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 implantable CGM (“Eversense”) including, 90-day Eversense, Eversense XL and Eversense E3 continuous glucose monitoring (“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 six months in the case of Eversense E3 and Eversense XL, as compared to seven to 14 days for non-implantable CGM systems. We affixed the CE mark to the original 90-day 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 was sold in select markets in Europe and the Middle East. In June 2018, the U.S. Food and Drug Administration, or FDA, approved the 90-day 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 Ascensia Diabetes Care Holdings AG (“Ascensia”) began commercializing Eversense E3 in the United States in the second quarter of 2022. In June 2022, we affixed the CE mark to the Eversense E3 CGM system and Ascensia began commercializing Eversense E3 in Europe in the third 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. We have reached more than 250 million covered lives in the U.S. through positive insurance payor coverage decisions. In August 2022, we
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received positive payor coverage decision from Elevance Health, formerly Anthem, who has more than 45 million covered lives. On August 3, 2020, 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. In July 2022, CMS provided temporary G-codes to enable immediate access to Eversense E3 for all eligible Medicare beneficiaries. In November 2022, CMS released its Calendar Year 2023 Medicare Physician Fee Schedule Proposed Rule that updates the payment amounts for the three CPT© Category III codes to account for the longer 6-month sensor. In 2022, we have been working with payors to transition their policies to Eversense E3 and have confirmed immediate coverage policy transition from select payors.
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 have 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 90-day Eversense, Eversense XL, Eversense E3 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 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 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 90-day Eversense system. In July 2018, we began distributing the 90-day 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 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 90-day Eversense system available in the United States, with a 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 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.
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. Information gathered from this sub-set and additional development efforts provided us the confidence to start the Pivotal study for the Eversense 365 System.
In April 2020, we announced that we received an extension to our CE Certificate of Conformity in the EEA such that the Eversense XL is no longer contraindicated for MRI, which means the sensor does not need to be removed from under the skin during MRI scanning. We had previously obtained this indication for Eversense in the United States
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in 2019. This MRI approval is a first for the CGM category, as all other sensors are required to be removed during an MRI scan.
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 E3 CGM system worldwide for people with diabetes, with the following initial exceptions: (1) until January 31, 2021, the territory did not include territories 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; (2) 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 (3) until May 31, 2022, the territory did 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, we received approval from the FDA for the Eversense E3 CGM System. The approval for our third-generation sensor, with proprietary sacrificial boronic acid (“SBA”) technology doubles the sensor life to six months with MARD of 8.5%. Ascensia began commercializing Eversense E3 in the United States during the second quarter of 2022.
The ENHANCE clinical study was initiated as a pivotal study with the purpose of gathering additional clinical data to support an iCGM submission for the Eversense E3 system using the SBA technology. In March 2022, we extended the ongoing ENHANCE clinical study to evaluate the safety and accuracy of the Eversense 365 System for a period of up to one year in the United States. In September 2022, we completed enrollment of the ENHANCE study. In November 2022, we submitted an IDE for the enrollment of a pediatric cohort in the ENHANCE study and, pending approval, plan to begin enrolling pediatric patients in the first half of 2023.
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 or certification.
In May 2016, we entered into a distribution agreement with 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 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.
In June 2022, we affixed the CE mark to the extended life Eversense E3 CGM system, and Ascensia began commercialization in select European markets during the third quarter of 2022, with the commercialization in all European markets in the fourth quarter of 2022.
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
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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 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, 2022. We do not expect any material changes in the near term to the underlying assumptions during the year ended December 31, 2023.
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 (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.
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.
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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 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, 2022 and 2021
The following table sets forth our results of operations for the years ended December 31, 2022 and 2021.
December 31,
Period-to-
2022
2021
Period Change
(in thousands)
(in thousands)
Revenue, net
$
656
$
1,394
$
(738)
Revenue, net - related parties
15,733
12,281
3,452
Total revenue
16,389
13,675
2,714
Cost of sales
13,663
14,486
(823)
Gross profit
2,726
(811)
3,537
Expenses:
Research and development expenses
39,719
27,217
12,502
Selling, general and administrative expenses
31,634
29,154
2,480
Operating loss
(68,627)
(57,182)
(11,445)
Other (expense) income, net:
Interest income
1,824
243
1,581
Gain (Loss) on fair value adjustment of option
43,745
(53,152)
96,897
Gain (Loss) on extinguishment of debt and option
(101)
330
(431)
Interest expense
(18,703)
(16,720)
(1,983)
Gain (Loss) on change in fair value of derivatives
184,221
(174,173)
358,394
Impairment cost
(138)
(1,647)
1,509
Other expense
(102)
(173)
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Total other (expense) income, net
210,746
(245,292)
456,038
Net Income (loss)
$
142,119
$
(302,474)
$
444,593
Components of Results of Operations
Total revenue
Our total net revenue increased to $16.4 million for the year ended December 31, 2022, compared to $13.7 million for the year ended December 31, 2021, an increase of $2.7 million. This increase was primarily due to the launch of Eversense E3 in the United States beginning in the second quarter of 2022 and the launch of Eversense E3 outside the United States during the fourth quarter of 2022, partially offset by slightly lower sales outside of the United States for the twelve-month period.
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Cost of sales and gross profit
Our cost of sales decreased to $13.7 million for the year ended December 31, 2022, compared to $14.5 million for the year ended December 31, 2021. Our gross profit increased to $2.7 million for the year ended December 31, 2022, compared to ($0.8 million) for the year ended December 31, 2021. Gross profit as a percentage of revenue, or gross margin, was 16.6% and (5.9%) for the years ended December 31, 2022 and 2021, respectively. The increase in gross margin was primarily driven by the transition from the Eversense 90-day product to the 180-day Eversense E3 product, sales channel mix, lower inventory write-offs, reduced warranty and replacement costs, and manufacturing efficiencies.
Research and development expenses
Research and development expenses were $39.7 million for the year ended December 31, 2022, compared to $27.2 million for the year ended December 31, 2021, an increase of $12.5 million. The increase was due to investments for next generation technologies including a $7.1 million increase in clinical studies activities, an increase of $3.3 million in personnel related costs due to the expansion of our research and development workforce, an increase of $1.6 million for consulting and other research and development support services and an increase of $0.5 million in other administrative R&D expenses.
Selling, general and administrative expenses
Selling, general and administrative expenses were $31.6 million for the year ended December 31, 2022, compared to $29.1 million for the year ended December 31, 2021, an increase of $2.5 million. The increase was primarily the result of a $3.4 million increase in personnel costs, a $1.4 million increase in other general and administrative costs to include recruiting and associated employee overhead, local tax expenses, and legal expenses partially offset by a $2.3 million decrease in sales and marketing costs.
Total other income (expense), net
Total other income (expense), net, was $210.7 million for the year ended December 31, 2022, compared to ($245.3) million for the year ended December 31, 2021, a change of $456.0 million. The change was primarily due to a $358.4 million gain in fair value of derivatives, a $96.9 million gain in the fair value of options primarily driven by the decrease on our stock price, a $1.5 million gain on impairment cost, and a $1.6 million increase in interest income, offset by $2.0 million decrease in interest expense and $0.4 million loss on extinguishment of option.
Comparison of the Years Ended December 31, 2021 and 2020
For the discussion of our financial condition and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, 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, 2021 filed with the SEC on March 1, 2022.
Liquidity and Capital Resources
Since our inception, we have incurred significant net losses and expect to incur additional losses in the near future. Our positive income in the current year is substantially the result of fair value gains due to embedded derivatives in our convertible notes. We incurred total net income (loss) of $142.1 million, ($302.5) million, and ($175.2) million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, we had an accumulated deficit of $808.9 million. To date, we have financed our operations primarily through sales of our equity securities and debt financings. As of December 31, 2022, we had cash, cash equivalents and marketable securities of $156.3 million.
On March 13, 2023, we issued and sold to PHC in a private placement a warrant (the “Purchase Warrant”) to purchase an aggregate of 15,425,750 shares of common stock (the “Purchase Warrant Shares”). The purchase price of the Purchase Warrant was approximately $0.97 per Purchase Warrant Share. The Purchase Warrant is a “pre-funded”
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warrant with a nominal exercise price of $0.001 per Purchase Warrant Share. We received aggregate gross proceeds of $15.0 million in the transaction, before deducting private placement expenses payable by us.
In November 2021, we entered into an Open Market Sale Agreement (the “2021 Sales Agreement”) with Jefferies LLC (“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 $34.4 million in net proceeds from the sale of 15,160,899 shares of our common stock under the 2021 Sales Agreement.
In November 2019, we entered into an Open Market Sale Agreement (“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.
On January 21, 2021, we entered into an underwriting agreement, which was subsequently amended and restated on the same day (“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 2021 Public 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 the Equity Line Agreement with Energy Capital, pursuant to which Energy Capital committed to purchase up to an aggregate of $12.0 million of shares of our newly designated Series B convertible Preferred Stock (“Series B Preferred Stock”), at our request from time to time during the 24-month term of the Equity Line Agreement.
In addition, beginning on January 1, 2022, since there had been no sales of the Series B Preferred Stock pursuant to the Equity Line Agreement, Energy Capital had the right, at its sole discretion to purchase up to $12.0 million of Series B Preferred Stock under the Equity Line Agreement at a purchase price of $1,000 per share of Series B Preferred Stock initially convertible into common stock, beginning six months after the date of its issuance, at a conversion price of $0.3951 per share. On November 7, 2022, Energy Capital exercised in full its right to purchase $12.0 million of Series B Preferred Stock.
Concurrently with entry into the Equity Line Agreement, we issued a warrant to Energy Capital, exercisable
beginning May 9, 2021, to purchase up to 10,000,000 shares of common stock at an exercise price of $0.3951 per share, (the “Warrant”). The Warrant was exercised in full in February 2022.
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On August 9, 2020, we entered into a financing agreement with Ascensia’s parent company, PHC Holdings Corporation (“PHC”), pursuant to which we issued $35.0 million in aggregate principal amount of Senior Secured Convertible Notes due on October 31, 2024 (the “PHC Notes”), to PHC on the Closing Date. We also issued PHC 2,941,176 shares of common stock to PHC as a financing fee. We also have the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon obtaining approval for the 180-day Eversense E3 product for marketing in the United States before such date. Upon the closing of the PHC Notes, we prepaid in full the First Lien Notes, issued and sold pursuant a loan agreement with Highbridge Capital Management, LLC (“Highbridge”) (the “Highbridge Loan Agreement”), in the amount of approximately $17.6 million. As described in Note 21, on March 13, 2023, we entered into an agreement with PHC, whereby PHC has agreed to exchange the PHC Notes for a warrant (the “Exchange Warrant”) to purchase up to 68,525,311 shares of common stock. The Exchange Warrant is a “pre-funded” warrant with a nominal exercise price of $0.001 per share. This exchange is expected to close on April 1, 2023, subject to the satisfaction of customary closing conditions for a transaction of this type.
Additionally, on August 9, 2020, we entered into a Stock Purchase Agreement with Masters Special Solutions, LLC and certain affiliates thereof (collectively “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 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 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 June 30, 2016, the Company entered into a loan agreement with Oxford Finance and Silicon Valley Bank (collectively, the “Lenders”) and issued to the Lenders 10-year stock purchase warrants to purchase an aggregate of 116,581, 63,025 and 80,645 shares of common stock at an exercise price of $3.86, $2.38 and $1.86 per share, respectively (“Oxford/SVB Warrants”). The Oxford/SVB warrants expire on June 30, 2026, November 22, 2026 and March 29, 2027, respectively.
On July 16, 2019, the Company entered into a loan agreement with Solar Capital, Ltd. (“Solar”) and 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 (“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 April 24, 2020, the Company entered into a loan agreement with Highbridge and issued the lender warrants to purchase an aggregate of 4,500,000 shares of the Company’s common stock with an exercise price of $0.66 per share (“Highbridge Warrants”). The Highbridge Warrants are exercisable until April 24, 2023. During the year ended December 31, 2021, the warrant holders exercised 1,750,000 warrants. There were no warrants exercised for the year ended December 31, 2022.
On November 9, 2020, the Company entered into the Equity Line Agreement and 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 (“Energy Capital Warrants”). The Energy Capital Warrants vested on May 9, 2021. As of December 31, 2022, the Energy Capital have been exercised in full, on a net basis.
As described above, on March 13, 2023, we issued the Purchase Warrant to PHC, which is exercisable for up to 15,425,750 shares of common stock. Additionally, on March 13, 2023, we entered into another agreement with PHC, whereby PHC agreed to exchange the PHC Notes for the Exchange Warrant, which will be exercisable for up to 68,525,311 shares of common stock, with such exchange closing on April 1, 2023, subject to the satisfaction of
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customary closing conditions for a transaction of this type. The Purchase Warrant is, and the Exchange Warrant will be, a “pre-funded” warrant with a nominal exercise price of $0.001 per share and no expiration date.
Indebtedness
PPP Loan
On April 22, 2020, the Company 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 Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) was evidenced by the PPP Note dated April 21, 2020 (the “PPP Note”) in the principal amount of $5.8 million with Silicon Valley Bank (“SVB”).
Under the terms of the PPP Note and the PPP Loan, interest accrued on the outstanding principal at a rate of 1.0% per annum. The term of the PPP Note was two years. In April 2022, the Company repaid the outstanding principal and accrued interest in full.
Convertible Notes
The following table summarizes our outstanding senior convertible note obligations at December 31, 2022:
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 1, 2018
5.25%
$
15.7
February 1, 2023
294.1176
$
3.40
2025 Notes
July 1, 2019
5.25%
$
51.2
January 15, 2025
757.5758
$
1.32
PHC Notes
August 14, 2020
8.00%
$
35.0
October 31, 2024
1901.7956
$
0.53
See Note 13 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, as well as Note 21 in the accompanying notes to our consolidated financial statements for a discussion of our agreement with PHC, whereby PHC has agreed to exchange the PHC Notes for the Exchange Warrant.
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 2023 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 2024. 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.
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Cash Flows
The following is a summary of cash flows for each of the periods set forth below (in thousands):
Year Ended
December 31,
2022
2021
Net cash used in operating activities
$
(66,312)
$
(56,078)
Net cash provided by (used in) investing activities
26,882
(148,749)
Net cash provided by financing activities
41,762
220,083
Net increase in cash and cash equivalents
$
2,332
$
15,256
Net cash used in operating activities
Net cash used in operating activities was $66.3 million for the year ended December 31, 2022, and consisted of a $184.2 million gain in the fair value of derivatives on convertible notes, a $43.7 million gain on fair value adjustment of options, a $2.5 million net change in operating assets and liabilities, partially offset by net income of $142.1 million, $13.3 million related to depreciation/amortization and other non-cash items, $8.6 million of stock-based compensation, and $0.1 million of loss on issuance of options.
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.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was $26.9 million for the year ended December 31, 2022, and consisted of $131.9 million from the sale and maturity of marketable securities, offset by $104.7 million from the purchase of marketable securities and $0.3 million of capital expenditures for laboratory equipment.
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 cash provided by financing activities
Net cash provided by financing activities was $41.8 million for the year ended December 31, 2022, and primarily consisted of $12 million proceeds from the issuance of Series B preferred stock related to the Energy Capital option exercise, $34.2 million from issuance of common stock, and $1.1 million for proceeds related to exercise of stock options and warrants, offset by $2.9 million in repayment of the PPP loan and $2.6 million taxes paid related to net share settlement of equity awards.
Net cash provided by financing activities was $220.1 million for the year ended December 31, 2021, and 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 of 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.
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