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”), Eversense E3 continuous glucose monitoring (“CGM”) system version is 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 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 (being the European Union plus Norway, Iceland, and Liechtenstein) (“EEA”). Subsequently, we affixed the CE mark to the extended life Eversense XL CGM system in September 2017 to be sold in select markets in Europe and the Middle East. In June 2022, we affixed the CE mark to the Eversense E3 CGM system and Ascensia Diabetes Care Holdings AG (“Ascensia”) began commercialization in select markets in Europe during the third quarter of 2022. In June 2018, the U.S. Food and Drug Administration (“FDA”), approved the 90-day Eversense CGM system for distribution throughout the United States. In June 2019, we received FDA approval for the non-adjunctive indication (dosing claim) for the 90-day 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 180-day extended life Eversense E3 CGM system was approved by the FDA and Ascensia began commercializing Eversense E3 in the United States 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. We have reached approximately 300 million covered lives in the United States through positive insurance payor coverage decisions. In June 2023, we received positive payor coverage decision from UnitedHealthcare, the largest healthcare insurance company in the United States that effective July 1, 2023, Eversense E3 CGM system would be covered. We also gained coverage expansion through the basal only and hypoglycemic indications across a significant number of commercial payors in 2023. On August 3, 2020, the Center for Medicare and Medicaid Services (“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
71
Physician Fee Schedule that updated 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. The Calendar Year 2024 Medicare Physician Fee Schedule continues to include the three CPT© Category III codes. In February 2024, we announced that Medicare coverage was expanded for Eversense E3 to include all people with diabetes using insulin and non-insulin users who have a history of problematic hypoglycemia providing access to millions of Medicare patients. The first MAC expansion became effective on February 25, 2024 with the remaining MAC’s expected to become effective in the near future.
In February 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 was 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-day System. The ENHANCE pivotal study for the Eversense 365-day system completed enrollment, the last patient of the adult cohort completed the study, and we completed our analysis of the data. Based on this analysis, we determined to advance to the next generation sensor platform as the underlying technology used in the 365-day and future products. We expect that this data will support an FDA submission to be made in the coming weeks for a new product with a target 365-day duration and once per week calibration.
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 strategic partnerships and distribution agreements that allow third party collaborators with direct sales forces and established distribution systems to market and promote Eversense.
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 (“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 (“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 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 six months in the United States and in September 30, 2019, we completed enrollment of the PROMISE trial. In the trial, we observed performance matching that of the then current Eversense 90-day product 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
72
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 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 (the “Commercialization Agreement”) 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, with the following initial exceptions: (i) 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; (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 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 integrated continuous glucose monitoring (“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 mid-2023, the data gathered in this trial was used to submit an application to the FDA for the integrated continuous glucose monitoring (“iCGM”) designation. The iCGM designation will enable our ability to integrate with insulin delivery devices like pens and pumps to create systems that would use Everesense for automous control and we exepect approval in the first half of 2024. In 2022, we submitted and received approval for an investigational device exemption (“IDE”) for an extension of the trial to allow for pediatric patients and we began enrolling patients in the first half of 2023. The ENHANCE pivotal study for the Eversense 365-day system has been fully enrolled, the last patient of the adult cohort completed the study and we completed the preliminary analysis of the data. Based on this analysis we determined to advance to the next generation sensor platform as the underlying technology used in the 365-day and future products. We expect that this data will support an FDA submission to be made in the coming weeks for a new product with a target 365-day duration and once per week calibration.
European Commercialization of Eversense
In September 2017, we affixed the CE mark for Eversense XL, which permits the product to be sold freely in any part of the European Economic Area (“EEA”). The Eversense XL is indicated for a sensor life of up to 180 days. 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.
We previously held a distribution agreement with Roche and granted Roche the exclusive right to market, sell and distribute Eversense in certain territories within EMEA and other countries outside of the United States. The distribution rights under the agreement expired January 31, 2021.
73
In June 2022, we affixed the CE mark for the Eversense E3 CGM system, and Ascensia began commercialization in certain European markets during the second half 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 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, 2023. We do not expect any material changes in the near term to the underlying assumptions during the year ended December 31, 2024.
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 generally 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.
In addition, we sell small quantities of our products directly to healthcare provider locations within the United States. In these direct sales, inventory is purchased on consignment to ensure availability when a patient is identified. No revenue is recognized upon delivery of our products to the healthcare provider locations, as we retain the ability to control the inventory. Rather, revenue is recognized when the product is consumed by a patient. Consignment sales represent approximately five percent of our net sales in 2023.
Our contracts may contain some form of variable consideration such as prompt-pay discounts, tier-volume price discounts and for the Commercialization 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
74
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 Commercialization 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. The 2023 Notes were paid in full in January 2023 and the derivative liability was derecognized.
In connection with our issuance of the convertible senior subordinated notes due 2025, or the 2025 Notes in July 2019, 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.
In August 2020, we issued 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 PHC notes were cancelled in full on March 31, 2023 in exchange for a pre-funded warrant to acquire shares of our common stock (“the PHC Exchange Warrant”) and the derivative liability was derecognized.
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.
75
Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
The following table sets forth our results of operations for the years ended December 31, 2023 and 2022.
2023
2022
Period Change
(in thousands)
(in thousands)
Revenue, net
$
1,655
$
656
$
999
Revenue, net - related parties
20,735
15,733
5,002
Total revenue
22,390
16,389
6,001
Cost of sales
19,299
13,663
5,636
Gross profit
3,091
2,726
365
Expenses:
Research and development expenses
48,752
39,719
9,033
Selling, general and administrative expenses
29,942
31,634
(1,692)
Operating loss
(75,603)
(68,627)
(6,976)
Other income (expense), net:
Interest income
5,362
1,824
3,538
Gain on fair value adjustment of option
—
43,745
(43,745)
Exchange related gain, net
14,109
—
14,109
Loss on extinguishment of debt and option
—
(101)
101
Interest expense
(11,110)
(18,703)
7,593
Gain on change in fair value of derivatives
6,648
184,221
(177,573)
Impairment cost
—
(138)
138
Other income (expense)
202
(102)
304
Total other income, net
15,211
210,746
(195,535)
Net (Loss) Income
$
(60,392)
$
142,119
$
(202,511)
Components of Results of Operations
Total revenue
Our total net revenue increased to $22.4 million for the year ended December 31, 2023, compared to $16.4 million for the year ended December 31, 2022, an increase of $6.0 million. This increase was primarily the result of increased commercial activities driving new patients and awareness and a full year of Eversense E3 revenue in 2023, partially offset by slightly lower sales outside of the United States during 2023.
Cost of sales and gross profit
Our cost of sales increased to $19.3 million for the year ended December 31, 2023, compared to $13.7 million for the year ended December 31, 2022. Our gross profit increased to $3.1 million for the year ended December 31, 2023, compared to $2.7 million for the year ended December 31, 2022. Gross profit as a percentage of revenue, or gross margin, was 13.8% and 16.6% for the years ended December 31, 2023 and 2022, respectively. The decrease in gross margin was primarily due to sales channel mix and increased contract manufacturing costs driven by raw material prices.
Research and development expenses
Research and development expenses were $48.8 million for the year ended December 31, 2023, compared to $39.7 million for the year ended December 31, 2022, an increase of $9.1 million. The increase was primarily due to investments for next generation technologies including a $4.0 million increase in clinical studies activities, an increase of $2.2 million in personnel related costs due to the expansion of our research and development workforce, an increase of
76
$1.4 million for consulting and other support services, an increase of $1.0 million in design and prototype development costs, and an increase of $0.5 million in other administrative R&D expenses.
Selling, general and administrative expenses
Selling, general and administrative expenses were $29.9 million for the year ended December 31, 2023, compared to $31.6 million for the year ended December 31, 2022, a decrease of $1.7 million. The decrease was primarily the result of a $1.0 million decrease in personnel costs, a $0.8 million decrease in other general and administrative costs to include recruiting and associated employee overhead, local tax expenses, and legal expenses, partially offset by a $0.1 million increase in other selling and marketing costs.
Total other income, net
Total other income, net, was $15.2 million for the year ended December 31, 2023, compared to $210.7 million for the year ended December 31, 2022, a reduction of $195.5 million. The change was primarily due to a $177.6 million reduction in gains on the fair value of derivatives primarily driven by debt settlement and the decrease in our stock price, and a $43.7 million reduction in the gain on fair value of options primarily driven by the decrease in our stock price, partially offset by a $3.5 million increase in interest income, a $7.6 million decrease in interest expense, a $14.1 million gain on exchange of debt, and $0.6 million increase in other income (expense) items, net.
Liquidity and Capital Resources
Since our inception, we have incurred significant net losses and expect to incur additional losses in the near future. We incurred total net (loss) income of ($60.4) million and $142.1 million for the years ended December 31, 2023 and 2022, respectively. Positive net income during 2022 was substantially the result of fair value gains due to embedded derivatives in our convertible notes. As of December 31, 2023, we had an accumulated deficit of $869.3 million. To date, we have financed our operations primarily through sales of our equity securities and debt financings. As of December 31, 2023, we had cash, cash equivalents and marketable securities of $109.5 million.
During 2023, we undertook a number of financing transactions designed to strengthen our balance sheet, including the repayment of our 2023 Notes, the issuance of additional pre-funded warrant to PHC for cash in a private placement, the exchange of our PHC Notes for a newly issued pre-funded warrant, the exchange of a portion of our 2025 Notes for cash and newly issued common stock in a series of private exchanges, the entry into a new term loan facility and the issuance of shares of common stock pursuant to an at the market offering program. These transactions are described in greater detail below.
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” 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.
On September 8, 2023, we entered into a loan agreement (the “Loan and Security Agreement”) with several institutions (collectively, the “Lenders") and Hercules Capital, Inc. (“Hercules”) in its capacity as administrative agent and collateral agent for itself and the Lenders, pursuant to which the Lenders agreed to make available up to $50.0 million in senior secured term loans (the “Term Loan Facility”), consisting of (i) an initial term loan of $25.0 million (the “Tranche 1 Loan”), which was funded on September 8, 2023 and (ii) two additional tranches of term loans in the amounts of up to $10.0 million (the “Tranche 2 Loan”) and $15.0 million (the “Tranche 3 Loan”), respectively, which will become available to us upon our satisfaction of certain terms and conditions set forth in the Loan and Security Agreement. In December 2023, we met the terms and conditions to draw on Tranche 2 Loan and the loan was funded on January 2, 2024 in an amount of $10.0 million. The loans under the Loan and Security Agreement mature on September 1, 2027.
77
On August 10, 2023, we entered into separate, privately negotiated exchange agreements (the “Exchange Agreements”) with a limited number of holders (the “Noteholders”) of our outstanding 5.25% Convertible Senior Notes due 2025 (the “2025 Notes”). Under the terms of the Exchange Agreements, the holders of the 2025 Notes agreed to exchange up to $30.8 million in aggregate principal amount of the 2025 Notes (the “Exchanged Notes”) for a combination of $7.5 million of cash and newly issued shares of common stock. The number of shares issued was determined based upon the volume-weighted average price per share of the common stock during a 15-day averaging period. Based on the volume-weighted average price per share of the common stock during the averaging period, we issued a total of 35.1 million shares of common stock in the exchanges.
In August 2023, we entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Goldman Sachs & Co. LLC (“GS”), 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 $106.6 million through GS as our sales agent in an “at the market” offering, which represented the remaining capacity under our then-existing at the market program with Jefferies LLC, as described below. GS will receive a commission up to 3.0% of the gross proceeds of any common stock sold through GS under the Equity Distribution Agreement. The shares will be offered and sold pursuant to an effective shelf registration statement on Form S-3, which was originally filed with the Securities and Exchange Commission on August 10, 2023. As of the date of this Annual Report on Form 10-K, no sales have been made under the Equity Distribution Agreement.
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 received commissions up to 3.0% of the gross proceeds of any common stock sold through Jefferies under the 2021 Sales Agreement. For the twelve months ending December 31, 2023 and 2022, we received $7.4 million and $34.2 million in net proceeds from the sale of 9,944,663 shares and 15,160,899 shares, respectively, of our common stock under the 2021 Sales Agreement. Effective August 7, 2023, in connection with the transactions described above, we and Jefferies mutually agreed to terminate the 2021 Sales Agreement. At the time of termination, approximately $106.6 million remained available for issuance pursuant to the 2021 Sales Agreement.
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. 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.
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 had 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 “PHC Exchange Warrant”) to purchase up to 68,525,311 shares of common stock. The
78
Exchange Warrant is a “pre-funded” warrant with a nominal exercise price of $0.001 per share. On March 31, 2023 (6:00 am Japan Standard Time on April 1, 2023), the PHC Exchange was consummated, and the Company issued the PHC Exchange Warrant in consideration for the cancellation of the PHC Notes.
Warrants
In connection with certain of our historical financing transactions, we have issued warrants to investors and providers of debt financing, as described below.
On June 30, 2016, we 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 April 24, 2020, we 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, 2030. During the year ended December 31, 2021, the warrant holders exercised 1,750,000 warrants. There were no warrants exercised for the years ended December 31, 2023 or 2022.
On November 9, 2020, we entered into the Equity Line Agreement and issued Energy Capital warrants to purchase up to 10,000,000 shares of our common stock with an exercise price of $0.3951 per share (“Energy Capital Warrants”). The Energy Capital Warrants vested on May 9, 2021. The warrants were recorded within equity based on their fair value of $3.4 million. In February 2022, the Energy Capital Warrants were exercised in full, on a net basis and Energy Capital received 8,917,535 shares of common stock upon the net exercise of the warrants.
On March 13, 2023, we issued to PHC, the Purchase Warrant to purchase 15,425,750 shares of common stock. The Purchase Warrant is a “pre-funded” warrant with a nominal exercise price of $0.001 per Purchase Warrant Share. We received aggregate gross proceeds of $15.0 million, before deducting private placement expenses payable by us. The warrants were recorded in equity based on their fair value of $14.3 million. Because PHC was an existing stockholder of the company at the time of the transaction, the $0.7 million excess of the purchase price over the fair value of the Purchase Warrant was recognized as an equity transaction and recorded as a capital contribution made by PHC to us as additional paid-in-capital. All or any part of the Purchase Warrant shall is exercisable by the holder at any time and from time to time.
In addition, on March 13, 2023, we entered into an exchange agreement with PHC, pursuant to which PHC agreed to exchange $35.0 million aggregate principal amount of the PHC Notes, including all accrued and unpaid interest thereon, for a warrant (the “PHC Exchange Warrant”) to purchase up to 68,525,311 shares of common stock. On March 31, 2023, the exchange was consummated, and we issued the PHC Exchange Warrant in consideration for the cancellation of the PHC Notes. The PHC Exchange Warrant is a “pre-funded” warrant with a nominal exercise price of $0.001 per PHC Exchange Warrant Share. The PHC Exchange Warrant was recorded in equity based on its fair value of $48.6 million.
On September 8, 2023, we entered into the Loan and Security Agreement and issued the Tranche 1 Warrants to acquire an aggregate of 832,362 shares of common stock at an exercise price of $0.6007 per share. The Tranche 1 Warrants may be exercised through the earlier of (i) September 8, 2030 and (ii) the consummation of certain acquisition transactions involving the company, as set forth in the warrant agreement. The Tranche 1 Warrants were recorded in equity based on their fair value of $0.4 million . The number of shares for which the Tranche 1 Warrants are exercisable and the associated exercise price are subject to certain customary proportional adjustments for fundamental events, including stock splits and reverse stock splits, as set forth in the warrant agreement.
On January 2, 2024, we issued the Tranche 2 Warrants to acquire an aggregate of 347,887 shares at an exercise price of $0.5749 per share. The Tranche 2 Warrants may be exercised through the earlier of (i) September 8, 2030 and (ii) the consummation of certain acquisition transactions involving the company, as set forth in the warrant agreement.
79
The number of shares for which the Tranche 1 Warrants are exercisable and the associated exercise price are subject to certain customary proportional adjustments for fundamental events, including stock splits and reverse stock splits, as set forth in the warrant agreement.
Indebtedness
Loan and Security Agreement
On September 8, 2023, we entered into the Loan and Security Agreement with the Lenders and Hercules, pursuant to which the Lenders agreed to make available to us the Term Loan Facility, consisting of (i) an initial Tranche 1 Loan, which was funded in the amount of $25.0 million on the Effective Date and (ii) the Tranche 2 Loan and Tranche 3 Loan, respectively, which would become available to the Company upon our satisfaction of certain terms and conditions set forth in the Loan and Security Agreement. The loans under the Loan and Security Agreement mature on September 1, 2027. In December 2023, we met the terms and conditions to draw on Tranche 2 Loan and the loan was funded on January 2, 2024 in an amount of $10.0 million.
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 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, we repaid the outstanding principal and accrued interest in full.
Convertible Notes
The following table summarizes our outstanding senior convertible note obligations at December 31, 2023:
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
2025 Notes
July 1, 2019
5.25%
$
20.4
January 15, 2025
757.5758
$
1.32
See Note 13 in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report for further discussion of the 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 2024 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 twelve months after issuance of the financial statements. 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.
80
Cash Flows
The following is a summary of cash flows for each of the periods set forth below (in thousands):
Year Ended
December 31,
2023
2022
Net cash used in operating activities
$
(70,163)
$
(66,312)
Net cash provided by investing activities
89,713
26,882
Net cash provided by financing activities
20,366
41,762
Net increase in cash and cash equivalents
$
39,916
$
2,332
Net cash used in operating activities
Net cash used in operating activities was $70.2 million for the year ended December 31, 2023, and consisted of a net loss of $60.4 million, a $14.1 million exchange-related gain, a $6.6 million gain in the fair value of derivatives on convertible notes, and a $4.0 million net change in operating assets and liabilities, partially offset by $8.7 million of stock-based compensation, and $6.3 million related to depreciation/amortization and other non-cash items.
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 extinguishment of options.
Net cash provided by investing activities
Net cash provided by investing activities was $89.7 million for the year ended December 31, 2023, and consisted of $158.6 million from the sale and maturity of marketable securities, offset by $68.5 million from the purchase of marketable securities and $0.4 million of capital expenditures for laboratory equipment and leasehold improvements.
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 provided by financing activities
Net cash provided by financing activities was $20.4 million for the year ended December 31, 2023, and primarily consisted of $7.4 million in proceeds related to the issuance of common stock and the exercise of stock options and warrants, $14.7 million in proceeds from the issuance of the PHC Purchase Warrant, and $24.4 million in net proceeds from borrowings pursuant to the Loan and Security Agreement, partially offset by $15.7 million and $7.5 million in repayment of the 2023 and 2025 notes, respectively, $2.7 million taxes paid related to net share settlement of equity awards, and $0.4 million in debt issuance costs.
Net cash provided by financing activities was $41.8 million for the year ended December 31, 2022, and primarily consisted of $12 million in 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.
81