Senseonics(SENS) - 2019 Q4 - Annual Report

PART I Item 1. Business Senseonics Holdings, Inc. develops and commercializes long-term, implantable continuous glucose monitoring (CGM) systems, Eversense and Eversense XL, with strategic partnerships and ongoing R&D Overview The company develops implantable CGM systems offering significantly longer glucose monitoring durations than competitors - Senseonics develops implantable CGM systems (Eversense, Eversense XL) for 90-180 day glucose monitoring, significantly longer than competitors' 7-14 days[17] - Eversense received CE mark in June 2016, Eversense XL in September 2017 (EMEA); U.S. FDA approved Eversense in June 2018, and a non-adjunctive indication in June 2019, enabling its use for insulin dosing decisions[17] - The company completed enrollment for the PROMISE 180-day U.S. pivotal clinical trial in September 2019, with topline data expected in Q2 2020, aiming for FDA approval by end of 2020[18] - Also pursuing FDA iCGM designation for the 90-day Eversense system, potentially by H2 2020, to integrate with automated insulin dosing systems[18] Background Global diabetes prevalence is rising, driving demand for CGM systems that improve glycemic control and quality of life - Global diabetes prevalence was 463 million in 2019, projected to reach 700 million by 2045[19] - CGM systems offer advantages over traditional fingerstick SMBG by providing real-time, continuous glucose data, improving glycemic control and quality of life[22] - Eversense received FDA non-adjunctive label in June 2019, allowing it to replace fingerstick tests for treatment decisions, and CMS finalized a national payment rate in November 2019, enabling Medicare access in 2020[23][24] Commercial Strategy The commercial strategy focuses on strategic partnerships, reimbursement, and patient access programs to drive product adoption - Commercial strategy relies on distributors and strategic partners for product delivery and insurance billing, with reimbursement and patient access being key priorities[26] - Achieved over 100 million covered lives through positive insurance payor coverage decisions in 2019[27] - Launched the Eversense Bridge Program in the U.S. to provide financial assistance and appeals support for eligible patients lacking or having limited insurance coverage[27] - Established a Certified Eversense Specialist (CES) network in H2 2019, including dermatologists and plastic surgeons, to offer alternative sensor placement for prescribing providers[53] - Net revenues are derived from sales of disposable Eversense Sensor Packs and durable Eversense Smart Transmitter Packs[30] Distribution Agreement with Roche Diabetes Care An exclusive distribution agreement with Roche Diabetes Care covers EMEA and other key markets, with recent amendments to terms - Exclusive distribution agreement with Roche Diabetes Care covers EMEA (excluding Scandinavia and Israel) and 17 other countries, including major emerging markets[29][31] - Agreement term is through January 31, 2021, with Roche obligated to purchase specified minimum volumes[32] - Amended in December 2019 to reduce 2020 minimum volumes and increase pricing for the remaining contract period[32] Clinical Development and Regulatory Pathway The company is advancing clinical trials and regulatory submissions for its CGM systems to expand market access United States Pivotal Trials Pivotal trials have supported FDA approvals for Eversense, with ongoing trials for longer duration and iCGM designation - PRECISE II trial (90-day) completed in 2016, demonstrated 8.5% MARD, leading to FDA PMA approval for Eversense in June 2018[36][39][41] - PROMISE pivotal trial (180-day) completed enrollment in September 2019, with topline data expected in Q2 2020, targeting FDA approval by end of 2020[18][35][42] - Data from the first 90 days of PROMISE will support an FDA iCGM designation submission for the 90-day system, with potential approval in H2 2020[18][42] Our Technology The Eversense system features an implantable sensor, a smart transmitter with alerts, and a mobile app, offering long-term, non-adjunctive glucose monitoring - Eversense system comprises three main components: a small implantable sensor (up to 180-day duration), a removable smart transmitter with vibratory alerts, and a mobile app for real-time monitoring[44][45][48][49] - The sensor uses an optical system with a glucose-indicating hydrogel, powered wirelessly by the transmitter via NFC every five minutes[46][47] - The system requires twice-daily fingerstick calibrations, but the non-adjunctive FDA approval in June 2019 allows it to replace fingerstick measurements for insulin dosing decisions[44] Future Product Development Future development focuses on enhancing interoperability, reducing calibration, extending sensor duration, and introducing new monitoring systems - Future development focuses on iCGM for interoperability with automated insulin delivery systems[51] - Aims to reduce calibration frequency from twice daily to once daily, then once weekly[51] - Developing a next-generation sensor for up to 365-day duration, intended to expand market to Type 2 diabetes patients not on intensive insulin therapy[51] - Developing "Gemini," a 2-in-1 CGM and Flash Glucose Monitoring system[51] Sales and Marketing Early commercialization efforts target intensively managed patients and healthcare providers through awareness campaigns and expanded placement networks - Early commercialization efforts focus on awareness and adoption among intensively managed patients and healthcare providers[52] - Launched the Certified Eversense Specialist (CES) network in H2 2019 to expand the pool of healthcare providers trained for sensor placement, including dermatologists and plastic surgeons[53] - Initiated "Be Unstoppable" digital marketing campaign in June 2019 and uses social media and major diabetes conferences to promote the product[54] Reimbursement Reimbursement efforts focus on securing and expanding payor coverage for Eversense in both U.S. and international markets Coverage in the United States The company has secured significant U.S. payor coverage but faces challenges with "experimental and investigational" classifications - Secured positive reimbursement decisions from U.S. third-party payors covering approximately 120 million lives[56] - Some commercial payors classify Eversense as "experimental and investigational," which the company disputes with published real-world data[57] - The Eversense Bridge Program and patient appeals support are key initiatives to expand payor policy and acceptance[57] Coverage Outside the United States International coverage for CGM systems varies by country, with distributors responsible for securing local reimbursement - International coverage for CGM systems varies by country and region, with distributors responsible for securing it[58] Manufacturing and Quality Assurance All Eversense components are manufactured by outsourced contract manufacturers adhering to strict quality standards, with inventory maintained for critical materials - All Eversense components are manufactured by outsourced contract manufacturers in North America and Europe[59] - Contract manufacturers are ISO 13485:2016 certified and meet FDA and international regulatory quality system requirements[59][60] - Expects per-unit manufacturing costs to decrease with increased demand[59] - Maintains sufficient inventory for single-sourced raw materials to mitigate potential supply interruptions[61] Competition The company competes in the CGM market against major players with established systems, focusing on accuracy, duration, and convenience - Competes in the CGM market with major players like Dexcom, Medtronic, and Abbott, who have FDA-approved systems[62] - Key competitive factors for Eversense are accuracy, duration, convenience, alert functionality, and customer support[66] - Competitors like Dexcom and Abbott offer non-adjunctive, factory-calibrated systems, and Dexcom G6 has an iCGM indication[62][63] - Also competes with traditional SMBG providers and companies developing next-generation glucose monitoring technologies[64][65] Intellectual Property The company maintains a robust intellectual property portfolio, including patents, trademarks, and trade secrets, to protect its CGM technology Patents The company holds a significant number of patents related to CGM systems, with expiration dates extending to 2039, but faces frequent litigation risks - As of December 31, 2019, held approximately 579 issued patents and pending applications related to CGM systems[69][220] - Patent portfolio includes 73 issued U.S. patents, 290 foreign issued patents, and 216 pending applications globally, with expiration dates ranging from 2020 to 2039[69][220] - The medical device industry is characterized by frequent patent litigation, and the company is aware of numerous third-party patents that could lead to infringement claims[71][229] Trademarks The company protects its brand through numerous U.S. and foreign trademark registrations - Holds 14 U.S. and 103 foreign trademark registrations, with 26 pending foreign applications[75][222] Trade Secrets Trade secrets and technical know-how are protected through confidentiality agreements with employees and collaborators - Protects trade secrets, technical know-how, and innovation through non-disclosure and assignment of invention agreements with employees, consultants, and collaborators[76][225] Government Regulation The company operates under extensive governmental regulation, including FDA, international, and healthcare fraud and abuse laws Regulation by the FDA Eversense is a Class III medical device requiring extensive FDA Pre-Market Approval and ongoing post-market compliance - Eversense is a Class III medical device, requiring extensive FDA Pre-Market Approval (PMA) based on comprehensive safety and efficacy data[78] - Post-approval, the company is subject to ongoing FDA regulations including QSR (cGMP), MDR for adverse events, and strict rules against off-label promotion[80][81][82] International Regulation International sales necessitate compliance with diverse local regulations, including EU directives and the upcoming Medical Device Regulation - International sales require compliance with diverse local regulations, including EU directives and CE conformity marking[83][84] - The EU Medical Device Regulation (EU 2017/745) will replace existing directives from Spring 2020, introducing stricter rules for device placement and surveillance[88][263] Other Regulatory Requirements Post-market compliance includes quality system regulations, adverse event reporting, and strict marketing controls, subject to unannounced inspections - Post-market, the company must comply with regulations including QSR, MDR, and reporting for recalls/corrections, with unannounced inspections by regulatory agencies[89] - Marketing and promotion are strictly regulated, prohibiting off-label uses, with non-compliance potentially leading to significant penalties[90][91] Health Insurance Portability and Accountability Act of 1996 and Similar Foreign and State Laws and Regulations Affecting the Transmission, Security and Privacy of Health Information The company is subject to stringent data privacy and security laws, including HIPAA, HITECH, GDPR, and CCPA, with significant compliance obligations - Subject to HIPAA and HITECH, which impose privacy and security requirements on individually identifiable health information, with HITECH extending these to business associates[93] - GDPR (EU) effective May 2018, imposes stringent operational requirements and significant fines for data processing[96] - CCPA (California) effective January 2020, creates new consumer privacy rights and security obligations for personal data[97] Fraud and Abuse Laws The company must comply with federal and state anti-kickback, self-referral, and false claims laws, with severe penalties for violations - Subject to federal Anti-Kickback Statute, prohibiting remuneration to induce referrals for federal healthcare programs, with severe penalties for violations[99][100] - Stark Law prohibits physician referrals to entities where they have financial interests for "designated health services"[101] - Federal False Claims Act and HIPAA prohibit false claims and statements, and the Civil Monetary Penalties Law allows penalties for various fraudulent activities[104][106][107] Physician Payments Sunshine Act The federal Physician Payment Sunshine Act mandates annual reporting of financial arrangements with physicians and teaching hospitals - Federal Physician Payment Sunshine Act mandates annual reporting of financial arrangements and transfers of value to physicians and teaching hospitals, with public disclosure[110] Healthcare Reform Healthcare reforms aim to reduce costs, potentially impacting medical device reimbursement, with the future of PPACA remaining uncertain - Healthcare reforms aim to reduce costs, potentially decreasing medical device reimbursement[111] - PPACA's future is uncertain due to ongoing challenges, but recent legislation eliminated the medical device tax and "Cadillac" tax[111] Brexit and the Regulatory Framework in the United Kingdom Brexit introduces legal and regulatory uncertainty in the UK, posing risks to supply chains and operational costs - UK's withdrawal from the EU (Brexit) on Jan 31, 2020, creates legal and regulatory uncertainty, potential divergence in laws, and risks to supply chains and costs[112][273][275] U.S. Foreign Corrupt Practices Act The FCPA prohibits corrupt payments to foreign officials and requires accurate record-keeping, with severe penalties for violations - FCPA prohibits corrupt payments to foreign officials and mandates accurate record-keeping and internal controls, with severe penalties for violations[113] UK Bribery Act and other anti-corruption laws The UK Bribery Act prohibits bribery and holds companies liable for failing to prevent it, with criminal and civil penalties - UK Bribery Act prohibits bribery and holds companies liable for failing to prevent it, with non-compliance leading to criminal and civil penalties[114][115] Employees As of December 31, 2019, the company had 191 employees, all based in the United States - As of December 31, 2019, the company had 191 employees, all located in the United States[116] Corporate Information Senseonics Holdings, Inc. was reincorporated in Delaware in 2015 and its common stock is listed on the NYSE American - Senseonics Holdings, Inc. was reincorporated in Delaware in December 2015 after acquiring Senseonics, Incorporated (founded 1996)[117][118] - Common stock is listed on the NYSE American under the symbol "SENS"[119] Available Information SEC filings, including 10-K, 10-Q, and 8-K, are accessible on the company's website and the SEC's website - SEC filings (10-K, 10-Q, 8-K) are available on the company's website and the SEC's website[121] Item 1A. Risk Factors The company faces numerous risks, including significant operating losses, going concern doubts, commercialization uncertainty, intense competition, and extensive regulatory and financial challenges Risks Relating to our Business and our Industry The company faces substantial risks from ongoing losses, market acceptance challenges, intense competition, and reliance on third-party partners - Incurred significant net losses since inception, with $115.5 million in 2019 and an accumulated deficit of $473.3 million as of December 31, 2019[123] - Success is highly dependent on successful commercialization and market acceptance of Eversense, requiring continuous R&D and product enhancements[132][136] - Failure to secure or retain adequate reimbursement from third-party payors for Eversense and related procedures is a critical risk[138] - Operates in a highly competitive CGM market against well-capitalized companies (Dexcom, Medtronic, Abbott) with greater resources and established market presence[147][151] - Highly dependent on distribution agreements; Roche accounted for 77% of total net revenues in 2019, and Advanced Diabetes Supply for 12%[158] - Relies on third-party manufacturers and a limited number of suppliers, exposing the company to risks of quality defects, supply shortages, and production delays[167][171] - Potential complications or undetected defects in Eversense could lead to product liability claims, reputational harm, and decreased market acceptance[179][180] Risks Related to our Financial Results and Need for Financing The company faces significant financial risks, including the need for additional capital, potential debt acceleration, and foreign currency exposure - Requires significant sales to achieve profitability and expects expenses to increase, with future profitability highly uncertain[191] - As of December 31, 2019, had $95.9 million in cash, insufficient to fund operations through Q1 2021, raising substantial doubt about its ability to continue as a going concern[193][370] - Expected non-compliance with Solar Loan Agreement's trailing six-month revenue covenant by March 31, 2020, could accelerate debt repayment for Solar Loan and 2025 Notes[199][367] - Debt covenants restrict ability to incur additional debt, pay dividends, make acquisitions, and other business activities[200][368] - Servicing debt requires significant cash flow, which the business may not generate, potentially forcing asset sales or liquidation[203] - Exposed to foreign currency exchange risk as some expenses are incurred and revenues derived in non-U.S. dollar currencies, particularly Euros[207][400] Risks Related to Development of our Products Product development faces risks from costly and time-consuming regulatory approvals for modifications and uncertain clinical trial outcomes - Product modifications or new products require additional regulatory approvals, which can be costly, time-consuming, and uncertain, potentially delaying or preventing market entry[208][209] - Clinical trials are expensive, lengthy, and uncertain, with risks of delays or unfavorable outcomes that could impede commercialization[210][211] Risks Related to Employee Matters and Managing our Growth The company's success depends on retaining key personnel and effectively managing significant growth with limited resources - Highly dependent on key executives and the ability to attract, retain, and motivate qualified scientific, clinical, manufacturing, and sales/marketing personnel[212][213] - Expected significant growth in employees and operations, requiring improved managerial, operational, and financial systems, which may be difficult to manage with limited resources[215] Risks Related to our Intellectual Property Intellectual property protection is uncertain, and the company faces risks of patent challenges, infringement claims, and costly enforcement - Intellectual property protection (patents, trademarks, trade secrets) is uncertain; patents may not provide competitive advantage, can be challenged, or designed around[223][224][225][236] - The medical device industry is characterized by frequent patent litigation, exposing the company to potential infringement claims from third parties[228][229] - Enforcing intellectual property rights is difficult, expensive, and time-consuming, potentially diverting management attention and financial resources[226][231] Risks Related to our Legal and Regulatory Environment The company is subject to extensive and evolving governmental regulations, including FDA approvals, product recalls, and complex healthcare fraud and abuse laws - Extensive governmental regulation by FDA, EU, and other bodies, with non-compliance leading to severe penalties, recalls, and business disruption[237] - FDA approval process is expensive, time-consuming, and uncertain, with potential for delays or denial of approvals for products or modifications[238][240] - Product recalls or discovery of serious safety issues, such as the September 2019 sensor recall, could significantly impact reputation, finances, and operations[244] - Subject to complex and broadly applicable federal, state, and foreign healthcare fraud and abuse laws (e.g., Anti-Kickback Statute, False Claims Act, HIPAA), with uncertain scope and enforcement, posing risks of penalties and operational restructuring[250][252][253] - Legislative or regulatory healthcare reforms, including the PPACA and Brexit, may increase costs, lengthen approval times, and reduce reimbursement for medical devices[261][263][266][272][275] Risks Related to our Common Stock The company's stock price is highly volatile, subject to dilution, accounting fluctuations, and anti-takeover provisions, with no expected cash dividends - Stock price is highly volatile, influenced by factors such as financial performance, regulatory approvals, competition, and stock sales by existing holders[276][278] - Issuance of additional common stock (for financings, acquisitions, or convertible note conversions) will dilute existing stockholders[279] - GAAP operating results can fluctuate substantially due to the fair value accounting of embedded conversion options and other features in convertible notes[280][282] - No cash dividends are expected in the foreseeable future, as all available funds are intended for business operations and expansion[285] - Corporate charter documents and Delaware law contain anti-takeover provisions that could hinder efforts to acquire control or change management[286][287][288] - Failure to maintain effective internal controls over financial reporting could impair accurate and timely financial statements, leading to loss of investor confidence and potential regulatory sanctions[291][296] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - No unresolved staff comments[302] Item 2. Properties The company's principal offices are in Germantown, Maryland, occupying approximately 63,500 square feet under leases expiring in 2023 - Principal offices are in Germantown, MD, occupying approximately 33,000 square feet under a lease expiring in 2023[303] - Entered a new non-cancellable operating sub-lease for approximately 30,500 square feet of office space in Germantown, MD, commencing September 2, 2019, and expiring in 2023[303] Item 3. Legal Matters The company is not currently a party to any material legal proceedings and is unaware of any pending or threatened legal actions - Not currently involved in any material legal proceedings, nor aware of any pending or threatened legal actions that could materially impact the business[304] Item 4. Mine Safety Disclosures The company states that this item is not applicable - Not applicable[305] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is listed on the NYSE American, with no cash dividends paid or expected, and a significant number of shares outstanding - Common stock is listed on the NYSE American under the symbol "SENS"[306] - Has never declared or paid cash dividends and intends to retain all future earnings for business operations and expansion[307] - As of March 10, 2020, there were 204,113,102 shares of common stock outstanding, held by 185 record holders[5][308] - No recent sales of unregistered securities[311] Item 6. Selected Consolidated Financial Data This section provides a five-year summary of key financial data, showing significant revenue growth alongside substantial net losses and fluctuating cash positions Selected Consolidated Financial Data (2015-2019) | Metric (in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :-------------------- | :--- | :--- | :--- | :--- | :--- | | Statement of Operations Data: | | | | | | | Total revenue | $21,301 | $18,913 | $6,373 | $332 | $38 | | Cost of sales | $40,749 | $27,059 | $9,758 | $660 | $0 | | Gross profit | $(19,448) | $(8,146) | $(3,385) | $(328) | $38 | | Sales and marketing expenses | $49,555 | $27,730 | $6,857 | $2,736 | $792 | | Research and development expenses | $38,430 | $31,863 | $30,735 | $26,347 | $18,251 | | General and administrative expenses | $23,229 | $19,839 | $15,336 | $13,022 | $9,807 | | Operating loss | $(130,662) | $(87,578) | $(56,313) | $(42,433) | $(28,812) | | Net loss | $(115,549) | $(93,971) | $(59,101) | $(43,930) | $(29,877) | | Basic and diluted net loss per common share | $(0.61) | $(0.60) | $(0.51) | $(0.49) | $(4.32) | | Balance Sheet Data (as of Dec 31): | | | | | | | Cash and cash equivalents | $95,938 | $136,793 | $16,150 | $13,047 | $3,939 | | Working capital | $1,050 | $129,220 | $21,775 | $9,806 | $(2,371) | | Total assets | $132,801 | $159,973 | $45,944 | $22,271 | $5,423 | | Total liabilities | $141,450 | $88,712 | $38,677 | $27,148 | $15,120 | | Total stockholders' (deficit) equity | $(8,649) | $71,261 | $7,267 | $(4,877) | $(9,697) | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance, highlighting ongoing losses, going concern issues, and strategic efforts to manage liquidity and commercialization Overview Senseonics focuses on developing and commercializing long-term implantable CGM systems, with commercial success dependent on regulatory approvals and reimbursement - Senseonics focuses on developing and commercializing Eversense and Eversense XL CGM systems, offering 90-day and 180-day implantable glucose monitoring[316] - The Eversense system received FDA non-adjunctive approval in June 2019, allowing it to replace fingerstick measurements for insulin dosing decisions[316] - Commercialization relies on distributors and strategic partners, with sales highly dependent on third-party payor coverage and adequate reimbursement[318] European Commercialization of Eversense Eversense XL was commercialized in Europe in Q4 2017 through an exclusive distribution agreement with Roche Diabetes Care, which was amended in 2019 - Eversense XL (180-day sensor) commercialized in Europe in Q4 2017 following CE mark approval in September 2017[320] - Exclusive distribution agreement with Roche Diabetes Care for EMEA (excluding Scandinavia and Israel) and 17 other countries, expiring January 31, 2021[321] - The Roche agreement was amended in December 2019 to reduce 2020 minimum purchase volumes while increasing pricing[322] United States Development and Commercialization of Eversense U.S. development includes FDA approvals for Eversense, ongoing 180-day pivotal trials, and programs to enhance patient access and non-adjunctive use - PRECISE II trial led to FDA PMA approval for 90-day Eversense in June 2018, demonstrating 8.5% MARD[323] - PROMISE 180-day pivotal trial enrollment completed in September 2019, with topline data expected in Q2 2020 and FDA approval targeted by end of 2020[324] - Launched the Eversense Bridge Program in March 2019 to provide financial assistance and appeals support for U.S. patients[325] - Received FDA non-adjunctive indication in June 2019, allowing Eversense to replace fingerstick measurements for treatment decisions, launched with a new app in December 2019[326] Critical Accounting Policies and Use of Estimates Financial statement preparation involves significant estimates for revenue, warranty, inventory, and derivative liabilities, impacting reported results - Preparation of financial statements involves significant estimates and assumptions, particularly for variable consideration in revenue, warranty obligations, inventory obsolescence, and embedded derivatives[329][333] - The Eversense Bridge Program's reimbursements to customers are treated as a reduction in revenue, with estimates based on historical data, payor mix, and market conditions[333] - Warranty obligations are estimated and recorded at shipment based on product performance and historical replacement data[334] - Embedded conversion options in convertible notes are bifurcated and recorded as derivative liabilities, remeasured at fair value each reporting period[337][338][339] Results of Operations This section details the year-over-year changes in the company's revenue, cost of sales, operating expenses, and net loss Comparison of the Years Ended December 31, 2019 and 2018 Total revenue increased, but higher cost of sales and operating expenses led to a larger gross and net loss in 2019 Financial Performance Comparison (2019 vs 2018) | Metric (in thousands) | 2019 | 2018 | Change | | :-------------------- | :--- | :--- | :----- | | Total revenue | $21,301 | $18,913 | +$2,388 | | Cost of sales | $40,749 | $27,059 | +$13,690 | | Gross profit | $(19,448) | $(8,146) | $(11,302) | | Gross margin | (91.3)% | (43.1)% | -48.2 pp | | Sales and marketing expenses | $49,555 | $27,730 | +$21,825 | | Research and development expenses | $38,430 | $31,863 | +$6,567 | | General and administrative expenses | $23,229 | $19,839 | +$3,390 | | Operating loss | $(130,662) | $(87,578) | $(43,084) | | Change in fair value of derivative liabilities | $29,232 | $209 | +$29,023 | | Net loss | $(115,549) | $(93,971) | $(21,578) | - Increase in cost of sales was primarily due to $5.3 million in impairment charges for obsolete inventory, $3.3 million for scrap, $3.0 million for warranty expenses, and $1.0 million for product back-ups related to a sensor recall[344] - Sales and marketing expenses increased by $21.8 million, mainly due to a $13.0 million increase in payroll costs for additional headcount and $6.4 million in marketing costs for U.S. commercialization efforts[345] - Research and development expenses increased by $6.6 million, primarily due to a $7.9 million increase for the PROMISE clinical trial and other studies[346] Comparison of the Years Ended December 31, 2018 and 2017 Total revenue significantly increased in 2018, but higher cost of sales and operating expenses resulted in a larger net loss Financial Performance Comparison (2018 vs 2017) | Metric (in thousands) | 2018 | 2017 | Change | | :-------------------- | :--- | :--- | :----- | | Total revenue | $18,913 | $6,373 | +$12,540 | | Cost of sales | $27,059 | $9,758 | +$17,301 | | Gross profit | $(8,146) | $(3,385) | $(4,761) | | Gross margin | (43.1)% | (53.1)% | +10.0 pp | | Sales and marketing expenses | $27,730 | $6,857 | +$20,873 | | Research and development expenses | $31,863 | $30,735 | +$1,128 | | General and administrative expenses | $19,839 | $15,336 | +$4,503 | | Operating loss | $(87,578) | $(56,313) | $(31,265) | | Net loss | $(93,971) | $(59,101) | $(34,870) | - Sales and marketing expenses increased by $20.9 million, primarily due to a $13.0 million increase in payroll costs for additional headcount and $6.9 million in market research and marketing for the U.S. launch[355] Liquidity and Capital Resources The company has incurred substantial losses, faces going concern doubts due to insufficient cash, and is at risk of debt acceleration from covenant non-compliance - Incurred substantial losses since inception ($473.3 million accumulated deficit as of Dec 31, 2019) and funded operations through equity and debt[359][360] - Cash and cash equivalents were $95.9 million at December 31, 2019, insufficient to fund operations through Q1 2021, leading to substantial doubt about going concern[360][370] - Expected non-compliance with Solar Loan Agreement covenants by March 31, 2020, could accelerate debt repayment[367][375] - Implemented a restructuring in November 2019 to reduce cash burn and align strategic goals, including a 30% workforce reduction[372][374] Common Stock The company has raised capital through common stock offerings, with an additional $50 million offering authorized in 2019 Common Stock Offerings | Offering Date | Net Proceeds (in millions) | | :------------ | :------------------------- | | June 2018 | $149.0 | | July 2019 | $26.8 | - Entered an Open Market Sale Agreement in November 2019 to sell up to $50 million in common stock, with no sales as of December 31, 2019[363] Warrants The company issued Solar Warrants to purchase 1.125 million common shares, exercisable until July 2029 - Issued Solar Warrants to purchase 1,125,000 common shares at $1.20/share, exercisable until July 2029, with a fair value of $0.7 million[364][498] Indebtedness The company has secured term loans and issued convertible notes, with significant debt obligations and restrictive covenants Term Loans The company secured a $45 million Solar Term Loan in 2019, but faces potential acceleration due to expected covenant non-compliance - Secured a $45.0 million Solar Term Loan in July 2019, using $11.6 million to repay previous term loans[365] - The Solar Term Loan bears a floating annual interest rate of 6.50% plus LIBOR (minimum 8.98%) and matures on July 1, 2024[365] - Expected to be in non-compliance with the trailing six-month revenue covenant of the Solar Loan Agreement by March 31, 2020, which could trigger acceleration of the Solar Loan and 2025 Notes[367][493] - The Solar Term Loan is secured by substantially all company assets and includes restrictive covenants[366][494][495] Convertible Notes The company issued $82 million in 2025 convertible notes and $53 million in 2023 convertible notes, with embedded conversion options recorded as derivative liabilities - Issued $82.0 million in 5.25% convertible senior subordinated notes due January 15, 2025, in July 2019[368][501] - Used $37.9 million of proceeds to repurchase $37.0 million of outstanding 2023 Notes[502] - Convertible at an initial rate of 757.5758 shares per $1,000 principal amount (approx. $1.32/share)[368][503] - Embedded conversion option, fundamental change make-whole provision, and cash settled make-whole shares provision were bifurcated and recorded as a $38.3 million derivative liability[508] - Issued $53.0 million in 5.25% convertible senior subordinated notes due February 1, 2023, in January/February 2018[368][510] - Embedded conversion option and other provisions were bifurcated and recorded as an initial $17.3 million derivative liability[512] Funding Requirements and Outlook The company's ability to fund operations is uncertain due to insufficient cash, expected debt covenant non-compliance, and reliance on future capital or alliances - Ability to fund operations depends on the effectiveness of the November 2019 restructuring, raising additional capital, and strategic alliances[375] - Expected non-compliance with Solar Loan Agreement covenants by March 31, 2020, creates substantial doubt about the company's ability to continue as a going concern[370][375] - November 2019 restructuring reduced workforce by approximately 30% and incurred $0.8 million in severance expenses[372][374] Cash Flows Net cash used in operating activities significantly increased in 2019, while net cash provided by financing activities decreased Summary of Cash Flows (in thousands) | Cash Flow Activity | 2019 | 2018 | 2017 | | :----------------- | :--- | :--- | :--- | | Net cash used in operating activities | $(136,047) | $(90,771) | $(55,739) | | Net cash (used in) provided by investing activities | $(1,045) | $19,426 | $(13,226) | | Net cash provided by financing activities | $96,237 | $191,988 | $72,068 | | Net (decrease) increase in cash and cash equivalents | $(40,855) | $120,643 | $3,103 | | Cash and cash equivalents, at beginning of year | $136,793 | $16,150 | $13,047 | | Cash and cash equivalents, at ending of year | $95,938 | $136,793 | $16,150 | - Net cash used in operating activities increased significantly from $90.8 million in 2018 to $136.0 million in 2019[377][428] - Net cash provided by financing activities decreased from $192.0 million in 2018 to $96.2 million in 2019[383][384][428] Contractual Obligations The company has significant contractual obligations, with a substantial portion of debt classified as short-term due to expected covenant non-compliance Contractual Obligations as of December 31, 2019 (in thousands) | Contractual Obligations | Total | 2020 | 2021-2023 | 2024-2025 | After 2025 | | :---------------------- | :---- | :--- | :-------- | :-------- | :--------- | | Operating lease obligations | $3,509 | $938 | $2,571 | $- | $- | | Principal payments under Solar Term Loan | $45,000 | $- | $36,250 | $8,750 | $- | | Interest payments under Solar Term Loan | $15,716 | $4,108 | $8,439 | $3,169 | $- | | Principal payment under 2023 Notes | $15,700 | $- | $15,700 | $- | $- | | Interest payments under 2023 Notes | $2,541 | $824 | $1,717 | $- | $- | | Principal payment under 2025 Notes | $82,000 | $- | $- | $82,000 | $- | | Interest payments under 2025 Notes | $22,227 | $4,372 | $13,116 | $4,739 | $- | | Other commitments | $1,500 | $1,500 | $- | $- | $- | | Total contractual obligations | $188,193 | $11,742 | $77,793 | $98,658 | $- | - Due to expected non-compliance with Solar Loan Agreement covenants, outstanding indebtedness under the Solar Loan and 2025 Notes are classified as short-term liabilities as of December 31, 2019[389] Off-Balance Sheet Arrangements The company did not have any off-balance sheet arrangements during the reported periods - The company did not have any off-balance sheet arrangements during the periods presented[390] Recent Accounting Pronouncements This section outlines recently adopted and not-yet-adopted accounting standards and their expected impact on the financial statements Recently Adopted The company adopted new accounting standards for leases and nonemployee share-based payments in 2019, with no material impact on net loss or cash flows - Adopted ASU 2016-02 (ASC 842) Leases effective January 1, 2019, recognizing Right-of-Use (ROU) assets and corresponding lease liabilities on the balance sheet[391][470] - Adopted ASU 2018-07 for nonemployee share-based payments effective January 1, 2019, simplifying accounting to align with employee share-based payments[394][472] - Neither adoption had a material impact on consolidated net loss or cash flows[391][394][470][472] Not Yet Adopted Future accounting standards for credit losses and fair value measurement disclosures are not expected to significantly impact the company's financial statements - ASU 2016-13 (Credit Losses) will be adopted on January 1, 2023, but is not expected to have a significant impact due to no current holdings in available-for-sale securities and no historical collection issues[395][473] - ASU 2018-13 (Fair Value Measurement Disclosures) became effective on January 1, 2020, and is not expected to have a significant impact on financial statements[397][476] Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are interest rate sensitivity on its floating-rate debt and foreign currency exposure from Euro-denominated sales, with no current hedging activities Interest Rate Risk The company is exposed to interest rate fluctuations primarily through its floating-rate Solar Term Loan, but does not currently hedge this risk - Primary market risk exposure is interest rate sensitivity, with cash and cash equivalents ($95.9 million as of December 31, 2019) held in short-term, low-risk investments[399] - The Solar Term Loan has a floating interest rate (minimum 8.98%), while the 2023 and 2025 Notes have fixed interest rates[399] - Does not currently engage in hedging transactions to manage interest rate risk[399] Foreign Currency Risk The company faces foreign currency exchange risk, mainly from Euro-denominated international sales, and does not currently hedge this exposure - Exposed to foreign currency exchange risk, mainly from Euro-denominated international sales, where a strengthening U.S. dollar could negatively impact revenue[400] - Does not currently engage in hedging transactions to manage foreign currency exchange rate risk[400] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements, independent auditor reports, and detailed notes, including a going concern emphasis Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on the financial statements and internal controls, while emphasizing substantial doubt about the company's going concern ability - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2019, 2018, and 2017[405] - Ernst & Young LLP also issued an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2019[406] - The report includes an explanatory paragraph highlighting substantial doubt about the company's ability to continue as a going concern due to recurring losses and a projected working capital deficiency[407] Opinion on Internal Control over Financial Reporting Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2019 - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO criteria[412][414][416] - Ernst & Young LLP issued an unqualified opinion on the effectiveness of internal control over financial reporting[412] Consolidated Balance Sheets This table presents the company's assets, liabilities, and equity (deficit) as of December 31, 2019 and 2018 Consolidated Balance Sheets (in thousands) | Asset/Liability/Equity (as of Dec 31) | 2019 | 2018 | | :------------------------------------ | :--- | :--- | | Assets: | | | | Cash and cash equivalents | $95,938 | $136,793 | | Accounts receivable | $3,239 | $830 | | Accounts receivable - related parties | $7,140 | $6,267 | | Inventory, net | $16,929 | $10,231 | | Prepaid expenses and other current assets | $4,512 | $3,985 | | Total current assets | $127,758 | $158,106 | | Deposits and other assets | $3,042 | $117 | | Property and equipment, net | $2,001 | $1,750 | | Total assets | $132,801 | $159,973 | | Liabilities: | | | | Accounts payable | $4,285 | $4,407 | | Accrued expenses and other current liabilities | $18,636 | $13,851 | | Deferred revenue | $- | $628 | | Term Loans, net of discount (current) | $43,434 | $10,000 | | 2025 Notes, net of discount (current) | $60,353 | $- | | Total current liabilities | $126,708 | $28,886 | | Term Loans, net of discount (non-current) | $- | $4,783 | | 2023 Notes, net of discount (non-current) | $12,464 | $53,194 | | Other liabilities | $2,278 | $1,849 | | Total liabilities | $141,450 | $88,712 | | Stockholders' Equity (Deficit): | | | | Common stock | $203 | $177 | | Additional paid-in capital | $464,491 | $428,878 | | Accumulated deficit | $(473,343) | $(357,794) | | Total stockholders' (deficit) equity | $(8,649) | $71,261 | Consolidated Statements of Operations and Comprehensive Loss This table presents the company's revenue, expenses, and net loss for the years ended December 31, 2019, 2018, and 2017 Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric | 2019 | 2018 | 2017 | | :------------------------------------ | :--- | :--- | :--- | | Revenue, net | $4,924 | $2,039 | $529 | | Revenue, net - related parties | $16,377 | $16,874 | $5,844 | | Total revenue | $21,301 | $18,913 | $6,373 | | Cost of sales | $40,749 | $27,059 | $9,758 | | Gross profit | $(19,448) | $(8,146) | $(3,385) | | Sales and marketing expenses | $49,555 | $27,730 | $6,857 | | Research and development expenses | $38,430 | $31,863 | $30,735 | | General and administrative expenses | $23,229 | $19,839 | $15,336 | | Operating loss | $(130,662) | $(87,578) | $(56,313) | | Interest income | $1,933 | $2,001 | $135 | | Loss on extinguishment of debt | $(398) | $- | $- | | Interest expense | $(11,799) | $(8,282) | $(3,099) | | Debt issuance costs | $(3,344) | $- | $- | | Change in fair value of derivative liabilities | $29,232 | $209 | $- | | Other (expense) income | $(511) | $(321) | $176 | | Total other income (expense), net | $15,113 | $(6,393) | $(2,788) | | Net loss | $(115,549) | $(93,971) | $(59,101) | | Basic and diluted net loss per common share | $(0.61) | $(0.60) | $(0.51) | | Basic and diluted weighted-average shares outstanding | 188,754,160 | 157,429,145 | 115,975,402 | Consolidated Statements of Changes in Stockholders' Equity (Deficit) This table summarizes the changes in the company's stockholders' equity (deficit) for the years ended December 31, 2019, 2018, and 2017 Consolidated Statements of Changes in Stockholders' Equity (Deficit) (in thousands) | Metric (as of Dec 31) | 2019 | 2018 | 2017 | | :-------------------- | :--- | :--- | :--- | | Total Stockholders' Equity (Deficit) | $(8,649) | $71,261 | $7,267 | | Common Stock Shares Outstanding | 203,453 | 176,918 | 136,883 | | Additional Paid-In Capital | $464,491 | $428,878 | $270,953 | | Accumulated Deficit | $(473,343) | $(357,794) | $(263,823) | - Total stockholders' equity shifted from a positive $71.3 million in 2018 to a deficit of $8.6 million in 2019, primarily due to the net loss of $115.5 million[425] Consolidated Statements of Cash Flows This table presents the company's cash flows from operating, investing, and financing activities for the years ended December 31, 2019, 2018, and 2017 Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 2019 | 2018 | 2017 | | :----------------- | :--- | :--- | :--- | | Net cash used in operating activities | $(136,047) | $(90,771) | $(55,739) | | Net cash (used in) provided by investing activities | $(1,045) | $19,426 | $(13,226) | | Net cash provided by financing activities | $96,237 | $191,988 | $72,068 | | Net (decrease) increase in cash and cash equivalents | $(40,855) | $120,643 | $3,103 | | Cash and cash equivalents, at beginning of year | $136,793 | $16,150 | $13,047 | | Cash and cash equivalents, at ending of year | $95,938 | $136,793 | $16,150 | - Net cash used in operating activities increased significantly from $90.8 million in 2018 to $136.0 million in 2019[377][428] - Net cash provided by financing activities decreased from $192.0 million in 2018 to $96.2 million in 2019[383][384][428] Notes to Consolidated Financial Statements These notes provide detailed information on the company's accounting policies, financial condition, and specific transactions 1. Organization Senseonics Holdings, Inc. is a Delaware corporation focused on developing and commercializing long-term implantable continuous glucose monitoring systems - Senseonics Holdings, Inc. is a Delaware corporation focused on developing and commercializing long-term, implantable continuous glucose monitoring systems[430] - Senseonics, Incorporated, founded in 1996, is a wholly-owned subsidiary and the operating entity[430] 2. Going Concern The company's recurring losses and insufficient cash raise substantial doubt about its ability to continue as a going concern without additional financing - Incurred substantial operating losses and cumulative negative cash flows since inception, with a net loss of $115.5 million in 2019 and an accumulated deficit of $473.3 million[431][432] - As of December 31, 2019, cash and cash equivalents were $95.9 million, which is insufficient to fund operations through the first quarter of 2021[432] - There is substantial doubt about the company's ability to continue as a going concern without additional financing or a waiver from Solar Capital for expected covenant non-compliance[432][433] 3. Summary of Significant Accounting Policies This section details the key accounting principles and estimates used in preparing the financial statements, including revenue recognition, inventory, and derivative liabilities - Financial statements are prepared in accordance with U.S. GAAP, relying on estimates for stock-based compensation, long-lived assets, deferred taxes, derivative liabilities, inventory obsolescence, warranty obligations, and variable revenue consideration[434][435] - Revenue from product sales is recognized when customers gain control, with variable consideration (like Eversense Bridge Program reimbursements) reducing recognized revenue[452][455] - Warranty obligations are estimated and recorded at shipment based on product performance and historical replacement data[450] - Embedded conversion options in convertible notes are bifurcated as derivative liabilities and remeasured at fair value each reporting period[447][448][449] Revenue Concentration by Customer | Customer | 2019 | 2018 | 2017 | | :------- | :--- | :--- | :--- | | Roche Diabetes Care GmbH | 77% | 86% | 93% | | Advanced Diabetes Supply | 12% | N/A | N/A | Net Revenues by Geographic Region (in thousands) | Region | 2019 Amount | 2019 % of Total | 2018 Amount | 2018 % of Total | 2017 Amount | 2017 % of Total | | :----- | :---------- | :-------------- | :---------- | :-------------- | :---------- | :-------------- | | Outside of the United States | $18,054 | 84.8% | $17,498 | 92.5% | $6,373 | 100.0% | | United States | $3,247 | 15.2% | $1,415 | 7.5% | $- | 0.0% | | Total | $21,301 | 100.0% | $18,913 | 100.0% | $6,373 | 100.0% | - The company did not hold any marketable securities as of December 31, 2019, and 2018[442] - Inventory is valued at the lower of cost or net realizable value, with adjustments for obsolete or excess items based on future demand and product shelf life[443] - No allowance for doubtful accounts was recorded as of December 31, 2019, and 2018, indicating no significant collectability concerns for accounts receivable[444] - Property and equipment are depreciated using the straight-line method over 3-7 years and are reviewed for impairment, with no indicators identified in 2017-2019[445][446] Warranty Reserve Reconciliation (in thousands) | Metric | 2019 | 2018 | | :-------------------------- | :--- | :--- | | Balance at beginning of year | $816 | $813 | | Provision for warranties | $3,296 | $1,119 | | Settlements made | $(1,915) | $(1,116) | | Balance at end of year | $2,197 | $816 | - Cost of sales includes raw materials, contract manufacturing fees, warranty costs, recall costs, product obsolescence, scrap, warehousing, shipping, and internal supply chain employee costs[457] - Sales and marketing expenses primarily consist of personnel costs (salaries, commissions) for sales, marketing, and customer support, along with marketing programs, advertising, and consultant fees[458] - Research and development expenses cover Eversense development, clinical trials, feasibility studies, and strategic partnerships, including personnel costs, lab supplies, and regulatory expenses, and are expensed as incurred[459] - General and administrative expenses include personnel costs for executive, finance, accounting, business development, IT, and HR, as well as IT, facility, legal, and consulting fees[460] Stock-Based Compensation Expense (in thousands) | Expense Category | 2019 | 2018 | 2017 | | :--------------- | :--- | :--- | :--- | | Cost of sales | $153 | $- | $- | | Sales and marketing | $3,001 | $1,685 | $509 | | Research and development | $1,600 | $1,364 | $930 | | General and administrative | $3,298 | $3,326 | $2,659 | | Total | $8,052 | $6,375 | $4,098 | - No provision for U.S. federal or state income taxes due to recurring net operating losses, with a full valuation allowance against net deferred income tax assets[540] - As of December 31, 2019, had federal and state net operating loss (NOL) carryforwards of $419.2 million and research and experimental (R&E) credit carryforwards of $9.4 million[541] - Embedded features of the 2023 and 2025 Notes are derivative liabilities measured at fair value using the binomial option pricing model, incorporating management assumptions[548][550] Anti-Dilutive Shares Outstanding (in thousands) | Type of Shares | 2019 | 2018 | 2017 | | :------------- | :--- | :--- | :--- | | Stock-based awards | 24,219 | 21,458 | 16,414 | | 2023 Notes | 6,673 | 20,481 | - | | 2025 Notes | 63,566 | - | - | | Warrants | 5,197 | 4,072 | 4,427 | | Total anti-dilutive shares outstanding | 99,654 | 46,010 | 20,841 | [Item 9. Changes in and Dis