Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


 

FORM 10-Q

 

 

(Mark One)

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

 

For the Quarterly Period Ended June 30, 2018

or

 

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

For the transition period from ______ to ______

Commission file number: 001-37717


Senseonics Holdings, Inc.

(Exact name of registrant as specified in its charter)


 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

3841
(Primary Standard Industrial
Classification Code Number)

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

 

20451 Seneca Meadows Parkway

Germantown, MD 20876‑7005

(301) 515‑7260

 

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 


 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non‑accelerated filer   ☐
(Do not check if a smaller reporting company)

 

 

 

Smaller reporting company ☐

 

Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

There were 176,026,760 shares of common stock, par value $0.001, outstanding as of August 7, 2018.

 

 

 

 


 

Table of Contents

 

TABLE OF CONTENTS

 

PART I: Financial Information

 

 

 

ITEM 1 : Financial Statements

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 (Unaudited) and December 31, 2017  

2

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for three and six months ended June 30, 2018 and 2017  

3

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017  

4

Notes to Unaudited Condensed Consolidated Financial Statements  

5

 

 

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

19

 

 

ITEM 3 : Quantitative and Qualitative Disclosures about Market Risk

30

 

 

ITEM 4 : Controls and Procedures

30

 

 

 

 

 

 

ITEM 1 : Legal Proceedings

31

 

 

ITEM 1A : Risk Factors

31

 

 

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

32

 

 

ITEM 3 : Defaults Upon Senior Securities

32

 

 

ITEM 4 : Mine Safety Disclosures

32

 

 

ITEM 5 : Other Information

32

 

 

ITEM 6 : Exhibits

33

 

 

SIGNATURES  

34

 

 

 

 

 

 

 

 

 

 

 

 

 

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Senseonics Holdings, Inc.

 

Condensed Consolidated Balance Sheet s

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

    

 

 

    

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

183,928

 

$

16,150

 

Marketable securities

 

 

7,954

 

 

20,300

 

Accounts receivable, primarily from a related party

 

 

2,988

 

 

3,382

 

Inventory, net

 

 

8,400

 

 

2,991

 

Prepaid expenses and other current assets

 

 

4,195

 

 

2,092

 

Total current assets

 

 

207,465

 

 

44,915

 

 

 

 

 

 

 

 

 

Deposits and other assets

 

 

205

 

 

176

 

Property and equipment, net

 

 

998

 

 

853

 

Total assets

 

$

208,668

 

$

45,944

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

5,172

 

$

7,712

 

Accrued expenses and other current liabilities

 

 

9,863

 

 

5,428

 

Notes payable, current portion

 

 

10,000

 

 

10,000

 

Total current liabilities

 

 

25,035

 

 

23,140

 

 

 

 

 

 

 

 

 

Notes payable, net of discount

 

 

9,619

 

 

14,414

 

Convertible senior notes, net of discount

 

 

34,469

 

 

 —

 

Derivative liability

 

 

32,312

 

 

 —

 

Notes payable, accrued interest

 

 

1,444

 

 

1,054

 

Other liabilities

 

 

73

 

 

69

 

Total liabilities

 

 

102,952

 

 

38,677

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value per share; 450,000,000 and 250,000,000 shares authorized, 175,897,790 and 136,882,735 shares issued and outstanding as of June 30, 2018 and December 31, 2017

 

 

177

 

 

137

 

Additional paid-in capital

 

 

424,131

 

 

270,953

 

Accumulated deficit

 

 

(318,592)

 

 

(263,823)

 

Total stockholders' equity

 

 

105,716

 

 

7,267

 

Total liabilities and stockholders’ equity

 

$

208,668

 

$

45,944

 

 

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

 

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Senseonics Holdings, Inc.

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Revenue, primarily from a related party

 

$

3,623

    

$

814

 

$

6,569

    

$

1,367

 

Cost of sales

 

 

3,839

 

 

1,714

 

 

7,147

 

 

2,759

 

Gross profit

 

 

(216)

 

 

(900)

 

 

(578)

 

 

(1,392)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing expenses

 

 

6,177

 

 

1,249

 

 

9,618

 

 

2,389

 

Research and development expenses

 

 

8,289

 

 

5,604

 

 

16,402

 

 

12,602

 

General and administrative expenses

 

 

5,382

 

 

3,888

 

 

9,393

 

 

7,655

 

Operating loss

 

 

(20,064)

 

 

(11,641)

 

 

(35,991)

 

 

(24,038)

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

241

 

 

37

 

 

425

 

 

58

 

Interest expense

 

 

(2,236)

 

 

(767)

 

 

(4,007)

 

 

(1,451)

 

Change in fair value of 2023 derivative

 

 

(10,166)

 

 

 —

 

 

(15,013)

 

 

 —

 

Other expense

 

 

(271)

 

 

(3)

 

 

(183)

 

 

(16)

 

  Total other expense, net

 

 

(12,432)

 

 

(733)

 

 

(18,778)

 

 

(1,409)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(32,496)

 

 

(12,374)

 

 

(54,769)

 

 

(25,447)

 

Total comprehensive loss

 

$

(32,496)

 

$

(12,374)

 

$

(54,769)

 

$

(25,447)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.23)

 

$

(0.12)

 

$

(0.40)

 

$

(0.26)

 

Basic and diluted weighted-average shares outstanding

 

 

138,767,873

 

 

103,689,994

 

 

137,923,135

 

 

98,825,088

 

 

 

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

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Senseonics Holdings, Inc.

 

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2018

    

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(54,769)

 

$

(25,447)

 

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

 

 

 

 

 

 

 

Depreciation expense

 

 

104

 

 

92

 

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

 

 

1,519

 

 

226

 

Change in fair value of derivative liability

 

 

15,012

 

 

 —

 

Stock-based compensation expense

 

 

3,058

 

 

1,719

 

Provision for lower of cost or net realizable value

 

 

202

 

 

263

 

Net realized gain on marketable securities

 

 

(69)

 

 

 —

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

394

 

 

(549)

 

Prepaid expenses and other current assets

 

 

(2,103)

 

 

(197)

 

Inventory

 

 

(5,611)

 

 

(3,169)

 

Deposits and other assets

 

 

(76)

 

 

(36)

 

Accounts payable

 

 

(2,540)

 

 

(88)

 

Accrued expenses and other current liabilities

 

 

4,118

 

 

2,616

 

Accrued interest

 

 

390

 

 

358

 

Deferred rent

 

 

 4

 

 

11

 

Net cash used in operating activities

 

 

(40,367)

 

 

(24,201)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(176)

 

 

(196)

 

Purchases of marketable securities

 

 

(7,935)

 

 

(7,981)

 

Sales and maturities of marketable securities

 

 

20,350

 

 

7,300

 

Net cash provided by (used in) investing activities

 

 

12,239

 

 

(877)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

149,379

 

 

40,343

 

Proceeds from exercise of stock options

 

 

813

 

 

186

 

Proceeds from notes payable, net of costs

 

 

 —

 

 

4,896

 

Proceeds from issuance of warrants

 

 

 —

 

 

104

 

Proceeds from convertible senior notes, net of costs

 

 

50,734

 

 

 —

 

Principal payments of notes payable

 

 

(5,000)

 

 

 —

 

Principal payments under capital lease obligations

 

 

(20)

 

 

(40)

 

Net cash provided by financing activities

 

 

195,906

 

 

45,489

 

Net increase in cash and cash equivalents

 

 

167,778

 

 

20,411

 

Cash and cash equivalents, at beginning of period

 

 

16,150

 

 

13,047

 

Cash and cash equivalents, at end of period

 

$

183,928

 

$

33,458

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

954

 

$

811

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

Common stock offering costs incurred

 

$

282

 

$

 —

 

Convertible debt offering costs incurred

 

$

29

 

$

 —

 

Capital expenditures

 

$

73

 

$

 —

 

 

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

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Senseonics Holdings, Inc.

 

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization

 

Senseonics Holdings, Inc., a Delaware corporation, is a medical technology company focused on the development and commercialization of glucose monitoring products to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy.

 

ASN Technologies, Inc. (“ASN”) was incorporated in Nevada on June 26, 2014. On December 4, 2015, ASN reincorporated in Delaware and changed its name to Senseonics Holdings, Inc. On December 7, 2015, Senseonics Holdings, Inc. acquired 100% of the outstanding capital stock of Senseonics, Incorporated (the "Acquisition"). Senseonics, Incorporated was originally incorporated on October 30, 1996 and commenced operations on January 15, 1997. Senseonics Holdings, Inc. and its wholly-owned subsidiary Senseonics, Incorporated are hereinafter referred to as the “Company” unless the context requires otherwise.

2. Liquidity

 

The Company’s operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, lack of operating history and uncertainty of future profitability. Since inception, the Company has incurred substantial operating losses, principally from expenses associated with the Company’s research and development programs. The Company has not generated significant revenues from the sale of products and its ability to generate revenue and achieve profitability largely depends on the Company’s ability, alone or with others, to complete the development of its products or product candidates, and to obtain necessary regulatory approvals for the manufacture, marketing and sales of those products. These activities will require significant uses of working capital through the remainder of 2018 and beyond.

 

On March 23, 2016, the Company effected the initial closing of its public offering of 15,800,000 shares of its common stock at a price to the public of $2.85 per share (the “March 2016 Offering”). The Company received aggregate net proceeds from the March 2016 Offering, including proceeds from the underwriters’ subsequent partial exercise of their option to purchase additional shares, of $44.8 million. On June 30, 2016, the Company entered into Amended and Restated Loan and Security Agreement with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) resulting in borrowings of an aggregate principal amount of $25.0 million. On June 1, 2017, the Company effected the closing of its offering of 29,078,014 shares of its common stock at a price of $1.41 per share (the “May 2017 Offering”). The Company received aggregate net proceeds from the May 2017 Offering of $40.4 million. On August 23, 2017, the Company effected the closing of its offering of 13,383,125 shares of its common stock at a price of $2.15 per share (the “August 2017 Offering”). The Company received aggregate net proceeds from the August 2017 Offering of $26.5 million. In January 2018, the Company issued $50.0 million in aggregate principal amount of convertible senior subordinated notes, and in February 2018, the Company issued an additional $3.0 million in aggregate principal amount of convertible senior subordinated notes (collectively, the “2023 Notes”) upon the partial exercise of the underwriters’ over-allotment option. On June 28, 2018, the Company effected the closing of its offering of 38,076,561 shares of its common stock at a price of $3.93 per share (the “June 2018 Offering”). The Company received aggregate net proceeds from the June 2018 Offering of $149.1 million. Management has concluded that, based on the Company’s current operating plans, its existing cash, cash equivalents, and marketable securities available for sale will be sufficient to meet the Company’s anticipated operating needs through 2020. Accordingly, management has concluded that the doubt about the Company’s ability to continue as a going concern through March 31, 2019 that existed at May 10, 2018 has been alleviated.

 

Historically, the Company has financed its operating activities through the sale of equity and equity linked securities and the issuance of debt. The Company plans to continue financing its operations with external capital for the foreseeable future. However, the Company may not be able to raise additional funds on acceptable terms, or at all. If the

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Company is unable to secure sufficient capital to fund its research and development and other operating activities, the Company may be required to delay or suspend operations, enter into collaboration agreements with partners that could require the Company to share commercial rights to its products to a greater extent or at earlier stages in the product development process than is currently intended, merge or consolidate with other entities, or liquidate.

 

3. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the Company’s opinion, the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly its financial position, results of operations, and cash flows. The consolidated balance sheet at December 31, 2017, has been derived from audited financial statements as of that date. The interim condensed consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the U.S. Securities and Exchange Commission (“SEC”). The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim condensed consolidated financial statements are read in conjunction with the audited financial statements and notes previously included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but not limited to, inventory valuation, inputs used to value stock-based compensation, recoverability of long-lived assets, fair value of financial instruments, income taxes, depreciable lives of property and equipment, reserves for expected warranty costs, and estimated accruals for clinical and preclinical study costs, which are accrued based on estimates of work performed under contracts. Actual results could differ from those estimates; however management does not believe that such differences would be material.

 

Segment Information

 

Operating segments are defined as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one segment, glucose monitoring products.

 

Comprehensive Loss

 

Comprehensive loss comprises net loss and other changes in equity that are excluded from net loss. For the three and six months ended June 30, 2018 and 2017, the Company’s net loss equaled its comprehensive loss and, accordingly, no additional disclosure is presented.

 

Cash and Cash Equivalents and Concentration of Credit Risk

 

The Company considers highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value.

 

The Company’s cash and cash equivalents potentially subject the Company to credit and liquidity risk. The Company maintains cash deposits at major financial institutions with high credit quality and, at times, the balances of those deposits may exceed the Federal Deposit Insurance Corporation limits of $250,000. The Company has not

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experienced and does not anticipate any losses on deposits with commercial banks and financial institutions that exceed the federally insured amounts.

 

Concentration of Revenues and Customers

 

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

 

During the three and six months ended June 2018 and 2017, the Company derived substantially all of its revenue from two customers. Total revenues from those customers was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2018

    

2017

 

2018

    

2017

 

Roche Diabetes Care (related party)

 

$

3,070

 

$

698

 

$

5,638

 

$

1,163

 

Rubin Medical

 

$

529

 

$

116

 

$

897

 

$

204

 

 

Marketable Securities

 

Marketable securities consist of government and agency securities and corporate debt securities. The Company’s investments are classified as available for sale. Such securities are carried at fair value, with any unrealized holding gains or losses reported, net of any tax effects reported, as accumulated other comprehensive income. Realized gains and losses, and declines in value judged to be other-than-temporary, if any, are included in consolidated results of operations. A decline in the market value of any available for sale security below cost that is deemed to be other-than-temporary results in a reduction in fair value, which is charged to earnings in that period, and a new cost basis for the security is established. Dividend and interest income is recognized when earned. The cost of securities sold is calculated using the specific identification method. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets.

 

Inventory

 

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

   

Accounts Receivable

 

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

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is computed by use of the straight-line method over the estimated useful lives of the assets, which is between three to five years for laboratory equipment, between five to seven years for office furniture and equipment, and the shorter of lease term or useful life for leasehold improvements. Upon disposition of the assets, the costs and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. Repairs and maintenance costs are included as expense in the accompanying statement of operations.

 

Management reviews property and equipment for impairment whenever events or changes in circumstances

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indicate that the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Management did not identify any indicators of impairment through June 30, 2018.

 

Derivative Financial Instruments

 

In connection with the Company’s issuance of the 2023 Notes in January 2018, the Company bifurcated the embedded conversion option, along with the interest make-whole provision and make-whole fundamental change provision, and recorded the embedded conversion option as a derivative liability in the Company’s consolidated balance sheets in accordance with Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging . The financial instrument is remeasured at the end of each reporting period with changes in fair value recorded in the consolidated statements of operations in other income (expense) as change in fair value of 2023 derivative.

 

Warranty Reserve

 

The Company may replace Eversense system components that do not function in accordance with the product specifications. Estimated replacement costs associated with a product are recorded at the time of shipment. The Company estimates future replacement costs by analyzing historical replacement experience for the timing and amount of returned product, and the Company evaluates the reserve quarterly and makes adjustments when appropriate.

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers , using the full retrospective transition method. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

The Company generates product revenue from sales of the Eversense system and related components and supplies at a fixed price to third-party distributors (the “Customers”) who resell the products to health care providers and patients in the European Union. The Company is paid for its sales directly to the Customers, regardless of whether or not the Customers resell the products to health care providers and patients.

 

Revenues from product sales are recognized when the Customers obtain control of the Company’s product, which occurs at a point in time, based upon the delivery terms as defined in the distributor agreement. The Company is typically paid within 60 days of invoicing subsequent to the Customers obtaining control of the Company’s product.

 

The Company offers no discounts, rebates, rights of return, or other allowances to the Customers which would result in the establishment of reserves against product revenue. Additionally, to date, the Company has not incurred incremental costs in obtaining a Customer contract.

 

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Cost of Sales

 

The Company uses third-party contract manufacturers to manufacture Eversense and related components and supplies. Cost of sales includes raw materials, contract manufacturing service fees, reserves for expected warranty costs, reserves for inventory valuation, scrap, and shipping and handling expenses associated with product delivery.

 

Shipping and Handling Expenses

 

Shipping and handling expenses associated with product delivery are included within cost of sales in the Company’s consolidated statements of operations.

 

Research and Development Costs

 

Research and development costs are expensed as incurred. Research and development expenses include costs related to employee compensation, preclinical studies and clinical trials, supplies, outsource testing, consulting and depreciation and other facilities‑related expenses.

 

Stock‑Based Compensation

 

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

 

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

 

Under ASC Topic 718, the cumulative amount of compensation cost recognized for instruments classified as equity that ordinarily would result in a future tax deduction under existing tax law shall be considered to be a deductible difference in applying ASC Topic 740, Income Taxes . The deductible temporary difference is based on the compensation cost recognized for financial reporting purposes; however, these provisions currently do not impact the Company, as all the deferred tax assets have a full valuation allowance.

 

Since the Company had net operating loss (“NOL”) carryforwards as of June 30, 2018, no excess tax benefits for the tax deductions related to stock-based awards were recognized in the statements of operations and comprehensive loss.

 

Income Taxes

 

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

 

Management uses a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return, as well as guidance on derecognition, classification, interest and penalties and financial statement reporting disclosures. For those benefits to be recognized, a

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tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. In the ordinary course of business, transactions occur for which the ultimate outcome may be uncertain. Management does not expect the outcome related to accrued uncertain tax provisions to have a material adverse effect on the Company’s financial position, results of operations or cash flows.  The Company recognizes interest and penalties accrued on any unrecognized tax exposures as a component of income tax expense. The Company did not have any amounts accrued relating to interest and penalties as of June 30, 2018 and December 31, 2017.

 

The Company is subject to taxation in various jurisdictions in the United States and remains subject to examination by taxing jurisdictions for the year 1998 and all subsequent periods due to the availability of NOL carryforwards. In addition, all of the NOLs and research and development credit carryforwards that may be used in future years are still subject to adjustment.

 

Fair Value of Financial Instruments

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of their short maturities. The Company’s term notes and 2023 Notes are recorded at historical cost, net of discounts, and are not remeasured at fair value.

 

Net Loss per Share

 

Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.

 

For periods of net loss, diluted net loss per share is calculated similarly to basic loss per share because the impact of all potential common shares is anti-dilutive. At June 30, 2018 and 2017, the total number of anti-dilutive shares, consisting of common stock options, stock purchase warrants, and the 2023 Notes using the if-converted method, which have been excluded from the computation of diluted loss per share, were as follows:

 

 

 

 

 

 

 

 

 

June 30,

 

 

    

2018

    

2017

 

Stock-based awards

 

21,305,247

 

15,348,333

 

2023 Notes

 

15,499,998

 

 —

 

Warrants

 

4,082,544

 

4,570,902

 

Total anti-dilutive shares outstanding

 

40,887,789

 

19,919,235

 

 

For periods of net income, and when the effects are not anti-dilutive, diluted earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the impact of all potential dilutive common shares, consisting primarily of common stock options and stock purchase warrants using the treasury stock method, and the 2023 Notes using the if-converted method.

 

Recent Accounting Pronouncements

 

Recently Adopted

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, which amends the guidance for accounting for revenue from contracts with customers. This ASU supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition , and creates a new ASC Topic 606, Revenue from Contracts with Customers . In 2015 and 2016, the FASB issued additional ASUs related to ASC Topic 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identifying performance obligations, and licensing, and they include other improvements and practical expedients. The Company adopted this new standard on January 1, 2018 using the full retrospective transition method. The adoption of the new standard did not materially impact the amounts reported in the Company’s consolidated financial statements and there were no other significant changes impacting the timing or measurement of revenues or the Company’s business process and controls.

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In August 2016, the FASB issued ASU 2016-15, guidance on the classification of certain cash receipts and cash payments in the statements of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees.  The Company adopted this new standard on January 1, 2018 on a retrospective basis. The adoption of the new standard did not impact the amounts reported in the Company’s consolidated statements of cash flows.

 

Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, guidance for accounting for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing arrangements. In July 2018, the FASB issued ASU 2018-11 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. The guidance is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. The Company plans to adopt the guidance on January 1, 2019. The Company is in the process of reviewing of its lease agreements and evaluating the impact of the lease guidance on the Company’s consolidated financial statements. The Company anticipates recording additional assets and corresponding liabilities on its consolidated balances sheets related to operating leases within its lease portfolio upon adoption of the guidance.

 

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

 

 

4.  Marketable Securities

 

Marketable securities available for sale, consisting of government and agency securities and corporate debt securities, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Market

 

 

    

Cost

    

Gains

    

Losses

    

Value

 

Corporate debt securities

 

$

7,954

 

$

 —

 

$

 —

 

$

7,954

 

Total

 

$

7,954

 

$

 —

 

$

 —

 

$

7,954

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Market

 

 

  

Cost

    

Gains

    

Losses

    

Value

 

Government and agency securities

 

$

5,990

 

$

 —

 

$

 —

 

$

5,990

 

Corporate debt securities

 

 

14,310

 

 

 —

 

 

 —

 

 

14,310

 

Total

 

$

20,300

 

$

 —

 

$

 —

 

$

20,300

 

 

 

5.  Inventory, net

 

Inventory, net consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2018

    

2017

 

Finished goods

    

$

401

    

$

375

 

Work-in-process

 

 

7,065

 

 

2,150

 

Raw materials

 

 

934

 

 

466

 

Total

 

$

8,400

 

$

2,991

 

 

 

 

 

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6.  Prepaid Expenses and Other Current Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2018

    

2017

 

Contract manufacturing

 

$

2,920

 

$

1,601

 

Clinical and preclinical

    

 

37

    

 

35

 

Marketing

 

 

594

 

 

93

 

Software

 

 

150

 

 

214

 

Insurance

 

 

199

 

 

77

 

Other

 

 

295

 

 

72

 

Total prepaid expenses and other current assets

 

$

4,195

 

$

2,092

 

 

 

 

 

 

 

 

 

7. Accrued Expenses and Other Current Liabilities

 

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

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2018

    

2017

 

Contract manufacturing

 

$

3,439

 

$

1,209

 

Compensation and benefits

 

 

2,376

 

 

2,209

 

Product warranty

 

 

403

 

 

813

 

Legal

 

 

577

 

 

627

 

Interest on notes payable and 2023 Notes

 

 

1,302

 

 

180

 

Audit and tax related

 

 

373

 

 

315

 

Clinical and preclinical

    

 

159

    

 

55

 

Other

 

 

1,234

 

 

20

 

Total accrued expenses and other current liabilities

 

$

9,863

 

$

5,428

 

 

 

8. Commitments and Contingencies

 

The Company leases approximately 33,000 square feet of research and office space under a non‑cancelable operating lease expiring in 2023. The Company has an option to renew the lease for one additional five‑year term. Additionally, the Company leases approximately 12,000 square feet of office space under a cancelable operating lease expiring in December 2018. The Company can terminate the lease agreement upon 60 days’ prior written notice. The Company has an option to renew the lease for three additional two-month terms. Expense recognition is based upon a straight‑line basis and was $0.2 million for each of the three months ended June 30, 2018 and 2017 and $0.3 million for each of the six months ended June 30, 2018 and 2017.

 

 

On March 31, 2016, the Company amended a corporate development agreement with a supplier to include a minimum purchase commitment per year. Total research and development expense related to the minimum payment was $0.2 million and $0.5 million for the three months ended June 30, 2018 and 2017, respectively, and $0.5 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively. There were approximately $0.6 million of future minimum payments under this commitment at June 30, 2018.

9 . 401 (k) Plan

 

The Company has a defined contribution 401(k) plan available to all full-time employees. Employee contributions are voluntary and are determined on an individual basis subject to the maximum allowable under federal income tax regulations. Participants are fully vested in their contributions. There have been no employer contributions to

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this plan. Administrative expenses for the plan, which are paid by the Company, were not material in the three or six months ended June 30, 2018 or 2017.

 

 

10. Notes Payable

 

Convertible Senior Notes

 

In January 2018, the Company issued $50.0 million in aggregate principal amount of the 2023 Notes. In February 2018, the Company issued an additional $3.0 million in aggregate principal amount of the 2023 Notes, pursuant to the partial exercise of the overallotment option by the underwriter. The net proceeds from the issuance of the 2023 Notes, after deducting transaction costs, were $50.7 million. The 2023 Notes are general, unsecured, senior subordinated obligations of the Company. The Company pays interest semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2018. As the 2023 Notes have a maturity date of February 1, 2023, they are classified as a long-term liability on the Company’s consolidated balance sheet at June 30, 2018.

 

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

 

In accordance with GAAP relating to embedded conversion features, the Company bifurcated the embedded conversion option, along with the interest make-whole provision and make-whole fundamental change provision, and in January 2018 recorded the embedded conversion option as a debt discount and derivative liability in the Company’s consolidated balance sheets at its initial fair value of $17.3 million. Additionally, the Company incurred transaction costs of $2.2 million. The debt discount, embedded conversion option and transaction costs, are being amortized to interest expense over the term of the 2023 Notes at an effective interest rate of 9.30%. 

 

The derivative liability will be remeasured at each reporting period with changes in fair value recorded in the consolidated statements of operations in other income (expense).

 

In the second quarter of 2018, the Company issued 73,529 shares of common stock upon the conversion of $250,000 in aggregate principal amount of the 2023 Notes.

 

Term Notes Payable

 

On June 30, 2016, the Company entered into an Amended and Restated Loan and Security Agreement with Oxford and SVB (the “Lenders”). Pursuant to the Amended and Restated Loan and Security Agreement, the Company has borrowed an aggregate principal amount of $25.0 million in the following three tranches: $15.0 million (“Tranche 1 Term Loan”); $5.0 million (“Tranche 2 Term Loan”); and $5.0 million (“Tranche 3 Term Loan”) (each, a “Term Loan,” and collectively, the “Term Loans”). The funding conditions for the Tranche 1 Term Loan were satisfied as of June 30, 2016. Therefore, the Company issued secured notes to the Lenders for aggregate gross proceeds of $15.0 million (the “Notes”) on June 30, 2016. The Company used approximately $11.0 million from the proceeds from the Notes to repay the outstanding balance under the Company’s previously existing Loan and Security Agreement with Oxford. The Company borrowed the Tranche 2 Term Loan in November 2016 upon the Lenders’ confirmation that the Company received positive data in its U.S. pivotal trial of Eversense, and the Company submitted a pre-market approval (“PMA”) application for Eversense in the United States with the FDA. The Company borrowed the Tranche 3 Term Loan in March 2017 upon completion of the first commercial sale of its second-generation transmitter in the European Union.

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The maturity date for all Term Loans is June 1, 2020 (the “Maturity Date”).

 

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

 

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

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

 

Pursuant to the Amended and Restated Loan and Security Agreement, the Company also issued 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 (see Note 11, “Stockholders’ Equity”).

 

The Notes are collateralized by all of the Company’s consolidated assets. The Notes also contain certain restrictive covenants that limit the Company’s ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions, as well as financial reporting requirements. The Company incurred issuance costs related to the Notes of approximately $0.6 million that are being amortized as additional interest expense over the term of the Notes using the effective interest method. The fair value of the stock purchase warrants, which was estimated to be $0.5 million, was recorded as a discount to the Notes, which is also being amortized as additional interest expense over the term of the Notes using the effective interest method.

 

At maturity (or earlier prepayment), the Company is also required to make a final payment equal to 9.00% of the aggregate principal balances of the funded Term Loans. This fee is being accrued as additional interest expense over the term of the Notes using the effective interest method. At June 30, 2018 and December 31, 2017, the final payment fee accrual was $1.4 million and $1.1 million, respectively.

 

The following are the scheduled maturities of the 2023 Notes and Term Loans as of June 30, 2018 (in thousands):

 

 

 

 

 

 

2018 (remaining six months)

    

$

5,000

 

2019

 

 

10,000

 

2020

 

 

5,000

 

2021

 

 

 —

 

2022

 

 

 —

 

After 2022

 

 

52,700

 

Total

    

$

72,700

 

 

   

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The Company estimates the fair value of the term notes based on borrowing rates currently available for loans with similar terms (Level 2). The Company believes that the fair value of its term notes approximate their carrying value. The Company estimates the fair value of the 2023 Notes using commonly accepted valuation methodologies and market-risk measurements that are indirectly observable, such as credit risk (Level 2). At June 30, 2018, the fair value of the 2023 Notes, excluding the derivative liability, was $42.5 million.

 

 

11. Stockholders’ Equity

 

Preferred Stock

 

As of June 30, 2018 and December 31, 2017, the Company’s authorized capital stock included 5,000,000 shares of undesignated preferred stock, par value $0.001 per share. No shares of preferred stock were outstanding as of June 30, 2018 or December 31, 2017.

 

Common Stock

 

As of June 30, 2018 and December 31, 2017, the Company’s authorized capital stock included 450,000,000 and 250,000,000 shares of common stock, respectively, par value $0.001 per share. The Company had 175,897,790 and 136,882,735 shares of common stock issued and outstanding at June 30, 2018 and December 31, 2017, respectively.

 

Stock Purchase Warrants

 

In connection with the issuance of the Notes, the Company also 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. The cumulative fair value of the warrants, which the Company estimated to be $0.5 million, was recorded as a discount to the Notes. These warrants expire on June 30, 2026, November 22, 2026, and March 29, 2027, respectively, and are classified in equity. In connection with the Company’s original Loan and Security Agreement with Oxford in 2014, the Company issued to Oxford 10-year stock purchase warrants to purchase an aggregate of 167,570 shares of common stock at an exercise price of $1.79 per share. The fair value of the warrants, which the Company estimated to be $0.2 million, was recorded as a discount to the promissory notes issued to Oxford in connection with the original Loan and Security Agreement. These warrants expire on November 2, 2020, July 14, 2021 and August 19, 2021, and are classified in equity. The unamortized deferred financing fees and debt discount related to the notes rollover amount will be amortized along with the deferred financing costs and the discount created by the new issuance of the warrants over the term of the loan using the effective interest method. For each of the three and six months ended June 30, 2018 and 2017, the Company recorded amortization of discount of debt of $0.1 million within interest expense in the accompanying statements of operations and comprehensive loss.

 

Stock‑Based Compensation

 

In December 2015, the Company adopted the 2015 Equity Incentive Plan (the “2015 Plan”) under which incentive stock options, non-qualified stock options, and restricted stock awards may be granted to the Company’s employees and certain other persons in accordance with the 2015 Plan provisions. In connection with the March 2016 Offering, the Company’s board of directors adopted and the Company’s stockholders approved an Amended and Restated 2015 Equity Incentive Plan (the “amended and restated 2015 Plan”). The amended and restated 2015 Plan became effective as of the date of the pricing of the March 2016 Offering. The Company’s board of directors may terminate the amended and restated 2015 Plan at any time. Options granted under the amended and restated 2015 Plan expire ten years after the date of grant.

 

Pursuant to the amended and restated 2015 Plan, the number of shares initially reserved for issuance pursuant to equity awards was 17,251,115 shares, representing 8,000,000 shares plus up to an additional 9,251,115 shares in the event that options that were outstanding under the Company’s equity incentive plans as of February 16, 2016 expire or otherwise terminate without having been exercised (in such case, the shares not acquired will revert to and become available for issuance under the amended and restated 2015 Plan). The number of shares of the Company’s common stock reserved for issuance under the amended and restated 2015 Plan will automatically increase on January 1 of each

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year, beginning on January 1, 2017 and ending on January 1, 2026, by 3.5% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Company’s board of directors. As of June 30, 2018, 1,906,380 shares remained available for grant under the amended and restated 2015 Plan.

 

On May 8, 1997, the Company adopted the 1997 Stock Option Plan (the “1997 Plan”), under which incentive stock options, non‑qualified stock options, and restricted stock awards may be granted to the Company’s employees and certain other persons in accordance with the 1997 Plan provisions. Approximately 7,844,281 shares of the Company’s common stock underlying options have vested or are expected to vest under the 1997 Plan. Upon the effectiveness of the 2015 Plan, the Company no longer grants any awards under the 1997 Plan.

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

12. Fair Value Measurements

 

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use to price the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

·

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

·

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

·

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

 

The Company classifies money market funds within Level 1 in the fair value hierarchy because the Company uses quoted prices in active markets. The Company classifies government agency securities and corporate debt securities within Level 2 in the fair value hierarchy because the Company uses pricing sources utilizing market observable inputs to determine fair value. The Company values the embedded conversion option through a Monte Carlo analysis utilizing future stock prices modeled using geometric Brownian motion; option pricing models utilizing using inputs such as the Company’s stock price, volatility of the Company’s common stock and guideline public companies, dividend yield, and risk-free rate; and management assumptions concerning the likelihood of the occurrence of certain corporate events.

 

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The Company has segregated its financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.

 

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The following table represents the fair value hierarchy of the Company’s financial assets and liabilities measured at fair value on a recurring basis as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

   

Total

   

Level 1

   

Level 2

   

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

14,218

 

$

14,218

 

$

 —

 

$

 —

 

Corporate debt securities

 

 

7,954

 

 

 —

 

 

7,954

 

 

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Embedded conversion option

 

 

32,312

 

 

 —

 

 

 —

 

 

32,312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

   

Total

   

Level 1

   

Level 2

   

Level 3

 

Money market funds

 

$

4,706

 

$

4,706

 

$

 —

 

$

 —

 

Government and agency securities

 

 

7,987

 

 

 —

 

 

7,987

 

 

 —

 

Corporate debt securities

 

 

17,708

 

 

 —

 

 

17,708

 

 

 —

 

 

 

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

 

 

 

 

 

 

 

Embedded

 

 

Conversion

 

   

Option

December 31, 2017

 

$

 —

Issuance of the 2023 Notes

 

 

17,300

Change in fair value included in other income (expense)

 

 

15,012

June 30, 2018

 

$

32,312

 

The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain financial instruments within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended June 30, 2018 and 2017. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.

 

Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

 

The Company has no financial assets and liabilities that are measured at fair value on a non-recurring basis.

 

Non-Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The Company has no non-financial assets and liabilities that are measured at fair value on a recurring basis.

 

Non‑Financial Assets and Liabilities Measured at Fair Value on a Non‑Recurring Basis

 

The Company measures its long‑lived assets, including property and equipment, at fair value on a non‑recurring basis. These assets are recognized at fair value when they are deemed to be impaired. No such fair value impairment was recognized in the three and six months ended June 30, 2018 and 2017.

13. Income Taxes

 

The Company has not recorded any tax provision or benefit for the three and six months ended June 30, 2018 or June 30, 2017. The Company has provided a valuation allowance for the full amount of its net deferred tax assets since

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realization of any future benefit from deductible temporary differences, NOL carryforwards and research and development credits is not more-likely-than-not to be realized at June 30, 2018 and December 31, 2017.

On December 22, 2017, the Tax Cuts and Jobs Acts was enacted into law. The new legislation contains several key tax provisions that will impact the Company, including the reduction of the corporate income tax rate to 21% effective January 1, 2018. The new legislation also includes a variety of other changes, such as a one-time repatriation tax on accumulated foreign earnings, a limitation on the tax deductibility of interest expense, acceleration of business asset expensing, and reduction in the amount of executive pay that could qualify as a tax deduction, among others. The lower corporate income tax rate required the Company to remeasure its U.S. deferred tax assets and liabilities as well as reassess the realizability of its deferred tax assets and liabilities. ASC Topic 740 requires the Company to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff has issued Staff Accounting Bulletin No. 118 which allows the Company to record provisional amounts during a measurement period which is similar to the measurement period used when accounting for business combinations. While no adjustments has been made in the current period, the Company will continue to assess the impact of the recently enacted tax law on its business and financial statements and will reflect the provisional impact of the tax law change in the period when such analysis is complete.

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those described below and elsewhere in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K, particularly in Part I – Item 1A, “Risk Factors,” and our other filings with the Securities and Exchange Commission. Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes for the year ended December 31, 2017, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2018. Unless otherwise indicated or the context otherwise requires, all references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section to the "Company," "we," "our," "ours," "us" or similar terms refer to Senseonics Holdings, Inc. and its subsidiaries.

 

Overview

 

We are a medical technology company focused on the development and commercialization of glucose monitoring products to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy. Our continuous glucose monitoring, or CGM, systems, Eversense and Eversense XL, are reliable, long‑term, implantable CGM systems that we have designed to continually and accurately measure glucose levels in people with diabetes for a period of up to 90 and 180 days, respectively, as compared to six to fourteen days for currently available CGM systems. We believe Eversense and Eversense XL will provide people with diabetes a more convenient method to monitor their glucose levels in comparison to the traditional method of self‑monitoring of blood glucose, or SMBG, as well as currently available CGM systems. In our U.S. pivotal clinical trial, we observed that Eversense measured glucose levels over 90 days with a degree of accuracy superior to that of currently available CGM systems. On June 21, 2018, our Eversense System received approval from the U.S. Food and Drug Administration, or FDA, for marketing in the United States and we have begun distributing Eversense through our direct sales force in the United States. Eversense and Eversense XL are approved for sale in Europe/Middle East and Africa (EMEA).

 

Recent Developments

 

On June 28, 2018, we effected the closing of a public offering of 38,076,561 shares of our common stock at a price of $3.93 per share, or the June 2018 Offering. We received aggregate net proceeds from the June 2018 Offering of $149.1 million.

European Development and Commercialization of Eversense

In May 2016, we received our CE Mark for Eversense, which allows us to market and sell Eversense in Europe. In connection with our CE Mark, we have agreed to conduct post-market surveillance activities. In June 2016, we commenced commercialization of Eversense in Sweden through our exclusive distribution agreement with Rubin Medical, or Rubin, which also has the right to distribute Eversense in Norway and Denmark. Rubin markets and sells medical products for diabetes treatment in the Scandinavian region.

 

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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 which we granted Roche the exclusive right to market, sell and distribute Eversense in Germany, Italy and the Netherlands .   In November 2016, we entered into an amendment to the distribution agreement granting Roche the exclusive right to market, sell and distribute Eversense in Europe, the Middle East and Africa, excluding Sweden, Norway, Denmark, Finland and Israel.  Roche is a pioneer in the development of blood glucose monitoring systems and a global leader for diabetes management systems and services. We began distributing Eversense through Roche in Germany in September 2016 and in Italy and the Netherlands in the fourth quarter of 2016. To date, we have begun distributing Eversense in an aggregate of 14 countries through Rubin and Roche.

 

In September 2017, we received the CE Mark for Eversense XL, which is indicated for a sensor life of up to 180 days. Eversense XL began commercialization in Europe in the fourth quarter of 2017. In February 2018 we received approval to market Eversense NOW, which is an application designed to remotely monitor the Eversense users’ CGM data in real time.

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. We also observed a MARD of 9.5% utilizing one calibration point 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 March 29, 2018, we had a meeting with the FDA Clinical Chemistry and Clinical Toxicology Devices Panel, during which the panel voted that the Eversense benefits outweighed the risks by a count of 8 to 0. The panel also voted 8 to 0 in favor of the safety and 8 to 0 in favor of the efficacy of Eversense. On June 21, 2018, we received PMA approval from the FDA for the Eversense System. We have begun 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. We intend to pursue a Category I CPT code in the future.

 

Pediatric Development

 

On June 22, 2018, third party researchers presented data from a clinical trial evaluating the performance of Eversense XL for up to 180 days in pediatrics aged 12 and over and adults with diabetes at the American Diabetes Association's 78th Scientific Sessions. In this prospective, unblinded, single-arm, single-center trial conducted by LMC Diabetes & Endocrinology in Canada, 30 children and six adults with diabetes were evaluated on the accuracy and safety of the Eversense XL CGM System through the 180-day trial duration. When referenced against a lab analyzer, the findings demonstrated the accuracy of Eversense XL (MARD of 9.4%, 15/15% metric of 83%, and 99.6% of consensus error grid data in zones A and B). Trial participants also generally expressed an overall favorable rating of the system. No serious adverse events related to the insertion/removal of the sensor or device were reported. We believe the observations from this study could potentially help inform the design of our future pediatric clinical trials.

 

We have never been profitable and our net losses were $32.5 million and $12.4 million for three months ended June 30, 2018 and 2017, respectively, and $54.8 million and $25.4 million for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, our accumulated deficit totaled $318.6 million, primarily as a result of expenses incurred in connection with our research and development programs and from general and administrative expenses associated with our operations. We expect to continue to incur significant expenses and increasing operations and net losses for the foreseeable future.

 

We have incurred and expect to continue to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. In addition, we expect that our expenses will increase substantially as we continue the research and development of our other products and maintain, expand and protect our intellectual property portfolio and seek regulatory approvals in other jurisdictions. Furthermore, we expect to continue to incur

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additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. We will need to obtain substantial additional funding in connection with our continuing operations through public or private equity or debt financings or other sources, which may include collaborations with third parties. However, we may be unable to raise additional funds when needed on favorable terms or at all. Our failure to raise such capital as and when needed would have a material and adverse impact on our financial condition and our ability to develop and commercialize Eversense and future products and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so.

 

Financial Overview

 

Revenue

 

During the three and six months ended June 30, 2018, we generated product revenue from sales of the Eversense and Eversense XL system in Europe pursuant to distribution agreements with Roche and Rubin, and we expect to begin marketing Eversense and Eversense XL in additional countries throughout the remainder of 2018. We have begun distributing the Eversense System directly in the United States through our own direct sales and marketing organization. We expect our revenue from product sales will increase as we ramp up our commercialization efforts through the remainder of 2018 and into 2019. If we fail to successfully commercialize Eversense or if we are unable to successfully complete the development of future generations of Eversense, our ability to generate future revenue, and our results of operations and financial position, will be adversely affected.

 

Cost of Sales

 

We utilize contract manufacturers to produce the Eversense system. Cost of sales consists primarily of the components of the Eversense system and assembly, as well as reserves for warranty costs. Other cost of sales includes distribution-related expenses such as logistics and shipping costs of Eversense to Roche and Rubin for distribution in various regions in Europe, the Middle East and Africa. We calculate gross margin as revenue less costs of sales divided by revenue. We expect our overall gross margin to improve over the long term, as our sales increase and we have more opportunities to spread our costs over larger production volumes. However, our gross margins may fluctuate from period to period.

 

Sales and Marketing

 

Sales and marketing expenses consist primarily of salaries and other related costs, including stock‑based compensation, for personnel who perform sales and marketing functions. Other significant costs include promotional materials and tradeshow expenses.

 

We anticipate that our sales and marketing expenses will increase in the future as we continue to expand our commercialization of Eversense.

 

Research and Development

 

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

 

We have incurred significant research and development expenses from inception, with the substantial majority of the expenses spent on the development of Eversense. We expect to continue to commit significant resources to continue to develop Eversense and future product enhancements and to conduct ongoing and future clinical trials. We expect that our overall research and development expenses will continue to increase in absolute dollars, but to decline as a percentage of total expenses as we expand the commercialization of Eversense.

 

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General and Administrative

 

General and administrative expenses consist primarily of salaries and other related costs, including stock‑based compensation, for personnel in our executive, finance, accounting, business development, and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

 

Our general and administrative expenses have increased, and we expect them to continue to increase in the future, as a result of operating as a public company. These increases include increased costs related to the hiring of additional personnel and increased fees to outside consultants, lawyers and accountants as well as expenses related to maintaining compliance with NYSE American listing rules and SEC requirements, insurance, and investor relations costs. These expenses may further increase when we no longer qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, which will require us to comply with certain reporting requirements from which we are currently exempt.

 

Other Income (Expense), Net

 

Other income (expense) primarily consists of the change in the fair value of the 2023 derivative, which represents the value of the embedded conversion option within our convertible senior subordinated notes due 2023. This financial instrument is remeasured at the end of each reporting period with changes in fair value recorded in other income (expense). Interest income consists of interest earned on our cash equivalents and interest expense primarily consists of the interest expense on the secured notes, or the Notes, we issued to Oxford Finance LLC, or Oxford, in connection with our original Loan and Security Agreement in July and December 2014 and the Notes we issued to Oxford and Silicon Valley Bank, or SVB, in connection with our Amended and Restated Loan and Security Agreement in June 2016, November 2016 and March 2017. We refer to Oxford and SVB together as the Lenders. This interest expense primarily consists of (i) contractual interest on the Notes, (ii) amortization of debt discount related to warrants, or the warrants, that we issued to the Lenders in connection with the Notes, and (iii) the accrual into interest expense of a final payment obligation that we are required to pay to the Lenders at maturity of the Notes.

 

Results of Operations

 

Comparison of the three months ended June 30, 2018 and 2017

 

The following table sets forth our results of operations for the three months ended June 30, 2018 and 2017 (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

June 30, 

 

Period-to-

 

 

 

2018

 

2017

 

Period Change

 

 

 

(in thousands)

 

 

 

 

Revenue, primarily from a related party

    

$

3,623

    

$

814

    

$

2,809

 

Cost of sales

 

 

3,839

 

 

1,714

 

 

2,125

 

Gross profit

 

 

(216)

 

 

(900)

 

 

684

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

Sales and marketing expenses

 

 

6,177

 

 

1,249

 

 

4,928

 

Research and development expenses

 

 

8,289

 

 

5,604

 

 

2,685

 

General and administrative expenses

 

 

5,382

 

 

3,888

 

 

1,494

 

Operating loss

 

 

(20,064)

 

 

(11,641)

 

 

(8,423)

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

241

 

 

37

 

 

204

 

Interest expense

 

 

(2,236)

 

 

(767)

 

 

(1,469)

 

Change in fair value of 2023 derivative

 

 

(10,166)

 

 

 —

 

 

(10,166)

 

Other expense

 

 

(271)

 

 

(3)

 

 

(268)

 

Total other expense, net

 

 

(12,432)

 

 

(733)

 

 

(11,699)

 

Net loss

 

$

(32,496)

 

$

(12,374)

 

$

(20,122)

 

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Revenue

 

Our revenue increased to $3.6 million for the three months ended June 30, 2018, compared to $0.8 million for the three months ended June 30, 2017. This increase was due to increased demand of Eversense from Rubin and Roche for distribution in Europe during the three months ended June 30, 2018.

 

Cost of sales

 

Our cost of sales increased to $3.8 million for the three months ended June 30, 2018, compared to $1.7 million for the three months ended June 30, 2017. This increase was due to increased sales of Eversense to Roche and Rubin for distribution in Europe during the three months ended June 30, 2018.

 

Our gross profit was $(0.2) million and $(0.9) million for the three months ended June 30, 2018 and 2017, respectively. Gross profit as a percentage of revenue, or gross margin, was (6)% and (111)% in the three months ended June 30, 2018 and 2017, respectively.

 

Sales and marketing expenses

 

Sales and marketing expenses were $6.2 million for the three months ended June 30, 2018, compared to $1.3 million for the three months ended June 30, 2017, an increase of $4.9 million. The $4.9 million increase was primarily due to a $2.6 million increase in salaries, bonuses and payroll related costs for additional headcount, an increase in market research and marketing costs of $1.7 million in preparation of the U.S. launch of Eversense, and an increase of $0.6 million in other sales and general marketing expenses to support our European distribution of Eversense as well as in preparation for our U.S. launch of Eversense.

 

Research and development expenses

 

Research and development expenses were $8.3 million for the three months ended June 30, 2018, compared to $5.6 million for the three months ended June 30, 2017, an increase of $2.7 million. The increase of $2.7 million was primarily due to a $1.0 million increase in salaries, bonuses and payroll related costs for additional headcount, and an increase of $1.7 million for research and development expenses related to the development of future generations of Eversense.

 

General and administrative expenses

 

General and administrative expenses were $5.4 million for the three months ended June 30, 2018, compared to $3.9 million for the three months ended June 30, 2017, an increase of $1.5 million. The increase was primarily due to a $0.9 million increase in salaries, bonuses and payroll related costs for additional headcount, and an increase of $0.6 million in other general and administrative costs to support our operations.

 

Total other expense, net

 

Total other expense, net, was $12.4 million for the three months ended June 30, 2018, compared to $0.7 million for the three months ended June 30, 2017, an increase of $11.7 million. The increase was primarily due to a $10.2 million change in fair value of the derivative liability and interest expense on our Term Loans and 2023 Notes described below in “Liquidity and Capital Resources.”

 

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Comparison of the six months ended June 30, 2018 and 2017

 

The following table sets forth our results of operations for the six months ended June 30, 2018 and 2017 (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

June 30, 

 

Period-to-

 

 

 

2018

 

2017

 

Period Change

 

 

 

(unaudited)

 

 

 

 

Revenue, primarily from a related party

    

$

6,569

    

$

1,367

    

$

5,202

 

Cost of sales

 

 

7,147

 

 

2,759

 

 

4,388

 

Gross profit

 

 

(578)

 

 

(1,392)

 

 

814

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

Sales and marketing expenses

 

 

9,618

 

 

2,389

 

 

7,229

 

Research and development expenses

 

 

16,402