a $0.6 million net of an increasedecrease in deferred revenue, partially offset by a $4.7 million decrease in accounts payable, accrued expenses and other current liabilities, accrued interest, and deferred rentreceivable. Net non-cash items consisted of $0.2 million), partially offset by stock-based compensation expense of $7.0$2.0 million, an increasenon-cash interest expense of $0.9 million, depreciation and amortization of $0.2 million, partially offset by decrease in the fair value of derivative liability of $22.5 million, non-cash interest expense of $1.5 million, non-cash interest expense of $2.4 million, and depreciation write-down of the carrying value of our inventory to net realizable value, and net realized gain on marketable securities of an aggregate amount of $0.2$2.1 million.

 

Net cash (used in) provided byused in investing activities

 

Net cash used in investing activities was $1.0$0.1 million for the ninethree months ended September 30, 2019,March 31, 2020 and consisted primarily of capital expenditures for laboratory and production equipment at our contract manufacturers.equipment.

 

Net cash provided byused in investing activities was $13.7$0.5 million for the ninethree months ended September 30, 2018March 31, 2019 and consisted sales and maturities of marketable securities$0.4 million of $22.4 million, partially offset by purchases of marketable securities of $8.0 million, and capital expenditures for laboratory equipment and $0.1 million of $0.7 million.lease payments.

 

Net cash (used in) provided byused in financing activities

 

Net cash provided byused in financing activities was $96.2$48.0 million for the ninethree months ended September 30,March 31, 2020 and primarily consisted of $45.0 for the repayment of outstanding principal on our Solar Loan Agreement and $3.4 million for a final payoff fee and prepayment premium.

Net cash used in financing activities was $2.5 million for the three months ended March 31, 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 million of the Term Loans.

Net cash provided by financing activities was $194.2 million for the nine months ended September 30, 2018, and consisted primarily of $149.0 million from the issuance of common stock in our June 2018 Offering, $50.7 million from the issuance of the 2023 Notes, and $2.0 million from the exercise of stock options, partially offset by aggregate principal payments on term loans of $2.5 million.

Contractual Obligations

The following summarizes our Term Loanscontractual obligations as of March  31, 2020: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment due by period

 

 

 

 

 

 

Remainder of

 

 

 

 

 

 

 

After

 

Contractual Obligations

 

Total

 

2020

 

2021-2022

 

2023-2024

 

2024

 

Operating lease obligations

    

$

3,279

    

$

708

    

$

1,971

    

$

600

    

$

 -

 

Principal payment under 2023 Notes

 

 

15,700

 

 

 -

 

 

 -

 

 

15,700

 

 

 -

 

Interest payments under 2023 Notes

 

 

2,473

 

 

412

 

 

1,649

 

 

412

 

 

 -

 

Principal payment under 2025 Notes⁽¹⁾

 

 

82,000

 

 

 -

 

 

 -

 

 

 -

 

 

82,000

 

Interest payments under 2025 Notes⁽¹⁾

 

 

22,031

 

 

2,180

 

 

8,759

 

 

8,759

 

 

2,333

 

Other commitments⁽²⁾

 

 

1,500

 

 

1,500

 

 

 -

 

 

 -

 

 

 -

 

Total contractual obligations

 

$

126,983

 

$

4,800

 

$

12,379

 

$

25,471

 

$

84,333

 


(1)

Pursuant to the Exchange Agreement on April 21, 2020, $24.0 million aggregate principal amount of 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. The contractual obligations for the 2025 Notes do not reflect this subsequent event.

(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. These do not include obligations negotiated with suppliers and contract manufacturers subsequent to the quarter ended March 31, 2020.

Off-Balance Sheet Arrangements

Except as described below, during the three months ended March 31, 2020, we did not have any other, and capital lease obligations of $7.5 million.we currently do not have any other, off-balance sheet arrangements as defined by SEC rules.

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ContractualSubsequent Supplier and Contract Manufacturer Obligations

 

The following summarizes our contractual obligations as of September 30, 2019. (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment due by period

 

 

 

 

 

 

Remainder of

 

 

 

 

 

 

 

After

 

Contractual Obligations

 

Total

 

2019

 

2020-2021

 

2022-2023

 

2023

 

Operating lease obligations

    

$

3,715

    

$

206

    

$

1,907

    

$

1,602

    

$

 -

 

Principal payments under Solar Term Loan

 

 

45,000

 

 

 -

 

 

6,250

 

 

30,000

 

 

8,750

 

Interest payments under Solar Term Loan

 

 

13,835

 

 

1,021

 

 

8,111

 

 

4,437

 

 

266

 

Solar note Final fee payment

 

 

2,903

 

 

 -

 

 

 -

 

 

 -

 

 

2,903

 

Principal payment under 2023 Notes

 

 

15,700

 

 

 -

 

 

 -

 

 

15,700

 

 

 -

 

Interest payments under 2023 Notes

 

 

2,885

 

 

 -

 

 

1,649

 

 

1,236

 

 

 -

 

Principal payment under 2025 Notes

 

 

82,000

 

 

 -

 

 

 -

 

 

 -

 

 

82,000

 

Interest payments under 2025 Notes

 

 

24,036

 

 

 -

 

 

8,734

 

 

8,744

 

 

6,558

 

Total contractual obligations

 

$

190,074

 

$

1,227

 

$

26,650

 

$

61,719

 

$

100,477

 


(1)

Represents the principal and interest payment schedule for the Solar Term Loan, 2023 Notes and 2025 Notes that were outstanding as of September 30, 2019.  For additional information, see “Liquidity and Capital Resources – Indebtedness.”

Off‑Balance Sheet Arrangements

During three and nine months ended September 30, 2019 we did not have, and we do not currently have, any off‑balance sheet arrangements, as defined under SEC rules.

JOBS Act

In April 2012, the JOBS Act was enacted. Section 107(b)As a result of the JOBS Act provides that an “emerging growth company” can take advantageimpact of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period, and, as a result, we will adopt new or revised accounting standardsCOVID-19 pandemic on the relevant dates on which adoption of such standards is required for other public companies.

Atglobal healthcare community and our streamlined operational focus implemented at the end of the 2019 fiscal year,first quarter of 2020, we will no longer be an emerging growth companyhave been negotiating with certain of our major suppliers and we will no longer be exempt from (i) providing an auditor’s attestation reportcontract manufacturers to pay for materials procured by these parties on our systembehalf or for costs incurred related to Eversense manufacturing activities that we paused or delayed. Some of internal controls overthese fees may also be dependent on whether the materials will expire prior to when we resume production at normal operating levels, or if further delays in manufacturing occur. As of June 9, 2020, we expect to have to pay approximately $1.9 million for costs related to pausing manufacturing activities and $0.6 million if certain manufacturing timelines are not met within a specified period. We will record any fees contingent upon future manufacturing timing in its consolidated financial reporting pursuant to Section 404(b)statements if, and when, it is probable such obligations will become due. When we resume manufacturing activities, some of the Sarbanes-Oxley Act and (ii) complying with any requirement thatamounts paid for materials may be adopted by the PCAOB regarding mandatory audit firm rotation or regarding a supplementcredited back to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in our financial statements prospectively from the date of the change in estimate.upon consumption.

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Management considers an accounting policy to be critical if it is important to our financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. The development and selection of these critical accounting policies have been determined by our management. Due to the significant judgment involved in selecting certain of the assumptions used in these areas, it is possible that different parties could choose different assumptions and reach different conclusions.

We believe there have been no material changes to our critical accounting policies and use of estimates as disclosed in the footnotes to our audited financial statements for the year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2019.

 

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, 2019,March 31, 2020, we had cash, and cash equivalents, and restricted cash of $130.6$18.8 million. We generally hold our cash in interest-bearing money market accounts.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. Additionally, the interest rates on our 2025 Notes and 2023 Notes are fixed. The rate on borrowings under our Solar Term Loan is variable, subject to a minimum floor interest rate. Due to the short-term maturities of our cash equivalents and the minimum interest rate on the Solar Term Loan,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 results of operations.cash equivalents. The interest rates on our 2023 and 2035 Notes are fixed, as are the interest rates on the First Lien Notes and Second Lien Notes. 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 dollar.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 March 31, 2020, which could increase our foreign currency and interest rate risk.  

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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.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision of andOur management, with the participationassistance of our management, including our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an evaluation ofhas reviewed and evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019, the end of the period covered by this Quarterly Report. The term “disclosure controls and procedures,” as set forth(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other proceduresamended) as of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, managementMarch 31, 2020. Management recognizes that disclosureany controls and procedures, no matter how well conceiveddesigned and operated, can provide only reasonable not absolute,

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assurance that theachieving their objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to applyapplies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures. The designprocedures are designed to provide reasonable assurance of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in asuch control system, misstatements due to error or fraud may occur and not be detected.objectives. Based on the evaluation of our disclosure controls and procedures as of September 30, 2019,March 31, 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 waswere no changechanges 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, 2019March 31, 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”

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of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, filed with the SEC on March 15, 2019.16, 2020, as amended on April 28, 2020.

We are exploring strategic alternatives and there can be no assurance that we will be successful in identifying, undertaking or completing any strategic alternative, that any such strategic alternative will address our capital and business needs or that the process will not have an adverse impact on our business.

In March 2020, we announced that our Board of Directors has decided to explore potential strategic alternatives to enhance stakeholder value. The process of reviewing and pursuing strategic alternatives may be time consuming and disruptive to our business operations and, if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We could incur substantial expenses associated with identifying and evaluating potential strategic alternatives. No decision has been made with respect to any strategic alternative and we cannot assure you that we will be able to identify, undertake and complete any strategic alternative that will address our capital and operational needs.

Any potential strategic alternative would be dependent upon a number of factors that may be beyond our control. We do not intend to comment regarding the evaluation of strategic alternatives until such time as we have determined that further disclosure is necessary or appropriate. As a consequence, perceived uncertainties related to our future may have an adverse impact on our business, operations, and the market price of our common stock.

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

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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 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 and the Solar LoanExchange Agreement may limit the manner in which we operate.

The indentures related to the 2023 Notes and the 2025 Notes, the Exchange Agreement, and the SolarHighbridge Loan 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.

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In addition, the SolarHighbridge Loan Agreement hasand the Exchange Agreement have minimum liquidity and monthly net product revenue requirements and the Solar TermHighbridge Loan and otherAgreement includes a covenant requiring the Company to operate within an approved budget. Our obligations under both the SolarHighbridge Loan Agreement and the Exchange Agreement are be 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.

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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.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 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 and the Solar LoanExchange 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 amended and restated certificate of incorporation providesauthorizes us to issue up to 450,000,000 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, 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.

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%. Commencing November 21, 2020, we are required to pay the lender equal monthly payments of principal and interest as required to fully amortize by April 21, 2022 any principal amount outstanding on the PPP Loan as of October 21, 2020. A portion of the PPP Loan may be forgiven by the SBA upon our application beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES 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 25% 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 CourtSBA will perform a full review of Chanceryany PPP loan over $2.0 million before forgiving the loan.

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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 StatePPP Loan is consistent with the broad objectives of Delawarethe Paycheck Protection Program of the CARES Act. The certification described above does not contain any objective criteria and is subject to interpretation. On April 23, 2020, the exclusive forumSBA 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 certain litigationand 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 initiatedsubject 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 our stockholders, whichthe SBA or other government entity or claims under the False Claims Act could limit our stockholders' ability to obtainconsume significant financial and management resources. Should we be audited or reviewed by federal or state regulatory authorities as a favorable judicial forumresult of filing an application for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation provides that the Court of Chanceryforgiveness of the StatePPP Loan or otherwise, such audit or review could result in the diversion of Delaware ismanagement’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 exclusive forum forfull amount of the following typesPPP Loan. Any of actions or proceedings under Delaware statutory or common law: (i) any derivative action or proceeding broughtthese events could have a material adverse effect on our behalf, (ii) any action asserting a claim for breachbusiness, results of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine. However, this exclusive forum provision would not apply to suits brought to enforce a duty or liability created by the Securities Act or the Exchange Act. The choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our businessoperations and financial condition.

 

ITEM 2: Unregistered Sales of Equity and Securities and Use of Proceeds

 

Not applicable.

 

ITEM 3: Defaults Upon Senior Securities

 

Not applicable.

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ITEM 4: Mine Safety Disclosures

 

Not applicable.

 

ITEM 5: Other Information

 

None.

 

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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

 

Amended and Restated Certificate of Incorporation of Senseonics Holdings, Inc. (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37717), filed with the Commission on March 23, 2016).

 

 

 

3.2

 

Amended and Restated Bylaws of Senseonics Holdings, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-37717), filed with the Commission on March 23, 2016).

 

 

 

3.3

 

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Senseonics Holdings, Inc. (incorporated herein by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2018 (File No. 001-37717), filed with the Commission on August 8, 2018).

 

 

 

10.1

Indenture, dated as of July 25, 2019, by and between the Company, the Subsidiary and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37717), filed with the Commission on July 29, 2019).

10.2

Form of Note representing the Company’s 5.25% Convertible Senior Notes due 2025 (included as Exhibit A to the Indenture filed as Exhibit 4.1), filed with the Commission on July 29, 2019).

10.3

Second Supplemental Indenture, dated as of July 25, 2019, by and between the Company and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (File No. 001-37717), filed with the Commission on July 29, 2019).

10.4

Registration Rights Agreement, dated as of July 25, 2019, by and among the Company, the Subsidiary and Jefferies LLC (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37717), filed with the Commission on July 29, 2019).

10.5

Loan and Security Agreement among Solar Capital Ltd., the Lenders, Senseonics, Incorporated and the Company dated as of July 16, 2019 (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37717), filed with the Commission on July 17, 2019).

10.6

Form of Warrant to be issued pursuant to the Solar Loan Agreement (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-37717), filed with the Commission on July 17, 2019).

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**

 

Certifications of Principal Executive Officer and Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act.

 

 

 

101.INS*

 

XBRL Instance Document

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

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+        Portions of this exhibit (indicated by asterisks) have been excluded because such information (i) is not material and (ii) would be competitively harmful if publicly disclosed.

*         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.

 

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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 12, 2019June 9, 2020

By:

/s/Jon IsaacsonNick B. Tressler

 

 

Jon IsaacsonNick B. Tressler

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)

 

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