Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysi s of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with 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.
Overview
We are a medical technology company focused on the development and manufacturing of glucose monitoring products designed to transform lives in the global diabetes community with differentiated, long-term implantable glucose management technology. Our Eversense, Eversense XL and Eversense E3 CGM system 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 six months, respectively, as compared to seven to 14 days for non-implantable CGM systems. We affixed the CE mark to
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the original Eversense CGM system in June 2016, which marked the first certification for the product to be sold within the European Economic Area (EEA). Subsequently, we affixed the CE mark to the extended life Eversense XL CGM system in September 2017 which is currently available in select markets in Europe and the Middle East. 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. In February 2022, the extended life Eversense E3 CGM system was approved by the FDA and we expect Ascensia Diabetes Care Holdings AG, or Ascensia, to begin commercializing Eversense E3 in the second quarter of 2022.
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. During 2020, we received positive payor coverage decisions from Cigna Corporation, who has more than 17 million medical customers and offers a Medicare Advantage plan in 17 states and Washington, DC, Blue Cross and Blue Shield plans, and announced local coverage determinations, or LCD, proposals for implantable therapeutic CGMs such as Eversense by all the Medicare Administrative Contractors to enable Eversense to be used by Medicare beneficiaries as a Part B physician service. We continue to see momentum of broad national payor acceptance, including on August 3, 2020, the Center for Medicare and Medicaid Services, or CMS, released its Calendar Year 2021 Medicare Physician Fee Schedule Proposed Rule that announces proposed policy changes for Medicare payments, including the proposed establishment of national payment amounts for the three CPT© Category III codes describing the insertion (CPT 0446T), removal (0447T), and removal and insertion (0048T) of an implantable interstitial glucose sensor, which describes our Eversense CGM systems, as a medical benefit, rather than as part of the Durable Medical Equipment channel that includes other CGMs. In December 2021, CMS released its Calendar Year 2022 Medicare Physician Fee Scheduled that update global payments for the device cost and procedure fees.
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 both the United States and our overseas markets, we entered into a strategic partnerships and distribution agreements that allow third party collaborators with direct sales forces and established distribution systems to market and promote Senseonics CGM systems, including Eversense, Eversense XL and future generation products.
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.
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In December 2018, we initiated the PROMISE pivotal clinical trial to evaluate the safety and accuracy of Eversense for a period of up to 6 months in the United States. In September 30, 2019, we completed enrollment of the PROMISE trial. In the trial, we observed performance matching that of the current Eversense 90-day product available in the United States, with a mean absolute relative difference, or MARD, of 8.5%. This result was achieved with reduced calibration, down to one per day, while also doubling the sensor life to six months. Following the results of the PROMISE trial, on September 30, 2020, a Premarket Approval, or PMA, supplement application to extend the wearable life of the Eversense CGM System to six months was submitted to the FDA. In February 2022, the extended life Eversense E3 CGM system was approved by the FDA and we expect Ascensia Diabetes Care Holdings AG, or Ascensia, to begin commercializing Eversense E3 in the second quarter of 2022.
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 provided financial assistance to eligible patients purchasing Eversense, which may have been substantial depending on a patient’s insurance coverage. We also assisted patients in their appeal of adverse coverage decisions made by insurance providers. In December 2020, we terminated the Eversense Bridge Program. In 2021, Ascensia initiated a patient assistance program to provide financial assistance to patients on Eversense. The lack of a patient assistance program, or a program’s design being ineffective, could adversely impact the sales of Eversense and, consequently our net revenues. In addition, we may not be able to recognize a substantial portion of the revenue related to Eversense insertions for the patients participating in these access programs, or previously the Bridge Program. The amount of time required to obtain favorable coverage and reimbursement decisions, including navigating the appeals process with third-party payors, is uncertain, and we may see increased product utilization without corresponding recognized revenue. Our operating results may be adversely impacted if we are unable to obtain successful appeals or favorable coverage decisions by insurance providers, or if there are not effective patient access programs in place.
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.
On February 26, 2020, we announced that the FDA approved a subgroup of PROMISE trial participants to continue for a total of 365 days to gather feasibility data on the safety and accuracy of a 365-day sensor. This sub-set of 30 participants were left undisturbed for 365 days with the goal of measuring accuracy and longevity over the full 365 days. Following information gathered from this sub-set and continued development efforts, and pending developments at the FDA relating to the ongoing the ongoing COVID-19 pandemic, in the first half of 2022 we plan to seek Investigational Device Exemption, or IDE, from the FDA to explore the 365-day sensor in a clinical trial. If the IDE is approved in a timely manner, we would target to begin enrollment of a clinical trial, in which we intend to include a pediatric population, in the second half of 2022.
On August 9, 2020, we entered into a collaboration and commercialization agreement with Ascensia pursuant to which we granted Ascensia the exclusive right to distribute our 90-day Eversense CGM system and our 180-day Eversense CGM system worldwide for people with diabetes, with the following initial exceptions: (i) until January 31, 2021, the territory did not include countries covered by our then existing distribution agreement with Roche Diagnostics International AG and Roche Diabetes Care GmbH, which are the Europe, Middle East and Asia, excluding Scandinavia and Israel, and 17 additional countries, including Brazil, Russia, India and China, as well as select markets in the Asia Pacific and Latin American regions; (ii) until September 13, 2021, the territory did not include countries covered by our current distribution agreement with Rubin Medical, which are Sweden, Norway and Denmark; and (iii) until May 31, 2022, the territory does not include Israel. Pursuant to the Commercialization Agreement, in the United States, Ascensia began providing sales support for the 90-day Eversense product on October 1, 2020 and Ascensia ramped up sales activities and assumed commercial responsibilities for the 90-day Eversense product during the second quarter of 2021. In February 2022, the extended life Eversense E3 CGM system was approved by the FDA and we expect Ascensia to begin commercializing Eversense E3 in the United States in the second quarter of 2022.
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European Commercialization of Eversense
In September 2017, we affixed the CE mark to the Eversense XL, which is indicated for a sensor life of up to six months. Eversense XL began commercialization in the EEA 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 had granted Roche the exclusive right to market, sell and distribute Eversense in the EMEA, excluding Scandinavia and Israel. In addition, Roche had 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. Roche was 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. On November 30, 2020 we entered into a final amendment and settlement agreement with Roche to facilitate the transition of distribution to Ascensia as sales concluded on January 31, 2021, including final purchases, and transition support activities. The distribution rights under the agreement expired January 31, 2021.
COVID-19
On January 30, 2020, the World Health Organization, or the WHO, announced a global health emergency because of a new strain of coronavirus, or COVID-19, and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. In response to the pandemic, many states and jurisdictions have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus. The state of Maryland, where we are headquartered, has been affected by COVID-19. The Governor of Maryland issued an order closing all non-essential businesses, which took effect on March 23, 2020. Beginning with the initial outbreak and through 2021 substantially all of our workforce is still working from home either all or substantially all of the time. Additionally, because our sensor requires an in-clinic procedure, we saw a reduction in access to clinics and sensor insertions during multiple periods during the pandemic.
The COVID-19 pandemic infection rates in the United States are still high, vaccine distribution is on-going, and it is difficult to predict the longevity and severity COVID-19 will have on our business.
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 resources, in March 2020, we made significant reductions in our cost structure and operations to improve cash flow and generate future expenditure savings to ensure the long-term success of Eversense. Specifically, in the first quarter of 2020, we temporarily suspended commercial sales and marketing of the Eversense CGM System and we reduced our workforce by approximately 60%.
Critical Accounting 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 did not make any material changes to these assumptions for the year ended December 31, 2021. We do not expect any material changes in the near term to the underlying assumptions during the year ended December 31, 2022.
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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.
Revenue
We generate product revenue from sales of the Eversense system and related components and supplies to Ascensia, through the Commercialization Agreement, third-party distributors in the European Union and to 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.
Revenue from product sales is recognized at a point in time when the Customers obtain control of our product based upon the delivery terms as defined in the contract at an amount that reflects the consideration which we expect to receive in exchange for the product. Contracts with our distributors contain performance obligations, mostly for the supply of goods, and is typically satisfied upon transfer of control of the product. Customer contracts do not include the right to return unless there is a product issue, in which case we may provide replacement product. Product conformity guarantees do not create additional performance obligations and are accounted for as warranty obligations in accordance with guarantee and loss contingency accounting guidance.
Our contracts may contain some form of variable consideration such as prompt-pay discounts, tier-volume price discounts and for the Ascensia commercial agreement, revenue share. Variable consideration, such as discounts and prompt-pay incentives, are treated as a reduction in revenue and variable considerations, such as revenue share, is treated as an addition in revenue when the product sale is recognized. The amount of variable consideration that is included in the transaction price may be constrained and is included in revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period, when the uncertainty associated with the variable consideration is subsequently resolved. Estimating variable consideration and the related constraint requires the use of significant management judgment. Depending on the variable consideration, we develop estimates for the expected value based on the terms of the agreements, historical data, geographic mix, reimbursement rates, and market conditions.
Contract assets consist of trade receivables and unbilled receivables from customers and are recorded at net realizable value. Unbilled receivables relate to the revenue share variable consideration from the Ascensia commercial agreement.
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.
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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, we 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 our consolidated balance sheets in accordance with Accounting Standards Codification, or ASC, Topic 815, Derivatives and Hedging.
On April 21, 2020, we entered into the Highbridge Loan Agreement, in which we borrowed an aggregate principal amount of $15.0 million through the issuance and sale of the First Lien Notes and issued 1,500,000 shares of our common stock to the Lenders as a commitment fee. The First Lien Notes also contained redemption features that were evaluated for bifurcation as separate derivative instruments including the permitted prepayment put option, the mandatory accelerated redemption and the mandatory redemption and reinvestment upon an asset sale. We recorded the fair value of the embedded features in the amount of $1.0 million as a debt premium and derivative asset in our consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging. The derivative was adjusted to fair value at each reporting period, with the change recorded in change in fair value of derivatives that is a component of other income (expense) in our consolidated statements of operations and comprehensive loss. On August 14, 2020, we prepaid the First Lien Notes in full, including the discounted prepayment premium, in the amount of approximately $17.6 million and recognized a loss on extinguishment in the amount of $0.7 million.
On April 21, 2020, we entered into a Note Purchase and Exchange Agreement with certain funds managed by Highbridge providing for the exchange (the “Exchange”) of $24.0 million aggregate principal amount of our outstanding 2025 Notes for (i) $15.7 million aggregate principal amount of newly issued Second Lien Notes, (ii) 11,026,086 shares of common stock, (iii) 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. On August 9, 2020, we entered into a First Amendment to Note Purchase and Exchange Agreement with Highbridge (as amended by the Amendment, the “Exchange Agreement”). The Second Lien Notes also contained redemption features that were evaluated for bifurcation as separate derivative instruments including the permitted prepayment put option, the mandatory accelerated redemption and the mandatory redemption and reinvestment upon an asset sale. Unlike the First Lien Notes, the Second Lien Notes also permit voluntary conversion at the option of the holder as described above. We recorded the fair value of these embedded features in the amount of $1.9 million as a derivative asset in our consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging. The derivative was adjusted to fair value at each reporting period, with the change in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in our consolidated statement of operations and comprehensive loss. During the fiscal year ended December 31, 2020, Highbridge elected to convert the full $15.7 million of outstanding principal on the Second Lien Notes.
In August 2020, we issued $35.0 million in aggregate principal amount of convertible senior secured notes due 2024, or the PHC Notes. The Note Purchase Agreement also contained several provisions requiring bifurcation as a separate derivative liability including an embedded conversion feature, mandatory prepayment upon event of default that constitutes a breach of the minimum revenue financial covenant, optional redemption upon an event of default, change in interest rate after PMA approval and default interest upon an event of default. We recorded the fair value of the embedded features as a derivative liability in our consolidated balance sheets in accordance with 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
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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, 2021 and 2020
The following table sets forth our results of operations for the years ended December 31, 2021 and 2020.
Year Ended
December 31,
Period-to-
2021
2020
Period Change
(in thousands)
(in thousands)
Revenue, net
$
1,394
$
1,368
$
26
Revenue, net - related parties
12,281
3,581
8,700
Total revenue
13,675
4,949
8,726
Cost of sales
14,486
22,315
(7,829)
Gross profit (loss)
(811)
(17,366)
16,555
Expenses:
Sales and marketing expenses
5,483
20,550
(15,067)
Sales and marketing expenses- related parties
2,133
—
2,133
Total Sales and marketing expenses
7,616
20,550
(12,934)
Research and development expenses
27,217
20,413
6,804
General and administrative expenses
21,538
20,801
737
Operating loss
(57,182)
(79,130)
21,948
Other (expense) income, net:
Interest income
243
175
68
Loss on fair value adjustment of option
(53,152)
(30,721)
(22,431)
Gain (Loss) on extinguishment of debt and option
330
(21,112)
21,442
Loss on issuance of debt & other issuance costs
—
(12,706)
12,706
Interest expense
(16,720)
(16,167)
(553)
Debt issuance costs
—
(1,216)
1,216
Loss on change in fair value of derivatives
(174,173)
(11,641)
(162,532)
Impairment cost
(1,647)
(2,339)
692
Other expense
(173)
(311)
138
Total other (expense) income, net
(245,292)
(96,038)
(149,254)
Net loss
$
(302,474)
$
(175,168)
$
(127,306)
Components of Results of Operations
Revenue, net
Our total net revenue increased to $13.7 million for the year ended December 31, 2021, compared to $4.9 million for the year ended December 31, 2020, an increase of $8.7 million. This increase was due to the transition of commercial responsibility for Eversense to Ascensia and its orders for Eversense for distribution in the European Union and in the United States. Ascensia assumed commercial responsibilities for Eversense XL beginning on February 1, 2021 and for the 90-day Eversense product during the second quarter of 2021.
Cost of sales
Our cost of sales decreased to $14.5 million for the year ended December 31, 2021, compared to $22.3 million for the year ended December 31, 2020, a decrease of $7.8 million. The decrease was primarily attributed to the reduction of inventory impairment, write-offs and scrap expense of $13.9 million and a reduction of $0.2 million in salaries &
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related costs, partially offset by an increase of $6.3 million in production costs, freight and logistic cost and warranty and replacement costs related to the commercialization of Eversense under the Ascensia commercialization and collaboration agreement.
Gross profit (loss) was $(0.8) million and $(17.4) million for the years ended December 31, 2021 and 2020, respectively. Gross profit as a percentage of revenue, or gross margin, was (5.9)% and (350.9)% for the years ended December 31, 2021 and 2020, respectively. The improved gross margin was primarily due to the fulfillment of orders utilizing existing written off inventory as a result of the COVID-19 pandemic.
Sales and marketing expenses
Sales and marketing expenses were $7.6 million for the year ended December 31, 2021, compared to $20.6 million for the year ended December 31, 2020, a decrease of $12.9 million. The decrease was primarily the result of the reduction in sales support due to the transition to Ascensia for the commercialization of Eversense.
Research and development expenses
Research and development expenses were $27.2 million for the year ended December 31, 2021, compared to $20.4 million for the year ended December 31, 2020, an increase of $6.8 million. The increase was due to the expansion of our R&D workforce which was $2.2 million increase in personnel-related costs. Also, the increase was due to various R&D efforts to improve our sensor & transmitter technology in 2021 that led to $4.1 million increase in consulting, contract fabrication and other R&D support services and an increase of $0.5 million in clinical studies.
General and administrative expenses
General and administrative expenses were $21.5 million for the year ended December 31, 2021, compared to $20.8 million for the year ended December 31, 2020, an increase of $0.7 million. The increase was due to higher salaries and related expenses of $1.3 million, primarily related to stock-based compensation and related expenses, offset by a reduction of $0.6 million in other administrative expenses including accounting and consulting costs.
Total other income (expense), net
Total other income (expense), net, was ($245.3) million for the year ended December 31, 2021, compared to ($96.0) million for the year ended December 31, 2020, an increase of $149.3 million expense. The increase in expense was primarily due to a $162.5 million change in fair value of the embedded derivatives in our convertible notes, $22.4 million change in non-cash loss on fair value adjustment of the Energy Capital Option and an increase of $0.6 million in interest expense, offset by a $21.4 million reduction in loss on extinguishment of debt, a $12.7 million reduction in loss on issuance of debt & issuance costs, a reduction of $1.2 million in debt issuance cost a decrease of $0.7 million in impairment cost, a decrease of $0.1 million in other expenses and a $0.1 million increase in interest income.
Comparison of the Years Ended December 31, 2020 and 2019
For the discussion of our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 5, 2021.
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
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1996. We have never been profitable and our net losses were $302.5 million, $175.2 million, and $115.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, we had an accumulated deficit of $951.0 million. To date, we have funded our operations principally through the issuance of preferred stock, common stock, convertible note issuance and debt. As of December 31, 2021, we had cash, cash equivalents and marketable securities of $181.8 million.
In November 2021, we entered into an Open Market Sale Agreement, or 2021 Sales Agreement, with Jefferies LLC, or Jefferies, under which we could offer and sell, from time to time, at our sole discretion, shares of our common stock having an aggregate offering price of up to $150.0 million through Jefferies as our sales agent in an “at the market” offering. Jefferies will receive a commission up to 3.0% of the gross proceeds of any common stock sold through Jefferies under the 2021 Sales Agreement. As of the date of this Annual Report on Form 10-K, we have received $8.1 million in net proceeds from the sale of 3,077,493 shares of our common stock under the 2021 Sales Agreement.
In November 2019, we entered into an Open Market Sale Agreement, or 2019 Sales Agreement, with Jefferies, under which we could offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $50.0 million through Jefferies as our sales agent in an “at the market” offering. In June 2021, we received $48.4 million in net proceeds from the sale of 12,830,333 shares of our common stock utilizing the full capacity under the 2019 Sales Agreement. For the twelve months ended December 31, 2020, we had received $0.1 million in net proceeds from the sale of 175,289 shares of our common stock under the 2019 Sales Agreement.
On January 21, 2021, we entered into an underwriting agreement, which was subsequently amended and restated on the same day, or the Underwriting Agreement, with H.C. Wainwright & Co., LLC, as representative of the underwriters, the Underwriters, to issue and sell 51,948,052 shares of common stock, in an underwritten public offering pursuant to effective registration statements on Form S-3, including and a related prospectus and prospectus supplement, in each case filed with the Securities and Exchange Commission, the Offering. The price to the public in the Offering was $1.925 per share of common stock. The Underwriters agreed to purchase the shares from the Company pursuant to the Underwriting Agreement at a price of $1.799875 per share and the Company also agreed to reimburse them for customary fees and expenses. The initial closing of the Offering occurred on January 26, 2021. Subsequent to the initial closing, the Underwriters exercised their option to purchase an additional 7,792,207 shares of Common Stock. Total net proceeds from the Offering were $106.1 million after deducting underwriting discounts and commissions and estimated offering expenses.
On January 17, 2021, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional purchasers, the Purchasers, pursuant to which we sold to the Purchasers, in a registered direct offering, the Registered Direct Offering, an aggregate of 40,000,000 shares, the Shares, of common stock, $0.001 par value per share. The Shares were sold at a purchase price of $1.25 per share for aggregate gross proceeds to the us of $50 million, before deducting fees to the placement agent and other estimated offering expenses payables. The Shares were offered and sold by us pursuant to an effective shelf registration statement on Form S-3, which was originally filed with the Securities and Exchange Commission on November 27, 2019. The net proceeds to us from the Registered Direct Offering, after deducting fees and expenses and the estimated offering expenses payable by us, are approximately $46.1 million.
On November 9, 2020, we entered into an equity line agreement, the Equity Line Agreement, with Energy Capital, LLC, or Energy Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Energy Capital is committed to purchase up to an aggregate of $12.0 million of shares of our newly designated series B convertible preferred stock, or the Series B Preferred Stock, at our request from time to time during the 24-month term of the Equity Line Agreement. Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that we have less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), we have the right, in our sole discretion, to present Energy Capital with a purchase notice, or a Regular Purchase Notice, directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of our Series B Preferred Stock at a per share price, or the Purchase Price, equal to $1,000 per share of Series B Preferred Stock, with each share of Series B Preferred Stock initially convertible into common stock, beginning nine months after the date of its issuance, at a conversion price of
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$0.3951 per share. The Equity Line Agreement provides that we shall not affect any Regular Purchase under the Equity Line Agreement on any date where the closing price of the common stock on the NYSE American is less than $0.25 without the approval of Energy Capital.
On August 9, 2020, we entered into a financing agreement with Ascensia’s parent company, PHC, pursuant to which we issued $35.0 million in aggregate principal amount 2024 Notes, to PHC. We also issued PHC 2,941,176 shares of common stock to PHC as a financing fee. We also have the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon obtaining approval for the 180-day Eversense product for marketing in the United States before such date. Upon the closing of the 2024 Notes, we prepaid the First Lien Notes in full in the amount of approximately $17.6 million, which includes the discounted prepayment premium.
Additionally, on August 9, 2020, we entered into a Stock Purchase Agreement with Masters Special Solutions, LLC and certain affiliates thereof, or Masters, pursuant to which we issued and sold to Masters 3,000 shares of convertible preferred stock, designated as Series A Preferred Stock, the Series A Preferred Stock, at a price of $1,000.00 per share in an initial closing. Masters also had the option to purchase up to an additional 27,000 shares of Series A Preferred Stock at a price of $1,000.00 per share in subsequent closings, subject to the terms and conditions of the Stock Purchase Agreement, as amended, through January 11, 2021. In January 2021, Masters and its assignees purchased in aggregate an additional 22,783 shares of Series A Preferred Stock, resulting in additional gross proceeds of $22.8 million. Each share of Series A Preferred Stock is initially convertible into a number of shares of common stock equal to $1,000 divided by the conversion price of $0.476 per share, subject to customary anti-dilution adjustments, including in the event of any stock split. All shares of Series A Preferred Stock have been converted to common stock as of December 31, 2021.
Warrants
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. As of December 31, 2021, the Solar Warrants have been exercised in full, on a net basis.
On November 9, 2020, we issued Energy Capital warrants to purchase up to 10,000,000 shares of Company’s common stock with an exercise price of $0.3951 per share, or the Energy Capital Warrants. The Energy Capital Warrants have a vesting date of May 9, 2021. The Warrants can be exercised, in either a cashless exercise or a cash basis, at any time after the vesting date but prior to November 9, 2030. Energy Capital may exercise the Warrants at any time after the vesting date, without contingencies and independently of whether any shares of Series B preferred stock are issued.
Indebtedness
Term Loans
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.
On March 22, 2020 we terminated our Loan and Security Agreement with Solar and repaid the $45.0 million principal balance in full.
PPP Loan
On April 22, 2020, we received $5.8 million in loan funding from the PPP pursuant to the CARES Act, as amended by the Flexibility Act, and administered by the SBA. The unsecured loan, or the PPP Loan, is evidenced by the
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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. We have elected not to apply for forgiveness and are making monthly payments of principal and interest until the loan is paid in full in the second quarter of 2022. 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.
The PPP Note may be prepaid in part or in full, at any time, without penalty. The PPP Note provides for certain customary events of default, including (i) failing to make a payment when due under the PPP Note, (ii) failure to do anything required by the PPP Note or any other loan document, (iii) defaults of any other loan with the Bank, (iv) failure to disclose any material fact or make a materially false or misleading representation to the Bank or SBA, (v) default on any loan or agreement with another creditor, if the Bank believes the default may materially affect our ability to pay the PPP Note, (vi) failure to pay any taxes when due, (vii) becoming the subject of a proceeding under any bankruptcy or insolvency law, having a receiver or liquidator appointed for any part of our business or property, or making an assignment for the benefit of creditors, (viii) having any adverse change in financial condition or business operation that the Bank believes may materially affect our ability to pay the PPP Note, (ix) if we reorganize, merge, consolidate, or otherwise change ownership or business structure without the Bank’s prior written consent, or (x) becoming the subject of a civil or criminal action that the Bank believes may materially affect our ability to pay the PPP Note. Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require immediate payment of all amounts owed under the PPP Note, collect all amounts owing from us, and file suit and obtain judgment against us.
Highbridge Loan Agreement
On April 21, 2020, we entered into the Highbridge Loan Agreement, with certain funds managed by Highbridge Capital Management, LLC, or Highbridge, as the lenders (together with the other lenders from time to time party thereto, or the Lenders) and Wilmington Savings Fund Society, SCB, as collateral agent.
Pursuant to the Highbridge Loan Agreement, we borrowed an aggregate principal amount of $15.0 million on April 24, 2020 through the issuance and sale of First Lien Notes. In connection with the Highbridge Loan Agreement and receipt of the first tranche of borrowing, we issued 1,500,000 shares of our common stock to the Lenders as a commitment fee.
Upon the closing of the PHC Notes, we prepaid the First Lien Notes in full in the amount of approximately $17.6 million, which includes the discounted prepayment premium.
Exchange Agreement with Highbridge
On April 21, 2020 we entered into a Note Purchase and Exchange Agreement, or the Exchange Agreement, which we subsequently amended on August 9, 2020, with certain funds managed by Highbridge providing for the exchange of $24.0 million aggregate principal amount of our outstanding senior convertible notes due January 15, 2025, or the 2025 Notes, for (i) $15.7 million aggregate principal amount of newly issued Second Lien Secured Notes, or the Second Lien Notes, (ii) 11,026,086 shares of our common stock, (iii) warrants to purchase up to 4,500,000 shares of our common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged. The exchange closed on April 24, 2020. The warrants may be exercised for cash or on a cashless basis at any time through the three year anniversary of the issuance date.
As amended by the Amendment, effective as of the Closing Date, the holders of the Second Lien Notes had the right to convert the aggregate principal of the Second Lien Notes (together with any applicable prepayment premium) to common stock at a price per share equal to 90% of the greater of (i) the daily volume weighted average of the price per share of the common stock, on the conversion date, or if the conversion date is not a trading date, the trading day immediately prior to the conversion date and (ii) $0.33 per share. This conversion option had a daily limit of $1,000,000 in aggregate converted principal (inclusive of principal amount of First Lien Notes that were voluntarily converted).
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During the fiscal year ended December 31, 2020, Highbridge elected to convert the full $15.7 million of outstanding principal on the Second Lien Notes for issuance of 42,776,936 shares of common stock, which included prepayment premiums and were based off of our election of PIK interest.
Convertible Notes
The following table summarizes our outstanding senior convertible note obligations at December 31, 2021:
Aggregate
Initial Conversion
Conversion Price
Convertible
Issuance
Principal
Maturity
Rate per $1,000
per Share of
Note
Date
Coupon
(in millions)
Date
Principal Amount
Common Stock
2023 Notes
January 2018
5.25%
$
15.7
February 1, 2023
294.1176
$
3.40
2025 Notes
July 2019
5.25%
$
51.2
January 15, 2025
757.5758
$
1.32
PHC Notes
August 2020
9.50%
$
35.0
October 31, 2024
1867.4136
$
0.53
See Note 11 in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report for further discussion of the 2023 Notes, PHC 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, certifications and post-approval requirements. These activities, including our ongoing focus to grow covered lives through positive insurance payor policy decisions and continued development of Eversense 365-day product in the United States, will require significant uses of working capital through 2022 and beyond.
Management has concluded that based on our current operating plans, existing cash and cash equivalents and cash flows from our future operations will be sufficient to meet our anticipated operating needs through 2023. As part of our liquidity strategy, we will continue to monitor our capital structure and operating plans and we may access the capital markets or debt markets for additional funding if the opportunity arises to enhance our capital structure for changes to our operating plans, for financing strategic initiatives and to provide financial flexibility.
Cash Flows
The following is a summary of cash flows for each of the periods set forth below (in thousands):
Year Ended
December 31,
2021
2020
Net cash used in operating activities
$
(56,078)
$
(67,422)
Net cash used in investing activities
(148,749)
(181)
Net cash provided by (used in) financing activities
220,083
(10,130)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
15,256
$
(77,733)
Net cash used in operating activities
Net cash used in operating activities was $56.1 million for the year ended December 31, 2021, and consisted of a net loss of $302.5 million, a net change in operating assets and liabilities of $1.5 million, and $0.3 million of loss on extinguishment of debt, offset by a change in fair value of derivative liabilities of $174.2 million, a change of $53.2 million in the fair value adjustment related to the Energy Capital transactions, other non-cash charges, net of $9.6 million, stock-based compensation expense of $9.0 million, and $2.2 million of impairment costs.
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Net cash used in operating activities was $67.4 million for the year ended December 31, 2020, and consisted of a net loss of $175.2 million and provision for inventory obsolescence of $4.2 million, offset by a change in the fair value adjustment of $30.7 million, related to the Master and Energy Capital transactions, loss on extinguishment of debt in the amount of $21.1 million, non-cash interest expense of $11.0 million, a net change in operating assets and liabilities of $13.8 million, change in fair value of derivative liabilities of $11.6 million, loss on issuance of debt, other issuance cost and impairment of asset of $15.0 million, stock-based compensation expense of $7.3 million and other non-cash charges of $1.5 million.
Net cash used in investing activities
Net cash used in investing activities was $148.7 million for the year ended December 31, 2021, and consisted of $154.5 million from the purchase of marketable securities and $0.2 million of capital expenditures for laboratory equipment, offset by $6.0 million form sale and maturity of marketable securities.
Net used in investing activities was $0.2 million for the year ended December 31, 2020, and consisted of $0.2 million of capital expenditures, primarily for production equipment.
Net cash provided by (used in) financing activities
Net cash provided by financing activities was $220.1 million for the year ended December 31,2021, primarily consisted of $200.4 million from issuance of common stock, proceeds of $22.8 million for the issuance of Series A preferred stock and $5.0 million for proceeds related to exercise off stock options and warrants, offset by repayment of $2.8 million of PPP loan and $5.3 million taxes paid related to net share settlement of equity awards.
Net cash used in financing activities was $10.1 million for the year ended December 31, 2020, and primarily consisted of $66.1 million for the repayment of outstanding principal on our Solar Loan Agreement and Highbridge First Lien Notes, offset by proceeds from issuance of debt for $56.0 million, consisting $33.6 million from issuance of PHC notes, net proceeds of $14.4 million from the issuance of First Lien Notes, the PPP loan of $5.8 million and net proceeds from issuance of preferred stock of $2.5 million.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.