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 September 30, 2020
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
|
3841
|
47-1210911
|
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)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
|
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
|
Common Stock, $0.001 par value |
SENS |
NYSE American |
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 every Interactive Data File required to be submitted 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 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 |
☐ |
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 245,666,611 shares of common stock, par value $0.001, outstanding as of November 4, 2020.
TABLE OF CONTENTS
|
PART I: Financial Information |
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Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019 |
3 |
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4 |
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5 |
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6 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
7 |
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ITEM 2: Management Discussion and Analysis of Financial Condition and Results of Operations |
26 |
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ITEM 3: Quantitative and Qualitative Disclosures about Market Risk |
44 |
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44 |
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45 |
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45 |
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45 |
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ITEM 2: Unregistered Sales of Equity and Securities and Use of Proceeds |
50 |
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50 |
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51 |
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51 |
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51 |
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52 |
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2
Senseonics Holdings, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
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September 30, |
|
December 31, |
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||
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2020 |
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2019 |
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||
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|
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|
|
|
(unaudited) |
|
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Assets |
|
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|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
26,192 |
|
$ |
95,938 |
|
|
Restricted cash |
|
|
200 |
|
|
— |
|
|
Accounts receivable, net |
|
|
250 |
|
|
3,239 |
|
|
Accounts receivable - related parties |
|
|
251 |
|
|
7,140 |
|
|
Inventory, net |
|
|
4,284 |
|
|
16,929 |
|
|
Prepaid expenses and other current assets |
|
|
4,588 |
|
|
4,512 |
|
|
Total current assets |
|
|
35,765 |
|
|
127,758 |
|
|
|
|
|
|
|
|
|
|
|
Purchase put option |
|
|
4,224 |
|
|
— |
|
|
Deposits and other assets |
|
|
2,409 |
|
|
3,042 |
|
|
Property and equipment, net |
|
|
1,665 |
|
|
2,001 |
|
|
Total assets |
|
$ |
44,063 |
|
$ |
132,801 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit |
|
|
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|
|
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Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
949 |
|
$ |
4,285 |
|
|
Accrued expenses and other current liabilities |
|
|
9,153 |
|
|
18,636 |
|
|
Term Loans, net |
|
|
— |
|
|
43,434 |
|
|
2025 Notes, net |
|
|
— |
|
|
60,353 |
|
|
Total current liabilities |
|
|
10,102 |
|
|
126,708 |
|
|
|
|
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|
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|
|
|
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Long-term debt and notes payables, net |
|
|
59,649 |
|
|
11,800 |
|
|
Derivative liabilities |
|
|
24,590 |
|
|
664 |
|
|
Other liabilities |
|
|
1,693 |
|
|
2,278 |
|
|
Total liabilities |
|
|
96,034 |
|
|
141,450 |
|
|
|
|
|
|
|
|
|
|
|
Preferred stock and additional paid-in-capital, subject to possible redemption: $0.001 par value per share; 3,000 shares and 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019 |
|
|
2,811 |
|
|
— |
|
|
Total temporary equity |
|
|
2,811 |
|
|
— |
|
|
|
|
|
|
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|
|
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Commitments and contingencies |
|
|
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|
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|
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Stockholders’ deficit: |
|
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|
|
|
Common stock, $0.001 par value per share; 450,000,000 shares authorized; 244,238,638 and 203,452,812 shares issued and outstanding as of September 30, 2020 and December 31, 2019 |
|
|
244 |
|
|
203 |
|
|
Additional paid-in capital |
|
|
491,853 |
|
|
464,491 |
|
|
Accumulated deficit |
|
|
(546,879) |
|
|
(473,343) |
|
|
Total stockholders' deficit |
|
|
(54,782) |
|
|
(8,649) |
|
|
Total liabilities and stockholders’ deficit |
|
$ |
44,063 |
|
$ |
132,801 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Senseonics Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
||||
|
Revenue, net |
|
$ |
514 |
|
$ |
959 |
|
$ |
761 |
|
$ |
3,678 |
|
|
Revenue, net - related parties |
|
|
253 |
|
|
3,360 |
|
|
303 |
|
|
8,671 |
|
|
Total revenue |
|
|
767 |
|
|
4,319 |
|
|
1,064 |
|
|
12,349 |
|
|
Cost of sales |
|
|
(68) |
|
|
7,659 |
|
|
21,006 |
|
|
23,552 |
|
|
Gross profit (loss) |
|
|
835 |
|
|
(3,340) |
|
|
(19,942) |
|
|
(11,203) |
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|
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|
|
|
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Expenses: |
|
|
|
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|
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|
|
|
|
Sales and marketing expenses |
|
|
3,234 |
|
|
11,560 |
|
|
17,521 |
|
|
38,573 |
|
|
Research and development expenses |
|
|
4,568 |
|
|
11,076 |
|
|
15,726 |
|
|
28,688 |
|
|
General and administrative expenses |
|
|
5,501 |
|
|
5,388 |
|
|
15,635 |
|
|
17,321 |
|
|
Operating loss |
|
|
(12,468) |
|
|
(31,364) |
|
|
(68,824) |
|
|
(95,785) |
|
|
Other (expense) income, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1 |
|
|
519 |
|
|
173 |
|
|
1,556 |
|
|
Loss on extinguishment and issuance of debt |
|
|
(9,527) |
|
|
(398) |
|
|
(20,458) |
|
|
(398) |
|
|
Interest expense |
|
|
(3,632) |
|
|
(3,460) |
|
|
(11,560) |
|
|
(7,459) |
|
|
Debt issuance costs |
|
|
(931) |
|
|
(3,344) |
|
|
(1,216) |
|
|
(3,344) |
|
|
Gain on fair value and change in fair value of derivatives |
|
|
3,520 |
|
|
19,186 |
|
|
29,069 |
|
|
26,147 |
|
|
Other expense |
|
|
(391) |
|
|
(638) |
|
|
(720) |
|
|
(655) |
|
|
Total other (expense) income, net |
|
|
(10,960) |
|
|
11,865 |
|
|
(4,712) |
|
|
15,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net loss |
|
|
(23,428) |
|
|
(19,499) |
|
|
(73,536) |
|
|
(79,938) |
|
|
Total comprehensive loss |
|
$ |
(23,428) |
|
$ |
(19,499) |
|
$ |
(73,536) |
|
$ |
(79,938) |
|
|
|
|
|
|
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|
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|
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|
Basic and diluted net loss per common share |
|
$ |
(0.10) |
|
$ |
(0.10) |
|
$ |
(0.33) |
|
$ |
(0.43) |
|
|
Basic and diluted weighted-average shares outstanding |
|
|
236,519,812 |
|
|
197,223,419 |
|
|
220,250,060 |
|
|
183,804,257 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Senseonics Holdings, Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(in thousands)
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Additional |
|
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|
Total |
|
||
|
|
|
Common Stock |
|
Paid-In |
|
Accumulated |
|
Stockholders' |
|
||||||
|
|
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Equity (Deficit) |
|
||||
|
Three months ended September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019 |
|
177,031 |
|
$ |
177 |
|
$ |
433,228 |
|
$ |
(418,233) |
|
$ |
15,172 |
|
|
Issuance of common stock |
|
26,136 |
|
|
26 |
|
|
26,731 |
|
|
— |
|
|
26,757 |
|
|
Exercise of stock options |
|
179 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Stock-based compensation expense and vesting of RSUs |
|
20 |
|
|
— |
|
|
2,194 |
|
|
— |
|
|
2,194 |
|
|
Issuance of warrants related to debt |
|
— |
|
|
— |
|
|
723 |
|
|
— |
|
|
723 |
|
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
(19,499) |
|
|
(19,499) |
|
|
Balance, September 30, 2019 |
|
203,366 |
|
$ |
203 |
|
$ |
462,876 |
|
$ |
(437,732) |
|
$ |
25,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018 |
|
176,918 |
|
$ |
177 |
|
$ |
428,878 |
|
$ |
(357,794) |
|
$ |
71,261 |
|
|
Issuance of common stock |
|
26,136 |
|
|
26 |
|
|
26,731 |
|
|
— |
|
|
26,757 |
|
|
Exercise of stock options |
|
230 |
|
|
— |
|
|
93 |
|
|
— |
|
|
93 |
|
|
Stock-based compensation expense and vesting of RSUs |
|
82 |
|
|
— |
|
|
6,451 |
|
|
— |
|
|
6,451 |
|
|
Issuance of warrants related to debt |
|
— |
|
|
— |
|
|
723 |
|
|
— |
|
|
723 |
|
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
(79,938) |
|
|
(79,938) |
|
|
Balance, September 30, 2019 |
|
203,366 |
|
$ |
203 |
|
$ |
462,876 |
|
$ |
(437,732) |
|
$ |
25,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020 |
|
230,553 |
|
$ |
231 |
|
$ |
483,615 |
|
$ |
(523,451) |
|
$ |
(39,605) |
|
|
Exercise of stock options and ESPP purchases |
|
1,188 |
|
|
1 |
|
|
76 |
|
|
— |
|
|
77 |
|
|
Exchange and conversion of convertible notes, net |
|
12,498 |
|
|
12 |
|
|
5,859 |
|
|
— |
|
|
5,871 |
|
|
Stock-based compensation expense and vesting of RSUs |
|
— |
|
|
— |
|
|
2,303 |
|
|
— |
|
|
2,303 |
|
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
(23,428) |
|
|
(23,428) |
|
|
Balance, September 30, 2020 |
|
244,239 |
|
$ |
244 |
|
$ |
491,853 |
|
$ |
(546,879) |
|
$ |
(54,782) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019 |
|
203,453 |
|
$ |
203 |
|
$ |
464,491 |
|
$ |
(473,343) |
|
$ |
(8,649) |
|
|
Issuance of common stock, net |
|
175 |
|
|
— |
|
|
(86) |
|
|
— |
|
|
(86) |
|
|
Exercise of stock options and ESPP purchases |
|
2,220 |
|
|
2 |
|
|
573 |
|
|
— |
|
|
575 |
|
|
Exchange and conversion of convertible notes, net |
|
38,391 |
|
|
39 |
|
|
20,082 |
|
|
— |
|
|
20,121 |
|
|
Stock-based compensation expense and vesting of RSUs |
|
— |
|
|
— |
|
|
5,581 |
|
|
— |
|
|
5,581 |
|
|
Issuance of warrants related to debt, net |
|
— |
|
|
— |
|
|
1,212 |
|
|
— |
|
|
1,212 |
|
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
(73,536) |
|
|
(73,536) |
|
|
Balance, September 30, 2020 |
|
244,239 |
|
$ |
244 |
|
$ |
491,853 |
|
$ |
(546,879) |
|
$ |
(54,782) |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Senseonics Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
||||
|
|
|
September 30, |
|
||||
|
|
|
2020 |
|
2019 |
|
||
|
Cash flows used in operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(73,536) |
|
$ |
(79,938) |
|
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
853 |
|
|
335 |
|
|
Non-cash interest expense (debt discount and deferred costs) |
|
|
7,200 |
|
|
6,798 |
|
|
Loss on extinguishment and issuance of debt |
|
|
20,458 |
|
|
— |
|
|
Change in fair value of derivatives |
|
|
(29,069) |
|
|
(26,147) |
|
|
Stock-based compensation expense |
|
|
5,581 |
|
|
6,452 |
|
|
Provision for inventory obsolescence and net realizable value |
|
|
9,441 |
|
|
2,077 |
|
|
Non-cash lease expense |
|
|
— |
|
|
336 |
|
|
Loss on disposal of assets |
|
|
181 |
|
|
— |
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
9,880 |
|
|
829 |
|
|
Prepaid expenses and other current assets |
|
|
(77) |
|
|
(877) |
|
|
Inventory |
|
|
3,204 |
|
|
(11,708) |
|
|
Deposits and other assets |
|
|
117 |
|
|
(4) |
|
|
Accounts payable |
|
|
(3,336) |
|
|
(1,154) |
|
|
Accrued expenses and other liabilities |
|
|
(8,608) |
|
|
3,998 |
|
|
Deferred revenue |
|
|
— |
|
|
(628) |
|
|
Accrued interest |
|
|
(877) |
|
|
(908) |
|
|
Operating lease liabilities |
|
|
(586) |
|
|
— |
|
|
Other |
|
|
— |
|
|
(947) |
|
|
Net cash used in operating activities |
|
|
(59,174) |
|
|
(101,486) |
|
|
Cash flows used in investing activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(181) |
|
|
(951) |
|
|
Net cash used in investing activities |
|
|
(181) |
|
|
(951) |
|
|
Cash flows used in financing activities |
|
|
|
|
|
|
|
|
Issuance of common stock, net |
|
|
(87) |
|
|
26,757 |
|
|
Proceeds from exercise of stock options and ESPP purchases |
|
|
576 |
|
|
94 |
|
|
Proceeds from debt issuance, net of costs |
|
|
55,971 |
|
|
— |
|
|
Proceeds from 2025 Notes, net of cost |
|
|
— |
|
|
77,699 |
|
|
Proceeds from Solar term loan, net of cost |
|
|
— |
|
|
42,951 |
|
|
Proceeds from issuance of warrants, net of costs |
|
|
— |
|
|
723 |
|
|
Payments of notes payable |
|
|
(66,050) |
|
|
(15,000) |
|
|
Cost of modification of Second Lien Notes |
|
|
(601) |
|
|
— |
|
|
Repurchase of 2023 Notes |
|
|
— |
|
|
(37,000) |
|
|
Net cash (used in) provided by financing activities |
|
|
(10,191) |
|
|
96,224 |
|
|
Net decrease in cash, cash equivalents and restricted cash |
|
|
(69,546) |
|
|
(6,213) |
|
|
Cash, cash equivalents and restricted cash, at beginning of period |
|
|
95,938 |
|
|
136,793 |
|
|
Cash, cash equivalents and restricted cash, at ending of period |
|
$ |
26,392 |
|
$ |
130,580 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
5,600 |
|
$ |
4,200 |
|
|
Supplemental disclosure of non-cash investing and financing activities |
|
|
|
|
|
|
|
|
Property and equipment purchases included in accounts payable and accrued expenses |
|
$ |
— |
|
$ |
182 |
|
|
Issuance of common stock converted from notes payables |
|
$ |
300 |
|
$ |
— |
|
|
Exchange of 2025 Notes for Second Lien Notes |
|
$ |
(24,000) |
|
$ |
— |
|
|
Issuance of Second Lien Notes |
|
$ |
15,675 |
|
$ |
— |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Senseonics Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
|
1. |
Organization and Nature of Operations |
Senseonics Holdings, Inc., a Delaware corporation, is a medical technology company focused on the development and commercialization of long-term, implantable continuous glucose monitoring (“CGM”) systems to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy.
Senseonics, Incorporated is a wholly owned subsidiary of Senseonics Holdings and was originally incorporated on October 30, 1996 and commenced operations on January 15, 1997. Senseonics Holdings and Senseonics, Incorporated are hereinafter collectively referred to as the “Company” unless otherwise indicated or the context otherwise requires.
|
2. |
Going Concern and Liquidity Update |
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 suffered substantial operating losses, principally from expenses associated with the Company’s research and development programs and commercial launch of the Eversense® CGM System (for use up to 90 days) in the United States and the Eversense CGM and Eversense XL CGM Systems (for use up to 180 days) in Europe, the Middle East, and Africa. The Company has not generated significant revenue from the sale of products and its ability to generate revenue and achieve profitability largely depends on the Company’s ability to successfully expand the commercialization of Eversense, continue the development of its products and product upgrades, and to obtain necessary regulatory approvals for the sale of those products, including approval by the FDA for the new 180-day Eversense product in the United States. These activities will require significant uses of working capital through 2020 and beyond.
The Company generated a net loss of $73.5 million for the nine months ended September 30, 2020 and had an accumulated deficit of $546.9 million at September 30, 2020. During the nine months ended September 30, 2020, the Company repaid in full its term loan with Solar Capital Ltd. (“Solar”) in the amount of $48.4 million, and as a result, and in consideration of the evolving impact of the coronavirus (“COVID-19”) pandemic, the Company made significant reductions in its cost structure to improve operating cash flow and generate future capital expenditure savings to ensure the long-term success of Eversense. Specifically, the Company temporarily suspended commercial sales of the Eversense CGM system in the United States to new patients and streamlined its operational strategy to focus on the development and regulatory submission efforts for its new 180-day Eversense product in the United States.
On August 9, 2020, the Company entered into a Collaboration and Commercialization Agreement with Ascensia Diabetes Care Holdings AG (“Ascensia”) and entered into a financing agreement pursuant to which the Company issued $35.0 million in aggregate principal amount of Senior Secured Convertible Notes due in October 2024 (the “2024 Notes”) to Ascensia’s parent company, PHC Holdings Corporation (“PHC”) on August 14, 2020 (the “Closing Date”). The Company also has the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon obtaining approval for the 180-day Eversense product for marketing in the United States before such date. Additionally, on August 9, 2020, the Company entered into a Stock Purchase Agreement with Masters Special Situations, LLC and certain affiliates thereof (“Masters”) pursuant to which the Company issued and sold to Masters 3,000 shares of convertible preferred stock, designated as “Series A Convertible Preferred Stock” (the “Series A Preferred Stock”), at a price of $1,000.00 per share on the Closing Date. Masters also has the option to purchase up to an additional 27,000 shares of Series A Preferred Stock at a price of $1,000.00 per share in a subsequent closing, subject to the terms and conditions of the Stock Purchase Agreement, as amended as set forth in Note 13 – Subsequent Events.
7
On April 24, 2020, the Company received $15.0 million through the issuance and sale of First Lien Secured Notes due October 2021 (the “First Lien Notes”) pursuant to a Loan and Security Agreement (the “Highbridge Loan Agreement”) with certain funds managed by Highbridge Capital Management, LLC (“Highbridge”), as the lenders, together with the other lenders from time to time party thereto (the “Lenders”). Upon the closing of the 2024 Notes, the Company prepaid the First Lien Notes in full in the amount of approximately $17.6 million, which includes the discounted prepayment premium pursuant to the Highbridge Loan Agreement.
In connection with the entry into the Highbridge Loan Agreement on April 24, 2020, the Company entered into a Note and Purchase Exchange Agreement with the Lenders, pursuant to which the Company’s senior convertible notes maturing on January 15, 2025 (the “2025 Notes”) were exchanged for (i) $15.7 million aggregate principal amount of newly issued Second Lien Secured Notes (the “Second Lien Notes”), (ii) 11,026,086 shares of common stock, (iii) warrants to purchase up to 4,500,000 shares of common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged.
On April 22, 2020, the Company received $5.8 million in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”), as amended by the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), and administered by the U.S. Small Business Administration (the “SBA”), to support payroll, rent, and utilities incurred during a defined period.
The Company believes that these agreements provide the financial resources and mutual commitment to support the growth of Eversense and specifically for the Company, the manufacturing of Eversense and continued product development, including the U.S. launch of the new 180-day Eversense product, if approved. The timing and success of these collaborations and financings are dependent on certain events occurring in accordance with the Company’s plans, and may be influenced by uncontrollable external factors, including restrictions or impacts of COVID-19. Even with these transactions and that the potential subsequent closings contemplated by the transactions have not yet occurred, management’s doubt regarding its ability to continue as a going concern for the next twelve months from the date this Quarterly Report on Form 10-Q is filed is not yet alleviated.
|
3. |
Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Although the Company considers the disclosures in these unaudited consolidated financial statements to be adequate to make the information presented not misleading, certain information or footnote information normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of financial position at September 30, 2020 and December 31, 2019, results of operations, comprehensive loss, and changes in stockholder’s equity (deficit) for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019 have been included. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 16, 2020, and amended on April 28, 2020. The interim results for September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future interim periods.
The consolidated financial statements reflect the accounts of Senseonics Holdings, Inc. and its wholly owned operating subsidiary Senseonics Incorporated.
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 revenue and expenses during the reporting period. In the accompanying unaudited consolidated financial statements,
8
estimates are used for, but not limited to, stock-based compensation, recoverability of long-lived assets, deferred taxes and valuation allowances, derivative assets and liabilities, obsolete inventory, warranty obligations, variable consideration related to revenue, depreciable lives of property and equipment, and accruals for clinical study costs, which are accrued based on estimates of work performed under contract. The Company considered COVID-19 related impacts to its estimates, as appropriate, within its unaudited condensed consolidated financial statements and there may be changes to those estimates in future periods due to the uncertainties surrounding the severity and duration of the COVID-19 pandemic. Actual results could differ from those estimates; however, management does not believe that such differences would be material.
Segment Information
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 nine months ended September 30, 2020 and 2019, the Company’s net loss equaled its comprehensive loss and, accordingly, no additional disclosure is presented.
Cash and Cash Equivalents
The Company considers highly liquid investments with original 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. Cash and cash equivalents consisted of the following as of the periods listed below (in thousands):
| (1) | Includes overnight repurchase agreements |
Restricted Cash
The Company’s restricted cash includes pledged cash as collateral related to its credit card program with Silicon Valley Bank. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows (in thousands):
Long-lived Assets
Management reviews long-lived assets, including property and equipment and right-of-use assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As a result of COVID-19 and the events described above in Note 2, the Company identified an indicator of impairment and completed an impairment assessment. As part of the assessment, the Company concluded the fair value of some of its property and equipment exceeded its carrying values and recognized an impairment of property and
9
equipment in the amount of $0.2 million for the nine months ended September 30, 2020 that was recorded in the Company’s unaudited condensed consolidated statement of operations and comprehensive loss.
Warranty Obligation
The Company provides a warranty of one year on its smart transmitters. Additionally, the Company may also replace Eversense system components that do not function in accordance with the product specifications. Estimated replacement costs are recorded at the time of shipment as a charge to cost of sales in the consolidated statement of operations and are developed by analyzing product performance data and historical replacement experience, including comparing actual return management authorizations to revenue.
At September 30, 2020 and December 31, 2019, the warranty reserve was $1.1 million and $2.2 million, respectively. The decrease in warranty reserve balance was attributable to the decrease in warranty provisions during the period as a result of the temporary suspension of commercial sales of Eversense. The following table provides a reconciliation of the change in estimated warranty liabilities as of September 30, 2020 and December 31, 2019 (in thousands):
Revenue
The Company recognizes revenue in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition, 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, 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 revenue from sales of its Eversense CGM system and related components at a fixed price to third-party distributors in the European Union and to a network of strategic fulfillment partners in the United States (collectively, “Customers”) who then resell the products to health care providers and patients. 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. Customer contracts do not include the right to return unless there is a product issue, in which case the Company 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.
Revenue is recognized, at a point in time, when the Customers obtain control of the product based upon the delivery terms as defined in the contract at an amount that reflects the consideration which is expected to be received in exchange for the product. Contracts with the Customers include performance obligations for supply of goods and the performance obligation is typically satisfied upon transfer of control of the product. Distribution contracts may also contain requirements for training and customer service support, however these are not assessed as performance obligations given the activities are considered immaterial in the context of the contract. The payment terms and
10
conditions of the Customers vary, but the Company is typically paid within 60 days of invoicing subsequent to the Customers obtaining control of the Company’s product.
Revenue is recognized only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in a future period. The Company’s contracts may contain variable consideration such as prompt-pay discounts or tier-volume price discounts. Variable consideration, including the reimbursements paid by the Company to its Customers in accordance with the Eversense Bridge Program initiated in March 2019 and to a lesser extent, other discounts and prompt-pay incentives, is treated as a reduction in revenue when the product sale is recognized. Depending on the variable consideration, the Company estimates the expected value based on the terms of the agreements, historical data, insurance payor mix, reimbursement rates, and market conditions. In connection with the Eversense Bridge Program, the Company reimburses participating Customers an amount up to a fixed maximum for the difference in the cost of the Eversense CGM System and what they collect from insurance payors and the patient’s fee of $99. The Customers are responsible for confirming patient insurance coverage, obtaining pre-authorizations, determining eligibility, and continuously provide the Company with data regarding which patient orders are under the program and which are not. Customer supplied data, along with actual reimbursements that have been validated to patient claims, are used to support expected reimbursement estimates. Estimated reimbursement payments for product shipped to Customers but not provided to a patient within the same reporting period are recorded within accrued expenses and other current liabilities in the accompanying consolidated balance sheets. The Company’s estimates used in determining the variable consideration on a sale transaction may be adjusted each reporting period depending on actual results, provided a change does not reflect a modification to the original contract.
Contract assets consist of trade receivables from Customers and contract liabilities consist of amounts due to Customers in connection with the Eversense Bridge Program, classified as patient access and incentive programs within accrued liabilities on the accompanying unaudited condensed consolidated balance sheets. Trade receivables for customers in the United States are recorded at net realizable value, which is generally the contractual price but may be net of anticipated prompt-pay or promotional discounts.
Concentration of Revenue and Customers
For the three months ended September 30, 2020 and 2019, the Company derived 33% and 78% of its total revenue, respectively, from one customer, Roche Diabetes Care GmbH (“Roche”). For the nine months ended September 30, 2020 and 2019, the Company derived 29% and 70% of its total revenue, respectively, from one customer, Roche. During the three and nine months ended September 30, 2020, Roche did not place commercial sales orders in accordance with their quarterly requirements or towards their annual binding minimum requirements for sensors. Revenues for these corresponding periods in 2020 represent purchases for transmitters and miscellaneous Eversense system components.
11
Revenue by Geographic Region
The following table sets forth net revenue derived from the Company’s two primary geographical markets, the United States and outside of the United States, based on the geographic location to which the Company delivers the product, for the three and nine months ended September 30, 2020 and 2019.
Accounts Receivable
Accounts receivable consist of amounts due from the Company’s Customers and are recorded at net realizable value, which may include reductions for allowances for doubtful accounts at the time potential collection risk is identified or for promotional or prompt-pay discounts offered. The Company extended payment terms and provided one-time COVID-19 pandemic relief concessions to some of its customers in the United States for allowances up to a specified amount if they are unable to sell through Eversense and related components on hand prior to product expiry, which began to occur in the third quarter of 2020 and the Company expects to continue to occur in the fourth quarter of 2020. The Company does not have a history of collectability concerns, however an immaterial allowance for uncollectible accounts was recorded as of September 30, 2020. There were no provisions for uncollectible accounts recorded against accounts receivable at December 31, 2019.
Net Loss per Share
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company evaluated the Series A Preferred Stock to determine if those shares represented a participating security. Because the holders of the Series A Preferred Stock participate in Common Stock dividends, it is considered a participating security and the application of the two-class method will be applied once the Company has net income. The holders of the Series A Preferred Stock do not participate in losses; therefore, there is no impact to the current period net loss. The Masters option to purchase additional Series A Preferred Stock are not considered participating securities because the option holder is not entitled to participate in dividends until the option is exercised and the resulting Series A Preferred Stock shares are issued.
12
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. The total number of anti-dilutive shares at September 30, 2020 and 2019, consisting of common stock options and stock purchase warrants, which have been excluded from the computation of diluted net loss per share, was as follows:
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 stock purchase warrants and employee stock purchases using the treasury stock method.
Exit or Disposal Costs
Costs associated with exit or disposal activities, such as restructuring, sale or termination of a line of business, the closure of business activities in a particular location, the relocation of business activities, changes in management structure and a fundamental reorganization that affects the nature and focus of operations, are recognized and measured initially at their fair values during the period in which an obligation meets the definition of a liability. The Company’s workforce reduction on March 26, 2020 did not permit continuation of service past March 31, 2020 and associated one-time employee termination benefit costs in the amount of $1.4 million were paid and recorded in the Company’s accompanying unaudited consolidated financial statements for the nine months ended September 30, 2020.
Recent Accounting Pronouncements
Recently Adopted
In August 2018, the Financial Accounting Standards Board (“FASB “) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements on fair value measurements. The new standard includes additional disclosure requirements regarding the range and weighted average to develop significant unobservable inputs within Level 3 fair value measurements. The Company adopted this on its effective date, January 1, 2020 and did not have a material impact on the consolidated financial statements and related disclosures.
Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities in unrealized loss positions, the new standard requires allowances to be recorded instead of reducing the amortized cost of the investment. The Company does not currently hold or plan to invest in available-for-sale securities and has not historically experienced collection issues or bad debts with trade receivables. Accordingly, the Company does not expect this to have a significant impact on its consolidated financial statements and related disclosures at this time. The Company will adopt this guidance on its effective date for smaller reporting companies, January 1, 2023.
13
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
4. Inventory, net
Inventory, net of reserves, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
|
|
2020 |
|
2019 |
||
|
Finished goods |
|
$ |
259 |
|
$ |
3,944 |
|
Work-in-process |
|
|
1,419 |
|
|
10,938 |
|
Raw materials |
|
|
2,606 |
|
|
2,047 |
|
Total |
|
$ |
4,284 |
|
$ |
16,929 |
The Company charged $15.1 million and $3.3 million to cost of sales for the nine months ended September 30, 2020 and 2019, respectively, to reduce the value of inventory for items that are potentially obsolete, in excess of product demand, or to adjust costs to their net realizable value.
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
| (1) | Includes deposits for manufacturing and amounts for materials procured by contract manufacturers on behalf of the Company following its March 2020 announcement of its streamlined operational focus and may be applied when manufacturing resumes. |
14
|
6. |
Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consisted of the following (in thousands):
7.Notes Payable, Preferred Stock and Stock Purchase Warrants
Repayment of Solar Term Loan
On March 22, 2020, the Company and Solar terminated its Loan and Security Agreement, dated as of July 16, 2019 (the “Solar Loan Agreement”).
In connection with the termination, the Company paid $48.5 million representing all amounts outstanding under the Solar Loan Agreement, including the principal amount and interest of the loans, a payoff fee of 6.45% of the loans outstanding, a prepayment premium of 3.0% of the loans outstanding and other obligations owed to Solar thereunder. The Company issued warrants in connection to the Solar Loan Agreement to purchase an aggregate of 1,125,000 shares of the Company’s common stock with an exercise price of $1.20 per share, which are exercisable until July 25, 2029.
A loss on the extinguishment of debt in the amount of $4.5 million reflecting the difference between the repayment amount and the carrying value of the principal balance, accrued interest, unamortized debt issuance costs and unaccreted prepayment fee at March 22, 2020 was recorded to other income (expense) in the Company’s unaudited condensed consolidated statement of operations and comprehensive loss during the nine months ended September 30, 2020.
PPP Loan
On April 22, 2020, the Company received $5.8 million in loan funding from the PPP pursuant to the CARES Act, as amended by the Flexibility Act, and administered by the SBA. The unsecured loan (the “PPP Loan”) is evidenced by the PPP Note dated April 21, 2020 (the “PPP Note”) in the principal amount of $5.8 million with Silicon Valley Bank (the “Bank”).
Under the terms of the PPP Note and the PPP Loan, interest accrues on the outstanding principal at a rate of 1.0% per annum. The term of the PPP Note is two years, though it may be payable sooner in connection with an event of default under the PPP Note. To the extent the loan amount is not forgiven under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning after determination of forgiveness by the Bank. The Company may apply for forgiveness any time on or before the maturity date of the loan. If the Company does not apply for loan forgiveness within ten months after the last day of the covered period, the PPP loan is no longer deferred, and the Company must begin paying principal and interest.
15
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply for forgiveness for all or a part of the Company’s PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the specified period after the loan origination for certain purposes including payroll costs, interest on debt obligations incurred prior to February 15, 2020, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered specified period will qualify for forgiveness. As a result of the Company’s workforce reduction, the amount of forgiveness will correspondingly decrease.
The PPP Note may be prepaid in part or in full, at any time, without penalty. The PPP Note provides for certain customary events of default, including (i) failing to make a payment when due under the PPP Note, (ii) failure to do anything required by the PPP Note or any other loan document, (iii) defaults of any other loan with the Bank, (iv) failure to disclose any material fact or make a materially false or misleading representation to the Bank or SBA, (v) default on any loan or agreement with another creditor, if the Bank believes the default may materially affect the Company’s ability to pay the PPP Note, (vi) failure to pay any taxes when due, (vii) becoming the subject of a proceeding under any bankruptcy or insolvency law, having a receiver or liquidator appointed for any part of the Company’s business or property, or making an assignment for the benefit of creditors, (viii) having any adverse change in financial condition or business operation that the Bank believes may materially affect the Company’s ability to pay the PPP Note, (ix) if the Company reorganizes, merges, consolidates, or otherwise changes ownership or business structure without the Bank’s prior written consent, or (x) becoming the subject of a civil or criminal action that the Bank believes may materially affect the Company’s ability to pay the PPP Note. Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require immediate payment of all amounts owed under the PPP Note, collect all amounts owing from the Company, and file suit and obtain judgment against the Company.
Highbridge Credit Facility
Highbridge Loan Agreement
On April 21, 2020, the Company entered into the Highbridge Loan Agreement with certain funds managed by Highbridge, the Lenders and Wilmington Savings Fund Society, SCB, as collateral agent.
Pursuant to the Highbridge Loan Agreement, the Company borrowed an aggregate principal amount of $15.0 million on April 24, 2020. In connection with the Highbridge Loan Agreement and receipt of the first tranche of borrowing, the Company issued 1,500,000 shares of its common stock to the Lenders as a commitment fee.
On August 14, 2020, the Company prepaid the First Lien Notes in full, including the discounted prepayment premium, in the amount of approximately $17.6 million and recognized a loss on extinguishment in the amount of $0.7 million.
The First Lien Notes were secured, senior obligations that bear interest at the annual rate of 12% or, at the Company’s election, payment in kind (“PIK”) at an annual rate of 13%, payable monthly in arrears. The First Lien Notes would have matured on October 24, 2021 (the “First Lien Maturity Date”). The obligations under the First Lien Notes were secured by substantially all the Company’s assets.
The First Lien Notes also contained redemption features that were evaluated for bifurcation as separate derivative instruments including the permitted prepayment put option, the mandatory accelerated redemption and the mandatory redemption and reinvestment upon an asset sale. The Company recorded the fair value of the embedded features in the amount of $1.0 million as a debt premium and derivative asset in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging. The derivative is adjusted to fair value at each reporting period, with the change recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statements of operations and comprehensive loss.
16
The debt issuance costs incurred in connection with the Highbridge financings were allocated between the First Lien Notes, Second Lien Notes, common stock, and warrants. The Company incurred and deferred $1.5 million in debt issuance costs and debt discounts associated with the First Lien Notes, which will be amortized as interest expense over the term of the First Lien Notes, along with $1.0 million of debt premium from the derivative bifurcation.
Exchange Agreement with Highbridge
On April 21, 2020, the Company entered into a Note Purchase and Exchange Agreement with certain funds managed by Highbridge providing for the exchange (the “Exchange”) of $24.0 million aggregate principal amount of the Company’s outstanding 2025 Notes for (i) $15.7 million aggregate principal amount of newly issued Second Lien Notes, (ii) 11,026,086 shares of common stock, (iii) warrants to purchase up to 4,500,000 shares of common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged. The Exchange closed on April 24, 2020. The warrants may be exercised in cash or on a cashless basis at any time through the three-year anniversary of the issuance date. On August 9, 2020, the Company entered into a First Amendment to Note Purchase and Exchange Agreement with Highbridge (as amended by the Amendment, the “Exchange Agreement”).
On August 9, 2020, the Company entered into a First Amendment to Note Purchase and Exchange Agreement with Highbridge (as amended by the Amendment, the “Exchange Agreement”). The debt issuance costs incurred in connection with the Amendment were allocated to the Second Lien Notes. Loan modifications require third-party debt related costs to be expensed immediately. In connection with the Amendment, the Company recorded a total of $0.5 million in debt issuance costs which were expensed immediately.
The Second Lien Notes are secured, senior obligations of the Company, junior only to the First Lien Notes. Interest in cash at the annual rate of 7.5% or, at the Company’s option, payment in kind at an annual rate of 8.25%, on the Second Lien Notes will be payable monthly in arrears. The maturity date for the Second Lien Notes is August 9, 2023 (the “Second Lien Maturity Date”), unless earlier repurchased, redeemed or converted in accordance with their terms. The obligations under the Second Lien Notes are secured by substantially all of the Company’s assets.
The Company will have the right to prepay the Second Lien Notes at any time, subject to a prepayment premium, which in certain circumstances the Company may elect to pay in common stock, equal to the aggregate amount of interest payments through maturity.
The holders of the Second Lien Notes have the right to convert the aggregate principal of the Second Lien Notes (together with any applicable prepayment premium) to common stock at a price per share equal to 90% of the greater of (i) the daily volume weighted average of the price per share of the common stock, on the conversion date, or if the conversion date is not a trading date, the trading day immediately prior to the conversion date and (ii) $0.33 per share. This conversion option has a daily limit of $1.0 million in aggregate converted principal (inclusive of principal amount of First Lien Notes that are voluntarily converted by the Lenders). Subject to certain conditions, if the Company retains or reinvests proceeds of an asset sale pursuant to the Asset Sale Prepayment Provisions in the Exchange Agreement, the Holders shall be entitled to convert additional Second Lien Notes and the Lenders shall be entitled to convert First Lien Notes in aggregate combined principal amount equal to 45% of such net proceeds retained or reinvested (together with any applicable prepayment premium).
The Exchange Agreement contains customary terms and covenants, including without limitation: financial covenants, such as maintaining a minimum cash balance; and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The Exchange Agreement also contains customary events of default, after which the Second Lien Notes may be due and payable immediately, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, material adverse changes, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against us, and change of control, termination of any guaranty, governmental approvals, and lien priority.
The Second Lien Notes also contain redemption features that were evaluated for bifurcation as separate derivative instruments including the permitted prepayment put option, the mandatory accelerated redemption and the
17
mandatory redemption and reinvestment upon an asset sale. Unlike the First Lien Notes, the Second Lien Notes also permit voluntary conversion at the option of the holder as described above. The Company recorded the fair value of these embedded features in the amount of $1.9 million as a derivative asset in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statement of operations and comprehensive loss.
Since Highbridge was a noteholder of the 2025 Notes and exchanged $24.0 million of outstanding principal of the 2025 Notes for Second Lien Notes, the Exchange qualifies as a loan modification. The debt issuance costs incurred in connection with the Highbridge financings were allocated between the First Lien Notes, Second Lien Notes, common stock, and warrants. Loan modifications require third-party debt related costs to be expensed immediately, whereas fees paid to lenders of the modified loans are deferred. In connection with the issuance of the Second Lien Notes, the Company recorded a total of $14.1 million in debt issuance costs and debt discounts, including $13.2 million allocated from the 2025 Notes for the $24.0 million outstanding principal exchanged and the discount from the bifurcated derivative. These costs were recorded as debt discounts to the Second Lien Notes and are amortized as interest expense over the term of the Second Lien Notes. Allocated third-party debt related costs of $0.8 million were expensed during the three and nine months ended September 30, 2020.
During the quarter ended September 30, 2020, Highbridge voluntarily converted a total of $3.6 million of outstanding principal amount of the Second Lien Notes for 9,328,955 shares of common stock, which included prepayment premiums and were based off the Company’s election of PIK interest. Accordingly, $3.6 million of allocated deferred issuance costs, debt discounts and prepayment premiums were recognized as a loss on extinguishment of debt in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss during the three and nine months ended September 30, 2020. For the nine months ended September 30, 2020, Highbridge voluntarily converted a total of $9.6 million of outstanding principal amount of the Second Lien Notes for 22,695,294 shares of common stock, which included prepayment premiums and were based off the Company’s election of PIK interest. Accordingly, $10.0 million of allocated deferred issuance costs, debt discounts and prepayment premiums were recognized as a loss on extinguishment of debt in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss during the three and nine months ended September 30, 2020.
Convertible Notes
2024 Notes
On August 9, 2020, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with PHC, as the purchaser (together with the other purchasers from time to time party thereto, the “Note Purchasers”) and Alter Domus (US) LLC, as collateral agent. Pursuant to the Note Purchase Agreement, the Company borrowed $35.0 million in aggregate principal through the issuance and sale of 2024 Notes on August 14, 2020 (the “Closing Date”). The Company also issued 2,941,176 shares of its common stock, $0.001 par value per share to PHC as a financing fee (the “Financing Fee Shares”) on the Closing Date. The Financing Fee Shares are accounted for as debt discount in the amount of $1.5 million.
The 2024 Notes are senior secured obligations of the Company and will be guaranteed on a senior secured basis by the Company’s wholly owned subsidiary, Senseonics, Incorporated. Interest at the annual rate of 9.5% will be payable semi-annually in cash or, at the Company’s option, payment in kind. The interest rate will decrease to 8.0% if the Company obtains approval for 180-day Eversense XL for marketing in the United States, subject to certain conditions. The maturity date for the 2024 Notes is October 31, 2024 (the “Maturity Date”), provided that the Maturity Date will accelerate if the Company has not repaid the Company’s outstanding Second Lien Notes (other than an aggregate principal amount of up to $1.0 million) by 91 days prior to the maturity of the Second Lien Notes. The obligations under the 2024 Notes are secured by substantially all of the Company’s and its subsidiary’s assets.
18
The Note Purchasers are entitled to convert the 2024 Notes to common stock at a conversion rate of 1,867.4136 shares per $1,000 principal amount of the 2024 Notes (including any interest added thereto as payment in kind), equivalent to a conversion price of approximately $0.54 per share, subject to specified anti-dilution adjustments, including adjustments for the Company’s issuance of equity securities on or prior to April 30, 2022 below the conversion price. In addition, following a notice of redemption or certain corporate events that occur prior to the maturity date, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2024 Notes in connection with such notice of redemption or corporate event. In certain circumstances, the Company will be required to pay cash in lieu of delivering make whole shares unless the Company obtains stockholder approval to issue such shares.
Subject to specified conditions, on or after October 31, 2022, the 2024 Notes are redeemable by the Company if the closing sale price of the common stock exceeds 275% of the conversion price for a specified period of time and subject to certain conditions upon 10 days prior written notice at a cash redemption price equal to the then outstanding principal amount (including any payment in kind interest which has been added to such amount), plus any accrued but unpaid interest. On or after October 31, 2023, the 2024 Notes are redeemable by the Company upon 10 days prior written notice at a cash redemption price equal to the then outstanding principal amount (including any payment in kind interest which has been added to such amount), plus any accrued but unpaid interest, plus a call premium of 130% if redeemed at least six months prior to the Maturity Date or a call premium of 125% if redeemed within six months of the Maturity Date.
The Note Purchase Agreement contains customary terms and covenants, including financial covenants, such as operating within an approved budget and achieving minimum revenue and liquidity targets, and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The Note Purchase Agreement also contains customary events of default, after which the 2024 Notes be due and payable immediately, including defaults related to payment compliance, material inaccuracy of representations and warranties, covenant compliance, material adverse changes, bankruptcy and insolvency proceedings, cross defaults to certain other agreements, judgments against the Company, change of control or delisting events, termination of any guaranty, governmental approvals, and lien priority.
The Company also has the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon obtaining approval for the 180-day Eversense product for marketing in the United States before such date. This purchased put option represents a freestanding financial instrument and is recognized as an asset in the Company’s consolidated balance sheets at the fair value of $4.2 million.
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. The Company recorded the fair value of the embedded features in the amount of $25.8 million as a derivative liability in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statement of operations and comprehensive loss. The fair value of the derivative as of September 30, 2020 was $19.9 million.
In connection with the issuance of the Note Purchase Agreement, the Company incurred $2.9 million in debt issuance costs and debt discounts. The associated debt issuance costs are recorded as a contra liability in the amount of $1.4 million and are deferred and amortized as additional interest expense over the term of the notes.
2025 Notes
In July 2019, the Company issued $82.0 million in aggregate principal amount of 2025 Notes that will mature on January 15, 2025, unless earlier repurchased or converted. The 2025 Notes are convertible, at the option of the holders, into shares of the Company’s common stock, at an initial conversion rate of 757.5758 shares per $1,000 principal amount of the 2025 Notes (equivalent to an initial conversion price of approximately $1.32 per share).
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The 2025 Notes also contained an embedded conversion option requiring bifurcation as a separate derivative liability, along with the fundamental change make-whole provision and the cash settled fundamental make-whole shares provision. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded to other income (expense) in the Company’s consolidated statement of operations and comprehensive loss.
In connection with the Exchange on April 24, 2020, $24.0 million aggregate principal of the Company’s outstanding 2025 Notes held by Highbridge were exchanged for $15.7 million of Second Lien Notes, (ii) 11,026,086 shares of common stock, (iii) warrants to purchase up to 4,500,000 shares of common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged. This transaction modified the original 2025 Notes outstanding with Highbridge and resulted in $13.2 million of deferred issuance fees and debt discounts associated with the exchanged 2025 Notes being transferred as a discount to the Second Lien Notes.
2023 Notes
In the first quarter of 2018, the Company issued $53.0 million in aggregate principal amount of senior convertible notes due February 1, 2023 (the “2023 Notes”). In July 2019, the Company used the net proceeds from the issuance of the 2025 Notes to repurchase $37.0 million aggregate principal amount of the outstanding 2023 Notes. 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.
The Company bifurcated the embedded conversion option, along with the interest make-whole provision and make-whole fundamental change provision as a derivative liability. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statement of operations and comprehensive loss.
Convertible Preferred Stock and Warrants
On August 9, 2020, the Company entered into a Stock Purchase Agreement with Masters, pursuant to which the Company issued and sold to Masters 3,000 shares of Series A Preferred Stock, at a price of $1,000.00 per share, on the Closing Date. Masters also has the option to purchase up to an additional 27,000 shares of Series A Preferred Stock at a price of $1,000.00 per share in a subsequent closing, subject to the terms and conditions of the Stock Purchase Agreement, as amended as set forth in Note 13 – Subsequent Events. Each share of Series A Preferred Stock is initially convertible into a number of shares of common stock equal to $1,000 divided by the conversion price of $0.476 per share, subject to customary anti-dilution adjustments, including in the event of any stock split. The Series A Preferred Stock ranks senior to the common stock. Upon a liquidation, dissolution or winding up of the Company, each share of Series A Preferred Stock is entitled to receive an amount per share equal to the greater of the purchase price paid and the amount that the holder would have been entitled to receive at such time if the Series A Preferred Stock were converted into common stock. The holders are also entitled to participate in dividends declared or paid on the common stock on an as-converted basis. If we undergo a change of control, each holder has the right to cause us to redeem any or all of the Series A Preferred Stock for cash consideration equal to the liquidation amount. The holders of Series A Preferred Stock generally are entitled to vote with the holders of the shares of common stock on all matters submitted for a vote of holders of shares of common stock (voting together with the holders of shares of common stock as one class) on an as-converted basis. Additionally, certain matters will require the approval of the majority of the outstanding Series A Preferred Stock, voting as a separate class, including (i) altering or changing adversely the powers, privileges, preferences or rights of the Series A Preferred Stock, or (ii) amendments, modifications, repeal or waiver of any provision of the Company’s certificate of incorporation, bylaws or of the certificate of designations that would adversely affect the rights, preferences, privileges or powers of the Series A Preferred Stock.
The Series A Preferred Stock is contingently redeemable upon occurrence of a change of control event which is considered outside the control of the Company, and therefore the Series A Preferred Stock has been classified in temporary equity on the consolidated balance sheet. At each reporting period, the Company evaluates the probability of the Series A Preferred Stock being redeemed. The Company’s policy is to recognize the difference in carrying value to
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redemption value once the redemption becomes probable. As of September 30, 2020, the features that would require redemption (e.g., occurrence of a change of control) was not deemed probable.
The Company accounted for the option to purchase up to an additional 27,000 shares of preferred stock as a freestanding warrant instrument, as it is legally detachable and separately exercisable. This warrant is classified as a liability in accordance with ASC 480 on the Company’s balance sheet and was recorded at the estimated fair value of $4.8 million upon issuance. The warrant is required to be remeasured to fair value at each reporting period with the change recorded in change in fair value of derivatives that is a component of other income (expense). The fair value as of September 30, 2020 was $1.6 million.
The following carrying amounts were outstanding under the Company’s notes payable as of September 30, 2020 and December 31, 2019 (in thousands):
Interest expense related to the notes payable for the three and nine months ended September 30, 2020 was as follows (dollars in thousands):
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The following are the scheduled maturities of the Company’s notes payable as of September 30, 2020, including PIK interest on the Second Lien Notes (in thousands):
|
|
|
|
|
|
|
2020 (remaining three months) |
|
$ |
— |
|
|
2021 |
|
|
4,226 |
|
|
2022 |
|
|
1,537 |
|
|
2023 |
|
|
23,811 |
|
|
Thereafter |
|
|
92,700 |
|
|
Total |
|
$ |
122,274 |
|
|
8. |
Stockholders’ Deficit |
In November 2019, the Company entered into an Open Market Sale Agreement with Jefferies LLC which allows the Company to issue and sell up to $50 million in gross proceeds of its common stock. During the three and nine months ended September 30, 2020, the Company sold 0 and 175,289 shares of common stock, respectively, resulting in gross proceeds of $0.1 million.
9. Stock-Based Compensation
2015 Plan
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 units may be granted to the Company’s employees and certain other persons in accordance with the 2015 Plan provisions, such as officers and directors. In February 2016, 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”), which became effective on March 17, 2016. 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 of the Company’s common stock reserved for issuance automatically increases on January 1 of each year, ending on January 1, 2026, by 3.5% of the total number of shares of its common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by its board of directors. As of September 30, 2020, 6,741,934 shares remained available for grant under the amended and restated 2015 Plan.
Inducement Plan
On May 30, 2019, the Company adopted the Senseonics Holdings, Inc. Inducement Plan (the “Inducement Plan”), pursuant to which the Company reserved 1,800,000 shares of the Company’s common stock for issuance. The only persons eligible to receive grants of awards under the Inducement Plan are individuals who satisfy the standards for inducement grants in accordance with NYSE American Company Guide Section 711(a), including individuals who were not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to such persons entering into employment with the Company. An “Award” is any right to receive the Company’s common stock pursuant to the Inducement Plan, consisting of non-statutory options, restricted stock unit awards and other equity incentive awards. As of September 30, 2020, 1,461,208 shares remained available for grant under the Inducement Plan.
2016 Employee Stock Purchase Plan
In February 2016, the Company adopted the 2016 Employee Stock Purchase Plan, (the “2016 ESPP”). The 2016 ESPP became effective on March 17, 2016. The maximum number of shares of common stock that may be issued under the 2016 ESPP was initially 800,000 shares and automatically increases on January 1 of each year, ending on and including January 1, 2026, by 1.0% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; provided, however, the Board of Directors may act prior to the first day of any calendar year to
22
provide that there will be no January 1 increase in the share reserve for such calendar year or that the increase in the share reserve for such calendar year will be a lesser number of shares of common stock. At September 30, 2020 there were 6,171,581 shares of common stock available for issuance under the 2016 ESPP.
The 2016 ESPP permits participants to purchase shares of the Company’s common stock through payroll deductions of up to 15% of their earnings. Unless otherwise determined by the administrator, the purchase price of the shares will be 85% of the lower of the fair market value of common stock on the first day of an offering or on the date of purchase. Participants may end their participation at any time and deductions not yet used in a purchase are refundable upon employment termination. The Company initiated its first 2016 ESPP offering period on August 1, 2019 and new offering periods occur every six months thereafter, each consisting of two purchase periods of six months in duration ending on or about January 31st and July 31st of each year. A participant may only be in one offering at a time. On February 1, 2020, there were 566,573 shares purchased in connection with the initial offering period. The 2016 ESPP contains an offering reset provision whereby if the fair market value of a share on offering date of an ongoing offering is less than or equal to the fair market value of a share on a new offering date, the ongoing offering will terminate immediately after the purchase date and rolls over to the new offering. During the nine months ended September 30, 2020, 40 participants in the initial offering were automatically rolled over to the subsequent new offering as a result this reset provision and an incremental cost of less than $0.1 million.
The 2016 ESPP is considered compensatory for financial reporting purposes.
1997 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 3,093,386 shares of the Company’s common stock underlying options have vested under the 1997 Plan. Upon the effectiveness of the 2015 Plan, the Company no longer grants any awards under the 1997 Plan.
|
10. |
Fair Value Measurements |
The following table represents the fair value hierarchy of the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019 (in thousands):
| (1) | Classified as cash and cash equivalents due to their short-term maturity |
23
At September 30, 2020, the 2025 Notes no longer had sufficient trading activity and therefore transferred from Level 2, to Level 3. The following table provides a reconciliation of the beginning and ending net balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3) (in thousands):
The recurring Level 3 fair value measurements of the embedded features of the notes payable include the following significant unobservable inputs at September 30, 2020:
|
11. |
Income Taxes |
The Company has not recorded any tax provision or benefit for the three and nine months ended September 30, 2020 or September 30, 2019. The Company has provided a valuation allowance for the full amount of its net deferred tax assets since 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 September 30, 2020 and December 31, 2019.
On March 27, 2020, Congress enacted the CARES Act, as amended by the Flexibility Act, to provide certain relief as a result of the COVID-19 pandemic. The enactment of the CARES Act did not result in any material adjustments to the Company’s income tax provision or net deferred tax assets for the three and nine months ended September 30, 2020.
|
12. |
Related Party Transactions |
Roche Holding A.G, through its ownership interests in Roche Finance Ltd (collectively, “Roche”), has a noncontrolling ownership interest in the Company. Revenue from Roche during each of the three and nine months ended September 30, 2020 was $0.3 million. For the three and nine months ended September 30, 2019, revenue from Roche was $3.4 million and $8.7 million, respectively. Amounts due from Roche were less than $0.1 million at September 30, 2020 and $7.1 million at December 31, 2019. At each of September 30, 2020 and December 31, 2019, the Company had committed replacement obligations under warranties of $0 and $0.4 million, respectively.
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13. |
Subsequent Events |
Equity Line of Credit with Energy Capital, LLC
On November 9, 2020, the Company, entered into an equity line agreement (the “Equity Line Agreement”) with Energy Capital, LLC, a Florida limited liability company (“Energy Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Energy Capital is committed to purchase up to an aggregate of
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$12.0 million of shares of the Company’s newly designated series B convertible preferred stock (the “Series B Preferred Stock”) at the Company’s request from time to time during the 24-month term of the Equity Line Agreement.
Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that the Company has less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), the Company has the right, in its sole discretion, to present Energy Capital with a purchase notice (each, a “Regular Purchase Notice”) directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of the Company’s Series B Preferred Stock at a per share price (the “Purchase Price”) equal to $1,000 per share of Series B Preferred Stock, with each share of Series B Preferred Stock initially convertible into common stock (the “Common Stock”), beginning six months after the date of its issuance, at a conversion price of $0.3951 per share. The Equity Line Agreement provides that the Company shall not effect any Regular Purchase under the Equity Line Agreement on any date where the closing price of the Company’s Common Stock on the NYSE American is less than $0.25 without the approval of Energy Capital.
The holders of Series B Preferred Stock generally will be entitled to vote with the holders of the shares of Common Stock and Series A Preferred Stock on all matters submitted for a vote of holders of shares of Common Stock (voting together with the holders of shares of Common Stock and Series A Preferred Stock as one class) on an as-converted basis. Additionally, certain matters will require the approval of the majority of the outstanding Series B Preferred Stock, voting as a separate class, including (i) altering or changing adversely the powers, privileges, preferences or rights of the Series B Preferred Stock, or (ii) amendments, modifications, repeal or waiver of any provision of the Company’s certificate of incorporation, bylaws or of the Certificate of Designations that would adversely affect the rights, preferences, privileges or powers of the Series B Preferred Stock.
Energy Capital has agreed that, during any time prior to the termination of the Equity Line Agreement, neither it nor any of its agents, representatives or affiliates shall engage in any direct or indirect short-selling or hedging of the Company’s Common Stock which establishes a net short position with respect to the Common Stock.
Concurrently with entry into the Equity Line Agreement, the Company 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 expires, if unexercised, on November 9, 2030.
Extension of Masters Capital Purchase Option
On November 9, 2020, the Company and Masters entered into a side letter extending the expiration date of Masters’ option to purchase up to $27 million of shares of Series A Convertible Preferred Stock to January 11, 2021.
Filed Amended and Restated Certificate of Incorporation
On October 22, 2020, the Company held a special meeting of stockholders (the “Special Meeting”). At the Special Meeting, stockholders approved the amendment to the Company’s Amended and Restated Certificate of Incorporation (the “Amendment”) to increase the authorized number of shares of common stock from 450,000,000 shares to 900,000,000 shares.
Following the approval by the Company’s stockholders of the Amendment, on October 26, 2020, the Company filed the Amendment with the Secretary of State of the State of Delaware.
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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, uncertainties, and assumptions, including the duration and severity of the COVID-19 pandemic and its impact on our business and financial performance, 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, 2019, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2020, as amended on April 28, 2020. 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 subsidiary.
Overview and Business Updates
We are a medical technology company focused on the development and commercialization of long-term, implantable continuous glucose monitoring, or CGM, systems to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy. Our Eversense and Eversense XL CGM systems are designed to continually and accurately measure glucose levels in people with diabetes via a small under-the-skin sensor, a lightweight and rechargeable smart transmitter worn on the skin, and a convenient app for real-time glucose monitoring and management for a period of up to 90 and 180 days, respectively, as compared to seven to 14 days for non-implantable CGM systems.
The extended life Eversense XL CGM System, for use up to 180 days, is currently available in select markets in Europe, the Middle East, and Africa, or EMEA. The Eversense CGM System, for use up to 90 days, launched commercially in the United States in July 2019 and is currently available in the United States. 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 our Eversense systems are widely dependent on the ability of patients to obtain coverage and adequate reimbursement from third-party payors or government agencies. We leverage and target regions where we have coverage decisions for patient device use and provider insertion and removal procedure payment. During the nine months ended September 30, 2020, we received positive payor coverage decisions from Cigna Corporation, who has more than 17 million medical customers and offers a Medicare Advantage plan in 17 states and Washington DC, Blue Cross and Blue Shield plans, and announced local coverage determinations, or LCD, proposals for implantable therapeutic CGMs such as Eversense by all the Medicare Administrative Contractors to enable Eversense to be used by Medicare beneficiaries as a Part B physician service. We continue to see momentum of broad national payor acceptance, including on August 3, 2020, the Centers for Medicare and Medicaid Services, or CMS, released its Calendar Year 2021 Medicare Physician Fee Schedule Proposed Rule that announces proposed policy changes for Medicare payments, including the proposed establishment of national payment amounts for the three CPT© Category III codes describing the insertion (CPT 0446T), removal (0447T), and removal
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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.
Development and Commercialization of Eversense
On August 9, 2020, we entered into a collaboration and commercialization agreement with Ascensia Diabetes Care Holdings AG pursuant to which we have granted Ascensia the exclusive right to distribute the Company’s 90-day Eversense continuous glucose monitoring system and our 180-day Eversense continuous glucose monitoring system worldwide, with the following initial exceptions: (i) until January 31, 2021, the territory does not include countries covered by our current 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 does not include countries covered by our distribution agreement with Rubin Medical, which are Sweden, Norway and Denmark; and (iii) until May 31, 2022, the territory does not include Israel. Pursuant to the Commercialization Agreement, Ascensia has agreed to begin actively marketing and selling Eversense and Eversense XL as follows: (i) for the United States, Eversense at a date to be agreed upon and Eversense XL upon receipt of marketing approval from the U.S. Food and Drug Administration, or FDA; (ii) for Germany, Italy and Switzerland, Eversense XL beginning on February 1, 2021; and (iii) for Sweden, upon the later of the receipt of both marketing approval from the U.S. Food and Drug Administration and a new CE mark approval for a new Eversense XL version, and October 1, 2021. Ascensia will receive a portion of net revenue at specified tiered percentages ranging from the mid-teens to the mid-forty’s based on levels of global net revenues. Ascensia is obligated to achieve specified minimum annual revenue targets and meet specified levels of sales and marketing spend. Ascensia will purchase Eversense and Eversense XL from us at prices to be negotiated based on parameters set forth in the commercialization agreement. We will be responsible for product development and manufacturing, including regulatory submissions, approvals and registrations, and Ascensia will be responsible for sales, marketing, market access, patient and provider onboarding and customer support. We have agreed to establish a joint marketing committee with equal representation from each party.
In December 2018, we initiated the PROMISE pivotal clinical trial to evaluate the safety and accuracy of Eversense XL for a period of up to 180 days in the United States. On September 30, 2019, we completed enrollment of the PROMISE trial and had our last patient complete their 180-day visit during the first quarter of 2020. The 181 participants in the trial had the Eversense sensor inserted subcutaneously at eight sites across the United States where the safety and efficacy of the system was evaluated over a 180-day period. In the trial, we observed performance matching that of the current Eversense 90-day product available in the United States, with a mean absolute relative difference, or MARD, of 8.5%-9.6%. This result was achieved with reduced calibration, down to one per day, while also doubling the sensor life to 180 days. Following the results of the PROMISE trial, on September 30, a Premarket Approval, or PMA, supplement application to extend the wearable life of the Eversense CGM System to 180 days was submitted to the FDA. If approved by the FDA, this new product would double sensor duration of Eversense in the United States, with half of the insertion and removal procedures required, and would provide more than 12 times longer sensor duration than other CGM systems available in the United States. We anticipate a decision in the first half of 2021, and if positive, we will begin transitioning patients in the United States to the new 180-day Eversense product. However, shelter-in-place orders and other impacts from the COVID-19 pandemic could alter or delay the timing of response by the FDA regarding our submission.
On February 26, 2020, we announced that the FDA approved a subgroup of PROMISE trial participants to continue for a total of 365 days to gather feasibility data on the safety and accuracy of a 365-day sensor. This sub-set of 30 participants who all had sensors with the modified chemistry will be left undisturbed for 365 days with the goal of measuring accuracy and longevity over the full 365 days. Following information gathered from this sub-set and continued development efforts, in the first half of 2021 we plan to seek Investigational Device Exemption, or IDE, from the FDA. If the IDE is approved, we would then begin enrollment of a clinical trial in the second half of 2021, which would also include a pediatric population.
In April 2020, we announced that we received regulatory approval in Europe 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
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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.
COVID-19
On January 30, 2020, the World Health Organization, or the WHO, announced a global health emergency because of a new strain of coronavirus, or COVID-19, and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. In response to the pandemic, many states and jurisdictions have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus. The state of Maryland, where we are headquartered, has been affected by COVID-19. The Governor of Maryland issued an order closing all non-essential businesses, which took effect on March 23, 2020. Although the state of Maryland is gradually undergoing a phased reopening plan, substantially all of our workforce is still working from home either all or substantially all of the time. Additionally, because our sensor requires an in-clinic procedure, we saw a reduction in access to clinics and sensor insertions during the initial outbreak.
During the third quarter of 2020, reinsertion rates for existing patients on Eversense were more favorable than we originally anticipated at the start of the outbreak, leading to several new order requests from our distributors, and adjustments to concession allowances previously provided to some of our customers in the United States to reflect actual product usage. While these upward trends are promising, insertion volumes are still below pre-COVID-19 levels. Additionally, the recent COVID-19 pandemic infection rates in the United States have been increasing and it is difficult to predict the longevity and severity COVID-19 will have on our business.
Streamlined Operational Focus
As a result of the COVID-19 pandemic’s disruption to our operations, suppliers, employees, and the healthcare community in which we sell to and support, and our limited cash on hand after repayment of the Solar Loan Agreement (as defined below) in March 2020, we made significant reductions in our cost structure and operations to improve cash flow and generate future expenditure savings to ensure the long-term success of Eversense. Specifically, in the first quarter of 2020, we temporarily suspended commercial sales and marketing of the Eversense CGM System in the United States to new patients to solely focus our resources on supporting existing users, including ensuring broader insurance coverage for Eversense, and the development and regulatory submission of our new 180-day Eversense product in the United States. In connection with these actions, on March 26, 2020, we reduced our workforce by approximately 60%, over half of which were sales personnel. Associated one-time employee termination benefit costs in the amount of $1.4 million were paid and recorded in our accompanying unaudited condensed consolidated financial statements during the nine months ended September 30, 2020.
Net Revenue Impact
As a result of the COVID-19 pandemic, redistribution of country-specific government funding to COVID-19 efforts, overall excess inventory at our distributors, and the announcement of our streamlined focus in the first quarter of 2020, our net revenue for the three and nine months ended September 30, 2020 was significantly lower than the three and nine months ended September 30, 2019. We are uncertain as to the longevity or severity these factors may have on our future sales.
Under our exclusive distribution agreement with Roche Diagnostics International AG and Roche Diabetes Care GmbH, or collectively, Roche, we have granted Roche the exclusive right to market, sell and distribute Eversense in the EMEA, excluding Scandinavia and Israel. In addition, Roche has exclusive distribution rights in 17 additional countries, including Brazil, Russia, India and China, as well as select markets in the Asia Pacific and Latin American regions. This agreement expires in January 2021. During the three and nine months ended September 30, 2020, Roche did not place any commercial sales orders in accordance with their quarterly requirements or towards their annual binding minimum requirements for sensors and transmitters. Revenues for these corresponding periods in 2020 represent purchases for miscellaneous Eversense system components.
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We extended payment terms and provided one-time COVID-19 pandemic relief concessions to some of our customers in the United States for allowances up to a specified amount of first quarter purchases if they are unable to sell through Eversense and related components on hand prior to expiry, which occurred in the third quarter of 2020 and we expect to continue to occur in the fourth quarter of 2020. In efforts to continue supporting our installed patient base, our Eversense Bridge Program remains available for eligible existing patients on Eversense and we have removed the two-sensor limit previously prescribed by the program.
Inventory
As a result of significant changes and uncertainty regarding our forecasted demand and related expiry concerns, $13.6 million of inventory and related assets is impaired at September 30, 2020 with a corresponding charge to cost of sales in our unaudited condensed consolidated results of operations and comprehensive loss of $15.1 million for the nine months ended September 30, 2020. We will continue to assess our inventory and supplier related assets for recoverability if conditions materially change or worsen.
Long-lived Assets
We reviewed our long-lived assets, including property and equipment and right-of-use assets, for recoverability, which resulted in a loss on disposal of property and equipment in the amount of $0.2 million for the nine months ended September 30, 2020, which we recorded to other income (expense) in our unaudited condensed consolidated statement of operations and comprehensive loss. The impairment mostly related to the uncertainty of conducting validation efforts to be able to place new manufacturing equipment into service.
The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.
Equity Line of Credit
On November 9, 2020, we entered into an equity line agreement, or the Equity Line Agreement, with Energy Capital, LLC, a Florida limited liability company, or Energy Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Energy Capital is committed to purchase up to an aggregate of $12.0 million of shares of our newly designated series B convertible preferred stock, or the Series B Preferred Stock, at our request from time to time during the 24-month term of the Equity Line Agreement.
August 2020 Financings
On August 9, 2020, we entered into a Collaboration and Commercialization Agreement with Ascensia Diabetes Care Holdings AG, or Ascensia, and entered into a financing agreement pursuant to which we issued $35.0 million in aggregate principal amount of Senior Secured Convertible Notes due in October 2024, or the 2024 Notes, to Ascensia’s parent company, PHC Holdings Corporation, or PHC, on or about August 14, 2020, or the Closing Date. We also issued PHC 2,941,176 shares of common stock to PHC as a financing fee. We also have the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon obtaining approval for the 180-day Eversense product for marketing in the United States before such date. Upon the closing of the 2024 Notes, we prepaid the First Lien Notes described below in full in the amount of approximately $17.6 million, which includes the discounted prepayment premium.
Additionally, on August 9, 2020, we entered into a Stock Purchase Agreement with Masters Special Situations, LLC and certain affiliates thereof, or Masters, pursuant to which we issued and sold to Masters 3,000 shares of convertible preferred stock, or the Series A Preferred Stock, at a price of $1,000.00 per share in an initial closing, expected to occur on the Closing Date. Masters also has the option to purchase up to an additional 27,000 shares of Series A Preferred Stock at a price of $1,000.00 per share in a subsequent closing on or before January 11, 2021, subject to the terms and conditions of the Stock Purchase Agreement.
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On August 9, 2020, we entered into a First Amendment to Note Purchase and Exchange Agreement and Notes, or the Amendment, with Highbridge Capital Management, LLC, or Highbridge. Pursuant to the Amendment, effective as of the Closing Date, Highbridge agreed to an extension of the maturity date for the Second Lien Notes to August 2023. Additionally, the holders of the Second Lien Notes will have the right to convert the aggregate principal of the Second Lien Notes (together with any applicable prepayment premium) to common stock at a price per share equal to 90% of the greater of (i) the daily volume weighted average of the price per share of the common stock, on the conversion date, or if the conversion date is not a trading date, the trading day immediately prior to the conversion date and (ii) $0.33 per share. This conversion option has a daily limit of $1,000,000 in aggregate converted principal (inclusive of principal amount of First Lien Notes that are voluntarily converted).
Repayment of Solar Loan
On March 22, 2020, we and Solar Capital Ltd., or Solar, terminated our Loan and Security Agreement, dated as of July 16, 2019, or the Solar Loan Agreement. As previously disclosed in our Annual Report on Form 10-K, we expected to default on our obligations under the Solar Loan Agreement and were seeking a waiver from Solar of any default under the Solar Loan Agreement. Following discussions with Solar, we were unable to negotiate such a waiver and, as a result, it was determined to terminate the Solar Loan Agreement.
In connection with the termination, we paid $48.5 million representing all amounts outstanding under the Solar Loan Agreement, including the principal amount and interest of the loans, a payoff fee of 6.45% of the loans outstanding, a prepayment premium of 3.0% of the loans outstanding and other obligations owed to Solar thereunder. We issued warrants in connection with the Solar Loan Agreement to purchase an aggregate of 1,125,000 shares of our common stock with an exercise price of $1.20 per share, which are exercisable until July 25, 2029.
We recorded a loss on the extinguishment of debt in the amount of $4.5 million reflecting the difference between the repayment amount, excluding interest accrued and due, and the carrying value of the principal balance, accrued interest, unamortized debt issuance costs and unaccreted prepayment fee at March 22, 2020 in other income (expense) in our accompanying unaudited condensed consolidated statement of operations and comprehensive loss during the nine months ended September 30, 2020.
April 2020 Financings
On April 22, 2020, we received $5.8 million in loan funding from the Paycheck Protection Program, or PPP, established pursuant to the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, or the Flexibility Act, and administered by the U.S. Small Business Administration, or SBA, to support payroll, rent, and utilities incurred during a defined period.
On April 24, 2020, we received $15.0 million through the issuance and sale of First Lien Secured Notes due October 2021, or the First Lien Notes, pursuant to a Loan and Security Agreement, or the Highbridge Loan Agreement, with certain funds managed by Highbridge, as the lenders, together with the other lenders from time to time party thereto, or the Lenders, and Wilmington Savings Fund Society, SCB, as collateral agent. Under the terms of the Highbridge Loan Agreement, we may issue up to an additional $5.0 million in aggregate principal amount of First Lien Notes in a subsequent closing. In connection with the Highbridge Loan Agreement, we also issued 1,500,000 shares of common stock to the Lenders as a commitment fee.
Highbridge was current holders of $24.0 million principal amount of our convertible senior subordinated notes due 2025, or the 2025 Notes. In connection with the Highbridge Loan agreement, we entered into a Note and Purchase Exchange Agreement with the Lenders, pursuant to which those 2025 Notes were exchanged for (i) $15.7 million aggregate principal amount of newly issued Second Lien Secured Notes, or the Second Lien Notes, (ii) 11,026,086 shares of common stock, (iii) warrants to purchase up to 4,500,000 shares of our common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged.
These financing arrangements are further described under Liquidity and Capital Resources.
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Going Concern
We believe that the transactions with Ascensia, PHC and Masters described above will provide the financial resources and mutual commitment to support manufacturing of Eversense and continued product development, including the expected launch of the new 180-day Eversense product. The timing and success of these collaborations and financings are dependent on certain events occurring in accordance with our plans, and may be influenced by uncontrollable external factors, including restrictions or impacts of COVID-19. As a result of these recent subsequent events and that the transactions have not yet closed, management’s doubt regarding our ability to continue as a going concern for the next twelve months from the date this Quarterly Report on Form 10-Q is filed is not yet alleviated.
Financial Overview
Revenue
We generate product revenue from sales of the Eversense system and related components and supplies at a fixed price to third-party distributors in the European Union and to a network of strategic fulfillment partners in the United States, or collectively, Customers, who then resell the products to health care providers and patients. We are paid for our sales directly to the Customers, regardless of whether or not the Customers resell the products to health care providers and patients. Under the terms of our distribution agreement with Roche, Roche is contractually obligated to make certain minimum purchases of Eversense XL systems from us and, accordingly, the revenue we recognize for any given period is not necessarily indicative of the level of sales to end users for that, or any other, period.
Revenue from product sales is recognized at a point in time when the Customers obtain control of our product based upon the delivery terms as defined in the contract at an amount that reflects the consideration which we expect to receive in exchange for the product. Contracts with our distributors contain performance obligations, mostly for the supply of goods, and is typically satisfied upon transfer of control of the product. 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.
We recognize revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in a future period. Our contracts may contain some form of variable consideration such as prompt-pay discounts or tier-volume price discounts. Variable consideration, including reimbursements paid by us to our Customers in accordance with the Eversense Bridge Program initiated in March 2019 and to a lesser extent, other discounts, is treated as a reduction in revenue when the product sale is recognized. Depending on the variable consideration, we develop estimates for the expected value based on the terms of the agreements, historical data, insurance payor mix, reimbursement rates, and market conditions. In connection with the Eversense Bridge Program, we reimburse participating Customers an amount up to a fixed maximum for the difference in the cost of the Eversense CGM System and what they collect from insurance payors and the patient’s fee of $99. Our Customers are responsible for confirming patient insurance coverage, obtaining pre-authorizations, determining eligibility, and continuously provide us with data regarding which patient orders are under the program and which are not. We use this data, along with actual reimbursements that have been validated to patient claims, to support our expected reimbursement estimates. Estimated reimbursement payments for product shipped to Customers but not provided to a patient within the same reporting period are recorded within accrued expenses and other current liabilities in the accompanying consolidated balance sheets. Our estimates used in determining the variable consideration on a sale transaction may be adjusted each reporting period depending on actual results, provided a change does not reflect a modification to the original contract.
Contract assets consist of trade receivables from Customers and contract liabilities consist of amounts due to the Customers in connection with the Eversense Bridge Program, classified as patient access and incentive programs within accrued liabilities on the accompanying unaudited consolidated balance sheets. Trade receivables for customers in the United States are recorded at net realizable value, which is generally the contractual price but may be net of anticipated prompt-pay or promotional discounts.
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Concentration of Revenue and Customers
For the three months ended September 30, 2020 and 2019, we derived 33% and 78% of our total net revenue, respectively, from one customer, Roche Diabetes Care GmbH. For the nine months ended September 30, 2020 and 2019, we derived 29% and 70% of our total net revenue, respectively, from one customer, Roche Diabetes Care GmbH. During the three and nine months ended September 30, 2020, Roche did not place commercial sales orders in accordance with their quarterly requirements or towards their annual binding minimum requirements for sensors. Revenues for these corresponding periods in 2020 represent purchases for transmitters and miscellaneous Eversense XL system components.
Revenue by Geographic Region
The following table sets forth net revenue derived from our two primary geographical markets, the United States and outside of the United States, based on the geographic location to which we deliver the product, for the three and nine months ended September 30, 2020 and 2019:
Accounts Receivable
Accounts receivable consist of amounts due from our Customers and are recorded at net realizable value, which may include reductions for allowances for doubtful accounts at the time potential collection risk is identified or for promotional or prompt-pay discounts offered. We extended payment terms and provided one-time COVID-19 pandemic relief concessions to some of our customers in the United States for allowances up to a specified amount if they are unable to sell through Eversense and related components on hand prior to product expiry, which began to occur in the third quarter of 2020 and we expect to continue to occur in the fourth quarter of 2020. We do not have a history of collectability concerns; however, an immaterial allowance for uncollectible accounts was recorded as of September 30, 2020. There were no provisions for uncollectible accounts recorded against accounts receivable at December 31, 2019.
Use of Estimates
The preparation of our 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 revenue and expenses during the reporting period. In our accompanying unaudited consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, recoverability of long-lived assets, deferred taxes and valuation allowances, derivative assets and liabilities, obsolete inventory, warranty obligations, variable consideration related to revenue, depreciable lives of property and equipment, and accruals for clinical study costs, which are accrued based on estimates of work performed under contract. We considered COVID-19 related impacts to
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our estimates, as appropriate, within our unaudited condensed consolidated financial statements and there may be changes to those estimates in future periods due to the uncertainties surrounding the severity and duration of the COVID-19 pandemic. Actual results could differ from those estimates; however, we do not believe that such differences would be material.
Recent Accounting Pronouncements
Recently Adopted
In August 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements on fair value measurements. The new standard includes additional disclosure requirements regarding the range and weighted average to develop significant unobservable inputs within Level 3 fair value measurements. We adopted this on its effective date, January 1, 2020 and did not have a material impact on the consolidated financial statements and related disclosures.
Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities in unrealized loss positions, the new standard requires allowances to be recorded instead of reducing the amortized cost of the investment. We do not currently hold or plan to invest in available-for-sale securities and have not historically experienced collection issues or bad debts with trade receivables. Accordingly, we do not expect this to have a significant impact on our consolidated financial statements and related disclosures at this time. We will adopt this guidance on its effective date for smaller reporting companies, January 1, 2023.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact that this guidance will have on our consolidated financial statements.
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Results of Operations
Comparison of the three months ended September 30, 2020 and 2019
The following table sets forth our results of operations for the three months ended September 30, 2020 and 2019 (in thousands):
Revenue, net
Our net revenue decreased $3.6 million to $0.8 million for the three months ended September 30, 2020, compared to $4.3 million for the three months ended September 30, 2019. This decrease was a result of deferral of sales orders by Roche in the third quarter of 2020, and our decision to streamline our operational focus in March 2020 and temporarily suspend commercial sales to new patients in the United States.
Cost of sales
Our cost of sales decreased $7.7 million to $(0.1) million for the three months ended September 30, 2020, compared to $7.7 million for the three months ended September 30, 2019. The decrease was primarily due to the sales of previously impaired inventory, and the release of supplier allowances from the temporary suspension of manufacturing activities resulting from changes made to our operational focus.
Gross profit was $0.8 million and $(3.3) million for the three months ended September 30, 2020 and 2019, respectively. The increase in gross profit was primarily due to lower cost of sales.
Sales and marketing expenses
Sales and marketing expenses were $3.2 million for the three months ended September 30, 2020, compared to $11.6 million for the three months ended September 30, 2019, a decrease of $8.3 million. The decrease was primarily the result of our headcount reduction on March 26, 2020, which impacted the majority of the sales organization, resulting in
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a decline in salary and personnel costs of $5.5 million and a decline of $2.8 million related to travel, trade shows, consultants and other marketing programs to market Eversense.
Research and development expenses
Research and development expenses were $4.6 million for the three months ended September 30, 2020, compared to $11.1 million for the three months ended September 30, 2019, a decrease of $6.5 million. The decrease was due to decrease of $2.1 million of consulting, outside services and other expenses resulting from our change in operational plans to focus on our regulatory submission for the new 180-day Eversense product in the United States, $3.6 million for clinical trial costs primarily related to the PROMISE trial and $0.8 million for salary and other personnel related costs following our reduction in workforce in March 2020.
General and administrative expenses
General and administrative expenses were $5.5 million for the three months ended September 30, 2020, compared to $5.4 million for three months ended September 30, 2019, an increase of $0.1 million. The increase was primarily due to an increase of $0.7 million for personnel costs related to stock-based compensation, offset by a reductions of $0.3 million for legal fees and $0.3 million of other administrative expenses resulting from our reduction in workforce in March 2020.
Total other (expense) income, net
Total other expense, net, was $11.0 million for the three months ended September 30, 2020, compared to other income, net, of $11.9 million for the three months ended September 30, 2019, a decrease of $22.8 million. The decrease was primarily due to a $9.1 million increase in loss on extinguishment and issuance of debt, a $15.7 million change in the fair value of our derivatives and a decrease of $0.5 million in interest income, offset by a $2.4 million decrease in debt issuance costs.
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Comparison of the nine months ended September 30, 2020 and 2019
The following table sets forth our results of operations for the nine months ended September 30, 2020 and 2019 (in thousands):
Revenue, net
Our net revenue decreased $11.3 million to $1.1 million for the nine months ended September 30, 2020, compared to $12.3 million for the nine months ended September 30, 2019. This decrease was a result of deferral of sales orders by Roche in the first nine months of 2020, and our decision to streamline our operational focus in March 2020 and temporarily suspend commercial sales to new patients in the United States.
Cost of sales
Our cost of sales decreased $2.5 million to $21.0 million for the nine months ended September 30, 2020, compared to $23.6 million for the nine months ended September 30, 2019. The decrease was primarily due to a decrease in cost of sales of $9.7 million related to lower customer sales and a decrease of $0.9 million related to lower personnel related costs, offset by an increase of $8.0 million for impairment charges, scrap and write-offs for inventory and related assets during the nine months ended September 30, 2020 due to uncertainty in demand forecasts from changes made to our operational focus and current economic conditions.
Gross profit was $(19.9) million and $(11.2) million for the nine months ended September 30, 2020 and 2019, respectively. The decrease in gross profit was primarily due to lower sales and impairment charges for inventory and related assets.
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Sales and marketing expenses
Sales and marketing expenses were $17.5 million for the nine months ended September 30, 2020, compared to $38.6 million for the nine months ended September 30, 2019, a decrease of $21.1 million. The decrease was primarily the result of our headcount reduction on March 26, 2020, which impacted the majority of the sales organization, resulting in a decline in salary and personnel costs of $10.4 million and a decline of $10.6 million related to travel, trade shows, consultants and other marketing programs to market Eversense.
Research and development expenses
Research and development expenses were $15.7 million for the nine months ended September 30, 2020, compared to $28.7 million for the nine months ended September 30, 2019, a decrease of $13.0 million. The decrease was primarily due to decreases of $5.9 million for consulting expenses, outside services and other development expenses, $5.5 million related to PROMISE and other clinical studies and $1.6 million in personnel related costs following our reduction in workforce in March 2020.
General and administrative expenses
General and administrative expenses were $15.6 million for the nine months ended September 30, 2020, compared to $17.3 million for nine months ended September 30, 2019, a decrease of $1.7 million. The decrease was primarily due to a decrease of $1.3 million for net personnel related costs from higher severance costs in 2019 and our reduction in workforce in 2020, along with a net $0.4 million decrease for patents, legal and other administrative expenses in connection with operational changes and issues related to the COVID-19 pandemic.
Total other (expense) income, net
Total other expense, net, was $4.7 million for the nine months ended September 30, 2020, compared to other income, net, of $15.8 million for the nine months ended September 30, 2019, a decrease of $20.6 million. The decrease was primarily due to a $20.0 million increase in loss on extinguishment and issuance of debt, a $4.1 million increase of interest expense and a $1.4 million decrease to interest income, offset by a $2.9 million gain on fair value and change in fair value of derivatives and a $2.1 million decrease of debt issuance costs.
Liquidity and Capital Resources
Sources of Liquidity
To date, we have funded our operations principally through the issuance of preferred stock, common stock and debt. As of September 30, 2020, we had cash, cash equivalents, and restricted cash of $26.4 million.
On August 9, 2020, we entered into a financing agreement with Ascensia pursuant to which we issued $35.0 million in aggregate principal amount 2024 Notes, to Ascensia’s parent company, PHC, on the Closing Date. We also issued PHC 2,941,176 shares of common stock to PHC as a financing fee. We also have the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon obtaining approval for the 180-day Eversense product for marketing in the United States before such date. Upon the closing of the 2024 Notes, we prepaid the First Lien Notes in full in the amount of approximately $17.6 million, which includes the discounted prepayment premium.
Additionally, on August 9, 2020, we entered into a Stock Purchase Agreement with Masters, pursuant to which we issued and sold to Masters 3,000 shares of Series A Preferred Stock, at a price of $1,000.00 per share in an initial closing, expected to occur on the Closing Date. Masters also has the option to purchase up to an additional 27,000 shares of Series A Preferred Stock at a price of $1,000.00 per share in a subsequent closing on or before January 11, 2021, subject to the terms and conditions of the Stock Purchase Agreement. Each share of Series A Preferred Stock will initially be convertible into a number of shares of common stock equal to $1,000 divided by the conversion price of $0.476 per share, subject to customary anti-dilution adjustments, including in the event of any stock split. The Series A
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Preferred Stock will rank senior to the common stock. Upon a liquidation, dissolution or winding up of the Company, each share of Series A Preferred Stock will be entitled to receive an amount per share equal to the greater of the purchase price paid and the amount that the holder would have been entitled to receive at such time if the Series A Preferred Stock were converted into common stock. The holders will also be entitled to participate in dividends declared or paid on the common stock on an as-converted basis. If we undergo a change of control, each holder has the right to cause us to redeem any or all of the Series A Preferred Stock for cash consideration equal to the liquidation amount. The holders of Series A Preferred Stock generally will be entitled to vote with the holders of the shares of common stock on all matters submitted for a vote of holders of shares of common stock (voting together with the holders of shares of common stock as one class) on an as-converted basis. Additionally, certain matters will require the approval of the majority of the outstanding Series A Preferred Stock, voting as a separate class, including (i) altering or changing adversely the powers, privileges, preferences or rights of the Series A Preferred Stock, or (ii) amendments, modifications, repeal or waiver of any provision of our certificate of incorporation, bylaws or of the certificate of designations that would adversely affect the rights, preferences, privileges or powers of the Series A Preferred Stock.
On November 9, 2020, we entered into an equity line agreement, or the Equity Line Agreement, with Energy Capital, LLC, a Florida limited liability company, or Energy Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Energy Capital is committed to purchase up to an aggregate of $12.0 million of shares of our newly designated series B convertible preferred stock, or the Series B Preferred Stock, at our request from time to time during the 24-month term of the Equity Line Agreement.
Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that we have less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), we have the right, in our sole discretion, to present Energy Capital with a purchase notice, or a Regular Purchase Notice, directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of our Series B Preferred Stock at a per share price, or the Purchase Price, equal to $1,000 per share of Series B Preferred Stock, with each share of Series B Preferred Stock initially convertible into common stock, beginning six months after the date of its issuance, at a conversion price of $0.3951 per share. The Equity Line Agreement provides that we shall not affect any Regular Purchase under the Equity Line Agreement on any date where the closing price of the common stock on the NYSE American is less than $0.25 without the approval of Energy Capital.
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, or the Warrant. The Warrant expires, if unexercised, on November 9, 2030
Common Stock
In November 2019, we entered into an Open Market Sale Agreement with Jefferies LLC which allows us to issue and sell up to $50 million in gross proceeds of our common stock. As of September 30, 2020, we have received $0.1 million in net proceeds from the sale of 175,289 shares under this agreement.
Indebtedness
Term Loans
As described in our Overview and Business Updates, on March 22, 2020 we terminated our Loan and Security Agreement with Solar and repaid the $45.0 million principal balance in full.
PPP Loan
On April 22, 2020, we received $5.8 million in loan funding from the PPP pursuant to the CARES Act, as amended by the Flexibility Act, and administered by the SBA. The unsecured loan, or the PPP Loan, is evidenced by the PPP Note dated April 21, 2020, or the PPP Note, in the principal amount of $5.8 million with Silicon Valley Bank, or the Bank.
38
Under the terms of the PPP Note and the PPP Loan, interest accrues on the outstanding principal at a rate of 1.0% per annum. The term of the PPP Note is two years, though it may be payable sooner in connection with an event of default under the PPP Note. To the extent the loan amount is not forgiven under the PPP, we are obligated to make equal monthly payments of principal and interest, beginning after determination of forgiveness by the Bank. We may apply for forgiveness any time on or before the maturity date of the loan. If we do not apply for loan forgiveness within ten months after the last day of the covered period, the PPP loan is no longer deferred, and we must begin paying principal and interest.
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, we may apply for forgiveness for all or a part of our PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by us during the specified period after the loan origination for certain purposes including payroll costs, interest on debt obligations incurred prior to February 15, 2020, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered specified period will qualify for forgiveness. As a result of our workforce reduction, the amount of forgiveness will correspondingly decrease.
The PPP Note may be prepaid in part or in full, at any time, without penalty. The PPP Note provides for certain customary events of default, including (i) failing to make a payment when due under the PPP Note, (ii) failure to do anything required by the PPP Note or any other loan document, (iii) defaults of any other loan with the Bank, (iv) failure to disclose any material fact or make a materially false or misleading representation to the Bank or SBA, (v) default on any loan or agreement with another creditor, if the Bank believes the default may materially affect our ability to pay the PPP Note, (vi) failure to pay any taxes when due, (vii) becoming the subject of a proceeding under any bankruptcy or insolvency law, having a receiver or liquidator appointed for any part of our business or property, or making an assignment for the benefit of creditors, (viii) having any adverse change in financial condition or business operation that the Bank believes may materially affect our ability to pay the PPP Note, (ix) if we reorganize, merge, consolidate, or otherwise change ownership or business structure without the Bank’s prior written consent, or (x) becoming the subject of a civil or criminal action that the Bank believes may materially affect our ability to pay the PPP Note. Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require immediate payment of all amounts owed under the PPP Note, collect all amounts owing from us, and file suit and obtain judgment against us.
Highbridge Loan Agreement
On April 21, 2020, we entered into the Highbridge Loan Agreement, with certain funds managed by Highbridge Capital Management, LLC, or Highbridge, as the lenders (together with the other lenders from time to time party thereto, or the Lenders) and Wilmington Savings Fund Society, SCB, as collateral agent.
Pursuant to the Highbridge Loan Agreement, we borrowed an aggregate principal amount of $15.0 million on April 24, 2020 through the issuance and sale of First Lien Notes. In connection with the Highbridge Loan Agreement and receipt of the first tranche of borrowing, we issued 1,500,000 shares of our common stock to the Lenders as a commitment fee. Upon the closing of the 2024 Notes, we prepaid the First Lien Notes in full in the amount of approximately $17.6 million, which includes the discounted prepayment premium.
The First Lien Notes were secured, senior obligations that bear interest at the annual rate of 12% or, at our election, payment in kind at an annual rate of 13%, payable monthly in arrears. The First Lien Notes would have matured on October 24, 2021, or the First Lien Maturity Date, unless earlier repurchased, redeemed or converted in accordance with their terms. The obligations under the First Lien Notes were secured by substantially all our assets.
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Exchange Agreement with Highbridge
On April 21, 2020 we entered into a Note Purchase and Exchange Agreement, or the Exchange Agreement, which we subsequently amended on August 9, 2020, with certain funds managed by Highbridge providing for the exchange of $24.0 million aggregate principal amount of our outstanding senior convertible notes due January 15, 2025, or the 2025 Notes, for (i) $15.7 million aggregate principal amount of newly issued Second Lien Secured Notes, or the Second Lien Notes, (ii) 11,026,086 shares of our common stock, (iii) warrants to purchase up to 4,500,000 shares of our common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged. The Exchange closed on April 24, 2020. The warrants may be exercised in cash or on a cashless basis at any time through the three year anniversary of the issuance date.
The Second Lien Notes are secured, senior obligations, junior only to the First Lien Notes. The Second Lien Notes bear interest in cash at the annual rate of 7.5% or, at our election, payment in kind at an annual rate of 8.25%, payable monthly in arrears. The Second Lien Notes mature on August 9, 2023 unless earlier repurchased, redeemed or converted in accordance with their terms. The obligations under the Second Lien Notes are secured by substantially all of our assets.
We have the right to prepay the Second Lien Notes at any time, subject to a prepayment premium, which in certain circumstances we may elect to pay in our common stock, equal to the aggregate amount of interest payments through maturity.
As amended by the Amendment, effective as of the Closing Date, the holders of the Second Lien Notes will have the right to convert the aggregate principal of the Second Lien Notes (together with any applicable prepayment premium) to common stock at a price per share equal to 90% of the greater of (i) the daily volume weighted average of the price per share of the common stock, on the conversion date, or if the conversion date is not a trading date, the trading day immediately prior to the conversion date and (ii) $0.33 per share. This conversion option has a daily limit of $1,000,000 in aggregate converted principal (inclusive of principal amount of First Lien Notes that are voluntarily converted). During the quarter ended September 30, 2020, Highbridge elected to convert a total of $3.6 million of outstanding principal on the Second Lien Notes for issuance of 9,328,955 shares of common stock, which included prepayment premiums and were based off of our election of PIK interest. As of November 6, 2020, approximately $5.7 million principal amount of Second Lien Notes remained outstanding.
Subject to certain conditions, if we retain or reinvest proceeds of an asset sale pursuant to the asset sale prepayment provisions in the Exchange Agreement, the Second Lien Notes Holders shall be entitled to convert additional Second Lien Notes and the Lenders shall be entitled to convert First Lien Notes in aggregate combined principal amount equal to 45% of such net proceeds retained or reinvested (together with any applicable prepayment premium).
The Exchange Agreement contains customary terms and covenants, including without limitation: financial covenants, such as maintaining a minimum cash balance; and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The Exchange Agreement also contains customary events of default, after which the Second Lien Notes may be due and payable immediately, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, material adverse changes, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against us, and change of control, termination of any guaranty, governmental approvals, and lien priority.
Convertible Notes
In July 2019, we issued $82.0 million in aggregate principal amount of the 2025 Notes. In connection with the Exchange on April 24, 2020, $24.0 million in aggregate principal of Highbridge’s outstanding 2025 Notes were exchanged for (i) $15.7 million aggregate principal amount of Second Lien Notes, (ii) 11,026,086 shares of our common stock, (iii) warrants to purchase up to 4,500,000 shares of our common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged.
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In the first quarter of 2018, we issued $53.0 million in aggregate principal amount of senior convertible notes that will mature on February 1, 2023, or the 2023 Notes, of which $15.7 million in aggregate principal remains after some of the holders exchanged their 2023 Notes for 2025 Notes in July 2019. For additional information on the 2025 Notes and the 2023 Notes, see Note 7—Notes Payable, Preferred Stock and Stock Purchase Warrants in the accompanying unaudited consolidated financial statements.
The following table summarizes our outstanding notes payable at September 30, 2020:
2024 Notes
On August 9, 2020, we entered into a note purchase agreement with PHC, pursuant to which we agreed to borrow $35.0 million in aggregate principal through the issuance and sale of 2024 Notes on or prior to August 14, 2020. The 2024 Notes will be senior secured obligations and will be guaranteed on a senior secured basis by our wholly owned subsidiary, Senseonics, Incorporated. Interest at the annual rate of 9.5% will be payable semi-annually in cash or, at our option, payment in kind. The interest rate will decrease to 8.0% if we obtain approval for 180-day Eversense product for marketing in the United States, subject to certain conditions. The maturity date for the 2024 Notes will be October 31, 2024, provided that the maturity date will accelerate if we have not repaid our Second Lien Notes (other than an aggregate principal amount of up to $1.0 million) by 91 days prior to the maturity of the Second Lien Notes.
PHC will be entitled to convert the 2024 Notes to common stock at a conversion rate of 1,867.4136 shares per $1,000 principal amount of the 2024 Notes (including any interest added thereto as payment in kind), equivalent to a conversion price of approximately $0.54 per share, subject to specified anti-dilution adjustments, including adjustments for our issuance of equity securities on or prior to April 30, 2022 below the conversion price. In addition, following a notice of redemption or certain corporate events that occur prior to the maturity date, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such notice of redemption or corporate event. In certain circumstances, we will be required to pay cash in lieu of delivering make whole shares unless we obtain stockholder approval to issue such shares.
Subject to specified conditions, on or after October 31, 2022, the 2024 Notes are redeemable by us if the closing sale price of the common stock exceeds 275% of the conversion price for a specified period of time and subject to certain conditions upon 10 days prior written notice at a cash redemption price equal to the then outstanding principal amount (including any payment in kind interest which has been added to such amount), plus any accrued but unpaid interest. On or after October 31, 2023, the 2024 Notes are redeemable by us upon 10 days prior written notice at a cash redemption price equal to the then outstanding principal amount (including any payment in kind interest which has been added to such amount), plus any accrued but unpaid interest, plus a call premium of 130% if redeemed at least six months prior to the maturity date or a call premium of 125% if redeemed within six months of the maturity date.
The note purchase agreement contains customary terms and covenants, including financial covenants, such as operating within an approved budget and achieving minimum revenue and liquidity targets, and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily
41
restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The note purchase agreement also contains customary events of default, after which the 2024 Notes be due and payable immediately, including defaults related to payment compliance, material inaccuracy of representations and warranties, covenant compliance, material adverse changes, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against us, change of control or delisting events, termination of any guaranty, governmental approvals, and lien priority.
Funding Requirements and Outlook
The financing arrangements pending with PHC and Masters Capital could provide for a total of up to $42 million if successfully concluded. If we close on the sale of all of the equity contemplated by these arrangements, we project our available financial resources would fund operations through 2021.
New or additional financings may not be available to us on commercially acceptable terms, or at all, and may be impacted by new and current debt covenants. To the extent that we raise additional capital through debt or the sale of equity, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we are unable to raise additional funds through equity, debt financings, or achieve successful results from strategic agreements, including the Ascensia collaboration and commercialization agreement, we may be required to further delay, limit, reduce or terminate some of our operating plans.
Cash Flows
The following is a summary of cash flows for each of the periods set forth below (in thousands).
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|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
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||||
|
|
|
September 30, |
|
||||
|
|
|
2020 |
|
2019 |
|
||
|
Net cash used in operating activities |
|
$ |
(59,174) |
|
$ |
(101,486) |
|
|
Net cash used in investing activities |
|
|
(181) |
|
|
(951) |
|
|
Net cash (used in) provided by financing activities |
|
|
(10,191) |
|
|
96,224 |
|
|
Net decrease in cash, cash equivalents and restricted cash |
|
$ |
(69,546) |
|
$ |
(6,213) |
|
Net cash used in operating activities
Net cash used in operating activities was $59.2 million for the nine months ended September 30, 2020 and consisted of a net loss of $73.5 million, a net change in operating assets and liabilities of ($0.3) million mostly due to declines in accruals and accounts payables of $11.9 million reflecting reduced operational activities, partially offset by $9.9 million for collections of accounts receivable at December 31, 2019 and $3.2 reductions in inventory, net for increased impairment reserves, as well as net non-cash items of $14.6 million, primarily due to a change of $9.4 million for inventory obsolescence and net realizable value charges, $20.5 million for extinguishment and issuance losses on the notes and $13.8 million for interest expense, depreciation, disposal of fixed assets and stock-based compensation expense, partially offset by a decrease in fair value of derivatives of $29.1 million.
Net cash used in operating activities was $101.5 million for the nine months ended September 30, 2019, and consisted of a net loss of $79.9 million and a net change in non-cash items of $(10.1) million due to the change in the fair value of the derivatives on the 2025 Notes and 2023 Notes, offset by debt issuance fees associated with the modified convertible notes, and stock-based compensation costs, and changes related to operating assets and liabilities of $(11.4) million, mostly related to the build-up of inventory during the third quarter of 2019.
Net cash used in investing activities
Net cash used in investing activities was $0.2 million for the nine months ended September 30, 2020 and consisted of capital expenditures for laboratory equipment.
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Net cash used in investing activities was $1.0 million for the nine months ended September 30, 2019 and consisted of capital expenditures for laboratory and production equipment at our contract manufacturers.
Net cash (used in) provided by financing activities
Net cash used in financing activities was $10.2 million for the nine months ended September 30, 2020 and primarily consisted of $66.0 million for the repayment of outstanding principal, final payoff fees and prepayment premiums of $48.4 million for Solar Loan Agreement and $17.6 million for First Lien Notes, offset by proceeds of $56.0 million from the PPP loan of $5.8 million, from the First Lien Notes of $14.4 million, from the 2024 Notes of $33.3 million and $2.5 million from the issuance of Series A preferred stock.
Net cash provided by financing activities was $96.2 million for the nine months ended September 30, 2019, and consisted of net proceeds from the issuance of common stock of $26.8 million, net proceeds of $77.7 million from the issuance of 2025 Notes, net proceeds from the Solar Term Loan of $43.0 million and proceeds from stock option and warrant exercises of $0.1 million, offset by repurchases of $37.0 million of 2023 Notes and repayment in full of $15.0 million of term loans.
Contractual Obligations
The following summarizes our contractual obligations as of September 30, 2020:
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|
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Payment due by period |
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|||||||||||||
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|
|
|
|
Remainder of |
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|
|
|
|
|
|
After |
|
||
|
Contractual Obligations |
|
Total |
|
2020 |
|
2021-2022 |
|
2023-2024 |
|
2024 |
|
|||||
|
Operating lease obligations |
|
$ |
2,757 |
|
$ |
186 |
|
|
1,971 |
|
|
600 |
|
|
- |
|
|
Principal payments under PPP Loan |
|
|
5,763 |
|
|
- |
|
|
5,763 |
|
|
- |
|
|
- |
|
|
Interest payments under PPP Loan |
|
|
117 |
|
|
- |
|
|
117 |
|
|
- |
|
|
- |
|
|
Principal payments under 2023 Notes |
|
|
15,700 |
|
|
- |
|
|
- |
|
|
15,700 |
|
|
- |
|
|
Interest payments under 2023 Notes |
|
|
2,473 |
|
|
412 |
|
|
1,649 |
|
|
412 |
|
|
- |
|
|
Principal payments under 2024 Notes |
|
|
35,000 |
|
|
- |
|
|
- |
|
|
35,000 |
|
|
- |
|
|
Interest payments under 2024 Notes |
|
|
14,539 |
|
|
- |
|
|
7,650 |
|
|
6,889 |
|
|
- |
|
|
Principal payments under 2025 Notes |
|
|
57,700 |
|
|
- |
|
|
- |
|
|
- |
|
|
57,700 |
|
|
Interest payments under 2025 Notes |
|
|
13,703 |
|
|
|
|
|
6,090 |
|
|
6,090 |
|
|
1,523 |
|
|
Principal payments under Second Lien Notes |
|
|
8,111 |
|
|
- |
|
|
- |
|
|
8,111 |
|
|
- |
|
|
Interest payments under Second Lien Notes(1) |
|
|
1,718 |
|
|
- |
|
|
- |
|
|
1,718 |
|
|
- |
|
|
Other Commitments (2) |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Total contractual obligations |
|
$ |
157,581 |
|
$ |
598 |
|
$ |
23,240 |
|
$ |
74,520 |
|
$ |
59,223 |
|
| (1) | We have elected for PIK interest on these notes. |
| (2) | Other commitments include, among other things, minimum payment obligations and other obligations that we cannot cancel or where we would be required to pay a fee for termination before the contractual period ended. |
Contingencies – Contract Manufacturer Obligations
As a result of the impact of the COVID-19 pandemic on the global healthcare community and our streamlined operational focus implemented at the end of the first quarter of 2020, we have been negotiating with certain of our major suppliers and contract manufacturers to pay for materials procured by these parties on our behalf or for costs incurred related to Eversense manufacturing activities that we paused or delayed. Some of these fees are dependent on whether the materials will expire prior to when we resume production at normal operating levels, or if further delays in manufacturing occur. We will record any fees contingent upon future manufacturing timing in our consolidated financial statements if, and when, it is probable such obligations will become due. When we resume manufacturing activities, some of the amounts paid for materials may be credited back to us upon consumption.
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Off-Balance Sheet Arrangements
During the nine months ended September 30, 2020 we did not have any off-balance sheet arrangements as defined by SEC rules.
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of September 30, 2020, we had cash, cash equivalents, and restricted cash of $26.4 million. We generally hold our cash in interest-bearing money market accounts or short-term investments that meet our policy for cash equivalents. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents. The interest rates on our notes payable are all fixed. We do not currently engage in hedging transactions to manage our exposure to interest rate risk.
Foreign Currency Risk
The majority of our international sales are denominated in Euros. Therefore, our U.S. dollar value of sales is impacted by exchange rates versus the Euro. Currency fluctuations or a strengthening U.S. dollar can decrease our revenue from these Euro-denominated international sales. To date, foreign currency transaction gains and losses and exchange rate fluctuations have not been material to our consolidated financial statements, and we do not believe that the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would have had a material impact on our operating results or financial condition. We do not currently engage in any hedging transactions to manage our exposure to foreign currency exchange rate risk.
In addition, the uncertainty that exists with respect to the economic impact of the global COVID-19 pandemic has introduced significant volatility in the financial markets subsequent to our quarter ended September 30, 2020, which could increase our foreign currency and interest rate risk.
ITEM 4: Controls and Procedures
Changes to Smaller Reporting Company Requirements
On March 12, 2020, the SEC voted to adopt amendments to the “accelerated filer” and “large accelerated filer” definitions in Rule 12b-2 under the Securities Exchange Act of 1934, or the Exchange Act. The amendments more appropriately tailor the types of issuers that are included in the categories of accelerated and large accelerated filers and promote capital formation, preserve capital, and reduce unnecessary burdens and compliance costs for certain smaller issuers while maintaining investor protections. As a result, certain low-revenue issuers will not be required to have their management’s assessment of the effectiveness of internal control over financial reporting, or ICFR, attested to, and reported on, by an independent auditor, as required by Section 404(b) of the Sarbanes-Oxley Act, or SOX. However, those issuers will remain obligated, among other things, to establish and maintain ICFR and, as required by SOX Section 404(a), have management assess the effectiveness of ICFR. Additionally, the amendments revise certain transition thresholds for accelerated and large accelerated filers and add an ICFR auditor attestation check box to the cover page of Form 10-K.
The 2019 fiscal year was the first year we were required to have an auditor’s attestation report on our system of ICFR pursuant to SOX. As a result of these amendments, we are no longer required to have our independent auditor attest to our ICFR. We expect material savings in our audit fees for 2020 as a result of this change, which become effective on April 27, 2020 and apply to our annual report on Form 10-K for the year ended December 31, 2020.
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Evaluation of Disclosure Controls and Procedures
Our management, with the assistance of our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, has reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2020. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving such control objectives. Based on the evaluation of our disclosure controls and procedures as of September 30, 2020, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings
From time to time, we are subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legal proceedings, and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results or financial condition.
ITEM 1A: Risk Factors
Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. Except as described below, our risk factors as of the date of this Quarterly Report on Form 10-Q have not changed materially from those described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 16, 2020, as amended on April 28, 2020.
Our collaboration and commercialization agreement with Ascensia to market Eversense may not be successful.
We have entered into a collaboration and commercialization agreement with Ascensia, pursuant to which we have granted Ascensia the exclusive right to distribute Eversense worldwide, subject to initial exceptions based on our other current exclusive distribution agreements. Pursuant to this agreement, our future success will be dependent on Ascensia effectively marketing and selling Eversense. We expect that the substantial majority of our future revenue will come pursuant to this agreement in future years. If Ascensia fails to perform satisfactorily under this agreement, our commercialization efforts and financial results would be directly and adversely affected.
The agreement is terminable by Ascensia under a number of circumstances, including if Eversense XL is not approved in the United States by August 31, 2021 or if we undergo a change of control. The agreement is terminable by either party if the other party materially breaches its obligations under the agreement; provided, however, that if Ascensia is unable to achieve the specified minimum spending or revenue targets described above, then we will only have the right to covert Ascensia’s exclusive rights to nonexclusive rights, which may make it difficult for us to successfully engage with another commercial partner. The agreement is also terminable by either party if the other party undergoes bankruptcy, dissolution or winding up.
We cannot guarantee this agreement with Ascensia will be successful, that it will continue, or that we will be able to maintain any particular volume of sales under the agreement or increase the volume of sales from this relationship in the future.
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Our collaboration and commercialization agreement with Ascensia and the terms of our recent debt and preferred stock transactions may discourage a change of control of our company.
The terms of our agreements with Ascensia and PHC may discourage a third party from acquiring, or attempting to acquire, control of our company, even if a change of control was considered favorable by some or all of our stockholders. For example, because of the exclusivity of the distribution arrangements with Ascensia and the minimum five-year term of that exclusivity, prospective strategic acquirors may be unwilling to undertake an acquisition of our company. In addition, under the terms of the notes to be issued to PHC and the convertible preferred stock to be issued to MSS and, potentially, PHC, we would be required to make significant payments to redeem our these notes and to satisfy liquidation preference of our convertible preferred stock upon a change of control.
Our business, product sales and results of operations could be adversely affected by the effects of health epidemics, including the recent COVID-19 outbreak, in regions where we or third parties distribute our products or where we or third parties on which we rely have significant manufacturing facilities, concentrations, clinical trial sites or other business operations. The COVID-19 pandemic could materially affect our operations, including at our headquarters in Maryland and at our clinical trial sites, as well as the business or operations of our manufacturers, distributors or other third parties with whom we conduct business.
Our business could be adversely affected by health epidemics in regions where we have concentrations of clinical trial sites or other business operations and could cause significant disruption in the operations of third-party manufacturers and distributors upon whom we rely.
For example, in December 2019, a novel strain of coronavirus, SARS-CoV-2, causing a disease referred to as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States and several European countries. Our headquarters is located in Maryland, and our contract manufacturers are located in Germany, the United Kingdom and the United States. Our distributors are located in the United States and various countries in Europe.
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the U.S. government-imposed travel restrictions on travel between the United States, Europe and certain other countries. Further, the President of the United States declared the COVID-19 pandemic a national emergency, invoking powers under the Stafford Act, the legislation that directs federal emergency disaster response. Similarly, the Governor of Maryland has issued an order closing all non-essential businesses, which took effect on March 23, 2020. Substantially all of our workforce is now working from home either all or substantially all of the time. The effects of the Maryland order and our work-from-home policies may negatively impact productivity, disrupt our business and delay our clinical programs, regulatory and commercialization timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, operating results and financial condition.
Quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at third-party manufacturing facilities in the United States and other countries, or the availability or cost of materials, which would disrupt our supply chain. In particular, some of our suppliers of certain materials used in the production of our sensors and transmitters are located in Germany, the United Kingdom, China, Japan and the United States. For example, any manufacturing supply interruption of Eversense or future generation products, could adversely affect our ability to conduct planned clinical trials and commercialization activities.
Sales and demand for Eversense may be adversely affected by the global COVID-19 pandemic. Disruptions in the distributions of Eversense could result if patients are physically quarantined, if physicians restrict access to their facilities for a material period of time, if patients are unable or unwilling to visit health care providers, or if health care providers prioritize treatment of acute or communicable illnesses over diabetes management. We have begun to receive indications that insertions of Eversense have slowed during the pandemic, and this slowing could continue or worsen.
In addition, our clinical trials may be affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic. Some patients
46
may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. Similarly, our ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19 and adversely impact our clinical trial operations.
The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.
The global pandemic of COVID-19 continues to rapidly evolve. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, commercialization efforts, healthcare systems or the global economy as a whole. However, these effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.
Restrictive covenants under the indentures related to the 2023 Notes and the 2025 Notes, the Highbridge Loan Agreement, the Exchange Agreement and the PHC Note Purchase Agreement may limit the manner in which we operate.
The indentures related to the 2023 Notes and the 2025 Notes, the Exchange Agreement, the Highbridge Loan Agreement and the PHC Note Purchase Agreement contain, and any future indebtedness we incur may contain, various negative covenants that restrict, among other things, our ability to:
| ● | incur additional indebtedness, guarantee indebtedness or issue disqualified stock or, in the case of such subsidiaries, preferred stock; |
| ● | declare or pay dividends on, repurchase or make distributions in respect of, their capital stock or make other restricted payments; |
| ● | make investments or acquisitions; |
| ● | create liens; |
| ● | enter into agreements restricting certain subsidiaries' ability to pay dividends or make other intercompany transfers; |
| ● | consolidate, merge, sell or otherwise dispose of all or substantially all of our assets and the assets of our restricted subsidiaries; |
| ● | enter into transactions with affiliates; |
| ● | sell, transfer or otherwise convey certain assets; and |
| ● | prepay certain types of indebtedness. |
In addition, the Highbridge Loan Agreement and the Exchange Agreement have minimum liquidity requirements and the Highbridge Loan Agreement includes a covenant requiring the Company to operate within an approved budget. The PHC Note Purchase Agreement also contains covenants requiring us to operate within an approved budget and achieving minimum revenue and liquidity targets. Moreover, pursuant to our collaboration and commercialization agreement with Ascensia, we will have less ability to influence our revenues and ability to satisfy these revenue targets. Our obligations under the Highbridge Loan Agreement, the Exchange Agreement and the PHC Note Purchase Agreement are secured by substantially all of our assets. As a result, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities, repurchase shares of our common stock or finance future operations or capital needs.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control, including uncertainties related to the COVID-19 pandemic. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to
47
generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Despite our current debt levels, subject to certain conditions and limitations, we may still incur substantially more debt or take other actions which would intensify the risks discussed above.
Despite our current consolidated debt levels, subject to certain conditions and limitations in the indentures related to the 2023 Notes and the 2025 Notes, the Highbridge Loan Agreement, the Exchange Agreement, and the PHC Note Purchase Agreement, we may be able to incur substantial additional debt in the future, some of which may be secured debt. We may not be subject to any restrictions on incurrence of additional indebtedness under the terms of any future indebtedness. If new debt is added to our current debt levels, the related risks that we and they now face could intensify.
The issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plan, upon the conversion of our convertible senior subordinated notes or otherwise will dilute our existing stockholders.
Our certificate of incorporation authorizes us to issue up to 900,000,000 shares of common stock and up to 5,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue our shares of common stock, including by conversion of our convertible notes, in certain circumstances, conversion of our convertible preferred stock, in connection with a financing, acquisition, investment, our equity incentive plans or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.
The holders of the convertible preferred stock rank senior to our common stock upon a liquidation of our company.
In the event of a liquidation, dissolution or winding up of our company, our Series A convertible preferred stock, along with any convertible preferred stock that we may issue to PHC or Energy Capital, will rank senior to our common stock. Each share of preferred stock will be entitled to receive an amount per share equal to the greater of the purchase price paid and the amount that the holder would have been entitled to receive at such time if the convertible preferred stock were converted into common stock.
Until the holders of the convertible preferred stock have been paid their liquidation amount in full, no payment will be made to any holder of common stock. If our assets, or the proceeds from their sale, distributable among the holders of the convertible preferred stock are not sufficient to pay the liquidation amount in full, then those assets or proceeds will be distributed among the holders of the convertible preferred stock. In that case, there would be no assets or proceeds remaining to be distributed to holders of our common stock, which could impact the trading price of our common stock.
Shares of our convertible preferred stock and the PHC Notes are convertible into shares of our common stock and, upon conversion, will dilute your percentage of ownership.
Each share of our convertible preferred stock is convertible at any time at the option of the holder into 1,000 shares of our common stock (subject to customary anti-dilution adjustments, including in the event of any stock split). In addition, under the terms of our convertible preferred stock purchase agreement with MSS, MSS has the option to purchase up to an additional $27 million of convertible preferred stock having a conversion price per share equal to $0.476 per share of common stock (the closing price of our common stock on August 7, 2020) on or before January 11, 2021. Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that we have less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), we also have the right, in our sole discretion, to present Energy Capital with a purchase notice directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of
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$1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of our Series B Preferred Stock.
The PHC Notes are also convertible into our common stock at the option of the holder. Accordingly, any conversion of convertible preferred stock or the PHC Notes would dilute the ownership of our holders of common stock. The potential dilutive effect of the conversion of shares of convertible preferred stock or convertible notes may also adversely affect our ability to obtain additional financing on favorable terms or at all.
Holders of the convertible preferred stock and convertible notes have the ability exert substantial influence over us in a manner adverse to your interests.
Subject to maintaining specified ownership thresholds, the holders of convertible preferred stock and the PHC Notes have the ability to designate, in the aggregate, up to three members of our board of directors.
The holders of convertible preferred stock generally are entitled to vote with the holders of the shares of common stock on all matters submitted for a vote of holders of shares of common stock (voting together with the holders of shares of common stock as one class) on an as-converted basis. Additionally, certain matters require the approval of the majority of the outstanding convertible preferred stock, voting as a separate class, including (i) altering or changing adversely the powers, privileges, preferences or rights of the convertible preferred stock, or (ii) amendments, modifications, repeal or waiver of any provision of our certificate of incorporation or of the certificate of designations that would adversely affect the rights, preferences, privileges or powers of the convertible preferred stock.
As a result, the holders of our convertible preferred stock and the PHC Notes are able to influence our decisions, including the election and removal of directors, any merger, consolidation, sale of all or substantially all of our assets, or other significant corporate transactions. Some of these persons or entities may have interests different the interests of the holders of our common stock.
The future funding pursuant to agreements to sell convertible preferred stock to PHC, Masters and Energy Capital is not guaranteed.
We have entered into agreements with Masters, PHC and Energy Capital that, collectively, provide for our receipt of up to $54 million of funding pursuant to the sale of convertible preferred stock to Masters, PHC and Energy Capital. Pursuant to our agreement with PHC, we have the option to sell and issue to PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon our obtaining FDA approval for the 180-day Eversense product for marketing in the United States before such date. Additionally, on August 9, 2020, we entered into a Stock Purchase Agreement with Masters pursuant to which we issued and sold to Masters $3 million of shares of convertible preferred stock per share in an initial closing, and provided Masters with an option to purchase up to an additional $27 million of shares of convertible preferred stock in a subsequent closing on or before January 11, 2021, subject to the terms and conditions of the stock purchase agreement. On November 9, 2020, we entered into the Equity Line Agreement with Energy Capital. Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that we have less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), we have the right, in our sole discretion, to present Energy Capital with a purchase notice directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of our Series B Preferred Stock. Because of the contingencies of each transaction, there can be no guarantee that we will be able to sell the additional convertible preferred stock to PHC, Masters or Energy Capital. If we are unable to do so, we may be forced to seek to raise additional capital on less advantageous terms, if available at all, which would likely have a material adverse effect on our liquidity and the trading price of our common stock.
We may not be entitled to forgiveness of our recently received PPP Loan, and our application for the PPP Loan could in the future be determined to have been impermissible or could result in damage to our reputation.
On April 22, 2020 we received proceeds of $5.8 million from a loan under the Paycheck Protection Program of the CARES Act, a portion of which may be forgiven, which we intend to use to retain current employees, maintain payroll and make lease and utility payments. The PPP Loan matures on April 21, 2022 and bears annual interest at a rate of 1.0%. A portion of the PPP Loan may be forgiven by the SBA upon our application within ten months of the deferral
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period ending, but not later than December 31, 2020. Monthly payments of interest and principal will be required once approval of forgiveness is obtained. Under the CARES Act, as amended by the Flexibility Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight-week period beginning on the date of loan approval. Not more than 40% of the forgiven amount may be for non-payroll costs. The amount of the PPP Loan eligible to be forgiven is limited because of certain headcount reductions that we implemented in March 2020 and will be reduced if our full-time headcount declines further, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, in accordance with the amortization schedule described above, and we cannot provide any assurance that we will be eligible for loan forgiveness, that we will ultimately apply for forgiveness, or that any amount of the PPP Loan will ultimately be forgiven by the SBA. Furthermore, on April 28, 2020, the Secretary of the U.S. Department of the Treasury stated that the SBA will perform a full review of any PPP loan over $2.0 million before forgiving the loan. In accordance with the Flexibility Act, PPP loans received prior to June 5, 2020 may be extended to a five-year maturity if both the lender and the recipient agree. There can be no assurances made that we will seek a term or if we ask for a five-year term, that it will be agreed upon and granted by the lender.
In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the broad objectives of the Paycheck Protection Program of the CARES Act, as amended by the Flexibility Act. The certification described above does not contain any objective criteria and is subject to interpretation. On April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. Subsequently, on April 29, 2020 the SBA issued guidance that it will review all PPP loans of more than $2 million, following the lender’s submission of the borrower’s loan forgiveness application. The lack of clarity regarding loan eligibility under the Paycheck Protection Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that given our Company's circumstances we satisfied all eligible requirements for the PPP Loan, we are later determined to have violated any of the laws or governmental regulations that apply to us in connection with the PPP Loan, such as the False Claims Act, or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be subject to penalties, including significant civil, criminal and administrative penalties and could be required to repay the PPP Loan in its entirety. In addition, receipt of a PPP Loan may result in adverse publicity and damage to reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources. Should we be audited or reviewed by federal or state regulatory authorities as a result of filing an application for forgiveness of the PPP Loan or otherwise, such audit or review could result in the diversion of management’s time and attention and legal and reputational costs. If we were to be audited or reviewed and receive an adverse determination or finding in such audit or review, we could be required to return the full amount of the PPP Loan. Any of these events could have a material adverse effect on our business, results of operations and financial condition.
ITEM 2: Unregistered Sales of Equity and Securities and Use of Proceeds
Between July 1, 2020 and September 30, 2020, Highbridge voluntarily converted a total of $3.6 million of outstanding principal amount of the Second Lien Notes for 9,328,955 shares of common stock, which included prepayment premiums in accordance with the terms of the Second Lien Notes. These conversions were exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act as a conversion of securities by our existing security holders in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such conversion.
ITEM 3: Defaults Upon Senior Securities
Not applicable.
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ITEM 4: Mine Safety Disclosures
Not applicable.
ITEM 5: Other Information
None.
ITEM 6: Exhibits
The exhibits listed on the Exhibit Index hereto are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.
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31.1* |
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Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act. |
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Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act. |
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32.1** |
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101.INS* |
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Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document) |
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101.SCH* |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL* |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
** These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
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Certain portions of this exhibit, indicated by asterisks, have been omitted pursuant to Item 601(b)(10) of Regulation S-K because they are not material and would likely cause competitive harm to the registrant if publicly disclosed. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SENSEONICS HOLDINGS, INC. |
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Date: November 9, 2020 |
By: |
/s/Nick B. Tressler |
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Nick B. Tressler |
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Chief Financial Officer |
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(Principal Financial Officer) |
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CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT IS NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE COMPANY IF PUBLICLY DISCLOSED
EXHIBIT 10.1
COLLABORATION AND COMMERCIALIZATION AGREEMENT
THIS COLLABORATION AND COMMERCIALIZATION AGREEMENT (the “Agreement”) is made as of August 9, 2020 (the “Effective Date”) by and between Senseonics Incorporated, a Delaware corporation (“Senseonics”), with its principal office and place of business at 20451 Seneca Meadows Parkway Germantown, MD 20876-7005, and Ascensia Diabetes Care Holdings AG, a Swiss company (“Ascensia” or “ADC”) with its principal office and place of business at Peter Merian-Strasse 90, 4052 Basel, Switzerland (each of Senseonics and Ascensia, a “Party” and together, the “Parties”).
1.CERTAIN DEFINITIONS.
1.1“Affiliate” means, with respect to any Party, another entity or person which directly or indirectly, is controlled by, or controls, or is under common control with, such Party, where, for purposes of this definition, the term “control” means ownership, directly or indirectly, of 50% or more of the shares of stock entitled to vote for the election of directors, in the case of a corporation, or 50% or more of the equity interests in the case of any other type of legal entity, status as a general partner in any partnership, or any other arrangement whereby a Party controls or has the right to control the Board of Directors or equivalent governing body of a corporation or other entity, or if such level of ownership or control is prohibited in any country, any entity owning or controlling at the maximum control or ownership right permitted in the country where such entity exists; provided, however, that as to Ascensia, for so long as [***] owns or controls Ascensia, Affiliate shall include only such entity or person which is controlled, directly or indirectly by [***] that is involved in the glucose monitoring business.
1.2“Apps” means the mobile applications offered by Senseonics in connection with the Products.
1.3“Confidential Information” means any confidential or proprietary information of a Party disclosed to the other Party or generated in the course of this Agreement, including inventions, know-how, works of authorship, software, data, software tools, designs, schematics, plans or other information relating to any work in process, future development, engineering, manufacturing, marketing or business plan, or financial or personnel matters relating to either Party, its present or future products, sales, suppliers, customers, employees, investors or business.
1.4“Data” means the data collected by Senseonics through customers’ use of the Products and the Apps, as set forth in Exhibit A.
1.5“Field” means implantable sensors for continuously monitoring glucose in humans with diabetes.
1.6“Intellectual Property Rights” means any and all rights in and to discoveries, concepts, ideas, technical information, developments, specifications, methods, drawings, designs, flow charts, diagrams, models, formulae, procedures, processes, schematics, specifications, algorithms, apparatus, inventions, ideas, know-how, materials, techniques, methodologies, modifications, improvements, works of authorship, data (whether or not protectable under patent, copyright, trade secrecy or similar laws), patents, utility models, registered and unregistered designs, including mask works, copyrights, trade secrets, design history, manufacturing documentation, and any other form of protection afforded by law to inventions, models, designs, works of authorship, databases or technical information, and applications and registrations with respect thereto.
1.7“Products” means the following Senseonics proprietary products currently marketed under the brand “Eversense”, for which Senseonics has received regulatory approval for use in the Field during the Term, including any improved versions thereof for which Senseonics receives regulatory approval during the Term: (a) Eversense® CGM System (90-day product) (“90-day Product”); (b) Eversense® XL CGM System (180-day product outside the US) (“Eversense XL”); (c) Eversense XL 2.0 (“180-day Product”); (d) extended Eversense 365-day product [***] (“365-day Product”); and (e) [***], as each is more fully described in Exhibit B.
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT IS NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE COMPANY IF PUBLICLY DISCLOSED
1.8 “Quality Agreement” means a separate agreement between the Parties, which following its execution shall be attached hereto and made a part hereof as Exhibit C, and which sets forth, among other things, the quality control and quality assurance terms for the Products.
1.9“Specifications” means, with respect to each Product, the specifications for such Product, on file with Senseonics with a copy to be provided to Ascensia within thirty (30) days after the Effective Date, and with any amendments thereto to be provided to Ascensia promptly after such amendments.
1.10“Territory” means worldwide, except for (a) countries in which rights to distribute certain Products in the Field through January 31, 2021 have been granted, as of the Effective Date, by Senseonics to Roche Diabetes Care GmbH and Roche Diagnostics International AG (together, “Roche”) pursuant to that certain Distribution Agreement, dated May 24, 2016 between Senseonics and Roche, as amended (“Roche Agreement”); (b) the Scandinavian countries in which rights to distribute certain Products in the Field through September 13, 2021 have been granted, as of the Effective Date, by Senseonics to Rubin Medical AB pursuant to that certain Distribution Agreement, dated September 14, 2015, between Senseonics and Rubin Medical AB (“Rubin Medical Agreement”); and (c) the country in which rights to distribute the Products in the Field have been granted, as of the Effective Date, by Senseonics to [***] pursuant to that certain [***] (collectively, (a) through (c) referred to as the “Excluded Territories”). [***].
1.11“Third Party” means any entity or person other than Senseonics, Ascensia and their respective Affiliates.
2.PERFORMANCE OBLIGATIONS
2.1Collaboration. The Parties intend to collaborate and work together as further set out in this Agreement to provide the Eversense® system to patients globally and seek to grow the sales for the Products to reach their potential in the global market. As further set out in this Agreement, Senseonics will be responsible for Product development and clinical work and have primary responsibility for manufacturing, and Ascensia will have primary responsibility for sales and marketing of the Products in the Territory. The Parties shall be responsible for their respective roles and responsibilities as set forth on Exhibit D hereto. In exercising these roles, the Parties will collaborate and jointly seek to promote the best interest of the venture as detailed below. Each Party shall assist and cooperate with the other Party as such other Party may reasonably request from time to time in connection with its activities set forth on Exhibit D and this Section 2.1, including by providing access to relevant documents and making its employees available with reasonable advance notice at reasonable business hours. Each Party shall keep the other Party reasonably apprised of the progress and status of its activities hereunder.
2.2Purchase Orders.
(a)Purchase Orders. Ascensia shall make all purchases hereunder by submitting to Senseonics monthly firm purchase orders (each, a “Purchase Order”), specifying the types of Product ordered, quantities of Product, which will be a minimum of those quantities of Products required in such month by the Binding Commitment portion of the applicable Forecast, information on addresses to which the Products should be shipped, and any other categories of information as mutually agreed by the Parties. Senseonics shall accept or reject each Purchase Order in writing within [***] after its receipt of such Purchase Order; provided, however, that Senseonics shall be obligated to accept such Purchase Order if the quantities of Products in such Purchase Order are consistent with the Binding Commitment set forth in the most recent Forecast applicable to the time period in such Purchase Order, subject to Section 2.2(b). Each Purchase Order accepted by Senseonics shall be deemed an “Accepted Order”. Any Purchase Order that is not accepted or rejected in writing within [***] after Senseonics’ receipt of such Purchase Order shall be deemed accepted by Senseonics.
(b)Additional Quantities. In the event Ascensia desires to obtain quantities of Products in excess of the quantities specified in the Binding Commitment during a given Forecast, Ascensia shall notify Senseonics in writing and the Parties will discuss in good faith whether Senseonics is able to supply Ascensia with such additional quantities, provided that Senseonics shall use commercially reasonable efforts to accept such Purchase Order for such additional quantities.
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(c)Delivery and Shipping Terms. Accepted Orders will be binding on both Parties. The Purchase Order will specify a single delivery date for such order to be delivered, but will in no event be a date sooner than [***] from the Purchase Order date. Senseonics is responsible for transportation costs of shipping the Products to the distributors in the United States and to the packaging facilities in the European Union. If Senseonics is unable to deliver the Products of an Accepted Order on the scheduled delivery date, and Ascensia requests in writing (including by e-mail) that Senseonics deliver such Products on an expedited basis, Senseonics will use expedited delivery services, at its own costs, to deliver the Products. Ascensia or its designee shall be the importer of record and will be responsible for obtaining all distribution licenses for the Products in the Territory. The Parties shall reasonably cooperate with, and assist each other in, all aspects of the shipment, importation, and delivery process. Detailed shipping terms, including Incoterms, are set forth in Exhibit K.
(d)Separate Contracts. Each Accepted Order will constitute a separate contract for the supply of Ordered Product on the terms of this Agreement (and excluding all other terms and conditions including any set out or referred to in any Accepted Order), and the terms of this Agreement shall be incorporated by reference in all Accepted Orders. In the event of a conflict between an Accepted Order and the terms of this Agreement, the terms of this Agreement shall govern unless the Parties’ intent to alter the terms of this Agreement is expressly set forth in such Accepted Order.
2.3Supply.
(a)Performance. Senseonics shall manufacture and supply the Products in such quantities of the Products as ordered by Ascensia pursuant to one (1) or more Accepted Orders in accordance with this Agreement, in exchange for the Consideration set forth in Section 4 below. Senseonics shall perform its activities in accordance with all applicable laws and regulations, this Agreement, and prevailing professional standards and practices. Ascensia shall provide, upon request and only for use in accordance with the terms of this Agreement, Senseonics with any information that Senseonics reasonably requires to perform its obligations under this Agreement. The Parties further agree to comply with their obligations under the Quality Agreement. In the event of a conflict between the terms of the Quality Agreement and the terms of this Agreement, the provisions of this Agreement shall govern; provided, however, that the Quality Agreement shall govern with respect to quality and regulatory issues relating to the Products.
(b)Rolling Forecast. On or before the [***] of each calendar month during the Term of this Agreement, Ascensia shall provide Senseonics with a rolling monthly forecast of a good faith estimate of the quantity of Products that Ascensia plans to order during the [***] period of time commencing with the following calendar month (“Forecast”). Each Forecast shall be made in good faith for budget and capacity planning purposes only and shall be non-binding on the Parties, except as provided in Section 2.3(c). The Parties shall discuss and review the Forecast at each regularly scheduled meeting of the Joint Alliance Committee established by the Parties. The quantity of Products in the initial Purchase Order, if submitted before the described rolling forecasting process begins, shall be agreed upon by the Parties in writing.
(c)Binding Commitment. The first [***] of each Forecast shall constitute a binding commitment for Ascensia to purchase and for Senseonics to supply [***] of the quantities of Products specified therein, and Ascensia shall order such quantities pursuant to Section 2.2(a) (the “Binding Commitment”); provided, however, such Binding Commitment will be subject to a limit established by the Joint Alliance Committee based on capacity and consistency with prior Forecasts, and reviewed every [***]. With respect to quantities of Products in the Binding Commitment, Senseonics shall not be required to ship more than [***] per month to a single designated distribution facility and/or logistics and kitting provider within the European Union or more than [***] per month to a single central distribution location in each country in the Territory located outside the United States and European Union, as agreed to by the Parties.
(d)Shelf Life. All Products that are sensors shall be supplied by Senseonics to Ascensia on a monthly basis in accordance with the applicable Accepted Orders and have a shelf life of no less than [***] if delivered to the United States and to the European Union; provided, however, if Ascensia provides final kitting and/or packaging, such Products shall be delivered to Ascensia’s kitting and labelling facility, or designated subcontractor, in the European Union with [***] of shelf life. The Parties acknowledge and agree that, unless otherwise agreed in writing by Ascensia, Senseonics will perform or have performed final kitting and packaging. Further, the Parties acknowledge
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and agree that there may be exceptional cases where certain tender obligations require a greater shelf life for Products. In such cases, the Parties will discuss and determine in good faith how to meet such requirements.
(e)Failure to Supply. Except in the event of a force majeure (as set forth in Section 9.12), if Senseonics is unable to materially fulfill its obligations to supply Products in accordance with the terms of this Agreement and the Accepted Orders, then upon written request by Ascensia, Senseonics shall, to the extent needed to cover such failure to supply, (a) supply the undelivered Products or a portion thereof using an expedited transportation mode, at Senseonics’ expense; (b) supply the undelivered Products or a portion thereof at a future date; and/or (c) provide Ascensia access to Senseonics’ suppliers of the relevant Products such that Ascensia may discuss with such suppliers the terms under which such suppliers may provide Ascensia the undelivered Products or portion thereof, and purchase the undelivered Products or portion thereof from such third-party suppliers, which terms will be communicated to Senseonics in writing prior to any such purchase from a third-party supplier. To the extent such failure to supply results in a backorder to Ascensia’s customers, such forecast metrics will be adjusted reasonably to account for such impact and the adjusted forecast metrics will be used to determine any remedies dependent on such forecast metrics. If such failure to supply continues for a period of [***], then upon Ascensia’s written request, Senseonics shall conduct a technology transfer for the manufacturing of the Products to Ascensia, its Affiliate or a Third Party designated by Ascensia, at Ascensia’s discretion, in a manner and in a time period sufficient to satisfy Ascensia’s then-current demand for the Products, all subject to an arrangement determined to compensate Senseonics its margin on such Products that are subject to the technology transfer. The Parties shall discuss in good faith whether such replacement supply chain is more efficient or reliable on a going-forward basis, and based on such discussions, Senseonics will determine whether to continue with such replacement supply chain, or to the extent appropriate, revert to its original supply chain provided that the conditions causing the supply failure have been removed or otherwise resolved.
2.4Distribution
(a)Appointment and Grant of Rights to Ascensia. Subject to the terms and conditions of this Agreement, Senseonics hereby appoints Ascensia as Senseonics’ exclusive distributor of the Products in the Field in the Territory during the Term. Subject to the payment obligations herein, as well as any limitations, obligations, and exceptions set forth in this Agreement, including without limitation with respect to the remedies and provisions set forth in Section 2.4(h), Senseonics hereby grants to Ascensia (i) the exclusive, non-transferable (except in accordance with Section 9.1) right (but not obligation, except with respect to any Binding Commitment of any Forecast) to purchase all of Ascensia’s requirements of the Products in the Territory from Senseonics, (ii) the exclusive, non-transferable (except in accordance with Section 9.1), sublicensable (solely to Subdistributors in accordance with Section 2.4(e)) right to market, offer to sell, sell, and distribute the Products (including any software embedded therein, solely as and to the extent embedded in the Products and in no event on a standalone basis) to any customer in the Territory solely for use by such customer in the Territory in the Field, subject to each such customer’s execution of an agreement with Ascensia, which will include, at a minimum, customary representations, warranties, covenants and indemnities and the terms of the Product warranty in accordance with Exhibit E, and (iii) a non-exclusive, non-transferable (except in accordance with Section 9.1), sublicensable (solely to Subdistributors in accordance with Section 2.4(e)), revocable, right and license to make available the Apps or provide a link to download the Apps through a third-party app store to customers in connection with the Products for use in the Field in the Territory, subject to each such customer’s agreement to Senseonics’ standard end user agreement. Except as set forth herein or otherwise agreed to with Ascensia with respect to third-party distributors, strategic fulfillment partners, or sub-distributors, Senseonics shall not, as far as such limitation is consistent with applicable laws, directly or indirectly market, offer to sell, or assist any Third Party in marketing, offering to sell, selling, or distributing the Products, to any Third Party in the Territory for use in the Field. Ascensia hereby accepts such appointment and agrees to promote, market, distribute and sell the Products in the Field in the Territory, using commercially reasonable best efforts in accordance with Section 2.4(h), during the Term in accordance with the following and subject to the final sentence of this Section 2.4(a):
(i)In the United States, Ascensia will begin to actively market and sell (A) the Eversense 90-day Product beginning on such date during 2020 as agreed to by the Parties in writing, and (B) Eversense XL 2.0 upon U.S. Food and Drug Administration (“FDA”) approval for the promotion and sale of such Product in the United States (“FDA Approval”);
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(ii)In Germany, Italy, and Switzerland, Ascensia will begin to actively market and sell (A) Eversense XL commencing February 1, 2021, and (B) Eversense XL 2.0 upon FDA Approval and receipt of CE marking and the date that the packaged and labeled product is delivered to Senseonics’ Third Party logistics provider or such other designated Third Party logistics provider for such countries;
(iii)In Sweden, Ascensia will begin to actively market and sell Eversense XL 2.0 upon FDA Approval and receipt of CE marking and the date that the packaged and labeled Product is delivered to Senseonics’ Third Party logistics provider or such other designated Third Party logistics provider for such country, but in no event prior to October 1, 2021 (collectively, the territories listed in (i) through (iii), referred to as the “Core Markets”); and
(iv)In countries within the Territory but outside the Core Markets (“Non-Core Markets”), where either Party desires to distribute the Products in such countries, the Parties agree to engage in good faith discussions relating to the strategic value of such market, the required work to make the Products available in such market, and the business case of each Party relating to its distribution in such market, given market size, volume predictions, pricing, the Parties’ current customer base, and other relevant factors, and the approval of each Party shall be required to enter the market, such approval not to be unreasonably withheld. If the Parties determine that a market or country is not of strategic value to the Parties or that the business case does not support market entry, then Senseonics will have no obligation to supply Products to Ascensia in those markets or countries. For clarity, without Ascensia consent, Senseonics may not offer distribution rights for any market or country in the Territory to any other distributor during the Term. The Parties acknowledge and agree that there may be certain tender or supply obligations from government, regulatory, or payor requirements in certain Non-Core Markets existing as of the Effective Date and that, notwithstanding the grant of exclusivity in this Section 2.4(a), Senseonics may grant to its current distributors a right to continue to distribute products in the applicable Non-Core Markets during the currently existing period of such tenders; provided that Ascensia consents to such tenders, such consent to not be unreasonably withheld, delayed or conditioned. Senseonics agrees to discuss in good faith the transfer of such tenders to Ascensia and both Parties shall take commercially reasonable steps to transfer such tenders to Ascensia for the remaining term of the currently existing period of such tenders.
The Parties acknowledge and agree that ADC shall have the right to market the Products upon FDA Approval, but may not be able to sell until Product Availability.
(b)Senseonics Rights. Notwithstanding Section 2.4(a), Senseonics shall have the right, but not obligation, to market, offer to sell, sell, and distribute the 90-day Product to any customer within the United States until the launch of the 180-day Product in the United States. Upon launch of the 180 day Product in the United States, Ascensia, and not Senseonics, will have the right to market, offer to sell, sell, and distribute any requirements for the 90-day Product.
(c)Pricing. The Parties will establish a minimum price for the sale of the Products by Ascensia to customers to ensure that Products are not sold below Senseonics’ cost, plus an acceptable margin, as follows: [***].
(d)Restrictions. Ascensia shall not intentionally or knowingly advertise, market, promote, sell, deliver, tender, solicit or fill orders for Product to or for customers outside the Territory, within or outside the Field. Ascensia shall make reasonable efforts to share leads and other prospective customer information for such customers outside the Territory and/or Field with Senseonics from time to time. Except as otherwise expressly permitted under this Agreement, Ascensia shall not itself, or permit others to, modify, adapt, alter, reverse engineer or disassemble Product or create derivative works from the Product. Ascensia shall not remove, alter, or obscure in any way any proprietary rights notices of Senseonics (including patent markings, copyrights, trademarks or other attributions to Senseonics) or any batch, lot or registration numbers on or within any Product, sample or documentation provided by Senseonics to Ascensia.
(e)Subdistributors. Ascensia shall have the right to appoint one or more distributors (each, a “Subdistributor”) subject to each Subdistributor entering into a written agreement with Ascensia that is in a form reviewed by Senseonics and incorporating reasonable comments provided by Senseonics (“Subdistributor Agreement”), including: (a) an agreement that such Subdistributor shall comply with all applicable terms of this
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Agreement, including all applicable responsibilities, obligations, restrictions and limitations of Ascensia applicable to such Subdistributor set forth in this Agreement; and (b) an agreement that such Subdistributor will comply with the standards of quality and anti-corruption provisions no less protective of Senseonics as those set forth in this Agreement and the Quality Agreement. Such Subdistributor Agreement will be subject to and subordinate in all respects to the terms and conditions of this Agreement and will not grant to Subdistributor any rights with respect to the Products greater than the rights of Ascensia under this Agreement. Ascensia’s delegation to such Subdistributors may include wholesale distribution activities, other distribution activities, marketing, sales and promotion activities, subject to oversight by the Joint Alliance Committee as set forth hereinafter. Irrespective of such delegation, Ascensia shall remain responsible and liable to Senseonics for the full and faithful performance of Ascensia’s obligations under this Agreement, including any duties or obligations delegated expressly by Ascensia to any Subdistributor, and for any breach by Subdistributor of its obligations. Under no circumstances shall Senseonics have any obligations or liabilities associated with Ascensia’s appointment of any Subdistributor, and no Subdistributor shall have any relationship with or rights or privileges with respect to or against Senseonics.
(f)Promotional Material. The Joint Marketing Committee will have the right to review and approve, key advertising, sales information, literature and other promotional materials pertaining to Products as the Joint Marketing Committee may request (“Promotional Material”) prior to use or dissemination by Ascensia or any Subdistributor in the Territory. Senseonics shall complete its review of such Promotional Material within [***] after receipt. Ascensia shall be solely responsible, at its expense, for developing, producing, translating (as necessary) and maintaining an adequate inventory of current Promotional Material approved by the Joint Marketing Committee. Any such Promotional Materials will conform to Senseonics’ branding guidelines as reasonably provided or otherwise made available by Senseonics. Senseonics will provide to Ascensia at regular intervals a copy of Senseonics’ then-current available printed and online marketing materials in English applicable to the Products and Apps for use in the Field, at no cost to Ascensia. Senseonics will reasonably cooperate with Ascensia on the promotion and marketing of the Products in the Territory in accordance with any mutually agreed marketing plans. Subject to the terms of this Agreement, Senseonics hereby grants to Ascensia a non-exclusive, sublicensable (solely to Subdistributors in accordance with Section 2.4(e)), non-transferable (except in accordance with Section 9.1) license under copyrights used by Senseonics in the Territory with respect to the promotion of the Products, including registrations and applications for registration thereof, to use, copy, display and distribute the Promotional Materials.
(g) Warranties. The Products shall be covered by Senseonics’ warranty set forth in Exhibit E, and any breach by Senseonics of such warranty shall be handled in accordance with the terms of Exhibit E. For purposes of clarity, warranty Products shall be shipped in accordance with the distribution channel established for the specific country. Senseonics shall be responsible for carrier costs, shipping and handling charges in connection with shipping of replacement Products. Ascensia shall not, and shall not permit any Subdistributor to, make or publish any representations, warranties, statements or guarantees concerning Products, including concerning the features, performance or functionality of the Product, that are inconsistent with, or that alter, change, enlarge, limit, or otherwise modify any statements, representations or warranties contained in Exhibit E or the approved Promotional Material, unless authorized in writing in advance by Senseonics. Any warranty given or representation or statement made by Ascensia or a Subdistributor with respect to Product that is inconsistent with, or that alters, changes, enlarges, limits, or otherwise modifies any statements, representations or warranties contained in Exhibit E or the approved Promotional Material or that is not authorized in writing in advance by Senseonics (“Unauthorized Warranty”) shall be void and unenforceable against Senseonics, and Ascensia shall indemnify and hold Senseonics harmless from any liability, loss, damage, expense or claim (including court costs and attorneys’ fees) of any nature arising from or related to any such Unauthorized Warranty.
(h)Marketing and Revenue Covenants. Ascensia will use its commercially reasonable best efforts to sell and market the Products and achieve the Revised Ascensia Revenue Case (as defined on Schedule C-2).
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A. |
In the first fiscal year (which shall be defined as Ascensia’s fiscal year, running from April 1 – March 31 (“Fiscal Year”)) during which the 180-day Product is marketing, Ascensia will spend no less than [***] of the budgeted marketing fund (“Marketing Fund”) in each region in the Territory and provide U.S. sales force coverage of at least [***] of agreed sales force coverage, both as set out in the Ascensia Base Case (as defined on Exhibit F-2), subject to the timing adjustments detailed in this section. The key parameters of the “Ascensia Base Case” and the “Revised Ascensia Revenue Case” are set forth on Exhibit F-2. The |
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Marketing Fund spending assumes Product Availability by [***]. If Product Availability comes earlier, or later, than such date, the Parties will adjust the Marketing Fund spending during Fiscal Year 2021 to account for such actual product launch timing, provided that the budgeted Marketing Fund for the first twelve months following Product Availability of the 180-day Product in the U.S. shall not be less than the Marketing Fund set out in the Ascensia Base Case (and, if the Product is launched earlier than anticipated, 2022 spending shall be similarly pulled forward as reasonably agreed by the Parties for the number of months by which it is early). Similar adjustment of pushing back spending month-by-month shall be made if the Product is launched later than anticipated. Subject to Ascensia’s compliance with the foregoing Marketing Fund spending and sales force coverage in the U.S., Ascensia will retain exclusive rights to distribute the Products in the Field in the Territory irrespective of first Fiscal Year sales. For the avoidance of doubt, for the calculation of the Marketing Fund spending under this Section 2.4(h)(A), (i) pre-launch spending, specifically on the marketing of the 180-day Product in the United States shall count towards such spending, (ii) amounts spent on marketing the 90-day Product or sales force coverage used for the marketing of the 90-day Product shall not be applied towards Ascensia’s marketing requirements, and (iii) only twelve (12) months of marketing spending for the promotion of the Product from time of launch shall be attributed to the marketing requirements herein.
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B. |
Commencing with 2022 Fiscal Year, if Ascensia achieves gross sales revenues for the Products equal to [***] or more of the revenue anticipated by the Joint Alliance Committee to be achieved based on the patient forecast agreed to by the Joint Alliance Committee for such year in the Territory (or, if the Ascensia Base Case revenue is less, then [***] of the Ascensia Base Case revenue) (“Revenue Targets”), Ascensia will retain exclusive rights to distribute the Products in the Field in the Territory for the immediately subsequent Fiscal Year. |
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C. |
If the Required Purchasers (as defined in the Note Purchase Agreement) deliver notice of a default of a revenue covenant under the First Lien Note Purchase Agreement among Senseonics Holdings, Inc. (as the issuer), Senseonics, Incorporated (as a guarantor), PHC Holdings Corporation (as a purchaser), and Alter Domus (US), LLC, as Collateral Agent dated as of August 9, 2020 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Note Purchase Agreement”), Senseonics may convert Ascensia’s exclusive rights to distribute the Products in the Field in the Territory to nonexclusive rights to distribute the Products in the Field in the Territory, at its sole discretion upon three (3) months’ prior written notice. |
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D. |
If Ascensia does not meet the Revenue Targets in Section 2.4(h)(B) above, and the Required Purchasers (as defined in the Note Purchase Agreement) do not provide notice of a default as contemplated by Section 2.4(h)(C), Ascensia will retain exclusive distribution rights for the Products in the Field in the Territory, so long as it has spent [***] of the agreed Marketing Fund and provided at least [***] of the agreed U.S. sales force coverage for the applicable fiscal year, each as agreed to by the Joint Marketing Committee and the Joint Alliance Committee, respectively, or, if the following amount is lower, as long as it has spent [***] of the Marketing Fund and provided at least [***] of the U.S. sales force coverage, respectively, as set out in the Ascensia Base Case; provided that for the purposes of this determination, underspending in either the Marketing Fund or in sales force coverage can be offset dollar-for-dollar by overspending in the other category. |
For purposes of the foregoing, each annual amounts for the revenue forecast, Marketing Fund and sales force coverage for 2022 and subsequent years of the Term will be agreed to by the Joint Marketing Committee and the Joint Alliance Committee, as applicable (or escalated to the Joint Steering Committee in accordance with Section 2.6(b)(ii)), prior to the start of a new Fiscal Year based on assessment of the current Fiscal Year’s performance, market information and a reasonable increase in patient forecast based on actual performance, with a goal of maximizing the sales of the Products. The Marketing Fund and sales force coverage for 2022 and subsequent Fiscal Years will be reviewed at each Quarterly Business Review and, for purposes of this provision, may be adjusted by mutual
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agreement of the Parties at [***] intervals, including for taking into account an acceleration or delay in launch, as set forth in Section 2.4(h)(A) above such that revenue forecast for 2021 will be adjusted by the Parties to reflect any delay or acceleration in the availability of the Products from the Parties’ assumptions in the revenue forecasts.
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For the avoidance of doubt and notwithstanding anything contained in this Section 2.4(h) to the contrary, if Ascensia in any Fiscal Year does not meet the covenants in this Section 2.4(h) with respect to revenue achieved during such year and does not meet the covenants with respect to spending the required annual Marketing Fund and providing the required annual sales force coverage, Ascensia will be considered in material breach of its obligations with respect to the marketing, sales, and promotion under this Agreement. In the event of such breach, Senseonics may convert Ascensia’s exclusive rights to distribute the Products in the Field in the Territory to nonexclusive rights to distribute the Products in the Field in the Territory.
For clarity, if Ascensia does not meet all of the conditions to retain exclusivity as set out in Sections 2.4(h)(A), (B), and (D), Senseonics may convert Ascensia’s exclusive distribution rights to nonexclusive rights upon six (6) months’ prior written notice and in the case of a declaration by the Required Purchasers (as defined in the Note Purchase Agreement) of a default under the financing agreements as set out in Section 2.4(h)(C) above, Senseonics may provide Ascensia three (3) months’ prior written notice to convert Ascensia’s exclusive rights to distribute the Products in the Field in the Territory to non-exclusive rights to distribute the Products in the Field in the Territory.
(i)Packaging and Labeling. Unless otherwise agreed to in writing between the Parties, Senseonics shall be responsible for packaging the Products in accordance with the Specifications therefor, and all outer packaging used for transportation of the Products shall be of sufficient quality and type to protect such Products from reasonably anticipated risks during shipment from the origin to Ascensia’s initial designated destination. Senseonics shall be responsible for all labeling of the Products in accordance with Senseonics’ standard company practices and for the control of such labels and label modification processes and documentation, provided that Ascensia shall be responsible for providing Senseonics all Territory-specific labeling specifications for the Product necessary for sale of the Product in the Territory. Such responsibilities of the Parties shall be carried out in full compliance with applicable laws; provided that if Ascensia performs any labeling in connection with any Ascensia product or application related to the Product or Apps, then in no event shall Senseonics assume any liability for such labeling performed solely by Ascensia. Labeling will be conducted under Article 16 (1(a)) of the European Union Medical Device Regulation with such responsibilities set forth in the Quality Agreement.
(j)Training. Senseonics will provide to Ascensia, at no additional cost to Ascensia, initial and ongoing Product and program training support to enable Ascensia’s training staff to provide training to its sales, clinical and marketing personnel. Ascensia shall ensure that all of its employees who are engaged in the promotion and sales of the Products are adequately trained with respect to the sales and support of the Products. This includes but is not limited to sensor insertion and removal procedure training, per the applicable Product standard operating procedures or otherwise as agreed upon by the Parties in writing. Ascensia shall provide, at its cost and expense, clinical training manager resources (including personnel who will conduct training) to train healthcare providers on the sensor insertion and removal procedures. Each Party’s rights and responsibilities with respect to training are set forth in more detail on Exhibit G.
(k)Support. Ascensia agrees to provide Tier 1 support to customers in the Territory in accordance with Exhibit H, and will notify Senseonics of any material or reoccurring issues or errors related to the Products and Apps, and the support, maintenance, implementation, and use thereof. Ascensia further agrees to provide Senseonics such information in the English language as is necessary to enable Senseonics to recreate any such issues or errors, or as otherwise deemed reasonably necessary by Senseonics to provide support to Ascensia and/or customers in accordance with the terms herein. All such information shall be provided to Senseonics within the timeline specified in the “Complaint Handling” or “Troubleshooting” standard operating procedures provided by Senseonics to Ascensia. Senseonics agrees to provide Tier 2 support to customers in the Territory in accordance with Exhibit H. Senseonics’ Tier 2 support obligations will not apply to any issue arising or resulting from: (a) any issues that are not non-conformities of the Products or Apps to comply with the applicable documentation, Specifications, and this Agreement; (b) problems caused by Internet connections or other hardware, software or equipment which is not owned, controlled, provided or operated by Senseonics; (c) nonconformities resulting from misuse, abuse, negligence or improper or unauthorized use of the Products or Apps; or (d) any modification, amendment, revision, or change to the Products or Apps by any party other than Senseonics or its authorized representatives. “Tier 1” support means Ascensia’s first line technical support for customers in the Territory, receiving questions and issues, identifying problems and diagnoses, answering support inquiries by email and telephone during Ascensia’s normal business hours, assisting in installation inquiries, attempting to create repeatable demonstrations of any software errors, determining
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which problems require escalation to Senseonics for in-depth analysis, and new case documentation made available by Senseonics. “Tier 2” support means escalation of customer technical support issues arising from errors not resolved by Ascensia’s Tier 1 support, to Senseonics, as well as back-end maintenance releases, bug fixes, and updates; reasonable telephone and email support during Senseonics’ working hours, subject to payment of applicable maintenance fees; and upgrades at such prices and terms offered to other customers under the initial or renewed terms of service.
2.5Clinical Study. Each Party will notify the other Party when known clinical studies are conducted on the Products. Investigator initiated study requests are to be managed and coordinated by Ascensia and reviewed in conjunction with Senseonics prior to approving, with all study results to be shared with Senseonics for incorporation into Senseonics’ regulatory filings. All other clinical studies are to be managed and coordinated by Senseonics, with study results to be shared reasonably with Ascensia, including interim results, taking into account regulatory requirements and considerations, and using reasonable efforts to inform Ascensia before any public disclosure.
2.6Joint Committees. The Parties shall establish a Joint Alliance Committee, Joint Marketing Committee and Joint Steering Committee in accordance with this Section 2.6.
(a)Formation; Composition.
(i)Joint Alliance Committee. Promptly after the Effective Date, the Parties shall form a joint alliance committee (“Joint Alliance Committee”), which shall be responsible for facilitating the flow of information and otherwise promoting communication, coordination and collaboration between the Parties regarding all activities under this Agreement not overseen by the Joint Marketing Committee. Without limiting the foregoing, the Joint Alliance Committee shall lead the Quarterly Business Review, issue the quarterly reports set forth in Section 4.4, determine the U.S. sales force coverage as set forth in Section 2.4(h), and review on an annual basis whether there should be any adjustment in permitted capped gross to net adjustments for Permitted Access Programs and other matters as determined by the Joint Alliance Committee. In addition, if there is an extension of the Term and conditions are met for an adjustment in revenue sharing, the Joint Alliance Committee shall determine such revised revenue sharing terms. All decisions of the Joint Alliance Committee shall be made by consensus. Each Party shall appoint to the Joint Alliance Committee [***], or such other number as the Parties mutually agree in writing. Each Party may replace its representatives to the Joint Alliance Committee at any time upon written notice to the other Party.
(ii)Joint Marketing Committee. Promptly after the Effective Date, the Parties shall form a joint marketing committee (“Joint Marketing Committee”), which shall be responsible for oversight of the global marketing activities under this Agreement. The Joint Marketing Committee shall facilitate collaboration between the Parties with respect to marketing of the Products, align on the overall marketing strategies, review and approve Promotional Material, and review, discuss and determine marketing plans, including annual Marketing Fund spending for the purposes of the determinations set forth in Section 2.4(h); provided, however, Ascensia will have final decision-making authority with respect to actual marketing spend on Products by Ascensia, which shall not change the Marketing Fund targets for purposes of Section 2.4(h). The Joint Marketing Committee shall also discuss in good faith and establish minimum marketing spends by ADC for the sale and distribution of the Products in the Territory, and to the extent compliant with regulatory rules and regulations, discuss in good faith the inclusion of the “Contour” branding bundled with Eversense® branding in the marketing of the Products. The Joint Marketing Committee shall also propose, and provide a forum for discussion between the Parties regarding, entry into Non-Core Markets, and shall perform such other duties as are expressly assigned to the Joint Marketing Committee in this Agreement such other functions as appropriate to further the purposes of this Agreement as may be allocated to it by the Parties’ written agreement, except where in conflict with any provision of this Agreement. All decisions of the Joint Marketing Committee shall be made by consensus. If the Parties unable to reach agreement on a Joint Marketing Committee decision, they shall escalate such decision to the Joint Steering Committee for resolution. Each Party shall appoint to the Joint Marketing Committee [***] that have the requisite skills in the disciplines necessary for performance of activities under this Agreement. Each Party may change its Joint Marketing Committee members at any time by written notice to the other.
(iii)Joint Steering Committee. Promptly after the Effective Date, the Parties shall form a joint steering committee (“Joint Steering Committee”), which shall be responsible for general oversight of
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the Agreement and decision making and dispute resolution for matters escalated to the Joint Steering Committee in accordance with this Agreement. The Joint Steering Committee shall be comprised of each Party’s respective CEO and CFO (or equivalent senior officer) and such other members as such senior officers may determine. All decisions of the Joint Steering Committee shall be made by consensus. Except with respect to matters to which arbitration in Section 9.11 does not apply, if the Joint Steering Committee cannot resolve a matter within [***] after such matter has been referred to it, then such matter shall be finally and definitively resolved by arbitration as set forth in Section 9.11.
(b)Meetings.
(i)Joint Marketing Committee. The Joint Marketing Committee will meet monthly (by teleconference) or more frequently as needed for a major country or Product launch, and quarterly otherwise, during the Term. At the initial meeting of the Joint Marketing Committee, which shall occur promptly after the Effective Date, the Joint Marketing Committee shall establish operating procedures for its meetings and activities via charter. The charter for the Joint Marketing Committee, once finalized, will be attached hereto as Exhibit I. On an annual basis, at the last meeting of the then-current Fiscal Year, the Joint Marketing Committee shall determine the targets for sales and patients for the upcoming year, Marketing Fund spending and U.S. sales force coverage for the upcoming year, and Minimum Annual Price by market. During at least [***] per year, the Joint Marketing Committee will review global sales and marketing spend targets. Additionally, the Parties agree to share on a quarterly basis through the Joint Marketing Committee meetings key performance indicators as set forth in Exhibit J and such other key performance indicators agreed to by the Parties from time to time, for each region or market in the Territory, in order to inform the Parties, and to the extent required, shall put into place appropriate agreements with respect to the sharing of such indicators that are Data and only share such Data as is permissible under applicable laws and regulations. Each Party shall bear the expense of participation of its respective Joint Marketing Committee members in Joint Marketing Committee meetings. Written minutes shall be kept of all Joint Marketing Committee meetings and shall include material decisions made at such meetings.
(ii)Joint Steering Committee. The Joint Steering Committee shall meet at such times and locations as are agreeable to the Joint Steering Committee members, but no less than once per calendar quarter. Joint Steering Committee meetings may take place in person or through video or telephone communications. At the initial meeting of the Joint Steering Committee, which shall occur promptly after the Effective Date, the Joint Steering Committee shall establish operating procedures for its meetings and activities. At each meeting of the Joint Steering Committee, the Parties’ representatives shall provide an update on the status of the activities conducted under this Agreement and shall raise any items which need to be resolved from the Joint Marketing Committee. Each Party shall bear the expense of participation of its respective Joint Steering Committee members in Joint Steering Committee meetings. Written minutes shall be kept of all Joint Steering Committee meetings and shall include material decisions made at such meetings.
(c)Quarterly Business Reviews. Once per quarter, the Joint Alliance Committee will conduct a business review led by an equal number of representatives on the Joint Alliance Committee appointed by each Party (“Alliance Managers”) and attended by the appropriate functional leads (“Quarterly Business Review”), at such times and locations determined by the Alliance Managers. The Quarterly Business Review will cover, and the Alliance Managers will review and discuss, topics including Forecasts, Minimum Annual Prices sales forecasts, sales force, contract pricing, order coverage, lead time, reportable events, post-market surveillance, development and distribution activities, regulatory status, accomplishments, challenges and such other matters expressly assigned to the Joint Alliance Committee or Quarterly Business Review under this Agreement or that the Parties believe will lead to more effective coordination and increasing sales of the Products. Each Party shall bear the expense of participation of its respective Joint Alliance Committee members and functional leads in Quarterly Business Review meetings. Written minutes shall be kept of all Quarterly Business Review meetings.
2.7Regulatory Compliance. In performing its obligations hereunder each Party shall comply with all applicable federal, state, municipal, or local laws, rules, regulations, orders, decisions or permits of any relevant jurisdiction relating to matters including, but not limited to foreign corrupt practices, employment, safety, health, environmental standards and requirements, non-discrimination, equal employment opportunity, import/export and privacy protection. For greater certainty, in performing its obligations hereunder, Ascensia shall not make any payments to a government
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official. Ascensia shall not be responsible for regulatory approvals for the Products. Without limiting any of the foregoing, at all times during the Term, Ascensia shall comply with all requirements of all regulatory approvals applicable to the distribution of the Products. Ascensia shall keep Senseonics informed of the regulatory requirements in each country in the Territory and shall promptly notify Senseonics in writing, and provide a copy to Senseonics, of any correspondence, reports, or other communication with respect to Product submitted to or received from any regulatory authority in the Territory. Each Party shall immediately notify the other Party in writing if such Party suffers the loss or impairment of any license, permit or other authorization required for Ascensia to import the Products into the Territory or to distribute, market, promote or sell the Products in any country in the Territory or to otherwise perform obligations under this Agreement.
3.OWNERSHIP
3.1Use of Trademarks. Subject to the terms of this Agreement, Senseonics hereby grants to Ascensia a non-exclusive, sublicensable (solely to Subdistributors in accordance with Section 2.4(e)), non-transferable (except in accordance with Section 9.1) authorization to use the name and trademark, SENSEONICS, and other trademarks, service marks, trade dress, and/or logos which are owned by, or licensed or assigned to, Senseonics (“Senseonics Marks”) as agreed upon in advance by Senseonics, solely to promote Products in a manner consistent with this Agreement and solely in accordance with Senseonics’ branding guidelines. Except as set forth in the preceding sentence, Ascensia shall not have, assert or acquire any right, title or interest in or to any Senseonics Marks or any goodwill related thereto. Ascensia shall provide Senseonics with a sample of each proposed use of Senseonics Marks and shall obtain Senseonics’ approval of such sample prior its use. Ascensia shall use the Senseonics Marks in the form provided and in conformance with any trademark usage policies provided, from time to time, by Senseonics to Ascensia; provided that Ascensia may affix secondary labels or indices on the Products it distributes to identify it as the distributors of the Products so long as such labels do not cover and are not inconsistent with the Senseonics Marks. Ascensia shall not adopt, use, or attempt to register any trademarks or trade names that are confusingly similar to the Senseonics Marks or use the Senseonics Marks in such a way as to create combination marks with the Senseonics Marks.
3.2Ownership of Intellectual Property Rights. As between the Parties, subject to the terms of this Agreement, each Party will own all intellectual property that is owned or controlled by such Party prior to the Effective Date or that is developed outside of the scope of this Agreement without the use of the Confidential Information of the other Party, as well as any and all modifications, enhancements, and improvements thereto, regardless of the inventorship thereof (“Background IP”). Without limiting the foregoing, any inventions first made or conceived of on or after the Effective Date of the Agreement that are directly related to the Products or Apps, or the components or uses thereof, and any intellectual property rights therein (collectively, “Product IP”), shall be owned solely by Senseonics, regardless of the inventorship thereof. In connection with the foregoing, Ascensia hereby assigns and agrees to assign all right, title, and interest in and to such Product IP to Senseonics. With respect to any other inventions first made or conceived of on or after the Effective Date solely by Ascensia, solely by Senseonics, or jointly by the Parties, after the Effective Date of the Agreement that are not Product IP, and are not improvements to either Party’s Background IP, ownership of such inventions, and any intellectual property rights therein, shall be determined in accordance with U.S. rules of intellectual property ownership or inventorship. For clarity, any inventions so determined to be owned jointly by Senseonics and Ascensia will not require a duty of accounting to the other Party or obligation to obtain consent from the other Party for the licensing or exploitation thereof. The Parties shall negotiate in good faith and enter into a separate agreement relating to any such jointly owned intellectual property, which agreement will set forth the Parties’ understandings with respect to prosecution, enforcement, and such other matters agreed to by the Parties with respect to such jointly owned intellectual property.
3.3Data. Subject to payment of applicable fees, costs and amounts to be agreed for the work required to make the Data available, Senseonics agrees to grant to Ascensia certain rights in and to the Data, as set forth in Exhibit A, solely to the extent allowable by applicable laws, including the U.S. Health Insurance Portability and Accountability Act, the E.U. GDPR, and other applicable laws and regulations. The Parties will enter into any necessary data processing agreements to enable such sharing of Data.
3.4Reservation of Rights. Except for the rights expressly provided in this Agreement, no other rights are granted by Senseonics to Ascensia.
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3.5Notification. Each Party shall promptly notify the other Party if it becomes aware of any claim alleging infringement, misappropriation or misuse of the Senseonics Marks, copyrights, patents or other proprietary rights applicable to the Products by any Third Party.
4.PAYMENTS.
4.1Consideration.
4.1.1The consideration for Products to be paid to Senseonics shall be determined by the revenue sharing formula set forth on Exhibit F-1 (the “Consideration”). Exhibit F-1 provides for revenue sharing during 2020-2026. To the extent the Term of this Agreement expires five (5) years from the Product Availability Date for the 180-day Product in the United States, Exhibit F-1 shall apply for such portion of 2026. In the event of an extension of the Initial Term of the Agreement based on a delay of availability of the 365-day Product as set forth below, until cumulative gross revenues of the Products during the Term based on the Revised Ascensia Revenue Case have been achieved, Exhibit F-1 shall continue to apply. If (a) the Term of this Agreement is extended due to a delay in availability of the 365-day Product, and (b) the Revised Ascensia Revenue Case is surpassed, and provided that at such time Senseonics has not had an increase in costs of goods sold for the 180-day Product from the cost of goods sold during the first year of the Term for such Product ([***]), then upon the latter of the satisfaction of the conditions in (a) or (b) to occur, the Parties shall negotiate in good faith and effect a revision to the revenue sharing table in Exhibit F-1 to more equivalently share in the profits from the venture, such as increase Senseonics’ share of revenues to achieve a result such as the Parties splitting net gross profits on a [***] basis, which shall apply on a going-forward basis, commencing on the date that the latter condition of (a) and (b) is satisfied, and continuing through the conclusion of the Term, as extended. Ascensia shall be responsible for paying Senseonics all amounts set forth on Exhibit F-1, based on a tiered global revenue sharing structure of Net Sales. For purposes of this Agreement, “Net Sales” means gross invoiced sales for the Products, less normal and customary sales deductions and allowances as calculated under Generally Accepted Accounting Principles in the US (“US GAAP”), as adjusted below. Normal and customary sales deductions and allowances deducted to determine Net Sales for purposes of determining consideration shall include the following: prompt pay cash discounts, returns and allowances, customer (strategic fulfillment partner) rebates, distributor allowances, chargebacks for government or statutory payments, and Permitted Access Programs. For the purposes of this Agreement, “Permitted Access Programs” shall be any co-pay assistance or other access program, which shall in all cases comply with applicable laws and regulations, which offers a benefit to physicians or patients and is properly deducted to determine Net Sales in accordance with GAAP up to a cap of [***], which amount may be reviewed by the Parties’ representatives in the Joint Alliance Committee on an annual basis for correctness and resetting for the following year, and provided that the Parties may discuss in good faith Ascensia proposals for programs higher than such cap and make further adjustments therefor, and further, that absent agreement Ascensia may provide for programs above such cap, provided that any incremental cost not agreed to will not be deducted from Net Sales for the purposes of determining consideration.
4.2Payments. Ascensia will be responsible for invoicing customers and collecting fees for the Products from customers. Within [***] following the end of each month during the Term and within [***] following the expiration or earlier termination of this Agreement, Ascensia will transmit to Senseonics a statement reporting the revenue-sharing fees due to Senseonics for the immediately-preceding calendar month in accordance with Section 4.4. Each such statement shall be transmitted together with remittance of the revenue-sharing fees due pursuant to this Section 4. All amounts payable under this Section 4 shall be paid in United States dollars by check or by wire transfer to a bank account specified in writing by Senseonics. Within [***] following each quarter during the Term, the amounts owed to Senseonics during such quarter that were initially determined and based on the revenue sharing table in Exhibit F-1 will be adjusted upwards or downwards, as the case may be, based on credits from pricing Products below the Minimum Annual Price (as set forth in Section 2.4(c)), warranty claims (as allowed by Exhibit E), chargebacks, rebates, and operational costs and charges between the Parties, such as kitting or other provision of additional products or services from one Party to the other (such difference being the “True-Up Amount”). Ascensia shall provide Senseonics with a “True Up” statement that sets forth the calculation of the True Up Amount for such quarter (the “True Up Statement”). Senseonics shall have the right to dispute any such True Up Statement and related True Up Amount, and the Parties shall exchange information in good faith and attempt to promptly resolve any such dispute using good faith negotiations prior to resolution of such dispute in accordance with the dispute resolution provisions
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in Section 9.11. Such True Up Statement shall be transmitted together with remittance of the True Up Amount set forth in the True Up Statement.
4.3Taxes. Unless otherwise provided on the Purchase Order, in addition to the amounts stated above, Ascensia shall pay costs for all sales, use, value-added or excise taxes, assessments or other charges, including customs duties and fees attributable to the sale of the Product. In the event Senseonics pays any such fees, taxes, or charges, Ascensia shall promptly reimburse Senseonics for the same.
4.4Quarterly Reports. [***] prior to each Quarterly Business Review during the Term, each Party shall provide a written report containing the following information with respect to the immediately preceding quarter, for review and discussion at such QBR: [***].
4.5Records. Ascensia shall keep complete and accurate business and accounting records pertaining to inventories, sales and uses of Product in sufficient detail to permit Senseonics to confirm Ascensia’s compliance with this Agreement and to allow Ascensia to meet its reporting requirements hereunder. Senseonics shall keep complete and accurate business and accounting records pertaining to manufacture, sale, and shipping of Products to Ascensia under this Agreement, to allow Senseonics to meet its reporting requirements hereunder. Each Party shall maintain their respective records for a period of at least [***] after the calendar year to which they apply, or such longer period as is set out in the Quality Agreement. Each Party shall provide the other Party with copies of such records within [***] of any written request by the other Party. Without limiting the foregoing, Ascensia shall also keep records of Products shipped, quantity, serial or lot number and consignee for all Product sales for purposes of traceability and recall. Ascensia shall maintain these records for a period of at least [***] from the date of delivery of Product to Ascensia, or such longer period as is set out in the Quality Agreement.
4.6Inspection. Inspections shall be provided for in the Quality Agreement.
5.REPRESENTATIONS AND WARRANTIES; COVENANTS
5.1By Ascensia. Ascensia hereby represents and warrants to Senseonics, as of the Effective Date, as follows:
(a)Ascensia is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and is duly licensed (as applicable) and has the qualifications, the experience and the ability to properly perform its obligations under this Agreement.
(b)Ascensia does not employ, contract with, or retain any person directly or indirectly to perform Ascensia’s obligations under this Agreement if such person is (i) debarred by either the U.S. Food and Drug Administration under 21 U.S.C. § 335(a) or any equivalent law or regulation in the Territory, or (ii) disqualified as described in 21 C.F.R. § 812.119, or any equivalent law or regulation in the Territory.
(c)Ascensia has the power and authority and the legal right to enter into this Agreement and perform its obligations hereunder; Ascensia has taken all necessary authorized action on its part required to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; and this Agreement has been duly executed and delivered on Ascensia’s behalf and constitutes a legal, valid and binding obligation that is enforceable against Ascensia in accordance with its terms.
(d)Ascensia’s execution, delivery and performance of this Agreement shall not conflict in any material fashion with the terms of any other agreement or instrument to which it is or becomes a party or by which it is or becomes bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it.
(e)All necessary consents, approvals and authorizations of all governmental authorities and Third Parties required to be obtained by Ascensia in connection with this Agreement have been obtained, except where the failure to do so would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, assets, or operations of Ascensia or on the collaboration contemplated under this Agreement.
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(f)There is no litigation pending or, to Ascensia’s knowledge without having made an independent investigation, threatened against Ascensia or any of its Affiliates with respect to the transactions and activities contemplated by this Agreement, except where the failure to do so would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, assets, or operations of Ascensia or on the collaboration contemplated under this Agreement.
5.2By Senseonics. Senseonics hereby represents and warrants to Ascensia, as of the Effective Date, as follows:
(a)Senseonics is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and is duly licensed (as applicable) and has the qualifications, the experience and the ability to properly perform its obligations under this Agreement.
(b)Senseonics does not employ, contract with, or retain any person directly or indirectly to perform Senseonics’ obligations under this Agreement if such person is (i) debarred by either the U.S. Food and Drug Administration under 21 U.S.C. § 335(a) or any equivalent law or regulation in the Territory, or (ii) disqualified as described in 21 C.F.R. § 812.119, or any equivalent law or regulation in the Territory.
(c)Senseonics has the power and authority and the legal right to enter into this Agreement and perform its obligations hereunder; Senseonics has taken all necessary authorized action on its part required to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; and this Agreement has been duly executed and delivered on Senseonics’ behalf and constitutes a legal, valid and binding obligation that is enforceable against Senseonics in accordance with its terms.
(d)Senseonics’ execution, delivery and performance of this Agreement shall not conflict in any material fashion with the terms of any other agreement or instrument to which it is or becomes a party or by which it is or becomes bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it.
(e)All necessary consents, approvals and authorizations of all governmental authorities and Third Parties required to be obtained by Senseonics in connection with this Agreement have been obtained, except where the failure to do so would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, assets, or operations of Senseonics or Ascensia’s distribution of the Products or on the collaboration contemplated under this Agreement.
(f)There is no litigation pending or, to Senseonics’ knowledge without having made an independent investigation, threatened against Senseonics or any of its Affiliates with respect to the transactions and activities contemplated by this Agreement, except where the failure to do so would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, assets, or operations of Senseonics or Ascensia’s distribution of the Products or on the collaboration contemplated under this Agreement.
(g)All Products manufactured and supplied by or on behalf of Senseonics under this Agreement, at the time of release for delivery hereunder, (i) shall be conveyed with good and clear title, and (ii) shall not be subject to Third Party encumbrances.
(h)Senseonics shall manufacture or have manufactured the Products supplied by or on behalf of Senseonics under this Agreement using properly qualified personnel and in compliance with all applicable laws.
5.3Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 5.2 OR THE PRODUCT WARRANTY SET FORTH IN EXHIBIT E, NEITHER PARTY MAKES ANY WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE PRODUCTS, AND EACH PARTY EXPRESSLY DISCLAIMS ANY AND ALL OTHER WARRANTIES, INCLUDING, WITHOUT LIMITATION, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, QUALITY AND NON-INFRINGEMENT, AND ANY WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE.
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5.4Covenants.
(a)Quality Agreement. The Parties hereby agree to negotiate in good faith the execution of a Quality Agreement. Such Quality Agreement shall be mutually agreed to in writing prior to placement of any Purchase Order for the Product.
(b)Competitive Products. Ascensia agrees that, if during the Term, it markets, promotes, solicits orders for, offers for sale, sell or distributes in any manner, directly or indirectly, within the United States, any other CGM product, the Marketing Fund set out in this Agreement will be dedicated to the Products and the total sales force coverage (as measured by details) to which the Products are entitled under this Agreement shall not be reduced on account of providing sales and marketing support to such competitive product.
(c)Compliance with Laws. The Parties acknowledges that the Products and other materials made available to Ascensia by Senseonics hereunder may be subject to the export administration regulations of the United States Department of Commerce and other governmental regulations related to the export of technical data and equipment and products in the Territory. Each Party agrees to comply with all applicable laws and regulations in the Territory in connection with the distribution of the Products and performance of this Agreement. Each Party also agrees that it will comply with the requirements of the U.S. Foreign Corrupt Practices Act (“FCPA”), as amended from time to time, and any other applicable laws relating to bribery and corruption, and will refrain from making any payments to Third Parties that would cause the other Party to violate the FCPA or such other applicable laws.
(d)Debarment. Each Party covenants to the other Party that it shall not during the Term employ, contract with, or retain any person directly or indirectly to perform Ascensia’s obligations under this Agreement if such person is (i) debarred by either the U.S. Food and Drug Administration under 21 U.S.C. § 335(a) or any equivalent law or regulation in the Territory, or (ii) disqualified as described in 21 C.F.R. § 812.119, or any equivalent law or regulation in the Territory. If a Party becomes aware of the debarment or disqualification of any person or entity performing, directly or indirectly, any of such Party’s obligations under this Agreement, such Party agrees to notify the other Party immediately.
6.Indemnification And Liability
6.1Indemnification by Ascensia. Ascensia shall indemnify and hold harmless Senseonics and its Affiliates, and their respective directors, employees, consultants and agents (the “Senseonics Indemnified Parties”) from and against any and all liabilities, losses, damages, costs, and other expenses (including attorneys’ and expert witnesses’ costs and fees) awarded to a Third Party (or agreed to in a settlement with the Third Party by the indemnifying Party) (“Losses”) incurred by the Senseonics Indemnified Parties (or any of them) as a result of any claim, demand, action or proceeding by any Third Party (a “Claim”) to the extent arising from or relating to (i) any material breach of any representation, warranty, or covenant set forth in Section 5, (ii) the misappropriation by Ascensia or its Affiliates of any personally identifiable data of a Third Party in connection with the use or distribution of the Products or (iii) any intentional misconduct or negligence by Ascensia or any of its employees, agents, or subcontractors (including any Subdistributor); except to the extent such Losses result from any matter set forth in Section 6.2 for which Senseonics is obligated to indemnify the Ascensia Indemnified Parties.
6.2Indemnification by Senseonics. Senseonics shall indemnify and hold harmless Ascensia and its Affiliates, and their respective directors, employees, consultants and agents (the “Ascensia Indemnified Parties”) from and against any Losses incurred by the Ascensia Indemnified Parties (or any of them) as a result of any Claim to the extent arising from or relating to (i) any material breach of any representation, warranty, or covenant set forth in Section 5, (ii) any intentional misconduct or negligence by Senseonics or any of its employees, agents, or subcontractors, (iii) any product liability claim for injury or death of a person as a result of a material defect in the Products, (iv) use of the Senseonics Marks by Ascensia, as authorized herein, (v) the misappropriation by Senseonics or its Affiliates of any personally identifiable data of a Third Party in connection with the use of the Products, or (vi) the infringement by the Products of any intellectual property rights of a Third Party, excluding infringement arising from (A) use of a Product in combination with equipment or software not supplied by Senseonics where such Product would not itself be infringing, or (B) modifications of a Product by anyone other than Senseonics without Senseonics’ prior written approval; except
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to the extent such Losses result from any matter set forth in Section 6.1 for which Ascensia is obligated to indemnify the Senseonics Indemnified Parties.
6.3Indemnification Procedures. In the event of any Claim for which any Party seeking indemnification (the “Indemnified Party”) is or may be entitled to indemnification hereunder, the Indemnified Party may, at its option, require the indemnifying Party (“Indemnifying Party”) to defend such Claim at the Indemnifying Party’s sole expense. The Indemnified Party will have the right to participate in such defense and to employ counsel, at its own expense, separate from the counsel employed by the Indemnifying Party. The Indemnified Party will reasonably cooperate with the Indemnifying Party in such defense (including making documents and records available for review and making persons within its control available for pertinent testimony), provided that the Indemnifying Party shall reimburse the Indemnified Party for all of its reasonable out-of-pocket expenses. The Indemnifying Party may not agree to settle any such Claim without the Indemnified Party’s express prior written consent, not to be unreasonably withheld.
6.4Failure to Defend or Settle. If the Indemnifying Party fails or wrongfully refuses to defend or settle any Claims, then the Indemnified Party shall, upon written notice to the Indemnifying Party, have the right to defend or settle (and control the defense of) such Claims. In such case, the Indemnifying Party shall cooperate, at its own expense, with the Indemnified Party and its counsel in the defense and settlement of such Claims, and shall pay, as they become due, all costs, damages, and reasonable legal fees incurred therefore.
6.5Liability. EXCEPT WITH RESPECT TO LIABILITY ARISING FROM (A) A PARTY’S BREACH OF ITS CONFIDENTIALITY OBLIGATIONS, (B) A PARTY’S INDEMNIFICATION OBLIGATIONS, (C) A PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, OR (D) MISAPPROPRIATION BY A PARTY OF THE OTHER PARTY’S INTELLECTUAL PROPERTY RIGHTS (COLLECTIVELY, “EXCLUDED LIABILITY”), IN NO EVENT WILL EITHER OF THE PARTIES BE LIABLE TO THE OTHER FOR ANY INDIRECT OR CONSEQUENTIAL LOSS OR DAMAGES OR LOSS OF PROFITS IN RELATION TO, OR ARISING OUT OF THE OPERATION OR TERMINATION OF THIS AGREEMENT.
EXCEPT WITH RESPECT TO EXCLUDED LIABILITY, EACH PARTY’S LIABILITY TO THE OTHER PARTY UNDER THIS AGREEMENT, REGARDLESS OF THE CAUSE OF ACTION, IS LIMITED TO THE FOLLOWING: (A) FOR ANY CLAIM FILED WITHIN THE FIRST TWENTY-FOUR (24) MONTHS FOLLOWING THE EFFECTIVE DATE, ONE AND ONE-HALF TIMES (1.5X) THE TOTAL AMOUNTS PAID OR PAYABLE BY ASCENSIA TO SENSEONICS DURING THE TWELVE (12) MONTH PERIOD IMMEDIATELY PRECEDING SUCH CLAIM; AND (B) FOR ANY CLAIM FILED FOLLOWING SUCH TWENTY-FOUR (24) MONTH PERIOD, THE TOTAL AMOUNTS PAID OR PAYABLE BY ASCENSIA TO SENSEONICS DURING THE TWELVE (12) MONTHS IMMEDIATELY PRECEDING SUCH CLAIM; PROVIDED THAT THE FOREGOING LIMITATION SHALL NOT APPLY TO LIMIT ANY PRODUCT LIABILITY CLAIMS FOR DEATH OR INJURY TO PERSON.
7.TERM; TERMINATION
7.1Term. This Agreement shall begin on the Effective Date and, unless terminated sooner as provided in Section 7.2 below, shall end on the fifth anniversary of the Product Availability Date of the Eversense XL 2.0 (180-day Product) in the United States (the “Initial Term”), where “Product Availability Date” means the date that the packaged and labeled product is delivered to Senseonics’ Third Party logistics provider in the United States (“Product Availability”), and Ascensia is notified thereof. The Initial Term shall be automatically extended in order to provide Ascensia the opportunity to sell the 365-day Product, both [***], for two (2) years (the “Extended Term”) if Ascensia would not have otherwise had such opportunity to do so had the Initial Term expired; provided, however, irrespective of the status of the 365-day Product, the Extended Term shall not continue for more than three and one-half (3.5) years beyond the Initial Term without the mutual written agreement of both Parties. The Initial Term and Extended Term, as applicable, are collectively referred to herein as the “Term”.
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7.2Termination Events
(a)Delay in Product Availability Date. In the event the Product Availability Date of the Eversense XL 2.0 (180-day Product) in the United States is delayed beyond [***], Ascensia shall have the right to terminate this Agreement upon [***] prior written notice to Senseonics.
(b)For Cause. Subject to Section 2.4(g) (a breach of which will be handled in accordance with Exhibit E, as Senseonics’ sole and exclusive liability and Ascensia’s sole and exclusive remedy) and the last sentence of this Section 7.2(b), each Party shall have the right to terminate this Agreement, effective immediately, upon written notice to the other Party, if at any time the other Party has materially breached any of its obligations hereunder and has not cured such breach within [***] of receipt of written notice of such breach. Notwithstanding the foregoing, if Ascensia in any Fiscal Year does not meet the covenants in Section 2.4(h) with respect to revenue achieved during such year, or with respect to spending the required annual Marketing Fund and providing the required annual sales force coverage, which shall be considered a material breach of this Agreement, Senseonics will not have the right to terminate this Agreement based solely on such failure to meet such covenants, but may convert Ascensia’s exclusive rights to distribute the Products in the Field in the Territory to nonexclusive rights to distribute the Products in the Field in the Territory.
(c)Change of Control. Ascensia shall have the right to terminate this Agreement, effective upon [***] prior written notice, in the event a Third Party acquires, in one (1) or a series of transactions, at least [***] of the outstanding voting common stock or equity of Senseonics and/or all or substantially all of the business assets of Senseonics to which this Agreement relates (“Change of Control”).
(d)Revenue Milestones. In the event of a Change of Control of Senseonics, Senseonics shall have the right to terminate this Agreement, effective upon [***] prior written notice, (i) in the event cumulative Net Sales under this Agreement have exceeded the projected revenue in the Revised Ascensia Revenue Case for the full Initial Term of the Agreement, and Ascensia has been compensated for the reasonable, non-cancellable internal and external costs relating to shutting down the associated operations, including for any costs incurred by Ascensia in connection with wind-down and transition activities under Section 7.3 (including reasonable costs of terminating Ascensia’s contracts or agreements with Subdistributors), or (ii) upon payment to Ascensia of a margin on the difference between the cumulative revenue to date and the projected revenue in the Revised Ascensia Revenue Case, which is intended to compensate Ascensia for its expected return on its investment in the promotion of the Products. This aforementioned margin will be calculated using the revenue sharing table set forth in Exhibit F-1 by simulating the volume of Products sold through the remaining periods or a similar method reasonably acceptable to the Parties at that point in time.
(e)Bankruptcy. Each Party shall have the right to terminate this Agreement upon written notice to the other Party upon the bankruptcy, dissolution or winding up of such other Party, or the making or seeking to make or arrange an assignment for the benefit of creditors of such other Party, or the initiation of proceedings in voluntary or involuntary bankruptcy, or the appointment of a receiver or trustee of such other Party’s property, that is not discharged within [***].
7.3Effects of Termination. Upon expiration of the Term or earlier termination of this Agreement, all rights and obligations of the Parties under this Agreement will terminate, except as expressly provided in this Section 7.3 and Section 7.5. Ascensia shall perform an orderly wind-down of its distribution activities under this Agreement, and shall provide, in a prompt and timely manner, all cooperation and assistance to Senseonics, and undertake all actions as are required or reasonably requested by Senseonics, to facilitate the smooth transition of Ascensia’s obligations hereunder to Senseonics or to Senseonics’ Affiliate, distributor or other designee and to enable Senseonics or its designee to assume, with as little disruption as possible, the promotion, marketing, import, sale and distribution of Products in the Territory. Thereafter, Ascensia shall (a) cease, and shall cause its Subdistributors to cease, all further activities related to the Products, including all promotion, marketing, distribution and sales of the Products in the Territory; provided, however, Ascensia shall have the right to continue to sell any remaining inventory of Products purchased pursuant to one (1) or more Purchase Orders for a period not to exceed [***] following the effective date of termination or expiration of the Agreement (“Sell-Off Period”), (b) cease, and cause its Subdistributors to cease, all further use of, and promptly collect and return or, at Senseonics’ request, destroy, and cause its Subdistributors to collect and return or destroy, all documents containing Senseonics Marks or Confidential Information of Senseonics, all Promotional
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Material, and other Product-related sales or sales training materials; provided, however, Ascensia may continue to use any such Promotional Material in connection with its rights under Section 7.3(a) during the Sell-Off Period and retain one (1) copy of the Confidential Information of Senseonics for its legal files for the sole purpose of determining its obligations hereunder and for purposes of exercising any rights that survive expiration or termination hereunder, (c) pay any and all amounts due and payable to Senseonics under this Agreement (including any amounts due during the Sell-Off Period), provided, however, Senseonics will not be liable to Ascensia for any other amounts except as expressly set forth herein, and (d) terminate any and all Subdistributor Agreements. In addition, upon expiration of the Term or earlier termination of this Agreement, Senseonics shall promptly collect and return or, at Ascensia’s request, destroy, all Confidential Information of Ascensia then in its possession; provided, however, that Senseonics shall have the right to retain one (1) copy for its legal files for the sole purpose of determining its obligations hereunder and for purposes of exercising any rights that survive expiration or termination hereunder.
7.4Liability on Termination. Each Party understands that the rights of termination or expiration hereunder are absolute. Without limiting the generality of the foregoing, each Party acknowledges and agrees that the other Party has no obligation to agree to or approve any renewal or extension of this Agreement, and that it has no basis for expecting, and has received no assurance, that its business relationship with the other Party will continue beyond the Term. Neither Party shall incur any liability whatsoever for any damage, loss or expenses of any kind suffered or incurred by the other arising from or incident to any termination of this Agreement by such Party or any expiration hereof which complies with the terms of the Agreement, whether or not such Party is aware of any such damage, loss or expenses. In particular, without in any way limiting the foregoing, neither Party shall be entitled to any damages on account of prospective profits or anticipated sales, and Ascensia agrees that it has no basis for expecting, and has received no assurance, that any investment by Ascensia in the promotion of the Products will be recovered. Ascensia further agrees to waive the benefit of any law or regulation, if any, providing compensation to Ascensia arising from the termination or failure to renew this Agreement and Ascensia hereby represents and warrants that such waiver is irrevocable and enforceable by Senseonics.
7.5Survival. Sections 1, 3.2, 3.4, 4.1-4.3 (solely to the extent payments accrued but remain unpaid as of the effective date of termination), 4.5, 6, 7.3, 7.4, 7.5, 8, and 9 shall survive the expiration or termination of this Agreement.
8.CONFIDENTIAL INFORMATION
8.1Confidentiality Obligations. Each Party shall at all times, and notwithstanding any termination or expiration of this Agreement, hold in confidence and not disclose to any Third Party Confidential Information of the other Party, except as approved in writing by the other Party to this Agreement, and shall use the Confidential Information for no purpose other than the performance of this Agreement and the purposes expressly permitted by this Agreement. Each Party shall only permit access to Confidential Information of the other Party to those of its employees, consultants, agents, contractors (including, with respect to Ascensia, Subdistributors), Affiliates, and attorneys having a need to know and who are bound in writing prior to disclosure by confidentiality obligations at least as restrictive as those contained herein. The obligations in this Section 8 shall terminate five (5) years from the date of expiration or termination of this Agreement in accordance with Section 7. Notwithstanding the foregoing, Ascensia may not share any Confidential Information relating to Senseonics’ technology, intellectual property, internal processes, or development plans with a portfolio company of [***] or with any other partner, member, director, officer, retired partners, member, director, officer, or stockholder of such portfolio company of [***], except for a partner or member of [***] who is involved in the monitoring of the activities under the Note Purchase Agreement or this Agreement.
8.2Exceptions to Confidentiality Obligations. A Party’s obligations under this Agreement with respect to any portion of the other Party’s Confidential Information shall terminate when the Party that is subject to such obligations can document in writing that such information: (a) entered the public domain through no fault of such Party; (b) it was in such Party’s possession free of any obligation of confidence at the time it was communicated to such Party by the other Party; (c) it was rightfully communicated to such Party free of any obligation of confidence subsequent to the time it was communicated to such Party by the other Party; or (d) it was developed by employees or agents of such Party independently of and without reference to any information communicated to such Party by the other Party.
8.3Authorized Disclosure. Notwithstanding anything to the contrary, a Party shall not be in violation of Section 8.1 with regard to a disclosure of the other Party’s Confidential Information that is in response to a valid order by a court
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or other governmental body or necessary to comply with applicable law (including applicable securities laws) or governmental regulations, provided that if such Party is required to make any such disclosure of the other Party’s Confidential Information it shall to the extent practicable give reasonable advance notice to the other Party of such disclosure requirement in order to permit the other Party to seek confidential treatment of or to limit the Confidential Information required to be disclosed, and shall reasonably cooperate with the other Party in objecting to or limiting such disclosure or obtaining confidential treatment thereof.
9.MISCELLANEOUS
9.1Assignment. Neither Party has the right to assign its rights or delegate its obligations under the Agreement without the prior written consent of the other Party, except that each Party may assign its rights and delegate its obligations under the Agreement without such consent to an Affiliate (other than a portfolio company of [***] that is not otherwise a subsidiary or parent of Ascensia) of such Party or in connection with the transfer or sale to a Third Party of all or substantially all of the business of such Party to which the Agreement relates, whether by merger, sale of stock, sale of assets or otherwise. Notwithstanding the foregoing, any permitted assignment hereunder shall not relieve the assigning Party of its responsibilities for performance of its obligations under this Agreement. The rights and obligations of the Parties under this Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Parties. Any assignment not in accordance with this Agreement shall be void.
9.2Relationship of the Parties. It is expressly agreed that Senseonics and Ascensia shall be independent contractors and that the relationship between the Parties shall not constitute a partnership, joint venture or agency of any kind. Neither Party shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other Party, without the prior written consent of the other Party.
9.3Amendment. Unless otherwise provided herein, this Agreement may not be changed, waived, discharged, or terminated orally, but instead only by a written document that is signed by the duly authorized officers of both Parties.
9.4Waiver. No failure or delay by either Party in exercising any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial waiver thereof include any other or further exercise thereof or the exercise of any other right, power, or privilege.
9.5Severability. Whenever possible, each provision of the Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any term or provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of the Agreement and this Agreement shall be interpreted and construed as if such provision had never been contained herein.
9.6Notices. All notices and statements to be given (which shall be in writing) and all payments to be made hereunder (other than payments required to be wired) shall be given or made at the respective addresses of the Parties as set forth above, unless notification of a change of address is given in writing. All notices, payments (other than wired payments) and statements to be made hereunder shall be mailed by certified or registered mail, return receipt requested, or sent by overnight courier, or by facsimile or other electronic means. Any notice given pursuant to this Agreement by mail shall be considered effective three (3) business days after mailing. Any notice sent by overnight courier shall be considered effective one day after mailing. The date of transmission of any notice sent by electronic means shall be deemed to be the date the notice or statement is transmitted.
9.7Construction. The section headings of this Agreement are inserted for ease of reference only, and shall not be used to interpret, define, construe, or describe the scope or extent of any aspect of this Agreement. Unless otherwise expressly stated, when used in this Agreement the word “including” means “including but not limited to.” Each Party represents that it has had the opportunity to participate in the preparation of this Agreement and hence the Parties agree that the rule of construction that ambiguities be resolved against the drafting Party shall not apply to this Agreement.
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9.8No Third Party Beneficiaries. Unless expressly provided, no provisions of this Agreement are intended or shall be construed to confer upon or give to any person other than Ascensia and Senseonics any rights, remedies, or other benefits under or by reason of this Agreement.
9.9Equitable Relief. Each Party acknowledges and agrees that any breaches or violations of Section 8 may cause the non-breaching Party irreparable damage for which the award of monetary damages would be inadequate. Consequently, the non-breaching Party may seek to enjoin the breaching Party from any and all acts in violation of any such provisions, which remedy shall be cumulative and not exclusive, and a Party may seek the entry of an injunction enjoining any breach or threatened breach of such provisions, in addition to any other relief to which the non-breaching Party may be entitled at law or in equity.
9.10 Governing Law and Dispute Resolution. This Agreement shall be governed by and interpreted under the laws of New York, without regard to its conflict or choice of law provisions. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement.
9.11 Dispute Resolution. The Parties shall attempt by direct negotiation, between designated officers of the Parties, in good faith to resolve promptly any dispute arising out of or relating to this Agreement.
If the dispute has not been resolved by negotiation as detailed above, then the Parties shall endeavor to settle the dispute by binding arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules. A single, impartial arbitrator mutually acceptable to the Parties shall conduct the arbitration.
The location of the arbitration shall be in New York, New York. As a condition of appointment of the arbitrator, said arbitrator shall agree to use her/his best efforts to conclude the proceeding within [***]. Said arbitrator shall further have the authority to limit the volume of evidence and documents to be submitted by the Parties. The Parties shall bear the costs of arbitration equally and shall bear their own expenses, including professional fees. The arbitrator’s decision shall be binding, final and non-appealable (absent manifest error). Any court having jurisdiction thereof may enter judgment upon the award rendered by the arbitrator. This Section 9.11, however, shall not be construed to limit or to preclude either Party from bringing any action in any court of competent jurisdiction for injunctive or other provisional relief as necessary or appropriate. The arbitration proceeding will be confidential and the arbitrator shall issue appropriate protective orders to safeguard each Party’s Confidential Information. Except as required by applicable laws, including without limitation United States securities laws, no Party shall make (or instruct the arbitrator to make) any public announcement with respect to the proceedings or decision of the arbitrator without prior written consent of the other Party. The existence of any dispute submitted to arbitration, and the award, shall be kept in confidence by the Parties and the arbitrator, except as required in connection with the enforcement of such award or as otherwise required by applicable laws.
Notwithstanding anything to the contrary herein, the above procedures shall not apply to any disagreements relating to setting Revenue Targets, Marketing Fund spending and U.S. sales force coverage for each Fiscal Year as set forth in Section 2.4(h), or intellectual property rights, which disputes shall be resolved in the state and federal courts located in New York, New York. The Parties hereby irrevocably submit to the jurisdiction of the state and federal courts located in New York, New York for all such disputes.
9.12 Force Majeure. Neither Party shall be liable to the other for any failure or delay in the performance of any of its obligations under this Agreement arising out of any event or circumstance beyond its reasonable control, including war, rebellion, terrorism, civil commotion, strikes, lock-outs or industrial disputes; fire, explosion, earthquake, acts of God, flood, drought, or bad weather; pandemics, epidemics, or requisitioning or other act or order by any government, council, or constituted body. If such failure or delay occurs, then the affected Party shall give the other Party notice of the circumstances causing such failure or delay, and such Party shall be excused from the performance of such of its obligations that it is thereby disabled from performing for so long as it is disabled and for thirty (30) days thereafter; provided, however, that such affected Party commences and continues to take reasonable and diligent actions to cure such failure or delay. Notwithstanding the foregoing, if a Party is disabled from the performance of any material obligation under this Agreement for a period of ninety (90) days or more, then the other Party shall have the right to
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terminate this Agreement upon written notice to the other Party, in which event the provisions of Section 7.3 shall apply.
9.13 Attorneys’ Fees. If any claim, action, or dispute arises between the Parties with respect to any matter covered by this Agreement that leads to a proceeding before a court of competent jurisdiction to resolve such claim, the Prevailing Party in such proceeding shall be entitled to receive from the other Party its reasonable attorneys’ fees, expert witness fees, court costs and other out-of-pocket costs incurred in connection with such proceeding, in addition to any other relief that it may be awarded. For purposes of this Section 9.13, the term “Prevailing Party” means that Party in whose favor any monetary or equitable award is made or in whose favor any dispute is resolved, regardless of any settlement offers.
9.14 Publicity. Each Party shall have the right to issue from time to time press releases that disclose the relationship of the Parties under this Agreement upon the agreement of the Parties, which agreement shall not be unreasonably withheld, delayed, or conditioned. Any press releases that are to be issued by either Party shall be in a form and substance as may be mutually agreed upon by the Parties. Notwithstanding the foregoing, each Party shall have the right to issue press releases concerning this Agreement without the consent of the other Party solely to the extent necessary to comply with applicable securities laws, provided that such Party shall use reasonable efforts to provide prior notice to the other Party and consult with the other Party with respect to such press releases.
9.15 English Language. This Agreement is in the English language only, which language shall be controlling in all respects, and all versions hereof in any other language shall not be binding on the Parties hereto. All communications and notices to be made or given pursuant to this Agreement shall be made in the English language.
9.16 Entire Agreement. This Agreement includes all exhibits attached hereto (and along with the Quality Agreement) constitutes the entire Agreement by and between the Parties as to the subject matter hereof. Except for the Quality Agreement, which shall remain in effect, this Agreement supersedes and replaces in its entirety all prior agreements, understandings, letters of intent, and memoranda of understanding by and between the Parties hereto, in either written or oral form. No amendment or modification of this Agreement shall be valid unless set forth in writing referencing this Agreement and executed by authorized representatives of both Parties.
9.17 Counterparts. Each Party may execute this Agreement using a handwritten, electronic, or digital signature, in one or more counterparts, which may be exchanged via paper, fax or email (i.e., PDF format) when signed, each of which will be deemed an original, and all of such counterparts shall together constitute one and the same instrument.
[Signature page follows]
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IN WITNESS WHEREOF, the Parties hereto have this day caused this Agreement to be executed by their duly authorized officers.
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Senseonics, Inc. |
Ascensia Diabetes Care Holdings AG |
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(two signatories required) |
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By: |
/s/ Timothy Goodnow |
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By: |
/s/ Robert Schumm |
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Name: Timothy Goodnow |
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Name: Robert Schumm |
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Title: President & CEO |
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Title: President |
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Ascensia Diabetes Care Holdings AG |
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(two signatories required) |
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By: |
/s/ Katie Blakley |
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Name: Katie Blakley |
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Title: Head of Legal & Compliance, Americas |
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EXHIBIT A
DATA SHARING
For the data items ADC requests to be shared, Senseonics will prepare and provide to ADC a good faith estimate of the engineering and other costs required to make such data available to ADC. ADC will confirm to Senseonics which of those items it intends to proceed with and will pay such costs to Senseonics within [***] of completion of any items that take less than [***] to complete or on a monthly basis as work progresses for any projects requiring more than [***].
[This Exhibit shall be completed by the Parties in good faith within [***] of the Effective Date]
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EXHIBIT B
PRODUCTS
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a. |
Eversense® CGM System (90day system) – FDA approved June 2018 |
[***]
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b. |
Eversense® XL CGM System (180day system) – CE marked Nov 2017 |
[***]
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Eversense® XL 2.0 CGM System (180 day system) –
[***]
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c. |
[***] –based sensor CGM System (365 day system) |
[***]
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d. |
[***] based sensor CGM System (365 day system) |
[***]
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e. |
[***] |
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EXHIBIT C
QUALITY AGREEMENT
[NOTE: PARTIES TO COMPLETE IN GOOD FAITH WITHIN [***] OF THE EFFECTIVE DATE.]
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EXHIBIT D
ROLES AND RESPONSIBILITIES
[***]
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EXHIBIT E
PRODUCT WARRANTY
Senseonics warrants to Ascensia that the Products will function in material conformance with its Specifications set forth in documentation provided by Senseonics. The sole and exclusive remedy for a breach of the foregoing warranty shall be replacement of the defective Product(s) by Senseonics based on the following schedule:
[***]
The Parties will determine a warranty in good faith for the 365-day Product prior to its launch.
Neither Party is liable for the cost of reinsertion. The Joint Marketing Committee may consider and discuss special situations.
Amounts paid for the portion of Product cost for which the patient is responsible will be added to Net Sales and be shared by the Parties in accordance with the revenue sharing provisions.
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EXHIBIT F-1
Consideration Table
[***]
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EXHIBIT F-2
BASE AND REVISED BUSINESS CASES
[***]
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EXHIBIT G
TRAINING
[***]
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EXHIBIT H
SUPPORT
[***]
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EXHIBIT I
CHARTER
[NOTE: PARTIES TO COMPLETE IN GOOD FAITH WITHIN [***] OF THE EFFECTIVE DATE.]
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EXHIBIT J
KEY PERFORMANCE INDICATORS
[NOTE: PARTIES TO COMPLETE IN GOOD FAITH WITHIN [***] OF THE EFFECTIVE DATE.]
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EXHIBIT K
SHIPPING TERMS
[NOTE: PARTIES TO COMPLETE IN GOOD FAITH WITHIN [***] OF THE EFFECTIVE DATE.]
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Timothy T. Goodnow, Ph.D., certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Senseonics Holdings, Inc. (the “registrant”); |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 9, 2020
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/s/ Timothy T. Goodnow, Ph.D. |
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Timothy T. Goodnow, Ph.D. |
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President & Chief Executive Officer |
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(principal executive officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Nick Tressler, certify that:
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I have reviewed this quarterly report on Form 10-Q of Senseonics Holdings, Inc. (the “registrant”); |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 9, 2020
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/s/ Nick B. Tressler |
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Nick B. Tressler |
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Chief Financial Officer |
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(principal financial officer) |
EXHIBIT 32.1
CERTIFICATIONS OF
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Timothy T. Goodnow, Ph.D., President and Chief Executive Officer of Senseonics Holdings, Inc. (the “Company”), and Nick B. Tressler, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:
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The Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 (the “Quarterly Report”), to which this Certification is attached as Exhibit 32.1, fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and |
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The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition of the Company as of the end of the period covered by the Quarterly Report and results of operations of the Company for the periods covered by the Quarterly Report. |
In Witness Whereof, the undersigned have set their hands hereto as of the 9th day of November 2020.
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/s/ Timothy T. Goodnow, Ph.D. |
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/s/ Nick B. Tressler |
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Timothy T. Goodnow, Ph.D. |
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Nick B. Tressler |
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President & Chief Executive Officer |
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Chief Financial Officer |
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(principal executive officer) |
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(principal financial officer) |
*This Certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.