What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2021-03-05 compared with 2020-03-16 · 3 added, 376 removed, 12 unchanged (97% of the section changed)

Market for Registrant’s Common Equit y, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information for Common Stock

Our common stock is listed on the NYSE American under the symbol “SENS.”

Dividend Policy

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Our ability to pay dividends on shares of our common stock is further limited by restrictions on our ability to pay dividends or make distributions under the terms of the agreements governing our indebtedness and may be limited by future similar agreements.

As of March 10, 2020, we had 204,113,102 shares of common stock outstanding held by 185 holders of record.

As of February 26, 2021, we had 377,883,267 shares of common stock outstanding held by 183 holders of record.

Performance Graph

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Selected Consolidated Financial Data

The following tables set forth selected financial data for each of the years in the five-year period ended December 31, 2019 and is derived from our audited financial statements.

Our historical results are not necessarily indicative of the results to be expected in the future.

The selected financial data should be read together with Item 7:

“Management’s Discussion and Analysis of Financial Condition and Results of Operations”

and in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere in this Annual Report.

Year Ended December 31,

(in thousands, except share and per share data)

Statement of Operations Data:

Revenue, net - related parties

Total revenue

Cost of sales

Sales and marketing expenses

Research and development expenses

General and administrative expenses

Operating loss

Other income (expense), net:

Interest income

Loss on extinguishment of debt

Interest expense

Debt issuance costs

Change in fair value of derivative liabilities

Other (expense) income

Deemed dividend as a result of Series E preferred stock beneficial conversion feature

Net loss available to common stockholders

Basic and diluted net loss per common share

Basic and diluted weighted-average shares outstanding

(in thousands)

Balance Sheet Data:

Cash and cash equivalents

Working capital

Marketable securities

Term loan, net of discount, including current portion

Convertible notes, net of discount and derivative liabilities, including current portion

Derivative liabilities

Total liabilities

Additional paid-in capital

Accumulated deficit

Total stockholders’

(deficit) equity

Management’s Discussion and Analysi s of Financial Condition and Results of Operations

You should read the following discussion and analysis together with “Selected Financial Data”

in Part II, Item 6 and our consolidated financial statements and related notes in Part II, Item 8 of this Annual Report.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties.

You should review the “Risk Factors”

section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

We are a medical technology company focused on the development and commercialization of a long-term, implantable continuous glucose monitoring, or CGM, system to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy.

Our Eversense and Eversense XL CGM systems are designed to continually and accurately measure glucose levels in people with diabetes via an under-the-skin sensor, a removable and rechargeable smart transmitter, and a convenient app for real-time diabetes monitoring and management for a period of up to 90 and 180 days, respectively, as compared to seven to 14 days for non-implantable CGM systems.

The original Eversense CGM system received a 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 in select markets in Europe, the Middle East, and Africa, or EMEA.

In June 2018, the U.S.

Food and Drug 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 can now be used as a therapeutic CGM in the United States to replace fingerstick blood glucose measurement to make treatment decisions, including insulin dosing.

Our net revenues are derived from sales of the Eversense 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.

We are in the early commercialization stages of the Eversense brand and are focused on driving awareness of our CGM system amongst intensively managed patients and their healthcare providers.

In the United States, we have a direct sales organization that consists of sales representatives, clinical trainers, customer care, and other specialists to educate, train, and support the patient and healthcare provider in their diabetes management with CGM systems.

In our overseas markets, we entered into distribution agreements that allow third party collaborators with direct sales forces and established distribution systems to market and promote Eversense XL primarily in the EMEA.

European Commercialization of Eversense

In September 2017, we received the CE mark for Eversense XL, which is indicated for a sensor life of 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.

In May 2016, we entered into a distribution agreement with Roche Diagnostics International AG and Roche Diabetes Care GmbH, together referred to as Roche.

Pursuant to the agreement, as amended, we have granted Roche the exclusive right to market, sell and distribute Eversense in the EMEA, excluding Scandinavia and Israel.

In addition, Roche has exclusive distribution rights in 17 additional countries, including Brazil, Russia, India and China, as well as

select markets in the Asia Pacific and Latin American regions.

The distribution agreement has a term through January 31, 2021.

Roche is obligated to purchase from us specified minimum volumes of Eversense XL CGM components at pre-determined prices.

On December 12, 2019, we further amended the distribution agreement to lower minimum volumes for 2020 and increase pricing for the remaining period of the contract.

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 sites in the United States.

In the trial, we measured the accuracy of Eversense measurements through 90 days after insertion.

We also assessed safety through 90 days after insertion or through sensor removal.

In the trial, we observed a mean absolute relative difference, or MARD, of 8.5% utilizing two calibration points for Eversense across the 40-400 mg/dL range when compared to YSI blood reference values during the 90-day continuous wear period.

Based on the data from this trial, in October 2016 we submitted a pre-market approval, or PMA, application to the FDA to market Eversense in the United States for 90-day use.

On June 21, 2018, we received PMA approval from the FDA for the Eversense system.

In July 2018, we began distributing the Eversense system directly in the United States through our own direct sales and marketing organization.

We have received Category III CPT codes for the insertion and removal of the Eversense sensor.

In December 2018, we initiated the PROMISE pivotal clinical trial to evaluate the safety and accuracy of Eversense for a period of up to 180 days in the United States.

In September 30, 2019, we completed enrollment of the PROMISE trial.

We expect to report topline data from the PROMISE trial in the second quarter of 2020.

If the data from the PROMISE trial is positive, we intend to use the data in a regulatory submission to the FDA to expand the Eversense system use for up to 180 days in the United States and expect approval by the end of 2020.

We also intend to use data from the first 90 days of the PROMISE trial, if positive, to support a regulatory submission to the FDA for an integrated, or iCGM, designation for our current Eversense 90-day system, which the FDA could potentially approve in the second 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 and launched with an updated app in December 2019.

With this approval, the Eversense system can be used as a therapeutic CGM to replace fingerstick blood glucose measurement for treatment decisions, including insulin dosing.

Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.

The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

These estimates, particularly estimates relating to accounting for variable consideration related to revenue, warranty obligations, inventory obsolescence and embedded derivatives, have a material impact on our financial statements and are discussed in detail throughout our analysis of the results of operations discussed below.

We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not readily apparent from other sources.

Actual results and outcomes could differ from these estimates and assumptions.

We generate product revenue from sales of the Eversense system and related components and supplies at a fixed price to third-party distributors in the European Union and to a network of strategic fulfillment partners in the United States, or collectively, Customers, who then resell the products to health care providers and patients.

We are paid for our sales directly to the Customers, regardless of whether or not the Customers resell the products to health care providers and patients.

Under the terms of our distribution agreement with Roche, Roche is contractually obligated to make certain minimum purchases of Eversense systems from us and, accordingly, the revenue we recognize for any given period is not necessarily indicative of the level of sales to end users for that, or any other, period.

Revenue from product sales is recognized at a point in time when the Customers obtain control of our product based upon the delivery terms as defined in the contract at an amount that reflects the consideration which we expect to receive in exchange for the product.

Contracts with our distributors contain performance obligations, mostly for the supply of goods, and is typically satisfied upon transfer of control of the product.

We recognize revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in a future period.

Our contracts may contain some form of variable consideration such as prompt-pay discounts or tier-volume price discounts.

Variable consideration, including reimbursements paid by us to our Customers in accordance with the Eversense Bridge Program initiated in March 2019 and to a lesser extent, other discounts, is treated as a reduction in revenue when the product sale is recognized.

Depending on the variable consideration, we develop estimates for the expected value based on the terms of the agreements, historical data, third-party payor mix, reimbursement rates, and market conditions.

In connection with the Eversense Bridge Program, we reimburse participating Customers an amount up to a fixed maximum for the difference in the cost of the Eversense System and what they collect from insurance payors and the patient’s fee of $99.

Our Customers are responsible for confirming patient insurance coverage, obtaining pre-authorizations, determining eligibility, and continuously provide us with data regarding which patient orders are under the program and which are not.

We use this data, along with actual reimbursements that have been validated to patient claims, to support our expected reimbursement estimates.

Estimated reimbursement payments for product shipped to our Customers but not provided to a patient within the same reporting period are recorded within accrued expenses and other current liabilities in our accompanying consolidated balance sheets.

Because of the limited experience with the Eversense Bridge Program, our estimates could change in future periods, and such changes could be material.

Warranty Obligations

We provide a one-year warranty on our smart transmitters to our customers.

We may also replace Eversense system components that do not function in accordance with the product specifications.

Estimated replacement costs are recorded at the time of shipment as a charge to cost of sales in the consolidated statement of operations and are

developed by analyzing product performance data and historical replacement experience, including comparing actual return management authorizations to revenues.

Inventory and Obsolescence

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.

We record an adjustment to reduce the value of inventory for items that are potentially obsolete, where the standard costs require adjustment to the net realizable value, and are in excess of future demand taking into consideration the product shelf life.

Our sensor manufacturing process can span several months, involves various contract manufacturers and includes raw components with long lead times, often resulting in significant work-in-progress inventory.

However, expiry does not commence until the chemistry is applied to the sensor.

We are able to isolate pre-chemistry sensor inventory in progress from post-chemistry sensor inventory and finished goods to assess against demand forecasts and customer dating requirements for potential excess or obsolete inventory Our estimates are based on information known at the time and include factors such as anticipated future usage and sales, potential for external unfavorable conditions such as import holds or quality issues, and planned product upgrades.

However, if actual product quality or conditions differ from our assumptions, additional inventory adjustments that would increase cost of sales could be required.

Derivative Financial Instruments

In connection with our issuance of the convertible senior subordinated notes due 2023, or the 2023 Notes in January 2018, we 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 our consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging.

In July 2019, we issued $82.0 million in aggregate principal amount of convertible senior subordinated notes due 2025, or 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 recorded the fair value of these embedded features as a derivative liability in the Company’s consolidated balance sheets in accordance with Accounting Standards Codification, or ASC, Topic 815, Derivatives and Hedging.

The derivative instruments are remeasured at the end of each reporting period with changes in fair value recorded in the consolidated statements of operations and comprehensive loss in other income (expense) as a change in fair value of the derivative liability.

The fair value assessment incorporates management’s assumptions for probabilities of conversion occurrence through maturity, stock price, volatility, risky bond rate, and trade data when available.

We engage a third-party valuation specialist to perform the valuation using the binomial option pricing model.

Results of Operations

Comparison of the Years Ended December 31, 2019 and 2018

The following table sets forth our results of operations for the years ended December 31, 2019 and 2018.

Period Change

(in thousands)

Revenue, net - related parties

Total revenue

Cost of sales

Sales and marketing expenses

Research and development expenses

General and administrative expenses

Operating loss

Other income (expense), net:

Interest income

Loss on extinguishment of debt

Interest expense

Debt issuance costs

Change in fair value of derivative liabilities

Other (expense) income

Total other income (expense), net

Our total net revenue increased to $21.3 million for the year ended December 31, 2019, compared to $18.9 million for the year ended December 31, 2018, an increase of $2.4 million.

This increase was primarily due to increased U.S.

sales of Eversense, net of reimbursements in connection with the Eversense Bridge Program .

Cost of sales

Our cost of sales increased to $40.7 million for the year ended December 31, 2019, compared to $27.1 million for the year ended December 31, 2018, an increase of $13.7 million.

This increase was primarily attributable to increased impairment charges of $5.3 million due to obsolete inventory and product enhancements, $3.3 million for scrap and costs to streamline our sensor supply chain, $3.0 million for warranty expenses, $1.0 million for product back-ups and replacements associated with the recall of 844 uninserted sensors in the third quarter of 2019 and a net increase of $1.1 million for packaging, warehousing and logistics related costs

Gross profit was $(19.4) million and $(8.1) million for the years ended December 31, 2019 and 2018, respectively.

Gross profit as a percentage of revenue, or gross margin, was (91.3)% and (43.1)% for the years ended December 31, 2019 and 2018, respectively.

Sales and marketing expenses

Sales and marketing expenses were $49.6 million for the year ended December 31, 2019, compared to $27.7 million for the year ended December 31, 2018, an increase of $21.8 million.

The increase was primarily due to increased commercialization efforts in the United States during 2019, including a $13.0 million increase in salaries, commissions and payroll related costs for additional headcount, an increase in marketing costs of $6.4 million mainly related to consultants and travel, and an increase of $2.4 million for marketing programs, customer support services and software.

Research and development expenses

Research and development expenses were $38.4 million for the year ended December 31, 2019, compared to $31.9 million for the year ended December 31, 2018, an increase of $6.6 million.

The increase was primarily due to a $7.9 million increase related to the PROMISE clinical trial and other post-approval and feasibility studies, a $0.8 million increase in salaries, bonuses and payroll related costs for additional headcount, partially offset by a decrease in contractual services of $2.1 million due to the FDA approval of Eversense in the United States in July 2018.

General and administrative expenses

General and administrative expenses were $23.2 million for the year ended December 31, 2019, compared to $19.8 million for the year ended December 31, 2018, an increase of $3.4 million.

The increase was primarily due to a $1.3 million increase in salaries, bonuses and payroll related costs for additional headcount, a $1.3 million increase in other general and administrative costs to support our operations, and a $1.1 million increase for legal, audit and consulting fees.

Total other income (expense), net

Total other income (expense), net, was $15.1 million for the year ended December 31, 2019, compared to $(6.4) million for the year ended December 31, 2018, an increase of $21.5 million.

The increase was primarily due to a $29.2 million change in fair value on our derivative liabilities in connection with the 2023 and 2025 Notes in 2019, offset by a $7.3 million increase in interest expense, debt issuance costs, and loss on the extinguishment of debt associated with the modification of the 2023 Notes and issuance of the 2025 Notes in July 2019.

Comparison of the Years Ended December 31, 2018 and 2017

The following table sets forth our results of operations for the years ended December 31, 2018 and 2017.

Period Change

(in thousands)

Revenue, net - related parties

Total revenue

Cost of sales

Sales and marketing expense

Research and development expenses

General and administrative expenses

Operating loss

Other income (expense):

Interest income

Interest expense

Change in fair value of derivative liabilities

Other (expense) income

Total other expense, net

Our revenue increased to $18.9 million for the year ended December 31, 2018, compared to $6.4 million for the year ended December 31, 2017.

This increase was due to increased demand of Eversense primarily from Roche for distribution in Europe, as well as $1.4 million in revenue related to U.S.

sales of Eversense.

Cost of sales

Our cost of sales increased to $27.1 million for the year ended December 31, 2018, compared to $9.8 million for the year ended December 31, 2017.

This increase was due to increased sales of Eversense primarily from Roche for distribution in Europe, as well as costs related to U.S.

sales of Eversense.

Gross profit was $(8.1) million and $(3.4) million for the years ended December 31, 2018 and 2017, respectively.

Gross profit as a percentage of revenue, or gross margin, was (43.1)% and (53.1)% for the years ended December 31, 2018 and 2017, respectively.

Sales and marketing expenses

Sales and marketing expenses were $27.7 million for the year ended December 31, 2018, compared to $6.9 million for the year ended December 31, 2017, an increase of $20.9 million.

The increase was primarily due to a $13.0 million increase in salaries, bonuses and payroll related costs for additional headcount, an increase in market research and marketing costs of $6.9 million in connection with the U.S.

launch of Eversense, and an increase of $1.0 million in other sales and general marketing expenses to support our European distribution of Eversense as well as in connection with our U.S.

launch of Eversense.

Research and development expenses

Research and development expenses were $31.9 million for the year ended December 31, 2018, compared to $30.7 million for the year ended December 31, 2017, an increase of $1.1 million.

The increase was primarily due to a $2.8 million increase in salaries, bonuses and payroll related costs for additional headcount, partially offset by a decrease in clinical trial expenses of $1.7 million.

General and administrative expenses

General and administrative expenses were $19.8 million for the year ended December 31, 2018, compared to $15.3 million for the year ended December 31, 2017, an increase of $4.5 million.

The increase was primarily due to a $2.8 million increase in salaries, bonuses and payroll related costs for additional headcount, and an increase of $1.7 million in other general and administrative costs to support our operations.

Total other expense, net

Total other expense, net, was $6.4 million for the year ended December 31, 2018, compared to $2.8 million for the year ended December 31, 2017, an increase of $3.6 million.

The increase was primarily due to an increase of $5.2 million in interest expense on our Oxford/SVB Term Loans and 2023 Notes and an increase of $0.1 million in other expenses, partially offset by an increase in interest income earned on cash equivalents of $1.7 million.

Liquidity and Capital Resources

From 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 not generated any significant revenue from product sales.

We have incurred substantial losses and cumulative negative cash flows from operations since our inception in October 1996.

We have never been profitable and our net losses were $115.5 million, $94.0 million, and $59.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.

As of December 31, 2019, we had an accumulated deficit of $473.3 million.

To date, we have funded our operations principally through the issuance of preferred stock, common stock and debt.

As of December 31, 2019, we had cash and cash equivalents of $95.9 million.

On June 28, 2018, pursuant to an underwriting agreement with BTIG, LLC, we closed an underwritten offering of 38,076,561 shares of our common stock, including BTIG, LLC’s exercise in full of its option to purchase additional shares, at a price of $3.93 per share, or the June 2018 Offering.

We received aggregate net proceeds of $149.0 million from the June 2018 Offering.

In July 2019, pursuant to an underwriting agreement with Jefferies LLC, we closed a follow-on public offering of 26,136,363 shares of our common stock at a price of $1.10 per share, which included the exercise in full by Jefferies LLC 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.

In November 2019, we entered into an Open Market Sale Agreement with Jefferies LLC which allows us to issue and sell up to $50 million in gross proceeds of our common stock.

There have been no sales under this agreement as of December 31, 2019.

On July 16, 2019, we issued 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, or the Solar Warrants.

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 respective fair value of $0.7 million, and were recorded within equity resulting in a debt discount that is being amortized as additional interest expense over the term of the Solar Term Loan using the effective interest method

On July 16, 2019, we entered into a Loan and Security Agreement, or the Solar Loan Agreement, with Solar Capital, Ltd., or Solar.

Pursuant to the Solar Loan Agreement, on July 25, 2019, or the effective date, we borrowed the Solar Term Loan in an aggregate principal amount of $45.0 million, or the Solar Term Loan.

We used $11.6 million of the Solar Term Loan to repay in full the term loans, or the Oxford/SVB Term Loans and together with the Solar Term Loan, the Term Loans, borrowed pursuant to our Amended and Restated Loan and Security Agreement with Oxford Finance LLC, or Oxford, and Silicon Valley Bank, or SVB.

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 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 in the amount of $1.3 million;

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.

As of December 31, 2019, we were subject to the following financial covenants and in compliance:

minimum liquidity at the end of the prior month, cash to be less than the positive value of two multiplied by the monthly cash burn plus the amount of accounts payable aged greater than 120 days;

minimum product revenue on a trailing six-month basis at the end of the prior month to be lower than the schedule provided pursuant the Solar Loan Agreement;

redemption of permitted convertible debt.

If an event of default arises, and we are not able to obtain a waiver, all amounts owed by us would begin to bear interest at a rate that is 5.00% above the rate effective immediately before such event of default, and may be declared immediately due and payable by the Lenders.

In addition, such a default would trigger a cross-default under the 2025 Notes, which would also result in the acceleration of the indebtedness under the 2025 Notes.

Although we were in compliance with the above financial covenants as of January 31, 2020 (the last month end for which we have completed our procedures to confirm covenant compliance as of the date of this filing),, based upon our current expectations for the remainder of the first quarter of 2020, we expect that we will be in noncompliance with the trailing six-month revenue covenant as March 31, 2020 and that, absent a waiver or amendment to the terms of the Solar Loan Agreement, we would likely remain in noncompliance with the trailing six-month revenue covenant for the foreseeable future thereafter.

Therefore, if we are not able to obtain a waiver of such default by Solar, it is possible that our outstanding indebtedness under the Solar Loan Agreement and the 2025 Notes could be accelerated and become immediately due and payable.

As a result, we have classified the outstanding indebtedness on the Solar Loan and 2025 Notes, net of discounts, as short-term liabilities in our consolidated balance sheet as of December 31, 2019.

If this were to occur, based on our current capital resources, we would not be able to satisfy such indebtedness without raising additional capital from other sources, which may not be available on commercially reasonable terms or at all.

If we were unable to raise such capital to satisfy these obligations, we could be required to sell assets, potentially liquidate our business or be forced into bankruptcy, any of which would have a material adverse effect on the value of our common stock.

The Solar Term Loan contains various non-financial covenants, including covenants that limit 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;

prepay certain types of indebtedness.

Convertible Notes

The following table summarizes our outstanding senior convertible note obligations at December 31, 2019:

Initial Conversion

Conversion Price

Rate per Share

(in millions)

of Common Stock

February 1, 2023

January 15, 2025

See Note 10 in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report for further discussion of the Term Loan, 2023 Notes, and 2025 Notes.

Funding Requirements and Outlook

Our ability to generate revenue and achieve profitability depends on the successful commercialization and adoption of our Eversense CGM systems by diabetes patients and healthcare providers, along with future product development, regulatory approvals, and post-approval requirements.

These activities, including our ongoing focus to grow covered lives through positive insurance payor policy decisions and obtain approval for Eversense XL in the United States, will require significant uses of working capital through 2020 and beyond.

Given our current cash position and our current operating plans, and our expected noncompliance with covenants under the Solar Loan Agreement, we had a working capital deficiency as of December 31, 2019.

As a result of these circumstances, there is substantial doubt about our ability to continue as a going concern through one year after the filing of our consolidated financial statements included in this Annual Report, without obtaining additional financing, securing a waiver from Solar Capital for expected covenant noncompliance, or entering into another form of non-equity or debt arrangement.

On November 7, 2019, we implemented a restructuring designed to meet 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;

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

Pursuant to the restructuring, we also immediately reduced our current, open and planned workforce by approximately 30%.

We incurred one-time restructuring costs related to severance expenses of approximately $0.8 million in the fourth quarter of 2019.

Our ability to fund our operations is dependent upon the effectiveness of our November 2019 restructuring, raising additional capital in the near term, strategic alliances and successful marketing efforts, and distribution or other collaborative arrangements.

Our existing debt and covenants could also impact our ability to raise additional funds.

Subject to obtainment of a waiver, we expect to be in noncompliance with certain covenants under the Solar Loan as of March 31, 2020 and for the foreseeable periods thereafter.

To the extent that we raise additional capital through debt or the sale of equity, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders.

If we raise additional funds, we may have to relinquish valuable rights to our technologies, future revenue streams or grant terms that may not be favorable to us.

If we are unable to raise additional funds through equity, debt financings, or strategic alliances when needed, we may be required to delay, limit, reduce or terminate some of our operating plans.

The following is a summary of cash flows for each of the periods set forth below (in thousands):

Net cash used in operating activities

Net cash (used in) provided by investing activities

Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net cash used in operating activities

Net cash used in operating activities was $136.0 million for the year ended December 31, 2019, and consisted of a net loss of $115.5 million and a net change in operating assets and liabilities of $(13.5) million, a change in the fair value of derivative liabilities of $(29.2) million, stock-based compensation expense of $8.1 million, non-cash interest expense of $8.5 million, loss on extinguishment of debt in the amount of $0.4 million and other non-cash charges of $5.2 million.

Net cash used in operating activities was $90.8 million for the year ended December 31, 2018, and consisted of a net loss of $94.0 million and a net change in operating assets and liabilities of $(6.7) million, partially offset by stock-based compensation expense of $6.4 million, non-cash interest expense of $3.3 million, and other non-cash charges of $0.2 million.

Net cash used in operating activities was $55.7 million for the year ended December 31, 2017, and consisted primarily of a net loss of $59.1 million, partially offset by stock-based compensation expense of $4.0 million, other non-cash expenses of $0.8 million, and a net change in assets and liabilities of $1.4 million .

Net cash provided by (used in) investing activities

Net used in investing activities was $1.0 million for the year ended December 31, 2019, and consisted of $1.0 million of capital expenditures, primarily for production equipment.

Net cash provided by investing activities was $19.4 million for the year ended December 31, 2018, and consisted of $28.4 million from the sale of marketable securities, partially offset by $1.0 million of capital expenditures for laboratory equipment, and $8.0 million for the purchase of marketable securities.

Net cash used in investing activities was $13.2 million for the year ended December 31, 2017, and consisted of $33.2 million for the purchase of marketable securities and $0.3 million of capital expenditures for laboratory equipment, partially offset by $20.3 million for the sale of marketable securities.

Net cash provided by financing activities

Net cash provided by financing activities was $96.2 million for the year ended December 31, 2019, and consisted primarily of $26.8 million from the issuance of common stock in our July 2019 offering, net of costs, $77.7 million from the issuance of the 2025 Notes, net of costs, and $43.0 million from the Solar Term Loan, net of cost, partially offset by $15.0 million for the repayment of the Oxford/SVB Term Loans and the repurchase of $37.0 million of 2023 Notes.

Net cash provided by financing activities was $192.0 million for the year ended December 31, 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 $2.3 million from the exercise of stock options, partially offset by aggregate principal payments on our Solar Term Loan and Oxford/SVB Term Loans of $10.0 million.

Net cash provided by financing activities was $72.1 million for the year ended December 31, 2017, and consisted primarily of the net proceeds of $66.9 million from the issuance of common stock, $5.0 million from notes payable and the issuance of warrants and $0.2 million from the exercise of stock options .

Contractual Obligations

The following summarizes our contractual obligations as of December 31, 2019.

Payment due by period

Contractual Obligations

Operating lease obligations

Principal payments under Solar Term Loan (1)

Interest payments under Solar Term Loan (1)

Principal payment under 2023 Notes (1)

Interest payments under 2023 Notes (1)

Principal payment under 2025 Notes (1)

Interest payments under 2025 Notes (1)

Other commitments (2)

Total contractual obligations

Represents the principal and interest payment schedule for the Solar Term Loan, 2023 Notes and 2025 Notes.

For additional information, see “Liquidity and Capital Resources –

Indebtedness.”

The Solar Term Loan interest payments include the $2.9 million payoff fee at the term of the loan.

Other commitments include, among other things, minimum payment obligations and other obligations in the ordinary course of business that we cannot cancel or where we would be required to pay a fee for termination before the contractual period ended.

As described above, in light of the expected noncompliance with a financial covenant under the Solar Loan Agreement as of March 31, 2020, we have classified the outstanding indebtedness under the Solar Loan and 2025 Notes as short-term liabilities in our consolidated balance sheet as of December 31, 2019.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

Recently Adopted

In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No.

2016-02, Leases (Topic 842), or ASC 842.

The guidance requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet 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 balance of retained earnings during the period of adoption.

The guidance is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption.

We adopted the new standard effective January 1, 2019 using the modified retrospective approach.

We did not elect the transition option, but elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment of whether a contract is or contains a lease and our initial direct costs for any leases that existed prior to adoption of the standard.

We also elected to combine lease and non-lease components for our facility leases and to exclude leases with an initial term of 12 months or less from our consolidated balance sheet and recognize the associated lease payments in our consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term.

Our equipment leases had a remaining term of 12 months or less at the adoption date.

The impact of adopting ASC 842 on our consolidated balance sheet as of January 1, 2019 is shown in the table below.

The adoption of ASC 842 did not materially affect our consolidated net loss or cash flows.

Impact of Adopting ASC 842 on the Financial Statements .

January 1, 2019

ASC 842 Adoption

Consolidated Balance Sheet Data (in thousands)

Operating lease assets (1)

Deferred rent non-current (2)

Operating lease liabilities (3)

Non-current operating lease liabilities (3)

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

As of December 31, 2018, the deferred rent balance was $84.

Represents recognition of operating lease liabilities.

In June 2018, the FASB issued ASU 2018-07 , Improvements to Nonemployee Share-Based Payment Accounting , which simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments is substantially the same as those made to employees.

Under the guidance, share based awards to nonemployees are measured at fair value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any are present, and awards are classified according to ASC 718 upon vesting which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees.

We adopted this guidance on January 1, 2019 and there was no significant impact on our consolidated financial statements.

Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments –

Credit Losses:

Measurement of Credit Losses on Financial Instruments , which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred.

For available-for-sale debt securities in unrealized loss positions, the new standard requires allowances to be recorded instead of reducing the amortized cost of the investment.

We do not currently hold or plan to invest in available-for-sale securities, and we have not historically experienced collection issues or bad debts with our 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 August 2018, the FASB issued 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 and became effective for us on January 1, 2020.

We have evaluated the standard and do not expect this guidance to have a significant impact on our consolidated financial statements and related disclosures.

We have evaluated all other issued unadopted ASUs and believe the adoption of these standards will not have a material impact on our consolidated statements of operations and comprehensive loss, balance sheets, or cash flows.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity