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UNITED
STATES
SECURITIES
AND
EXCHANGE
COMMISSION
Washington,
D.C.
20549
FORM
10-K
ANNUAL
REPORT
PURSUANT
TO
SECTION
13
OR
15(d)
OF
THE
SECURITIES
EXCHANGE
ACT
OF
1934
For
the
fiscal
year
ended
December
31,
2015
Commission
file
number
333-198168
Incorporated under the Laws of the
State
of
Delaware
I.R.S. Employer Identification No.
47-1210911
SENSEONICS
HOLDINGS,
INC.
20451
Seneca
Meadows
Parkway
Germantown,
MD
20876-7005
(301)
515-7260
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☒ No ☐
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes No ☒
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
"large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
(Do not check if a
smaller reporting company)
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity as of the last
business day of the registrant’s most recently completed second fiscal quarter is: n/a .
As of Febuary 18, 2016, 75,760,061 shares of common stock, $0.001 par value, were outstanding.
Table of Contents
SPECIAL
NOTE
REGARDING
FORWARD
‑‑LOOKING
STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements that involve substantial
risks and uncertainties. The forward ‑looking statements are contained principally in Part I, Item 1: “Business,” Part I, Item 1A:
“Risk Factors,” and Part 2, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
but are also contained elsewhere in this Annual Report. In some cases, you can identify forward ‑looking statements by the words
“may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,”
“predict,” “project,” “potential,” “continue”, “target”, “seek”, “contemplate”, and “ongoing,” or the negative of these terms, or
other comparable terminology intended to identify statements about the future. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be
materially different from the information expressed or implied by these forward ‑looking statements. Although we believe that we
have a reasonable basis for each forward ‑looking statement contained in this Annual Report, we caution you that these
statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which
we cannot be certain. All statements other than statements of historical fact could be deemed forward ‑looking, including but not
limited to statements about:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
our plans to develop and commercialize Eversense;
our U.S. pivotal clinical trial;
the timing and availability of data from our clinical trials;
the timing of our planned regulatory filings;
the timing of and our ability to obtain and maintain regulatory approval of Eversense;
the clinical utility of Eversense;
our ability to develop future generations of Eversense;
our plans to conduct a public offering of our common stock;
our ability to access our credit facilities in the future;
our future development priorities;
our ability to obtain adequate reimbursement and third-party payor coverage for Eversense;
our expectations about the willingness of healthcare providers to recommend Eversense to people with diabetes;
our commercialization, marketing and manufacturing capabilities and strategy;
our ability to comply with applicable regulatory requirements;
our ability to maintain our intellectual property position;
our estimates regarding the size of, and future growth in, the market for CGM systems; and
our estimates regarding our future expenses and needs for additional financing.
Forward-looking statements are based on our management's current expectations, estimates, forecasts and projections
about our business and the industry in which we operate, and our management's beliefs and assumptions are not guarantees of
future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases
beyond our control. You should refer to “Item 1A. Risk Factors” in this Annual Report for a discussion of important factors that
may cause our actual results to differ materially from those expressed or implied by our forward ‑looking statements. As a result
of these factors, we cannot assure you that the forward ‑looking statements in this Annual Report will prove to be accurate.
Furthermore, if our forward ‑looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant
uncertainties in these forward ‑looking statements, you should not regard these statements as a representation or warranty by us or
any other person that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking
statements in this Annual Report represent our views as of the date of this Annual Report. We anticipate that subsequent events
and developments may cause our views to change. However, while we may elect to update these forward-looking statements at
some point in the future, we undertake no obligation to publicly update any forward ‑looking statements, whether as a result of
new information, future events or otherwise, except as required by law. You should, therefore, not rely on these forward-looking
statements as representing our views as of any date subsequent to the date of this Annual Report.
You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form
10-K and have filed as exhibits to this Annual Report on Form 10-K completely and with the understanding that our actual future
results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary
statements.
Table of Contents
PART
I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Matters
Item 4. Mine Safety Disclosures
TABLE
OF
CONTENTS
PART
II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Consolidated Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART
III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART
IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
Page
2
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ABOUT
THIS
ANNUAL
REPORT
We were originally incorporated as ASN Technologies, Inc. in Nevada on June 26, 2014. On December 4, 2015, we
were reincorporated in Delaware and changed our name to Senseonics Holdings, Inc. Also, on December 4, 2015, we entered into
a merger agreement with Senseonics, Incorporated and SMSI Merger Sub, Inc., or the Merger Agreement, to acquire Senseonics,
Incorporated. The transactions contemplated by the Merger Agreement were consummated on December 7, 2015, referred to
throughout this Annual Report as the Acquisition. Pursuant to the terms of the Merger Agreement, (i) all issued and outstanding
shares of Senseonics, Incorporated's preferred stock were converted into shares of Senseonics, Incorporated common stock, $0.01
par value per share, or the Senseonics Shares, (ii) all outstanding Senseonics Shares were exchanged for 57,739,953 shares of our
common stock, $0.001 par value per share, or the Company Shares, reflecting an exchange ratio of one Senseonics Share for
2.0975 Company Shares, or the Exchange Ratio, and (iii) all outstanding options and warrants to purchase Senseonics Shares, or
the Senseonics Options and Senseonics Warrants, respectively, were each exchanged or replaced with options and warrants to
acquire shares of our common stock, or the Company Options and Company Warrants, respectively. Accordingly, Senseonics,
Incorporated became our wholly-owned subsidiary. In connection with the closing of the Acquisition, the directors and executive
officers of Senseonics, Incorporated became directors and executive officers of the Company.
Following the closing of the Acquisition, the business of Senseonics, Incorporated became our sole focus and all of our
operations following the closing of the Acquisition consist of the historical Senseonics, Incorporated business. Unless otherwise
indicated or the context otherwise requires, all references in this Annual Report to "the Company," "we," "our," "ours," "us" or
similar terms refer to (i) Senseonics, Incorporated prior to the closing of the Acquisition, and (ii) Senseonics Holdings, Inc. and its
subsidiaries subsequent to the closing of the Acquisition.
PRESENTATION
OF
FINANCIAL
INFORMATION
On December 7, 2015, ASN Technologies, Inc. acquired all of the outstanding capital stock of Senseonics, Incorporated.
While ASN Technologies, Inc. was the legal acquirer of Senseonics, Incorporated in the transaction, Senseonics, Incorporated
was deemed to be the acquiring company for accounting purposes. As such, the transaction was accounted for as a reverse
recapitalization in accordance with accounting principles generally accepted in the United States of America, and ASN
Technologies, Inc.'s historical financial statements have been replaced with Senseonics, Incorporated's historical financial
statements. The historical financial statements of ASN Technologies, Inc. are not included in this Annual Report because the
assets, liabilities and operations of ASN Technologies, Inc. were minimal. All common share, additional paid-in capital and per
share amounts in the consolidated financial statements and related notes have been retrospectively adjusted to reflect the
Exchange Ratio.
"Senseonics," the Senseonics logo and other trademarks or service marks of Senseonics Holdings, Inc. appearing in this
Annual Report are the property of Senseonics Holdings, Inc. This Annual Report contains additional trade names, trademarks and
service marks of others, which are the property of their respective owners.
TRADEMARKS
Table of Contents
Item
1.
Business
Overview
PART
I
We are a medical technology company focused on the design, development and commercialization of glucose
monitoring systems to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative
ease and accuracy. Our first generation continuous glucose monitoring, or CGM, system, Eversense, is designed to be a reliable,
long-term, implantable CGM system to continually and accurately measure glucose levels in people with diabetes for a period of
up to 90 days, as compared to five to seven days for currently available CGM systems. We believe Eversense will provide people
with diabetes with a more convenient method to monitor their glucose levels in comparison to the traditional method of self-
monitoring of blood glucose, or SMBG, as well as currently available CGM systems. In our European pivotal clinical trial, we
observed that Eversense measured glucose levels over 90 days with a degree of accuracy comparable or superior to that of other
currently available CGM systems. In July 2015, we applied for a CE mark and, subject to regulatory approval, we expect to begin
marketing Eversense in select European markets in the first half of 2016. We have also received approval from the U.S. Food and
Drug Administration, or FDA, of an investigational device exemption, or IDE, application to initiate clinical trials of Eversense in
the United States, and we initiated a single pivotal clinical trial in the United States in the first quarter of 2016. If the results of the
trial are favorable, we intend to apply as promptly as possible to market Eversense in the United States. We believe that we could
file for U.S. marketing approval as early as the second half of 2016 and expect the pre-market approval, or PMA, process could
take between six and 18 months.
Diabetes is a chronic, life-threatening disease for which there is no known cure. The disease is caused by the body's
inability to produce or effectively utilize the hormone insulin, which prevents the body from adequately regulating blood glucose
levels. If diabetes is not managed properly, it can lead to serious health conditions and complications, including heart disease,
limb amputations, loss of kidney function, blindness, seizures, coma and even death. According to the International Diabetes
Federation, or IDF, an estimated 387 million people worldwide had diabetes in 2014. The number of people with diabetes
worldwide is estimated to grow to 592 million by 2035 due to various reasons, including changes in dietary trends, an aging
population and increased prevalence of the disease in younger people. Diabetes is typically classified into two primary types.
Type 1 diabetes is an autoimmune disorder that usually develops during childhood and is characterized by the inability of the
body to produce insulin, resulting from destruction of the insulin producing beta cells of the pancreas. Type 2 diabetes is a
metabolic disorder that results when the body is unable to produce sufficient amounts of insulin or becomes insulin resistant.
People with Type 1 diabetes must administer insulin, either by injection or insulin pump, to survive. People with Type 2 diabetes
may require diet and nutrition management, exercise, oral medications or the administration of insulin to regulate blood glucose
levels.
In an attempt to maintain blood glucose levels within the normal range, many people with diabetes seek to actively
monitor their blood glucose levels. The traditional SMBG method of glucose monitoring requires lancing the fingertips,
commonly referred to as fingersticks, multiple times per day and night to obtain a blood drop to be applied to a test strip inside a
blood glucose meter. This method of monitoring glucose levels is inconvenient and can be painful and, because each
measurement represents a single blood glucose value at a single point in time, it provides limited information regarding trends in
blood glucose levels. In contrast, CGM systems are generally less painful and involve the insertion of sensors into the body to
measure glucose levels in the interstitial fluid throughout the day and night, providing real-time data that shows trends in glucose
measurements. Since CGM measurements from interstitial tissue are inherently less accurate than test-strip measurements made
directly from the blood, the FDA and other device regulators require that CGMs be labeled and marketed as "adjunctive" to test-
strip measurements, with instructions that patients confirm CGM measurements with test-strip measurements using blood
obtained from fingersticks prior to self-medicating. However, currently available CGM systems are often inconvenient, requiring
frequent sensor replacement and an extra device, called a receiver, to monitor glucose readings, and have limited safety features.
We have designed Eversense to continually and accurately measure glucose levels under the skin for up to 90 days, as
compared to five to seven days for currently available CGM systems. Eversense also includes additional safety features that warn
the user before the occurrence of adverse events and provide distinct on-body vibrations in a number of situations, such as when
low or high glucose levels are reached. We believe that Eversense will provide a
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more convenient method of continuous glucose monitoring, with longer duration and equal or superior accuracy, compared to
other currently available CGM systems.
According to estimates by Close Concerns, Inc., an independent diabetes information company, or Close Concerns,
global sales for CGM systems and insulin pumps for people with intensively managed diabetes were $2.7 billion in 2014, of
which $523 million represented sales of CGM systems, a 31% increase from 2013. United States sales for CGM systems and
insulin pumps for people with intensively managed diabetes were $1.7 billion in 2014, of which $381 million represented sales of
CGM systems, a 33% increase compared to 2013. In comparison, global SMBG sales were $6.7 billion in 2014, a decline of 7%
compared to 2013, driven largely by downward pricing pressure. Based on industry sources and current industry trends,
we estimate that U.S. sales of CGM systems will grow at a C A GR ranging from 35% to 40%, reaching
approximately $3 billion to $3.7 billion by 2020 . We also estimate that by 2020 global sales for insulin pumps will
increase to $3.5 billion, while global sales for SMBG will decline to $5.8 billion. We expect the growth in sales of CGM systems
to be driven primarily by increased penetration of CGM in the Type 1 diabetic population, as it potentially becomes a standard of
care, reaching up to 45% penetration of the Type 1 diabetic population in the United States by 2020, compared to 8% in 2014. We
believe that the increased penetration of CGM will be driven by higher awareness of the clinical benefits of CGM by people with
diabetes, healthcare providers and third-party payors, insulin pump integration, an improving coverage and reimbursement
environment and additional product innovation, including increased convenience, accuracy and sensor duration.
We conducted our European pivotal clinical trial in Germany, the United Kingdom and the Netherlands to evaluate the
accuracy of Eversense, based on the mean absolute relative difference, or MARD, when compared with reference standard
measurement. The 90-day accuracy and safety data for the first 44 subjects was previously compiled and used as the basis for our
CE mark application, which we submitted in July 2015 to support initial labeling for 90 days of use. The average MARD of the
first 44 subjects, over 90 days, was 11.4%. There were no device-related or procedure-related serious adverse events.
While the protocol for this trial was designed to produce a finding of statistical significance with 44 subjects, and our CE
mark application previously submitted was based on 90-day data for 44 subjects, we enrolled a total of 81 subjects in the trial. We
followed 71 of those subjects who received the current configuration of Eversense for 180 days in order to gather additional data
for two purposes. First, we intend to use this data to make a subsequent submission to EU regulators for CE mark approval to use
our sensor for 180 days. Second, we intend to use this data to support our application for regulatory approval in the United States.
The 90-day data for the 71 subjects reflected a MARD of 11.0%. We expect to report final 180-day accuracy and safety
data for all subjects in the European pivotal trial in the first quarter of 2016.
Including our European pivotal trial, we have enrolled more than 350 subjects and tested over 700 sensors as of
December 31, 2015. Throughout this experience, we have observed no device-related or procedure-related serious adverse events
in any of our trials. However, we have limited clinical experience with repeated use of our system in the same patient or the same
insertion site, and it is possible that there could be unforeseen complications from long-term use.
In the first quarter of 2016, we initiated a single pivotal clinical trial in the United States. This trial will be conducted at
seven to ten sites in the United States and enroll approximately 90 subjects. In the trial, we will measure the accuracy of
Eversense measurements through 90 days after insertion. We will also assess safety through 90 days after insertion or sensor
removal. If the results of the trial are favorable, we intend to apply for regulatory approval as promptly as possible to market our
product in the United States. We believe that we could file for U.S. marketing approval as early as the second half of 2016 and
expect that the PMA process could take between six and 18 months.
From its inception in 1996 until 2010, Senseonics, Incorporated devoted substantially all of its resources to researching
various sensor technologies and platforms. Beginning in 2010, the company narrowed its focus to designing, developing and
refining a commercially viable glucose monitoring system. We are headquartered in Germantown, Maryland. The members of our
management team have held senior leadership positions at a number of medical technology and biopharmaceutical companies,
including Abbott Diabetes Care, TheraSense, LifeCell and Medtronic.
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Members of our team have contributed to the development, regulatory approval and commercialization of several glucose
monitoring systems and insulin pumps. Our largest stockholders are New Enterprise Associates, Delphi Ventures and Roche
Finance, which is an affiliate of Roche Holding AG, a global pharmaceutical company that sells products, including insulin
pumps and blood glucose monitoring systems, to the diabetes market.
Diabetes
Overview
Diabetes is a chronic, life-threatening disease for which there is no known cure and arises as a result of the body's
inability to produce or effectively utilize the hormone insulin. Insulin regulates blood glucose levels and allows cells to utilize
glucose, the primary source of energy for cells. Glucose must be maintained at certain concentrations in the blood in order to
permit optimal cell function and health. For people with diabetes, the inability to produce sufficient levels of insulin, or the failure
to utilize insulin effectively, causes blood glucose levels to rise above the optimal range. If diabetes is not managed properly, it
can lead to serious health conditions and complications, including heart disease, limb amputations, loss of kidney function,
blindness, seizures, coma and even death. According to the most recent information available from the Centers for Disease
Control and Prevention, or CDC, diabetes was the seventh leading cause of death in the United States in 2010, directly resulting
in approximately 69,000 deaths and complications from diabetes contributed to approximately 234,000 deaths in the same year.
According to the IDF, an estimated 387 million people worldwide had diabetes in 2014. The number of people with
diabetes worldwide is estimated to grow to 592 million by 2035 due to a number of reasons including changes in dietary trends,
an aging population and increased prevalence of the disease in younger people. Based on estimates by the IDF, diabetes is among
the costliest chronic diseases and the total global economic cost of diagnosed diabetes in 2014 was approximately $612 billion.
Diabetes is typically classified into two primary types:
· Type
1
diabetes
is an autoimmune disorder that usually develops during childhood or adolescence and is characterized
by the inability of the body to produce insulin, resulting from destruction of the hormone producing beta cells in the
pancreas. People with Type 1 diabetes must administer insulin, either by injection or insulin pump, to survive. There is
no known way to prevent Type 1 diabetes. Based on the most recent information available from the CDC, there were in
excess of one million people with Type 1 diagnosed diabetes in the United States in 2012. Based on the most recent
information available from the IDF and the CDC, we estimate that there were in excess of 1.7 million people with
Type 1 diagnosed diabetes in Europe in 2014.
· Type
2
diabetes
is a metabolic disorder which generally develops in adults and results when the body is unable to
produce sufficient amounts of insulin or becomes insulin resistant. Although it is not precisely known how Type 2
diabetes develops, genetics, family history and environmental factors, such as excess weight and physical inactivity, are
viewed as contributing factors. As Type 2 diabetes progresses, individuals may require diet and nutrition management,
exercise, oral medications or the administration of insulin to regulate blood glucose levels. Based on the most recent
information from the CDC, we estimate there were approximately 20 million people with Type 2 diagnosed diabetes in
the United States in 2012. We estimate that there were approximately 33 million people with Type 2 diagnosed diabetes
in Europe in 2014. Of these people with Type 2 diagnosed diabetes, we estimate that approximately 5.7 million people in
the United States utilize insulin, either by injection or insulin pump, to manage their diabetes.
Importance
of
Glucose
Monitoring
If people with diabetes can maintain their blood glucose levels within normal limits, they can significantly mitigate the
negative effects of diabetes. In the December 2005 edition of the New
England
Journal
of
Medicine
, the authors of a peer-
reviewed study concluded that intensive diabetes therapy, which included the use of multiple daily injections, or MDI, or an
insulin pump, in combination with SMBG at least four times per day, with the goal of maintaining blood glucose levels within
normal limits, has long-term beneficial effects on lowering the risk of cardiovascular disease in people with Type 1 diabetes. In
the study, this intensive diabetes therapy reduced the risk of any cardiovascular disease event by 42% and the risk of non-fatal
heart attack, stroke or death from cardiovascular
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disease by 57%, as compared to less intensive diabetes therapy. Earlier studies also demonstrated benefits of intensive diabetes
therapy in lowering the long-term risks of other complications of diabetes, including vision loss, kidney damage and nerve
damage.
Despite the clinically demonstrated benefits of maintaining blood glucose levels within the normal range, doing so can
be challenging and inconvenient for people with diabetes. Blood glucose levels are affected by many factors, including the
carbohydrate and fat content of meals, exercise, stress, illness or impending illness, hormonal releases, variability in insulin
absorption rates and changes in the effects of insulin on the body. As a result, people with diabetes often experience unpredictable
and significant fluctuations in their glucose levels above the normal range, which is referred to as hyperglycemia, or below the
normal range, which is referred to as hypoglycemia.
· Hyperglycemia
occurs when blood glucose levels rise above the normal range, which generally occurs when the
body does not produce sufficient levels of insulin or fails to effectively utilize insulin. If not effectively managed,
hyperglycemia often results in chronic long-term complications, such as heart disease, limb amputations, loss of
kidney function, blindness, seizures, coma and even death.
· Hypoglycemia
occurs when blood glucose levels fall below the normal range, which can be caused by a number of
factors including excess insulin administration. In cases of severe hypoglycemia, people with diabetes risk acute
complications, such as loss of consciousness, coma or death.
In an attempt to maintain blood glucose levels within the normal range, people with diabetes must first accurately
measure their blood glucose levels and, if necessary, make therapeutic and dietary adjustments. When blood glucose levels are
high, people with diabetes often administer insulin in an effort to decrease blood glucose levels. In contrast, when blood glucose
levels are low, people with diabetes often ingest carbohydrates in an effort to raise blood glucose levels. As these adjustments are
made, additional blood glucose measurements may be necessary to gauge the individual's response to the adjustments. People
with diabetes frequently overcorrect and fluctuate between hyperglycemic and hypoglycemic states, often multiple times during
the same day. As a result, many people with diabetes are routinely outside the normal blood glucose range, and many are often
unaware that their glucose levels are either too high or too low. The inability to effectively control and monitor blood glucose
levels and the associated potential for serious complications from hyperglycemia and hypoglycemia can be frustrating,
overwhelming and, at times, dangerous.
Methods
of
Glucose
Measurement
The most accurate method of measuring blood glucose levels is through laboratory testing. Outside of laboratory testing,
there are three primary methods to measure blood glucose levels:
· Real-time
in-hospital
testing
of blood glucose levels is performed by healthcare providers at the point of care, using in
vitro
analyzers, such as the YSI Inc., or YSI, glucose analyzer. Outside of laboratory testing, in-hospital testing is the
most accurate method of measuring blood glucose levels. However, measurement of blood glucose through in-hospital
testing is not a practical solution for the daily monitoring of glucose levels by people with diabetes.
·
Self-monitoring
of
blood
glucose
, or SMBG, is the traditional method that people with diabetes use to monitor their
blood glucose levels. Although less accurate than in-hospital testing, SMBG systems are the prevalent method for the
daily monitoring of glucose levels. SMBG requires people with diabetes to lance their fingertips to obtain a blood drop
that is applied to a test strip inserted into a blood glucose meter. SMBG testing is generally done multiple times per day.
· Continuous
glucose
monitoring
, or CGM, is a way for people with diabetes to monitor glucose levels in real-time
throughout the day or night. CGM systems involve the implantation of sensors into the body to measure glucose levels in
the interstitial fluid, which is the fluid that surrounds tissues in the body, and typically relay the data, through a
transmitter, to an external receiver every five minutes. While each individual CGM measurement is slightly less accurate
than that of SMBG, the frequent, automatic measurements provided by
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CGM help people with diabetes reduce the risk of hypoglycemic and hyperglycemic events by providing them with real-
time glucose readings, glucose trend information and alerts. Current CGM systems require twice daily calibration using
blood drawn through a fingerstick. Current regulatory policy requires that patients confirm CGM measurements with a
real-time test-strip reading using blood obtained by a fingerstick prior to self-medicating with insulin.
Benefits
of
Continuous
Glucose
Monitoring
More frequent and accurate testing of blood glucose levels provides people with diabetes with a greater ability to
maintain their blood glucose levels within normal limits allowing them to more effectively manage their diabetes. The American
Diabetes Association, or the ADA, recommends that people with intensively managed diabetes test their blood glucose levels
after eating, at bedtime, before exercise or critical tasks and after treating for low blood glucose. Significantly more frequent
testing may be required to reach optimal blood glucose levels safely without falling into hypoglycemia. We use the term
"intensively managed diabetes" to refer to people with Type 1 diabetes and those people with Type 2 diabetes who require insulin
to be administered through an insulin pump or MDI.
The ability of people with diabetes to realize the benefits of more frequent glucose testing using SMBG is inherently
limited and inconvenient. SMBG generally requires people with diabetes to draw multiple blood samples over the course of a day
and night. Lancing and interchange of the fingers or alternate sites, in order to draw blood samples, can sometimes be painful and
is particularly difficult for children. Moreover, even if a person tests glucose levels with SMBG several times each day, each
measurement represents a single blood glucose value at a single point in time, which limits the ability to detect trends in glucose
levels. In contrast, CGM, due to its continuous and automatic monitoring, can provide significant data on trends in glucose levels.
The ability to detect rising or falling glucose levels, and the rate at which such levels are rising or falling, is critical for people
with diabetes, and their healthcare providers, to actively manage this condition. For instance, the risk of hypoglycemia is greatest
when individuals are sleeping. CGM systems continue reading glucose levels during sleep, and even provide alerts, in contrast to
SMBG, which does not allow for testing during sleep.
The beneficial effects of CGM have been validated in multiple clinical trials. According to a study published in the
November 2009 edition of Diabetes
Care
, people who intensively managed their diabetes consistently with CGM over a six-
month period had lower A1C levels, a measure of the three-month average of glucose in the blood, than those who did not. More
recently, two studies published in the April 2011 and January 2012 editions of Diabetes
Care
, showed improved glycemic
control in people with Type 1 and Type 2 diabetes who use CGM systems, compared to people who use SMBG, further
supporting the benefits of CGM in helping people with diabetes stay within a healthy glycemic range.
In addition to the health benefits of continuous and automatic blood glucose measurements provided by CGM, CGM is
generally considered to be more convenient than SMBG. People who intensively manage their diabetes will typically measure
their blood glucose levels three to ten times per day, including during the night. For children with diabetes, this may necessitate a
parent or caretaker waking the child multiple times during the night to take these measurements. People who use SMBG must
carry a fully supplied kit that may include a spring-loaded needle, or lancet, disposable test strips, cleansing wipes, and the
glucose meter, and then safely dispose of the used supplies, which can be inconvenient. In addition, at times, SMBG may require
multiple finger pricks to obtain a sufficient blood sample for such tests, which can be further compounded by the fact that people
with diabetes often experience decreased feeling in their fingers.
The
Market
for
CGM
We estimate that, of the approximately 39 million people diagnosed with diabetes in the United States, Canada,
Australia and the other select regions that we intend to target with Eversense (which include Scandinavia, Germany, the United
Kingdom, Italy, Switzerland, the Netherlands, Israel, Finland and Slovenia), 35%, or approximately 13 million people, are insulin
users. We believe that, of those 13 million insulin users, approximately 46%, or six million people, intensively manage their
diabetes. According to estimates by Close Concerns, global sales for CGM systems and insulin pumps for people with intensively
managed diabetes were $2.7 billion in 2014, of which $523 million represented sales
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of CGM systems, a 31% increase compared to 2013. United States sales for CGM systems and insulin pumps for people with
intensively managed diabetes were $1.7 billion in 2014, of which $381 million represented sales of CGM systems, a 33% increase
compared to 2013. In comparison, global SMBG sales were $6.7 billion in 2014, a decline of 7% compared to 2013, driven
largely by downward pricing pressure.
Based on industry sources and current industry trends, we estimate that U.S. sales of CGM systems
will grow at a C A GR ranging from 35% to 40%, reaching approximately $3 billion to $3.7 billion by 2020
. We also estimate that by 2020 global sales for insulin pumps will increase to $3.5 billion, while global sales for SMBG will
decline to $5.8 billion. We expect the growth in sales of CGM systems to be driven primarily by increased penetration of CGM in
the Type 1 diabetic population, as it potentially becomes a standard of care, reaching up to 45% penetration of the Type 1 diabetic
population in the United States by 2020, compared to 8% in 2014. We believe that the increased penetration of CGM will be
driven by higher awareness of the clinical benefits of CGM by people with diabetes, healthcare providers and third-party payors,
insulin pump integration, an improving coverage and reimbursement environment and additional product innovation, including
increased convenience, accuracy and sensor duration.
Limitations
of
Currently
Available
CGM
Systems
There are a limited number of currently available CGM systems for people with diabetes to monitor their glucose levels.
Although these CGM systems provide significant advantages to people with diabetes who are intensively managing their diabetes
as compared to SMBG, they have certain inherent limitations and shortcomings that we believe limit their rate of user adoption
and often lead to noncompliance and discontinuation. These limitations include:
·
·
Short
sensor
life
and
accuracy
limitations:
Currently available CGM systems generally rely on sensors that are
labeled for use for between five and seven days, after which the sensor must be removed and a replacement sensor
inserted. The accuracy of the CGM system may vary from sensor to sensor and over time, and generally declines
when used beyond the labeled five or seven day time period. As a result, users who seek to avoid the inconvenience
or the expense of changing the sensor regularly during such a short time interval may experience a decline in system
performance unless a replacement sensor is inserted.
Inconvenience:
Currently available CGM systems generally require the user to wear or carry an extra device to
receive and view the glucose readings. This could be particularly inconvenient for people using an insulin pump as
it adds to the number of devices they are required to carry. Additionally, because the sensors used in currently
available CGM systems may not be reinserted once removed, users are often forced to choose between incurring the
costly and inconvenient premature removal of a sensor and limiting certain physical activities, which increases the
risks of non-compliance.
· Limited
safety
features:
Although most currently available CGM systems audibly alert the user when
hypoglycemic or hyperglycemic events occur, only some systems provide predictive warnings before such events
occur. In addition, no currently available CGM system provides vibratory alerts. We believe that the limited safety
features of existing CGM systems leave an unmet need in connection with providing peace of mind for users,
specifically when the receiver is off-line or out of range.
·
Painful
and
frequent
insertion
process:
All currently available CGM systems include a sensor that must be
manually inserted transcutaneously by the user or, in the case of children, by a parent or other caregiver, generally
into the abdomen, through a painful and inconvenient procedure. Because of the nature of the self-insertion process,
the use of CGM systems requires significant education of the user and, in the case of children, a parent or other
caregiver. These systems require people with diabetes to remove and reinsert a new sensor between 50 and 70 times
per year. This frequency of required application can lead to a lack of compliance, as the user seeks to avoid the
burden, pain and cost associated with replacing sensors.
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Our
Solution
As a result of the inherent limitations and inconvenience of existing SMBG and CGM systems, we believe that there is a
significant unmet need among people with diabetes for an accurate, reliable, long-term, implantable CGM system. Consequently,
we have focused our efforts on developing and designing a CGM system that we believe will provide people with diabetes a more
convenient and discrete method of CGM, with significantly greater sensor duration, and equal or superior accuracy, than other
currently available CGM systems. We believe that Eversense will allow people with diabetes to comply more effectively with
their disease management therapies while living their lives with more freedom and greater peace of mind. Eversense is designed
to be the first CGM system to continually and accurately measure glucose levels initially for up to 90 days and, in the future, for
potentially up to 180 days.
Eversense consists of three components:
·
·
·
a small sensor inserted subcutaneously in the upper arm by a healthcare provider;
an external removable smart transmitter that receives, assesses and relays the data from the sensor and also provides
vibratory alerts; and
a mobile app that receives data from the transmitter and provides real-time glucose readings, alerts and other data on
the user's mobile device, such as a smartphone, Apple Watch or tablet.
In comparison to currently available CGM systems, we believe Eversense will provide the following important
advantages:
· Best-in-class
sensor
duration
and
long-term
accuracy
—Eversense achieves continuous glucose readings for up
to 90 days with an accuracy equal or superior to that of other currently available CGM systems while requiring
fewer than four sensors per year. Currently available CGM sensors are labeled for use for five to seven days,
requiring between 50 and 70 sensor insertions per year. We believe that the long-term accuracy and convenience of
quarterly insertion and removal will significantly reduce the burden of glucose monitoring for people with diabetes
using our system.
· Enhanced
convenience
—The ability of Eversense to display glucose readings on mobile devices will allow people
with diabetes to seamlessly blend the monitoring of their glucose levels with other uses of their mobile devices.
People with diabetes will not need to carry a separate handheld receiver to display glucose readings, which is
required by currently available CGM systems. In addition, our easily removable smart transmitter will allow people
with diabetes to conveniently remove and reapply the transmitter at will without having to also remove the sensor.
We believe these convenient features will greatly improve the quality of life and peace of mind for people with
diabetes by enhancing their ability to effectively manage their condition across a wide range of activities, from
sleeping to higher intensity activities, including sports.
· Essential
safety
features
—Eversense is designed to continuously and accurately monitor glucose levels and
provide predictive warnings using a proprietary algorithm, based on the user's personalized alarm settings, before
the occurrence of hypoglycemic or hyperglycemic events. We believe the personalized alarm will allow the user to
intervene and potentially avoid these events entirely. Additionally, our smart transmitter will provide distinct on-
body vibrations in a number of alarm situations, including when low or high-glucose related readings are reached or
when the transmitter is unable to communicate with the receiver. Unlike other currently available CGM systems,
this vibration alert enables our system to warn users of a hypoglycemic or hyperglycemic event even when the user's
mobile device is not available or nearby.
· Quick
and
easy
sensor
insertion
and
removal
—Our sensor is designed to be inserted and removed by a simple,
relatively painless and straightforward five-minute in-office procedure performed by a trained healthcare provider.
In a survey of 45 physicians and over 400 people with diabetes conducted by a prominent global strategy consulting
firm that we commissioned in 2015, on average, people with diabetes rated the sensor insertion process as neutral to
attractive, while a majority of physicians considered the
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insertion to be fairly simple or feasible. We believe that the long-term implantable nature of the sensor will also contribute to
greater user compliance.
Our
Strategy
Our goal is to be the global leader in providing long-term, accurate and reliable implantable glucose monitoring systems.
The key elements of our strategy include:
· Obtain
marketing
approval
of
Eversense
in
Europe,
followed
by
the
United
States.
We have filed for
regulatory approval for Eversense in Europe. In July 2015, we applied for a CE mark and, subject to regulatory
approval, we expect to begin commercializing Eversense in select European markets in the first half of 2016. We
also initiated a single pivotal clinical trial in the United States in the first quarter of 2016, and, if the results of the
trial are favorable, we intend to apply for regulatory approval in the United States. We also intend to seek to
commercialize our system in other international markets, including Canada, Australia and Israel.
· Commercialize
our
products
in
Europe
and
other
international
markets
through
a
third-party
distributor
network
and
in
the
United
States
through
our
own
direct
sales
and
marketing
organization.
In order to
ensure broad access to our products for people with diabetes and healthcare providers, we intend to establish a
strong third-party distributor network in Europe and other international markets, benefiting from distributors' local
market knowledge and taking advantage of local resources while minimizing our infrastructure and capital
requirements. We have entered into an exclusive distribution agreement with Rubin Medical, or Rubin, to market
and sell our products in the Scandinavian region. Rubin has experience in the area, including as the exclusive
Scandinavian distributor for the insulin pump manufacturer Animas Corporation. For commercialization in the
United States, we intend to establish our own trained, targeted sales force and marketing organization to reach as
broad a section of the diabetes population as possible in the most efficient manner. We believe this strategy will
ensure broader access to our products for people with diabetes and healthcare providers.
· Educate
and
train
healthcare
providers
and
people
with
diabetes
on
the
benefits
of
CGM
and
Eversense.
We
intend to communicate with and educate healthcare providers, including physicians, certified diabetes educators and
nurses, and people with diabetes about the benefits of Eversense and how it can help improve the health and lives of
people with diabetes. We have developed an insertion kit that is similar to that used in existing procedures that many
healthcare providers are accustomed to performing, and we also intend to develop training programs to help them
become comfortable and competent performing the sensor insertion and removal procedures. Finally, we intend to
communicate on a regular basis with people with diabetes and their healthcare providers so that we can continue to
understand their needs and demands, which will help us to serve them better.
· Continuously
innovate
to
introduce
enhanced
product
offerings
and
pursue
expanded
indications
to
meet
the
needs
of
people
with
diabetes
. Following our first approved version of Eversense, we intend to continue to
expand our Eversense line of product offerings to benefit both people with diabetes and healthcare providers,
including system modifications and next generation enhancements, with the goal of increasing the convenience and
functionality of the Eversense system. Our planned initiatives include: extending the approved sensor life to up to
180 days; providing on-demand, swipe measurement technology that would permit people with Type 1 diabetes to
perform real-time, single glucose readings by swiping their smartphone over our sensor; integrating with insulin
pumps; reducing transmitter size; and improving accuracy leading to reduced, or eliminated, calibration. We intend
to conduct clinical trials for pediatric indications and to seek approval to market to this part of the population.
Additionally, we intend to pursue an on-demand, swipe measurement device targeted to people with Type 2
diabetes.
· Establish
reimbursement
programs
for
coverage
of
Eversense
to
achieve
the
broadest
possible
acceptance
of
our
products.
Currently available CGM systems are generally reimbursed by a majority of third-party payors. In
addition, we will seek to establish a reimbursement program specific to Eversense
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insertion and removal in order to achieve reimbursement for these in-office sensor procedures. We believe that establishing such
reimbursement will be important in achieving the broadest possible acceptance of our system by healthcare providers.
·
Focus
on
low
cost
manufacturing
structure
to
enhance
our
profitability.
We intend to continue focusing on
product design and development, as opposed to investing in manufacturing facilities, by utilizing third-party
manufacturers. We intend to reduce our product costs and drive operational efficiencies by employing this scalable,
flexible manufacturing approach.
Clinical
Development
and
Regulatory
Pathway
Overview
In support of our regulatory submissions, we have expended considerable resources designing, developing and refining a
glucose monitoring system. Our clinical trials to date have consisted of 12 completed and two ongoing feasibility studies, in
which we have tested multiple configurations of our CGM system, as well as our recently completed European pivotal clinical
trial. In addition, we initiated a pivotal trial in the United States in the first quarter of 2016.
In total, including our ongoing and completed clinical trials involving the current and prior configurations of Eversense,
we have enrolled more than 350 subjects and tested over 700 sensors as of December 31, 2015. To date, we have observed no
device-related or procedure-related serious adverse events in any of our trials. The most common adverse events observed have
been minor skin rashes related to the adhesive patch and minor infections related to the insertion procedure.
As described above, a number of our trials are conducted as feasibility studies in which we evaluate various
configurations of our CGM system. These studies are intended to assess the performance of different system configurations in a
small population of subjects before enrolling a large clinical trial. The configuration changes that we have made to our CGM
system over time have generally involved minor alterations to our technology, such as software modifications and algorithm
adjustments, in order to enhance the performance of our system, such as extending sensor life and increasing accuracy. Our
clinical experience, as of December 31, 2015, is summarized in the table below:
Completed feasibility studies
European pivotal trial
Ongoing feasibility studies
Total
European
Pivotal
Trial
Subjects
Sensors
tested
enrolled
249
81
70
400
Aggregate
sensor
days
in
vivo
42,357
21,389
16,922
80,668
457
167
140
764
We recently completed the 180-day observation period of a prospective, single-arm, multicenter European pivotal
clinical trial, in which we enrolled 81 subjects across three sites in Germany, three sites in the United Kingdom and one site in the
Netherlands. We began enrolling subjects in this clinical trial in May 2014. The trial was suspended in June 2014, after initially
enrolling nine subjects, to allow for a configuration change involving a modification of the software controlling the brightness of
the LED contained in the sensor. We filed an amendment to the clinical trial design in October 2014 and recommenced
enrollment of the clinical trial, with the revised sensor configuration, in December 2014. Although all subjects in the trial have
been assessed through 180 days, we based our CE mark application on the 90-day data from the first 44 subjects who received the
revised sensor configuration, who we refer to as the 44 CE mark subjects. We expect to report final 180-day accuracy and safety
data for all subjects in the European pivotal trial in the first quarter of 2016.
The subject clinical trial population consists of subjects at least 18 years of age who have a clinically confirmed
diagnosis of diabetes and use insulin therapy to intensively manage their diabetes. Subjects who had a history of severe
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hypoglycemia, defined as hypoglycemia resulting in loss of consciousness or seizure, or diabetic ketoacidosis, in the six months
prior to trial were excluded from participation in the clinical trial. The evaluation period consists of 180 days after treatment. At
the initial visit, our sensor was inserted and initial accuracy measurements were taken. Additional accuracy measurements were
taken at 14 days and 30 days post-insertion, and on a monthly basis thereafter. These sensor measurements were continued
through the earlier of the failure of the sensor or 180 days post-insertion.
The purpose of this clinical trial is to evaluate the accuracy of Eversense measurements, measured by the MARD, when
compared with in
vitro
blood glucose measurements obtained using the YSI glucose analyzer over successive periods of 30 days
through 180 days, as well as to assess the safety of Eversense. YSI in
vitro
analyzers are bed-side instruments used in hospitals
and clinics to accurately measure blood glucose levels and are commonly used as comparators of glucose monitoring systems in
clinical trials. MARD is a statistical calculation that measures the average absolute value of the differences, expressed as a
percentage, between glucose measurements taken from interstitial fluid based on our CGM system and blood glucose
measurements from YSI. The lower the MARD of a glucose monitoring system, the more accurate the system and, therefore, the
more reliable the system's readings. A MARD of less than or equal to 20% is generally considered to be a threshold for regulatory
approval of a CGM system, although currently available CGM systems generally report an average MARD of approximately
13%.
Of the 44 CE mark subjects, 39 subjects, representing 89% of all devices, reached 90 days without experiencing a sensor
failure. The five sensors that failed prior to day 90 reached days 69 to 85 and these sensors were factored into the MARD
calculation described below only through their respective last measurements prior to sensor failure, which in all five instances
was at day 60. Based on the 90-day data of the 44 CE mark subjects, we observed an average MARD of 11.4%, and we generally
observed that the MARD was relatively consistent over the course of the 90-day observation period beginning with the second
measurement. For the first measurement, which occurs on day 1, the MARD is higher due to the process of tissue regeneration
shortly after insertion, which temporarily affects the sensor's accuracy.
We have also received 90-day accuracy and safety data for all 71 subjects who received the current configuration of
Eversense in the trial. Based on this 90-day data for these 71 subjects, we observed an average MARD of 11.0%, with no device-
related or procedure-related serious adverse events.
We also assessed the accuracy of Eversense among the 44 CE mark subjects using a Clarke Error-Grid. A Clarke Error-
Grid is a graphical scatter-plot that is commonly used for assessing the clinical accuracy of blood glucose measurements, as
compared to a reference value, such as those measures obtained using YSI glucose analyzers. A Clarke
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Error-Grid is categorized into five areas denoted A, B, C, D and E, with A and B being the most clinically desirable and D and E
being the least clinically desirable:
·
·
·
·
·
Zone A reflects measurements within 20% of the reference and are considered to be accurate;
Zone B reflects measurements that are outside of 20%, but would not lead to inappropriate treatment;
Zone C reflects measurements that may lead to an overcorrection of therapy;
Zone D reflects measurements that could potentially delay treatment for hypoglycemia or hyperglycemia; and
Zone E reflects measurements that are errors and could lead to inappropriate treatment of hypoglycemia or
hyperglycemia.
The Clarke Error-Grid plot below reflects the accuracy of the 90-day measurements of the 44 CE mark subjects.
Accuracy
Measures:
Eversense
compared
to
YSI
(measurements
over
90
days
in
44
patients)
Eversense
Clarke
Error
Grid
A&B% D&E% MARD%
11.4 %
99.1 % <0.01 %
In addition, we also assessed, as secondary endpoints in the clinical trial, reductions in A1C levels and the amount of
time per day the patients wore the smart transmitter. For the 44 CE mark subjects, we observed an average reduction in A1C
levels of 0.5% over the 90 day period. Additionally, on average, the 44 CE mark subjects wore the transmitter for 23.5 hours per
day.
Other
Completed
and
Ongoing
Clinical
Trials
To date, we have completed numerous feasibility studies to assess the accuracy and safety of various configurations of
Eversense, including the current configuration of Eversense. In addition, we are conducting ongoing feasibility studies in which
we are evaluating future potential configurations of Eversense. We conducted feasibility studies evaluating the current
configuration of Eversense in Romania, India and South Africa in 2014. In each case, these studies involved the testing of
Eversense over a 90-day measurement period with 90-day MARD results comparable to the results from our European clinical
trial described above.
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United
States
Pivotal
Trial
In July 2015, we applied for an IDE from the FDA, which was approved in November 2015, to initiate a single pivotal
clinical trial in the United States, which we initiated in the United States in the first quarter of 2016. This trial will be conducted at
seven to ten sites in the United States and enroll approximately 90 subjects. The 90-subject clinical trial population will consist of
adult subjects at least 18 years of age who have a clinically confirmed diagnosis of diabetes for more than one year. We are
excluding subjects from the clinical trial who have a history of severe hypoglycemia or diabetic ketoacidosis in the six months
prior to the trial.
In the trial, we will measure the accuracy of Eversense measurements through 90 days after insertion. We will also
assess safety through 90 days after insertion or sensor removal and measure the incidence of device-related and procedure-related
serious adverse events. If the results of the trial are favorable, we intend to apply for regulatory approval as promptly as possible
to market our product in the United States. We believe that we could file for U.S. marketing approval as early as the second half
of 2016 and expect that the pre-market approval, or PMA, process could take between six and 18 months.
Our
Technology
Eversense consists of three primary components: a small sensor inserted subcutaneously under the skin by a healthcare
provider; an external removable smart transmitter that receives, assesses and relays data from the sensor and provides vibratory
alerts; and a mobile app that receives data from the transmitter and provides real-time glucose readings, alerts and other data on
the person's mobile device. All of these components work together to provide sensor glucose values, trends and alerts to a user's
mobile device within 20 milliseconds. We have designed this reliable, long-term and implantable CGM system to continually and
accurately measure a person's glucose levels for up to 180 days. As with currently available CGM systems, Eversense will
initially require twice daily fingerstick calibrations. Further, upon receiving an alert from the CGM, a patient should confirm
CGM measurements with test-strip measurements prior to self-medicating, as noted in the CGM's label and instructions.
Smart
Sensor
The smart sensor is designed to be inserted under the skin, either in the back of the upper arm or in the abdomen, and
measures the glucose in the interstitial fluid. These glucose levels are then communicated wirelessly to the smart transmitter. We
have designed the sensor to last up to 180 days, as compared to other currently available CGM sensors labeled for use for between
five and seven days.
The sensor consists of an optical system, known as a micro-fluorometer, encased in a rigid, translucent polymer capsule,
which is 3.3 mm in diameter and 15 mm in length. The capsule is coated with a glucose-indicating hydrogel that is bound to the
surface of the capsule through polymerization. This hydrogel is energized, or excited, by a light-emitting diode, or LED,
contained in the optical system of the sensor, causing the hydrogel to fluoresce, or glow. Two photodiodes within the optical
system of the sensor measure the degree of fluorescence of the hydrogel, which is
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proportional to the level of glucose present in the interstitial fluid. The sensor then communicates the amount of fluorescence via
a near field communication, or NFC, interface to the transmitter. NFC is a high frequency wireless communication technology
that enables the exchange of data and energy between devices over a short range. The entire capsule is coated by a glucose-
permeable membrane for biocompatibility.
The sensor does not contain a battery or other stored power source. Instead, it is remotely and discretely powered, as
needed, by an inductive NFC link between the sensor and the transmitter. On power-up, the LED source is energized for
approximately five milliseconds to excite the hydrogel. Between readings every five minutes, the sensor remains electrically
dormant and fully powered down.
Smart
Transmitter
The removable smart transmitter is a rechargeable, external device that is worn over the sensor implantation site using a
daily adhesive patch or band, such as an armband or waistband. The transmitter supplies wireless power to the sensor through an
inductive NFC link, which activates a measurement sequence every five minutes. The transmitter then receives data from the
sensor and calculates glucose concentrations and trends. Based on these calculations and on the user's individual settings for
glucose levels, the transmitter determines if an alert condition exists, in which case the transmitter communicates the condition to
the user through on-body vibration. The information from the transmitter is also transmitted for display to the user's mobile
device via Bluetooth. Our transmitter is functional for at least 72 hours without recharging and can be fully charged in ten
minutes.
Mobile
App
Our mobile app is a software application that runs on both iOS mobile devices, including iPhones, iPads and Apple
Watches, and Android mobile devices. The mobile app receives information from the transmitter via Bluetooth and displays that
information discreetly to the user. This user-friendly, intuitive app provides real-time glucose readings, trends, graphs and alarms.
Within the mobile app, users can set alarms based on, among other things, glucose levels. The mobile app also allows for cloud-
based storage.
Future
Product
Development
Following our first generation Eversense, we intend to continue to expand our line of product offerings to benefit both
people with diabetes and healthcare providers. We expect these product development initiatives to include system modifications
and next generation enhancements that we believe will further increase the convenience and appeal
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of our products to people with diabetes and healthcare providers. Our ongoing and planned development initiatives include:
Advances
• First Generation
• 180-day sensor life
Stage
of
Development
• 180-day observation period of European pivotal clinical trial completed,
with final data expected in the first quarter of 2016
• CE mark expected in first half of 2016
• Initiated U.S. pivotal clinical trial in first quarter of 2016
• Planned commercial launch in Europe in first half of 2016
• Subject to successful completion of U.S. pivotal clinical trial, intend to
submit PMA application in second half of 2016
• Subject to 180-day accuracy and safety data from European pivotal clinical
trial, planned amendment to CE mark application in 2016
• Reduced transmitter size
• Pediatric use
• Insulin pump integration
• On demand monitoring (smartphone "swipe")
• In development—intend to initiate clinical trial in 2016
• In development—intend to initiate clinical trial in 2016
• Intend to identify insulin pump partners in 2016
• In development—intend to initiate clinical trial in 2017
for people with Type 1 diabetes
• Improved accuracy
• No fingerstick calibration required
• On demand monitoring (smartphone "swipe"
technology) without separate required
transmitter—for people with Type 2 diabetes
Sales
and
Marketing
• In development—intend to initiate clinical trial in 2017
• In development—intend to initiate clinical trial in 2017
• In development—intend to initiate clinical trial in 2018
Our initial focus will be to commercialize our product in select European markets through third-party distributors. We
plan to initially target markets where there is already an understanding and market acceptance of CGM, such as Sweden, Norway,
Denmark and Germany. We plan to work with third-party distributors in Europe who are experienced or familiar with the
regulatory requirements in each jurisdiction and with selling, marketing and supporting diabetes devices for the intensively-
managed diabetic population. To date, we have entered into one European distribution agreement with Rubin to market, sell and
distribute Eversense in Sweden, Norway and Denmark.
Based on the size and maturity of the U.S. market, our plan is to invest in developing a direct sales force and
infrastructure to support the launch of the product in the United States and target what we estimate to be approximately 2,100
endocrinologists in the United States who are clinically active and diabetes-focused.
As people with diabetes often consult with their healthcare providers about treatment options, we believe that educating
healthcare providers regarding the benefits of Eversense compared to SMBG and other currently available CGM systems is an
important step in promoting its use in people with diabetes. In a survey of 45 physicians and over 400 people with diabetes
conducted by a prominent global strategy consulting firm that we commissioned in 2015, healthcare providers highly valued the
accuracy and sensor duration of our system and the majority of physicians surveyed considered the insertion process to be fairly
simple or feasible. Approximately three out of four physicians preferred Eversense for their patients with intensively managed
diabetes. In addition, approximately four out of five intensively managed non-CGM patients who preferred a CGM option over
SMBG preferred Eversense over other currently available CGM systems. We intend to educate healthcare providers and people
with diabetes on the advantages of Eversense compared to SMBG and other currently available CGM systems. We also intend to
establish a customer care center to provide ongoing support to people with diabetes and healthcare providers.
Rubin
Medical
In September 2015, we entered into a distribution agreement with Rubin, pursuant to which we granted Rubin the
exclusive right to market, sell and distribute Eversense in Sweden, Norway and Denmark. Pursuant to the agreement,
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Rubin is obligated to purchase from us specified minimum volumes of Eversense components at pre-determined prices, which are
subject to potential amendment upon the occurrence of specified events. Rubin is responsible for the promotion, sale and
distribution of Eversense in Sweden, Norway and Denmark at such prices as Rubin determines in its sole discretion, subject to
specified exceptions.
The distribution agreement has an initial term of five years and is subject to renewal for up to two additional five year
periods if, at least 180 days prior to the expiration of a term, we and Rubin agree to minimum purchase requirements for the
additional term and we do not increase the purchase price of Eversense components that are subject to existing publicly procured
contracts unless Rubin can pass through the price increase to the customer.
The distribution agreement is terminable by us upon 30 days' notice under a number of circumstances, including if Rubin
fails to make required payments, Rubin competes with us or Rubin seeks to distribute Eversense outside of Sweden, Norway or
Denmark. The agreement is terminable by Rubin upon 30 days' notice under a number of circumstances, including if we breach
the warranties of the agreement, fail to obtain marketing approval or fail to satisfy our supply obligations. The agreement is
terminable by either party if the other party fails to comply with marketing laws, violates the confidentiality or intellectual
property protection provisions of the agreement, becomes insolvent, or becomes subject to specified convictions, injections or
enforcement actions. The termination rights contained in the agreement generally are subject to an opportunity to cure. Further,
we may terminate the agreement upon a change of control of our company that occurs after December 31, 2017, subject to us
providing 180 days written notice and paying a specified termination fee to Rubin.
Reimbursement
Coverage
in
the
United
States
Reimbursement from private third-party healthcare payors and, to a lesser extent, Medicare will be an important element
of our success. Although the Centers for Medicare and Medicaid, or CMS, established, effective 2008, Alpha-Numeric Healthcare
Common Procedure Coding System codes that will be applicable to each of the components of Eversense, to date, Medicare has
not adopted a national coverage determination with respect to CGM systems. It is not known when, if ever, Medicare will adopt
such a national coverage determination. In addition, each of the Medicare contractors responsible for developing local coverage
policies for medical equipment under Medicare Part B—the Durable Medical Equipment Medicare Administrative Contractors—
have published non-coverage determinations for CGM systems, concluding that there was no available Medicare benefit for the
products because they are "precautionary." As a result, CMS does not currently reimburse patients for the cost of a CGM system,
like Eversense, although the cost of certain related medical services may be reimbursed. Until such time as adequate coverage is
extended by CMS and/or its contractors, as applicable, reimbursement of our products will generally be limited to customers
covered by those third-party payors that have adopted policies recognizing coverage and reimbursement for CGM devices. As of
December 31, 2015, several of the largest private third-party payors, in terms of the number of covered lives, have issued
coverage policies for the category of CGM devices. These policies include varied requirements regarding patient condition and
characteristics. Many of these coverage policies reimburse for CGM systems under durable medical equipment benefits, which
are restrictive in nature and require the healthcare provider or supplier to comply with extensive documentation and other
requirements. We intend to seek coverage for Eversense as a medical benefit, which could avoid some of these restrictions,
although we may not be successful in doing so. In addition, customers who are insured by payors that do not offer coverage for
our devices will have to bear the financial cost of the products.
Although we believe that our products will generally be covered by most third-party payors described above, current
reimbursement codes for the insertion or removal procedures do not describe physician work and related resources required for
Eversense. Therefore, we plan to pursue new Category III CPT codes for the insertion and removal procedures. We have applied
for these codes and will seek to secure these codes in advance of the U.S. launch, with the goal that healthcare providers and
third-party payors will be able to use these codes to cover the insertion and removal of Eversense immediately upon our product
launch. However, we cannot guarantee that we will be successful in obtaining these codes or that they will be recognized by
payors.
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We have employed a reimbursement consultant to assist us in securing reimbursement agreements with third-party payors and to
assist in developing the optimal strategy for pursuing new reimbursement code approval. In addition, we intend to commence
negotiations with third-party payors by the first quarter of 2017. However, unless third-party and government payors provide
adequate coverage and reimbursement for Eversense and the related insertion and removal procedures, people with diabetes might
choose not to use our products on a widespread basis.
Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to
contain healthcare costs by limiting both coverage and the level of reimbursement of new medical devices, and, as a result, their
coverage policies may be restrictive, or they may not cover or provide adequate payment for our products. In order to obtain
reimbursement arrangements, we may have to agree to a net sales price lower than the net sales price we might charge in other
sales channels. Our revenue may be limited by the continuing efforts of government and third-party payors to contain or reduce
the costs of healthcare through various increasingly sophisticated means, such as requiring prospective reimbursement and second
opinions, purchasing in groups, or redesigning benefits. Our future dependence on the commercial success of Eversense makes us
particularly susceptible to any cost containment or reduction efforts. Accordingly, unless government and other third-party payors
provide adequate coverage and reimbursement for our products and the related insertion and removal procedures, our financial
performance may be limited.
Coverage
Outside
the
United
States
In countries outside the United States, coverage for CGM systems is obtained from various sources, including
governmental authorities, private health insurance plans, and labor unions. Coverage systems in international markets vary
significantly by country and, within some countries, by region. Coverage approvals must be obtained on a country-by-country,
region-by-region or, in some instances, a case-by case basis.
Manufacturing
and
Quality
Assurance
We currently outsource the manufacture of all components of our system. We plan to continue with an outsourced
manufacturing arrangement for the foreseeable future. Our contract manufacturers are all recognized in their field for their
competency to manufacture the respective portions of our system and have quality systems established that meet FDA
requirements. We believe the manufacturers we currently utilize have sufficient capacity to meet our launch requirements and are
able to scale up their capacity relatively quickly with minimal capital investment. We believe that, as we increase our demand in
the future, our per unit costs will decrease materially.
We have received certification from TÜV SÜD, our Notified Body to the International Standards Organization, or ISO,
for our quality system. This ISO 13485 certification includes design control requirements. As a medical device manufacturer, the
facilities of our sterilization and other critical suppliers are subject to periodic inspection by the FDA and corresponding state and
foreign agencies. We believe that our quality systems and those of our suppliers are robust and achieve high product quality.
Our suppliers are managed through our supplier management program that is focused on reducing supply chain risk. Key
aspects of this program include managing component inventory at the supplier, contractual requirements for last time buy
opportunities and second sourcing approaches for specific suppliers. Typically, our outside vendors produce the components to
our specifications and in many instances to our designs. Our suppliers are audited periodically by our quality department to ensure
conformity with the specifications, policies and procedures for our devices. We believe that, if necessary, alternative sources of
supply would be available in a relatively short period of time and on commercially reasonable terms.
Research
and
Development
Our research and development team includes employees who specialize in chemistry, software engineering, electrical
engineering, mechanical engineering and graphical user interface design, many of whom have considerable experience in
diabetes-related medical devices. Our research and development team focuses on the products currently under development,
including our clinical trials, as well as feasibility studies in which we are evaluating different design
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configurations to enhance product functionality for future generations of Eversense. Our research and development expenses were
$18.3 million and $12.9 million for the years ended December 31, 2015 and 2014, respectively.
Competition
The market for CGM systems is developing and competitive, subject to rapid change and significantly affected by new
product introductions. We expect to compete with well-capitalized companies, some of which are publicly-traded, that
manufacture CGM systems including Dexcom, Medtronic and Abbott. Each of these three companies has received approval from
the FDA to market their respective CGM system. Dexcom's Bluetooth-enabled CGM system is designed to be integrated with
smartphones.
As the industry evolves, we anticipate encountering increasing competition from companies that integrate CGM with
insulin pumps. We are aware of three companies, Johnson & Johnson, Medtronic and Tandem Diabetes Care, Inc., which have
received FDA approval for CGM-integrated insulin pumps. Johnson & Johnson's system integrates Dexcom's CGM sensor
technology and smartphone compatibility.
In addition to CGM providers, we will also compete with providers of traditional SMBG systems. Four companies
currently account for substantially all of the worldwide sales of SMBG systems: Roche Diabetes Care, a division of Roche
Diagnostics; LifeScan, Inc., a division of Johnson & Johnson; Abbott; and Bayer Diabetes Care, which has agreed to merge with
Panasonic Healthcare Holdings.
We may also compete with companies, including Roche Diagnostics and Abbott, developing next generation real-time
CGM or sensing devices and technologies, as well as several other companies that are evaluating non-invasive CGM products to
measure a user's blood glucose level. For example, Abbott is developing its FreeStyle Libre Flash Glucose Monitoring System,
which has received the CE mark in Europe and eliminates the need for routine fingersticks by reading glucose levels through a
transcutaneous sensor that can be worn for up to 14 days. There are also a number of academic and other institutions involved in
various phases of our industry's technology development.
Although we will face potential competition from many different sources, we believe that our technology, knowledge,
experience and scientific resources will provide us with competitive advantages. The key competitive factors affecting the success
of Eversense, if approved, are likely to be: the accuracy, sensor duration, safety, convenience and price of treatment; the
availability of coverage and reimbursement from government and other third-party payors; effective sales, marketing and
distribution; brand awareness and acceptance by healthcare providers and people with diabetes; customer service and support and
comprehensive education for people with diabetes and their healthcare providers; and rapid product innovation, including insulin
pump integration.
Many of the companies against which we may compete in the future have significantly greater financial resources and
expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory
approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and
diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller
or earlier stage companies may also prove to be significant competitors, particularly through collaborative arrangements with
large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and
management personnel and establishing clinical trial sites and subject registration for clinical trials, as well as in acquiring
technologies complementary to, or necessary for, our development.
Intellectual
Property
Protection of our intellectual property is a strategic priority for our business. We rely on a combination of patents,
trademarks, copyrights, trade secrets as well as nondisclosure and assignment of invention agreements, material transfer
agreements, confidentiality agreements and other measures to protect our intellectual property and other proprietary rights.
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Patents
As of December 31, 2015, we held a total of approximately 350 issued patents and pending patent applications that
relate to our CGM system. Our intellectual property portfolio includes 37 issued United States patents, 202 patents issued in
countries outside the United States and 111 pending patent applications worldwide. Our patents expire between 2015 and 2030,
subject to any patent extensions that may be available for such patents. If patents are issued on our pending patent applications,
the resulting patents are projected to expire on dates ranging from 2020 to 2035.
Our patents and patent applications cover certain aspects of our core sensor technologies and our product concepts for
CGM systems. However, our patent applications may not result in issued patents, and any patents that have been issued or may be
issued in the future may not protect the commercially important aspects of our technology. Furthermore, the validity and
enforceability of our issued patents may be challenged by third parties and our patents could be invalidated or modified by the
issuing governmental authority. Third parties may independently develop technology that is not covered by our patents that is
similar to or competes with our technology. In addition, our intellectual property may be infringed or misappropriated by third
parties, particularly in foreign countries where the laws and governmental authorities may not protect our proprietary rights as
effectively as those in the United States.
The medical device industry in general, and the glucose testing sector of this industry in particular, are characterized by
the existence of a large number of patents and frequent litigation based on assertions of patent infringement. We are aware of
numerous patents issued to third parties that may relate to the technology used in our business, including the design and
manufacture of CGM sensors and CGM systems, as well as methods for continuous glucose monitoring. Each of these patents
contains multiple claims, any one of which may be independently asserted against us. The owners of these patents may assert that
the manufacture, use, sale or offer for sale of our CGM sensors or CGM systems infringes one or more claims of their patents.
Furthermore, there may be additional patents issued to third parties of which we are presently unaware that may relate to aspects
of our technology that such third parties could assert against us and materially and adversely affect our business. In addition,
because patent applications can take many years to issue, there may be patent applications that are currently pending and
unknown to us, which may later result in issued patents that third parties could assert against us and materially and adversely
affect our business.
Any adverse determination in litigations, post grant trial proceedings, including interference proceedings, at the Patent
Office relating to intellectual property to which we are or may become a party could subject us to significant liabilities to third
parties or require us to seek licenses from third parties, and result in the cancellation and/or invalidation of our intellectual
property. Furthermore, if a court finds that we have willfully infringed a third party's intellectual property, we could be required to
pay treble damages and/or attorney fees for the prevailing party, in addition to other penalties. Although intellectual property
disputes in the medical device area are often settled through licensing or similar arrangements, costs associated with such
arrangements can be substantial and often require ongoing royalty payments. We may be unable to obtain necessary licenses on
satisfactory terms, if at all. If we do not obtain necessary licenses, we may not be able to redesign our products to avoid
infringement; if we are able to redesign our products to avoid infringement, we may not receive FDA approval in a timely
manner. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us
from manufacturing and selling our products, which could have a significant adverse impact on our business.
Trademarks
We have 12 pending U.S. trademark applications, including applications for the "Eversense" trademark, and eight
pending foreign trademark applications, as well as four foreign trademark registrations.
Trade
Secrets
We also rely on trade secrets, technical know-how and continuing innovation to develop and maintain our competitive
position. We seek to protect such intellectual property and proprietary information by generally requiring our employees,
consultants, contractors, scientific collaborators and other advisors to execute non-disclosure and assignment of invention
agreements upon the commencement of their employment or engagement as the case may be. Our agreements with our employees
prohibit them from providing us with any intellectual property or proprietary
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information of third parties. We also generally require confidentiality agreements or material transfer agreements with third
parties that receive or have access to our confidential information, data or other materials. Notwithstanding the foregoing, there
can be no assurance that our employees and third parties that have access to our confidential proprietary information will abide by
the terms of their agreements. Despite the measures that we take to protect our intellectual property and confidential information,
unauthorized third parties may copy aspects of our products or obtain and use our proprietary information.
Government
Regulation
Eversense is a medical device subject to extensive and ongoing regulation by the FDA, the U.S. Centers for Medicare &
Medicaid Services, or CMS, the European Commission, and regulatory bodies in other countries. Regulations cover virtually
every critical aspect of a medical device company's business operations, including research activities, product development,
contracting, reimbursement, medical communications, and sales and marketing. In the United States, the Federal Food, Drug and
Cosmetic Act, or FDCA, and the implementing regulations of the FDA govern product design and development, pre-clinical and
clinical testing, premarket clearance or approval, product manufacturing, import and export, product labeling, product storage,
recalls and field safety corrective actions, advertising and promotion, product sales and distribution, and post-market clinical
surveillance. Our business is subject to federal, state, local, and foreign regulations, such as ISO 13485, ISO 14971, FDA's
Quality System Regulation, or QSR, contained in 21 CFR Part 820, and the European Commission's Directive 93/42/EEC
concerning medical devices and its amendments and Directive 90/385/EEC concerning active implantable medical devices, as
amended.
Regulation
by
the
FDA
The FDA classifies medical devices into one of three classes. Devices requiring fewer controls because they are deemed
to pose lower risk are placed in Class I or II. Class I devices are subject to general controls such as labeling, pre-market
notification and adherence to the FDA's QSR, which cover manufacturers' methods and documentation of the design, testing,
production, control quality assurance, labeling, packaging, sterilization, storage and shipping of products, but are usually exempt
from premarket notification requirements. Class II devices are subject to the same general controls, may be subject to special
controls such as performance standards, post-market surveillance, FDA guidelines, or particularized labeling, and may also
require clinical testing prior to clearance or approval. Class III devices are those for which insufficient information exists to
assure safety and effectiveness solely through general or special controls, including devices that support or sustain human life, are
of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or
injury.
Some Class I and Class II devices are exempted by regulation from the pre-market notification requirement under
Section 510(k) of the FDCA, also referred to as a 510(k) clearance, and the requirement of compliance with substantially all of
the QSR. However, a pre-market approval, or PMA application, is required for devices deemed by the FDA to pose the greatest
risk, such as life-sustaining, life-supporting or certain implantable devices, or those that are "not substantially equivalent" either to
a device previously cleared through the 510(k) process or to a "preamendment" Class III device in commercial distribution before
May 28, 1976 when PMA applications were not required. The PMA approval process is more comprehensive than the 510(k)
clearance process and typically takes several years to complete. Eversense is likely to be considered a Class III device, which is
how other currently available CGM systems are also classified by the FDA. Unless an exemption applies, each new or
significantly modified CGM system we seek to commercially distribute in the United States will require either 510(k) clearance
or approval from the FDA through the PMA process. Both the 510(k) clearance and PMA processes can be expensive, lengthy
and require payment of significant user fees.
We held discussions with the FDA in the second quarter of 2015 regarding the appropriate regulatory requirements for
obtaining approval and accordingly, we currently intend to file a PMA submission for this device. A PMA application must be
supported by valid scientific evidence that typically includes extensive technical, pre-clinical, clinical, manufacturing and labeling
data, to demonstrate to the FDA's satisfaction the safety and efficacy of the device. A PMA application also must include a
complete description of the device and its components, a detailed description of the methods, facilities and controls used to
manufacture the device, and proposed labeling. After a PMA application is submitted and found to be sufficiently complete, the
FDA begins an in-depth review of the submitted information.
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During this review period, the FDA may request additional information or clarification of information already provided. Also
during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the
application and provide recommendations to the FDA. In addition, the FDA generally will conduct a pre-approval inspection of
the manufacturing facility to evaluate compliance with QSR, which requires manufacturers to implement and follow design,
testing, control, documentation and other quality assurance procedures.
FDA review of a PMA application generally takes between one and three years, but may take significantly longer. The
FDA can delay, limit or deny approval of a PMA application for many reasons, including:
·
·
·
·
the device may not be safe, effective, reliable or accurate to the FDA's satisfaction;
the data from pre-clinical studies and clinical trials may be insufficient to support approval;
the manufacturing process or facilities may not meet applicable requirements; and
changes in FDA approval policies or adoption of new regulations may require additional data.
If an FDA evaluation of a PMA application is favorable, the FDA will either issue an approval letter, or approvable
letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing
commercial marketing of a device, subject to the conditions of approval and the limitations established in the approval letter. If
the FDA's evaluation of a PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA
or issue a not approvable letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case
the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an
amendment to the PMA. The PMA process can be expensive, uncertain and lengthy and a number of devices for which FDA
approval has been sought by other companies have never been approved by the FDA for marketing.
New PMA applications or PMA supplements may be required for modifications to the manufacturing process, labeling,
device specifications, materials or design of a device that has been approved through the PMA process. PMA supplements often
require submission of the same type of information as an initial PMA application, except that the supplement is limited to
information needed to support any changes from the device covered by the approved PMA application and may or may not
require as extensive technical or clinical data or the convening of an advisory panel.
Clinical trials are typically required to support a PMA application and are sometimes required for a 510(k) clearance.
These trials generally require submission of an application for an IDE, to the FDA. The IDE application must be supported by
appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the
testing protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of
patients, unless the product is deemed a non-significant risk device and eligible for abbreviated IDE requirements. Generally,
clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the study protocol and
informed consent are approved by appropriate institutional review boards at the clinical trial sites. The FDA's approval of an IDE
allows clinical testing to go forward, but it does not bind the FDA to accept the results of the trial as sufficient to prove the
product's safety and efficacy, even if the trial meets its intended success criteria. All clinical trials must be conducted in
accordance with the FDA's IDE regulations that govern investigational device labeling, prohibit promotion, and specify an array
of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. Clinical trials must further
comply with the FDA's regulations for institutional review board approval and for informed consent and other human subject
protections. Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable
or, even if the intended safety and efficacy success criteria are achieved, may not be considered sufficient for the FDA to grant
approval or clearance of a product. The commencement or completion of any clinical trial may be delayed or halted, or be
inadequate to support approval of a PMA application, for numerous reasons, including, but not limited to, the following:
·
·
·
the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical
trial on hold;
patients do not enroll in clinical trials at the rate expected;
patients do not comply with trial protocols;
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·
·
·
·
·
patient follow-up is not at the rate expected;
patients experience adverse side effects;
patients die during a clinical trial, even though their death may not be related to the products that are part of our
trial;
institutional review boards and third-party clinical investigators may delay or reject the trial protocol;
third-party clinical investigators decline to participate in a trial or do not perform a trial on the anticipated schedule
or consistent with the clinical trial protocol, good clinical practices or other FDA requirements;
· we or third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate
manner or consistent with the clinical trial protocol or investigational or statistical plans;
third-party clinical investigators have significant financial interests related to us or our study that the FDA deems to
make the study results unreliable, or the company or investigators fail to disclose such interests;
regulatory inspections of our clinical trials or manufacturing facilities, which may, among other things, require us to
undertake corrective action or suspend or terminate our clinical trials;
changes in governmental regulations or administrative actions;
the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or efficacy; and
the FDA concludes that our trial design is inadequate to demonstrate safety and efficacy.
·
·
·
·
·
International
Regulation
International sales of medical devices are subject to local government regulations, which may vary substantially from
country to country. The time required to obtain approval in another country may be longer or shorter than that required for FDA
approval, and the requirements may differ. There is a trend towards harmonization of quality system standards among the
European Union, United States, Canada and various other industrialized countries.
The primary regulatory body in Europe is that of the European Union, the European Commission, which includes most
of the major countries in Europe. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror
those of the European Union with respect to medical devices. The European Union has adopted numerous directives and
standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices
that comply with the requirements of a relevant directive will be entitled to bear the CE conformity marking, indicating that the
device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed
throughout Europe. The method of assessing conformity varies depending on the class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third party assessment by a "Notified Body." This third-party
assessment may consist of an audit of the manufacturer's quality system and specific testing of the manufacturer's product. An
assessment by a Notified Body of one country within the European Union is required in order for a manufacturer to commercially
distribute the product throughout the European Union. Additional local requirements may apply on a country-by-country basis.
Outside of the European Union, regulatory approval would need to be sought on a country-by-country basis in order for us to
market our products.
Other
Regulatory
Requirements
Even after a device receives clearance or approval and is placed in commercial distribution, numerous regulatory
requirements apply. These include:
establishment registration and device listing;
·
· QSR, which requires manufacturers, including third party manufacturers, to follow stringent design, testing,
production, control, supplier/contractor selection, complaint handling, documentation and other quality assurance
procedures during all aspects of the manufacturing process;
labeling regulations that prohibit the promotion of products for uncleared, unapproved or "off-label" uses, and
impose other restrictions on labeling, advertising and promotion;
·
· MDR regulations, which require that manufacturers report to the FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or
serious injury if the malfunction were to recur;
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·
·
voluntary and mandatory device recalls to address problems when a device is defective and could be a risk to health;
and
corrections and removals reporting regulations, which require that manufacturers report to the FDA field corrections
and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation
of the FDCA that may present a risk to health.
Also, the FDA may require us to conduct post-market surveillance studies or establish and maintain a system for
tracking our products through the chain of distribution to the patient level. The FDA and the Food and Drug Branch of the
California Department of Health Services enforce regulatory requirements by conducting periodic, unannounced inspections and
market surveillance. Inspections may include the manufacturing facilities of our subcontractors.
Failure to comply with applicable regulatory requirements can result in enforcement actions by the FDA and other
regulatory agencies. These may include any of the following sanctions or consequences:
· warning letters or untitled letters that require corrective action;
·
·
·
·
·
·
·
·
·
·
fines and civil penalties;
unanticipated expenditures;
delays in approving or refusal to approve future products;
FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries;
suspension or withdrawal of FDA clearance or approval;
product recall or seizure;
interruption of production;
operating restrictions;
injunctions; and
criminal prosecution.
Our contract manufacturers, specification developers and some suppliers of components or device accessories, also are
required to manufacture our products in compliance with current good manufacturing practice requirements set forth in the QSR.
The QSR requires a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of
marketed devices, and it includes extensive requirements with respect to quality management and organization, device design,
buildings, equipment, purchase and handling of components or services, production and process controls, packaging and labeling
controls, device evaluation, distribution, installation, complaint handling, servicing, and record keeping. The FDA evaluates
compliance with the QSR through periodic unannounced inspections that may include the manufacturing facilities of our
subcontractors. If the FDA believes that any of our contract manufacturers or regulated suppliers are not in compliance with these
requirements, it can shut down such manufacturing operations, require recall of our products, refuse to approve new marketing
applications, institute legal proceedings to detain or seize products, enjoin future violations or assess civil and criminal penalties
against us or our officers or other employees.
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
We may also be subject to data privacy and security regulation by both the federal government and the states in which
we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or
HITECH, and their respective implementing regulations, imposes specified requirements relating to the privacy, security and
transmission of individually identifiable health information. Among other things, HITECH makes HIPAA's security standards
directly applicable to business associates, defined as service providers of covered entities that create, receive, maintain or transmit
protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also created
four new tiers of civil monetary penalties and gave state attorneys general new authority to file civil actions for damages or
injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys' fees and costs associated with pursuing federal
civil actions. In addition, many state laws govern the privacy and security of health information in certain circumstances, many of
which differ from HIPAA and each other in significant ways and may not have the same effect.
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Foreign data privacy regulations, such as the EU Data Protection Directive (Directive 95/46/EC), and the country-specific
regulations that implement Directive 95/46/EC, also govern the processing of personally identifiable data, and may be stricter
than U.S. laws.
Fraud
and
Abuse
Laws
In addition to FDA restrictions, there are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse,
including anti-kickback laws and physician self-referral laws. Our relationships with healthcare providers and other third parties
are subject to scrutiny under these laws. Violations of these laws are punishable by criminal and civil sanctions, including, in
some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including the Medicare,
Medicaid and Veterans Administration health programs.
Federal
Anti-Kickback
and
Self-Referral
Laws
The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or
providing remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, to induce either the
referral of an individual, or the furnishing, recommending, or arranging of a good or service, for which payment may be made
under a federal healthcare program such as Medicare and Medicaid or other federal healthcare programs. The term
"remuneration" has been broadly interpreted to include anything of value, including such items as gifts, discounts, the furnishing
of supplies or equipment, credit arrangements, waiver of payments and providing anything at less than its fair market value.
Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from
prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be
intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception
or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does
not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on
a case-by-case basis based on a review of all its relevant facts and circumstances. Several courts have interpreted the statute's
intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of (or
purchases, or recommendations related to) federal healthcare covered business, the Anti-Kickback Statute has been implicated
and potentially violated.
The penalties for violating the federal Anti-Kickback Statute include imprisonment for up to five years, fines of up to
$25,000 per violation and possible exclusion from federal healthcare programs such as Medicare and Medicaid. Many states have
adopted prohibitions similar to the federal Anti-Kickback Statute, some of which do not have the same exceptions and apply to
the referral of patients for healthcare services reimbursed by any source, not only by the Medicare and Medicaid programs.
Further, the Anti-Kickback Statute was amended by the Patient Protection and Affordable Care Act, or PPACA. Specifically, as
noted above, under the Anti-Kickback Statute, the government must prove the defendant acted "knowingly" to prove a violation
occurred. The PPACA added a provision to clarify that with respect to violations of the Anti-Kickback Statute, "a person need not
have actual knowledge" of the statute or specific intent to commit a violation of the statute. This change effectively overturns case
law interpretations that set a higher standard under which prosecutors had to prove the specific intent to violate the law. In
addition, the PPACA codified case law that a claim including items or services resulting from a violation of the federal Anti-
Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
We plan to provide the initial training to patients necessary for appropriate use of our products either through our own
diabetes educators or by contracting with outside diabetes educators that have completed an appropriate training course. Outside
diabetes educators are reimbursed for their services at fair market value.
Noncompliance with the federal anti-kickback legislation could result in our exclusion from Medicare, Medicaid or
other governmental programs, restrictions on our ability to operate in certain jurisdictions, and civil and criminal penalties.
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Federal law also includes a provision commonly known as the "Stark Law," which prohibits a physician from referring
Medicare or Medicaid patients to an entity providing "designated health services," including a company that furnishes durable
medical equipment, in which the physician has an ownership or investment interest or with which the physician has entered into a
compensation arrangement. Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements
received under a noncompliant arrangement, civil penalties, and exclusion from Medicare, Medicaid or other governmental
programs. We believe that we have structured our provider arrangements to comply with current Stark Law requirements.
Nevertheless, a determination of liability under such laws could result in fines and penalties and restrictions on our
ability to operate in these jurisdictions.
Additionally, as some of these laws are still evolving, we lack definitive guidance as to the application of certain key
aspects of these laws as they relate to our arrangements with providers with respect to patient training. We cannot predict the final
form that these regulations will take or the effect that the final regulations will have on us. As a result, our provider and training
arrangements may ultimately be found to be not in compliance with applicable federal law.
Federal
False
Claims
Act
The Federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person
whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal
government, or who has made a false statement or used a false record to get a claim approved. In addition, amendments in 1986 to
the Federal False Claims Act have made it easier for private parties to bring "qui tam" whistleblower lawsuits against companies
under the Federal False Claims Act. Penalties include fines ranging from $5,500 to $11,000 for each false claim, plus three times
the amount of damages that the federal government sustained because of the act of that person. Qui tam actions have increased
significantly in recent years, causing greater numbers of healthcare companies to have to defend a false claim action, pay fines or
be excluded from Medicare, Medicaid or other federal or state healthcare programs as a result of an investigation arising out of
such action.
There are other federal anti-fraud laws that that prohibit, among other actions, knowingly and willfully executing, or
attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and
willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare
offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false,
fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.
Additionally, HIPAA established two federal crimes in the healthcare fraud and false statements relating to healthcare
matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit
program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from
government sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering
up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment
for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.
Civil
Monetary
Penalties
Law
In addition to the Anti-Kickback Statute and the civil and criminal False Claims Acts, the federal government has the
authority to seek civil monetary penalties, or CMPs, assessments, and exclusion against an individual or entity based on a wide
variety of prohibited conduct. For example, the Civil Monetary Penalties Law authorizes the imposition of substantial CMPs
against an entity that engages in activities including, but not limited to: (1) knowingly presenting or causing to be presented, a
claim for services not provided as claimed or which is otherwise false or fraudulent in any way; (2) knowingly giving or causing
to be given false or misleading information reasonably expected to i nfluence the decision to discharge a patient; (3) offering or
giving remuneration to any beneficiary of a federal health care program likely to influence the receipt of reimbursable items or
services; (4) arranging for reimbursable services with an entity
25
Table of Contents
which is excluded from participation from a federal health care program; (5) knowingly or willfully soliciting or receiving
remuneration for a referral of a federal health care program beneficiary; or (6) using a payment intended for a federal health care
program beneficiary for another use. Noncompliance can result in civil money penalties of up to $10,000 for each wrongful act,
assessment of three times the amount claimed for each item or service and exclusion from the federal healthcare programs.
State
Fraud
and
Abuse
Provisions
Many states have also adopted some form of anti-kickback and anti-referral laws and a false claims act. We believe that
we are in conformance to such laws. Nevertheless, a determination of liability under such laws could result in fines and penalties
and restrictions on our ability to operate in these jurisdictions.
Physician
Payment
Sunshine
Act
Transparency laws regarding payments or other items of value provided to healthcare providers and teaching hospitals
may also impact our business practices. The federal Physician Payment Sunshine Act requires most medical device manufacturers
to report annually to the Secretary of Human Health Services financial arrangements, payments, or other transfers of value made
by that entity to physicians and teaching hospitals. The payment information is made publicly available in a searchable format on
a CMS website. Over the next several years, we will need to dedicate significant resources to establish and maintain systems and
processes in order to comply with these regulations. Failure to comply with the reporting requirements can result in significant
civil monetary penalties. Similar laws have been enacted or are under consideration in foreign jurisdictions.
U.S.
Foreign
Corrupt
Practices
Act
The U.S. Foreign Corrupt Practices Act, or FCPA, prohibits U.S. corporations and their representatives from offering,
promising, authorizing or making corrupt payments, gifts or transfers to any foreign government official, government staff
member, political party or political candidate in an attempt to obtain or retain business abroad. The FCPA also obligates
companies whose securities are listed in the United States to comply with accounting provisions requiring the company to
maintain books and records that accurately and fairly reflect all transactions of the corporation, including international
subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. Activities
that violate the FCPA, even if they occur wholly outside the United States, can result in criminal and civil fines, imprisonment,
disgorgement, oversight, and debarment from government contracts.
Employees
As of December 31, 2015, we had 39 employees, all of whom are located in the United States. None of our employees is
represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to
be good.
Facilities
Our principal offices occupy approximately 22,000 square feet of leased office space in Germantown, Maryland. Pursuant to an
amendment to the lease agreement that expires in 2023, we will expand the lease d premises by approximately 11,000 square feet
for a total of approximately 33,000 square feet. We believe that our current facilities are suitable and adequate to meet our
current needs. We intend to add new facilities or expand existing facilities as we add employees, and we believe that suitable
additional or substitute space will be available as needed to accommodate any such expansion of our operations.
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.
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Table of Contents
Information
about
Segments
We currently operate in a single business segment, glucose monitoring systems. See “Note 3—Summary of Significant
Accounting Policies—Segment Information” to our financial statements contained in Part II, Item 8 of this Annual Report.
Corporate
Information
We were originally incorporated as ASN Technologies, Inc. in Nevada on June 26, 2014. On December 7, 2015,
pursuant to the Merger Agreement and the transactions contemplated thereby, or the Acquisition, we acquired Senseonics,
Incorporated, a medical technology company focused on the design, development and commercialization of glucose monitoring
systems to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and
accuracy. From its inception in 1996 until 2010, Senseonics, Incorporated devoted substantially all of its resources to researching
various sensor technologies and platforms. Beginning in 2010, the company narrowed its focus to designing, developing and
refining a commercially viable glucose monitoring system.
In connection with the Acquisition, we reincorporated in Delaware and changed our name to Senseonics Holdings, Inc.
Upon the closing of the Acquisition, Senseonics, Incorporated merged with a wholly-owned subsidiary of ours formed solely for
that purpose and became our wholly-owned subsidiary. All of the outstanding capital stock, options and warrants to purchase
shares of Senseonics, Incorporated were converted into 57,739,953 shares of our common stock, options to purchase 9,251,164
shares of our common stock and warrants to purchase 5,010,604 shares of our common stock.
Our principal executive offices are located at 20451 Seneca Meadows Parkway, Germantown, Maryland 20876-7005
and our telephone number is (301) 515-7260. Our common stock is listed on the electronic marketplace operated by OTC Markets
Group, Inc. under the symbol “SENH”. W e intend to apply to list our common stock on the NYSE-M K T under the
symbol “SENS.”
Available
Information
Our website address is www.senseonics.com
. In addition to the information contained in this Annual Report,
information about us can be found on our website. Our website and information included in or linked to our website are not part
of this Annual Report.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are
available free of charge through our website as soon as reasonably practicable after they are electronically filed with or furnished
to the Securities and Exchange Commission, or SEC. The public may read and copy the materials we file with the SEC at the
SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally the SEC maintains an internet site that
contains reports, proxy and information statements and other information. The address of the SEC’s website is www.sec.gov .
Item
1A.
Risk
Factors
Our
business
is
subject
to
numerous
risks.
You
should
carefully
consider
the
following
risks
and
all
other
information
contained
in
this
Annual
Report,
as
well
as
general
economic
and
business
risks,
together
with
any
other
documents
we
file
with
the
SEC.
If
any
of
the
following
events
actually
occur
or
risks
actually
materialize,
it
could
have
a
material
adverse
effect
on
our
business,
operating
results
and
financial
condition
and
cause
the
trading
price
of
our
common
stock
to
decline.
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Risks
Relating
to
our
Business
and
our
Industry
We
have
incurred
significant
operating
losses
since
inception
and
cannot
assure
you
that
we
will
ever
achieve
or
sustain
profitability.
Since our inception, we have incurred significant net losses, including net losses of $29.9 million and $18.9 million for
the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, we had an accumulated deficit of
$160.8 million. To date, we have financed our operations primarily through sales of our equity securities and debt financings. We
have devoted substantially all of our resources to the research and development of our products, including conducting clinical
trials.
To implement our business strategy we need to, among other things, complete our clinical trials in Europe and the
United States, gain regulatory approval in Europe and the United States and other regions where we intend to sell our products,
establish additional distribution relationships in Europe to enable our commercial launch, establish our sales and marketing
infrastructure to initiate sales of our products in the United States and develop future generations of Eversense. We have never
been profitable and do not expect to be profitable in the foreseeable future. We expect our expenses to increase significantly as we
pursue these objectives. The extent of our future operating losses and the timing of profitability are highly uncertain, and we
expect to continue incurring significant expenses and operating losses over the next several years. Any additional operating losses
may have an adverse effect on our stockholders' equity, and we cannot assure you that we will ever be able to achieve
profitability. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual
basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise
capital, expand our business, maintain our development efforts, obtain regulatory approvals, diversify our product offerings or
continue our operations.
We
have
no
products
that
are
approved
for
commercial
sale.
If
we
are
unable
to
successfully
develop,
receive
regulatory
approval
for
and
commercialize
Eversense,
or
if
we
experience
significant
delays
in
doing
so,
our
business
will
be
harmed.
We have no products that are approved for commercial sale. We have invested substantially all of our efforts and
financial resources to the development of Eversense. Our ability to generate revenue from our products will depend heavily on
their successful development, regulatory approval and eventual commercialization. The success of any products that we develop
will depend on several factors, including:
·
·
·
successful completion of our clinical trials, including our U.S. pivotal trial for Eversense;
receipt of timely marketing approvals from applicable regulatory authorities;
our ability to procure and maintain suppliers and manufacturers of the components of Eversense and future versions
of Eversense;
launching commercial sales of Eversense, if approved for marketing;
·
· market acceptance of Eversense, if approved, by people with diabetes, the medical community and third-party
·
·
·
·
·
payors;
our ability to obtain adequate coverage and reimbursement for Eversense and the related insertion and removal
procedures;
our success in educating healthcare providers and people with diabetes about the benefits, administration and use of
Eversense and future versions of Eversense;
the prevalence and severity of adverse events experienced with Eversense and future versions of Eversense;
the perceived advantages, cost, safety, convenience and accuracy of alternative diabetes management therapies;
obtaining and maintaining patent, trademark and trade secret protection and regulatory exclusivity for Eversense and
otherwise protecting our rights in our intellectual property portfolio;
· maintaining compliance with regulatory requirements, including current good manufacturing practices; and
· maintaining a continued acceptable accuracy, safety, duration and convenience profile of Eversense
following approval.
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Whether regulatory approval will be granted is unpredictable and depends upon numerous factors, including the substantial
discretion of the regulatory authorities. Eversense's success in clinical trials will not guarantee regulatory approval. The FDA, the
corresponding Notified Body in the European Union and the European Economic Area, or EEA, or other comparable foreign
regulatory authorities may require that we conduct additional clinical trials, provide additional data, take additional manufacturing
steps, or require other conditions before they will grant us approval. If the FDA, the corresponding Notified Body in the European
Union and the EEA, or other comparable foreign regulatory authorities require additional clinical trials or data, we would incur
increased costs and delays in the marketing approval process, which may require us to expend more resources than we have
available. In addition, the FDA, the corresponding Notified Body in the European Union and the EEA, or other comparable
foreign regulatory authorities may not consider sufficient any additional required clinical trials, data or information that we
perform and complete or generate.
In cases where we are successful in obtaining regulatory approval to market one or more of our products, our revenue
will be dependent, in part, upon the size of the markets in the territories for which we gain regulatory approval, the accepted price
for the product, the ability to obtain coverage and reimbursement, and whether we own the commercial rights for that territory. If
the number of people with diabetes we target is not as significant as we estimate or the treatment population is narrowed by
competition, physician choice or treatment guidelines, we may not generate significant revenue from sales of such products, even
if approved.
Approval or clearance in the United States by the FDA or by a regulatory agency in another country does not guarantee
approval by the regulatory authorities in other countries or jurisdictions or ensure approval for the same conditions of use. In
addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Approval
processes vary among countries and can involve additional product testing and validation and additional administrative review
periods. It is possible that Eversense will never obtain regulatory approval in Europe or the United States, even if we expend
substantial time and resources seeking such approval. If we do not achieve one or more of these approvals in a timely manner or
at all, we could experience significant delays or an inability to fully commercialize Eversense and achieve profitability.
Both before and after a product is commercially released, we will have ongoing responsibilities under U.S. and EU
regulations. We will also be subject to periodic inspections by the FDA, the corresponding Notified Body in the European Union
and EEA and comparable foreign authorities to determine compliance with regulatory requirements, such as the Quality System
Regulation, or QSR, of the FDA, medical device reporting regulations, vigilance in reporting of adverse events and regulations
regarding notification, corrections, and recalls. These inspections can result in observations or reports, warning letters or other
similar notices or forms of enforcement action. If the FDA, the corresponding Notified Body in the European Union and EEA or
any comparable foreign authority concludes that we are not in compliance with applicable laws or regulations, or that any of our
products are ineffective or pose an unreasonable health risk, such authority could ban these products, suspend or cancel our
marketing authorizations, impose "stop-sale" and "stop-import" orders, refuse to issue export certificates, detain or seize
adulterated or misbranded products, order a recall, repair, replacement, correction or refund of such products, or require us to
notify health providers and others that the products present unreasonable risks of substantial harm to the public health. Discovery
of previously unknown problems with our product's design or manufacture may result in restrictions on the use of Eversense,
restrictions placed on us or our suppliers, or withdrawal of an existing regulatory clearance for Eversense. The FDA, the
corresponding Notified Body in the European Union and EEA or comparable foreign authorities may also impose operating
restrictions, enjoin and restrain certain violations of applicable law pertaining to medical devices, assess civil or criminal penalties
against our officers, employees or us, or recommend criminal prosecution of our company. Adverse regulatory action may restrict
us from effectively marketing and selling our products. In addition, negative publicity and product liability claims resulting from
any adverse regulatory action could have a material adverse effect on our business, financial condition, and operating results.
Foreign governmental regulations have become increasingly stringent and more extensive, and we may become subject
to even more rigorous regulation by foreign governmental authorities in the future. Penalties for a company's noncompliance with
foreign governmental regulation could be severe, including revocation or suspension of a company's business license and civil or
criminal sanctions. In some jurisdictions, such as Germany, any violation of a law related to medical devices is also considered to
be a violation of unfair competition law. In such cases, governmental authorities, our competitors and business or consumer
associations may then file lawsuits to prohibit us from commercializing
29
Table of Contents
Eversense in such jurisdictions. Our competitors may also sue us for damages. Any domestic or foreign governmental law or
regulation imposed in the future may have a material adverse effect on our business, financial condition and operating results.
We
are
dependent
on
one
product,
Eversense.
Our
success
depends
on
our
ability
to
continue
to
develop,
commercialize
and
gain
market
acceptance
for
our
products.
Our current business strategy is highly dependent on launching Eversense into commercial markets and achieving and
maintaining market acceptance. In order for us to sell Eversense to people with intensively managed diabetes, we must convince
them, their caregivers and healthcare providers that Eversense is an attractive alternative to competitive products for the
monitoring of glucose levels, including SMBG, as well as other competitive CGM systems and alternatives to CGM
methodologies. Market acceptance and adoption of Eversense depends on educating people with diabetes, as well as their
caregivers and healthcare providers, as to the distinct features, ease-of-use, positive lifestyle impact, and other perceived benefits
of Eversense as compared to competitive products.
Achieving and maintaining market acceptance of Eversense could be negatively impacted by many factors, including:
·
·
·
·
·
·
the failure of Eversense to achieve wide acceptance among people with intensively managed diabetes, their
caregivers, healthcare providers, third-party payors and key opinion leaders in the diabetes treatment community;
lack of evidence supporting the accuracy, duration, safety, ease-of-use or other perceived benefits of Eversense over
competitive products or other currently available diabetes management therapies;
perceived risks associated with the use of Eversense or similar products or technologies generally;
the introduction of competitive products and the rate of acceptance of those products as compared to Eversense;
adverse results of clinical trials relating to Eversense or similar competitive products; and
loss of regulatory approval for Eversense, adverse publicity or other adverse events including any product liability
lawsuits.
In addition, Eversense may be perceived by people with intensively managed diabetes, their caregivers or healthcare
providers to be more complicated or less effective than traditional monitoring methodologies, including SMBG, and people may
be unwilling to change their current regimens.
Moreover, healthcare providers tend to be slow to change their medical treatment practices because of perceived liability
risks arising from the use of new products and the uncertainty of third-party reimbursement. Accordingly, healthcare providers
may not recommend Eversense unless and until there is sufficient evidence to convince them to alter the treatment methods they
typically recommend, such as receiving recommendations from prominent healthcare providers or other key opinion leaders in the
diabetes treatment community.
If we are not successful in convincing people with diabetes of the benefits of Eversense, or if we are unable to achieve
the support of caregivers and healthcare providers or widespread market acceptance for Eversense, then our sales potential,
strategic objectives and profitability could be negatively impacted, which would adversely affect our business, financial condition
and operating results.
If
we
do
not
enhance
our
product
offerings
through
our
research
and
development
efforts,
we
may
fail
to
effectively
compete
or
become
profitable.
In order to capture and grow market share in the intensively managed diabetes market, we will need to enhance and
broaden our product offerings in response to the evolving demands of people with intensively managed diabetes and healthcare
providers, as well as competitive pressures and technologies. We may not be successful in developing, obtaining regulatory
approval for, or marketing Eversense or future versions of Eversense. In addition, notwithstanding our market research efforts,
our future products may not be accepted by people with diabetes, their caregivers, healthcare providers or third-party payors who
reimburse people with diabetes for Eversense and healthcare providers for their
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services. The success of Eversense or future versions of Eversense will depend on numerous factors, including our ability to:
·
·
·
·
·
·
·
identify the product features that people with intensively managed diabetes, their caregivers and healthcare
providers are seeking in a CGM system and successfully incorporate those features into our products;
develop and introduce future generations of Eversense in a timely manner;
offer products at a price that is competitive with other products then available;
adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third-
parties;
demonstrate the accuracy and safety of Eversense or future versions of Eversense;
obtain adequate coverage and reimbursement for Eversense or future versions of Eversense and the related insertion
and removal procedures; and
obtain the necessary regulatory approvals for Eversense and future versions of Eversense. For example, a future
product enhancement involves on-demand, swipe measurement technology that would permit people with Type 1
diabetes to perform real-time, single glucose readings by swiping their smartphone over our sensor. We do not
believe that such technology would require cGMP-compliant manufacturing for smartphones used for these real-
time readings. However, if regulatory authorities were to disagree, this would adversely impact our ability to
commercialize that product enhancement.
If we fail to generate demand by developing products that incorporate features requested by people with diabetes, their
caregivers or healthcare providers, or if we do not obtain regulatory clearance or approval for Eversense or future versions of
Eversense in time to meet market demand, we may fail to generate sales sufficient to achieve or maintain profitability. We have in
the past experienced, and we may in the future experience, delays in various phases of product development and commercial
launch, including during research and development, manufacturing, limited release testing, marketing and customer education
efforts. Any delays in our anticipated product launches may significantly impede our ability to successfully compete in our
markets. In particular, such delays could cause customers to delay or forego purchases of our products, or to purchase our
competitors' products. Even if we are able to successfully develop Eversense or future versions of Eversense when anticipated,
these products may not produce sales in excess of the costs of development, and they may be quickly rendered obsolete by the
changing preferences of people with diabetes or the introduction by our competitors of products embodying new technologies or
features.
Failure
to
secure
or
retain
adequate
coverage
or
reimbursement
for
Eversense
or
future
versions
of
Eversense
systems,
including
the
related
insertion
and
removal
procedures,
by
third-party
payors
could
adversely
affect
our
business,
financial
condition
and
operating
results.
We plan to derive nearly all of our revenue from sales of Eversense, if approved, in Europe and the United States and
expect to do so for the next several years. Patients who receive treatment for their medical conditions and their healthcare
providers generally rely on third party payors to reimburse all or part of the costs associated with their medical treatment,
including healthcare providers' services. As a result, access to adequate coverage and reimbursement for Eversense by third-party
payors is essential to the acceptance of our products by people with diabetes. Similarly, healthcare providers may choose not to
order a product unless third-party payors pay a substantial portion of the product. Coverage determinations and reimbursement
levels of both our products and the healthcare provider's performance of the insertion and removal procedures are critical to the
commercial success of our product, and if we are not able to secure positive coverage determinations and reimbursement levels
for our products or the insertion and removal procedures, our business would be materially adversely affected.
Within and outside the United States, reimbursement is obtained from a variety of sources, including government
sponsored and private health insurance plans. These third-party payors determine whether to provide reimbursement for specific
products and procedures. A third-party payor's decision to provide coverage for our products does not imply that an adequate
reimbursement rate will be obtained. Further, one third-party payor's decision to cover our products does not assure that other
payors will also provide coverage for the products or will provide coverage at an adequate reimbursement rate. In addition, there
may be significant delays in obtaining a reimbursement determination, and coverage, if granted, may be more limited than the
purposes for which the product is cleared by the FDA, the corresponding Notified Body in the European Union and EEA or other
foreign regulatory authorities. Moreover,
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eligibility for reimbursement does not imply that any product will be paid for in all cases or at a rate that covers its associated
costs, including research, development, manufacture, sale and distribution. For example, payment rates may vary according to the
use of the product and the clinical setting in which it is used, may be based on payments allowed for lower cost products that are
already reimbursed, and may be incorporated into existing payments for other services. Net prices for products may be reduced by
mandatory discounts or rebates required by government healthcare programs or third-party payors and by any future relaxation of
laws that presently restrict imports of products from countries where they may be sold at lower prices.
In the United States, the Centers for Medicare & Medicaid Services, or CMS, does not currently reimburse patients for
the cost of a CGM system, like Eversense, although the cost of certain related medical services may be reimbursed. Until such
time as adequate coverage is extended by CMS and/or its contractors, reimbursement of our products will generally be limited to
customers covered by those private third-party payors that have adopted policies recognizing coverage and reimbursement for
CGM devices. Private insurance companies and other private, third-party payors set payor-specific reimbursement policies. The
extent of coverage and the rate of reimbursement varies on a payor-by-payor basis. As of December 31, 2015, several of the
largest private third-party payors, in terms of the number of covered lives, have issued coverage policies for the category of CGM
devices. These policies include varied coverage requirements regarding patient condition and characteristics. Many of these
coverage policies reimburse for CGM systems under durable medical equipment benefits, which are restrictive in nature and
require the healthcare provider or supplier to comply with extensive documentation and other requirements.
In the United States, many third-party payors use coverage decisions and payment amounts determined by CMS as
guidelines in setting their coverage and reimbursement policies. As described above, CMS does not currently cover CGM devices
to patients for their home use. We do not know whether CMS will ever cover Eversense or any other CGM-related products. In
addition, those third-party payors that cover CGM products may and have included limitations as to the patient conditions and
characteristics eligible for coverage and may adopt different coverage and reimbursement policies for our products, which could
also diminish payments for Eversense. It is possible that some third-party payors will not offer any coverage for our products.
We plan to seek private-payor reimbursement for Eversense and specific reimbursement code recognition for the
insertion and removal procedures with national and regional third-party payors in the United States. While we also anticipate
entering into contracts with third-party payors, we cannot guarantee that we will succeed in doing so or that the reimbursement
contracts that we are able to negotiate will enable us to sell our products on a profitable basis. In addition, contracts with third-
party payors generally can be modified or terminated by the third-party payor without cause and with little or no notice to us.
Moreover, compliance with the administrative procedures or requirements of third-party payors may result in delays in processing
approvals by those third-party payors for people with diabetes to obtain coverage for Eversense. Failure to secure or retain
adequate coverage or reimbursement for Eversense by third-party payors, or delays in processing approvals by those payors,
could result in the loss of sales, which could negatively affect our business, financial condition and operating results.
Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly
sophisticated methods of controlling healthcare costs by imposing lower payment rates and negotiating reduced contract rates,
among others. As such, we believe that future coverage and reimbursement may be subject to increased restrictions, such as
additional preauthorization requirements, both in the United States and in international markets. Our dependence on the
commercial success of our Eversense products makes us particularly susceptible to any cost containment or reduction efforts. If
third-party coverage and reimbursement of products for which we may receive regulatory approval is not available or adequate in
either the United States or international markets, or if our production costs increase faster than increases in reimbursement levels,
we may be unable to sell Eversense or future versions of Eversense profitably and our business would be adversely impacted.
If
important
assumptions
we
have
made
about
what
people
with
intensively
managed
diabetes
are
seeking
in
a
CGM
system
are
inaccurate,
our
business
and
operating
results
may
be
adversely
affected.
Our business strategy was developed based on a number of important assumptions about the diabetes industry in general,
and the intensively managed diabetes market in particular, any one or more of which may prove to be
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Table of Contents
inaccurate. For example, we believe that the benefits of CGM will continue to drive increased rates of market acceptance for
products in this space. However, this trend is uncertain and limited sources exist to obtain reliable market data.
Another key element of our business strategy is utilizing market research to understand how people with diabetes are
seeking to improve their diabetes therapy management. This strategy underlies our entire product design, marketing and customer
support approach and is the basis on which we developed Eversense. However, our market research is based on interviews, focus
groups and online surveys involving people with intensively managed diabetes, their caregivers and healthcare providers that
represent only a small percentage of the overall intensively managed diabetes market. As a result, the responses we received may
not be reflective of the broader market and may not provide us accurate insight into the desires of people with intensively
managed diabetes. In addition, understanding the meaning and significance of the responses received during our market research
necessarily requires that analysis be conducted and conclusions be drawn. We may not be able perform an analysis that yields
meaningful results, or the conclusions we draw from the analysis could be misleading. Moreover, even if our market research has
allowed us to better understand the features people with diabetes are seeking in a CGM system to improve the management of
their diabetes, there can be no assurance that people with diabetes will actually purchase our products. As such, our strategy of
focusing on the intensively managed diabetes market may limit our ability to increase sales or achieve profitability.
We
operate
in
a
very
competitive
industry
and
if
we
fail
to
compete
successfully
against
our
existing
or
potential
competitors,
many
of
whom
have
greater
resources
than
we
have,
our
sales
and
operating
results
may
be
negatively
affected.
The market for CGM systems is very competitive, subject to rapid change and significantly affected by new product
introductions. We believe competitors have historically dedicated and will continue to dedicate significant resources to promote
their products or develop new products or methods to manage diabetes. We expect to compete with well-capitalized companies,
some of which are publicly-traded, that manufacture CGM systems including Medtronic, Inc., or Medtronic, Dexcom, Inc., or
Dexcom, and Abbott Diabetes Care, a division of Abbott Laboratories, or Abbott. Each of these three companies has received
approval from the FDA to market CGM systems. Dexcom's Bluetooth-enabled CGM system is designed to be integrated with
smart phones.
As the industry evolves, we anticipate encountering increasing competition from companies that integrate CGM with
insulin pumps. We are aware of three companies, Johnson & Johnson, Medtronic and Tandem Diabetes Care, Inc., which have
received FDA approval for CGM-integrated insulin pumps. Johnson & Johnson's system integrates Dexcom's CGM sensor
technology and smartphone compatibility.
In addition to CGM providers, we will also compete with providers of traditional SMBG systems. Four companies
currently account for substantially all of the worldwide sales of SMBG systems: Roche Diabetes Care, a division of Roche
Diagnostics; LifeScan, Inc., a division of Johnson & Johnson; Abbott; and Bayer Diabetes Care, which has agreed to merge with
Panasonic Healthcare Holdings. We may also compete with companies, including Roche Diagnostics and Abbott, developing next
generation real-time CGM or sensing devices and technologies, as well as several other companies that are evaluating non-
invasive CGM products to measure a user's blood glucose level. For example, Abbott is developing its FreeStyle Libre Flash
Glucose Monitoring System, which has received the CE mark in Europe and eliminates the need for routine fingersticks by
reading glucose levels through a transcutaneous sensor that can be worn for up to 14 days. There are also a number of academic
and other institutions involved in various phases of our industry's technology development.
Many of these competitors enjoy several advantages over us, including:
·
·
·
·
·
·
greater financial and human resources for sales and marketing, and product development;
established relationships with healthcare providers and third-party payors;
established reputation and name recognition among healthcare providers and other key opinion leaders in the
diabetes industry;
in some cases, an established base of long-time customers;
products supported by long-term clinical data;
larger and more established sales, marketing and distribution networks;
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greater ability to cross-sell products or provide incentives to healthcare providers to use their products; and
·
· more experience in conducting research and development, manufacturing, clinical trials, and obtaining regulatory
approval or clearance.
In addition, mergers and acquisitions in the diabetes industry may result in even more resources being concentrated
among a smaller number of our competitors. Smaller or early-stage companies may also prove to be significant competitors,
particularly through collaborative arrangements with large and established companies. These competitors also compete with us in
recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and subject registration
for clinical trials, as well as in acquiring technologies complementary to, or that may be necessary for, our programs.
If we are unable to effectively compete with our competitors, we may fail to meet our strategic objectives, and our
business, financial condition and operating results could be harmed.
Competitive
products
or
other
technological
innovations
for
the
monitoring,
treatment
or
prevention
of
diabetes
may
render
our
products
less
competitive
or
obsolete.
Our ability to achieve our strategic objectives will depend, among other things, on our ability to develop and
commercialize products for the monitoring and management of diabetes that offer distinct features, have a longer duration than
available alternatives, are easy-to-use, receive adequate coverage and reimbursement from third-party payors, include essential
safety features and are more appealing than available alternatives. Our primary competitors, as well as a number of other
companies, medical researchers and existing medical device companies are pursuing new delivery devices, delivery technologies,
sensing technologies, procedures, drugs and other therapies for the monitoring, treatment and prevention of diabetes. For
example, the National Institutes of Health and other supporters of diabetes research are continually seeking ways to prevent, cure
or improve treatment of diabetes, which if successful could render glucose monitoring devices, like Eversense, obsolete. Any
technological breakthroughs in diabetes monitoring, treatment or prevention could reduce the potential market for Eversense or
render Eversense less competitive or obsolete altogether, which would significantly reduce our potential sales.
Because of the size of the intensively managed diabetes market, we anticipate that companies will continue to dedicate
significant resources to developing competitive products. The frequent introduction by competitors of products that are, or claim
to be, superior to our products may create market confusion that may make it difficult to differentiate the benefits of our products
over competitive products. In addition, the entry of multiple new products may lead some of our competitors to employ pricing
strategies that could adversely affect the pricing of our products. If a competitor develops a product that competes with or is
perceived to be superior to Eversense, or if a competitor employs strategies that place downward pressure on pricing within our
industry, our sales may decline significantly or may not increase in line with our expectations, either of which would harm our
business, financial condition and operating results.
The
size
and
future
growth
in
the
market
for
CGM
systems
and
CGM-related
products
has
not
been
established
with
precision
and
may
be
smaller
than
we
estimate,
possibly
materially.
If
our
estimates
and
projections
overestimate
the
size
of
this
market,
our
sales
growth
may
be
adversely
affected.
Our estimates of the size and future growth in the market for CGM systems and CGM-related products, including the
number of people currently intensively managing their diabetes who may benefit from and be amenable to using Eversense, is
based on a number of internal and third-party studies, reports and estimates. In addition, our internal estimates are based in large
part on current treatment patterns by healthcare providers using CGM systems and our belief that the incidence of diabetes in the
United States and worldwide is increasing. While we believe these factors have historically provided and may continue to provide
us with effective tools in estimating the total market for CGM systems and CGM related products and our products, these
estimates may not be correct and the conditions supporting our estimates may change at any time, thereby reducing the predictive
accuracy of these underlying factors. The actual incidence of diabetes, and the actual demand for our products or competitive
products, could differ materially from our projections if our assumptions are incorrect. As a result, our estimates of the size and
future growth in the market for our CGM systems may prove to be incorrect. If the actual number of people with diabetes who
would benefit from Eversense
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Table of Contents
and the size and future growth in the market for Eversense is smaller than we have estimated, it may impair our projected sales
growth and have an adverse impact on our business.
Our
distribution
agreement
with
Rubin
to
market
Eversense
in
Sweden,
Norway
and
Denmark
may
not
be
successful.
Although we have entered into a distribution agreement with Rubin to market Eversense in Sweden, Norway and
Denmark, because we have yet to receive regulatory approval to commercialize Eversense in Europe, Rubin is currently not
marketing, selling or distributing Eversense. Under the agreement, following regulatory approval, Rubin will generally be
responsible for the promotion, sale and distribution of Eversense in Sweden, Norway and Denmark at such prices as Rubin
determines in its sole discretion. The initial prices at which Rubin purchases the products from us are set forth in the agreement.
Although Rubin has the exclusive right to distribute Eversense in the covered countries, the agreement does not require Rubin to
sell our products exclusively, and therefore, Rubin is free to sell products of our competitors. Because we have not yet received
regulatory approval, we are not yet able to assess Rubin's performance in distributing Eversense in the covered countries, and it
may take an extended period of time for us to accurately assess their performance under the agreement. Additionally, because the
agreement with Rubin is exclusive and has an initial five year term, we will have limited ability to terminate the agreement with
Rubin or to contract with any other distributor for Sweden, Norway and Denmark, and therefore we may be entirely dependent on
Rubin for sales in these countries. If Rubin fails to perform satisfactorily under the agreement, our ability to commercialize in
these countries, and potentially throughout Europe, could be adversely affected.
If
we
are
unable
to
establish
additional
distribution
arrangements,
we
may
have
to
alter
our
development
and
commercialization
plans
in
Europe
and
our
sales
in
Europe
may
be
negatively
affected.
To commercialize Eversense in Europe, we plan to establish arrangements with third-party distributors. Aside from our
agreement with Rubin with respect to Sweden, Norway and Denmark, we have not entered into any distribution arrangements to
date. We may face significant competition in seeking appropriate distribution arrangements. Whether we reach a definitive
distribution agreement will depend, among other things, upon our assessment of the distributor's resources and expertise, the
terms and conditions of the proposed agreement and the proposed distributor's evaluation of a number of factors. The distributor
may also consider alternative CGM systems or technologies that may be available if such an arrangement could be more attractive
than the one with us for Eversense. We expect that none of our third-party distributors will be required to sell our products
exclusively and each of them may freely sell the products of our competitors.
Distribution arrangements are complex and time-consuming to negotiate and document. We may not be able to negotiate
distribution arrangements on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the
development of Eversense, delay its potential commercialization in Europe or reduce the scope of any sales or marketing
activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect
to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional
capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to
further develop our products or bring them to market and generate revenue.
In addition, if a third-party distributor does not effectively sell our products, or if it engages in certain activities or ceases
to distribute our products, we may not be able to maintain or increase our revenues or enter into new countries and our sales
would be adversely affected. In such a situation, we may need to seek alternative third-party distributors or increase our reliance
on our other third-party distributors, which may harm our sales. Additionally, to the extent that we enter into additional
arrangements with third-party distributors to perform sales, marketing, or distribution services, the terms of the arrangements
could cause our product margins to be lower than if we directly marketed and sold our products.
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If
we
are
unable
to
establish
a
sales
and
marketing
infrastructure,
we
may
not
be
successful
in
commercializing
Eversense
in
the
United
States,
even
if
we
receive
regulatory
approval.
We have not yet commercialized Eversense and we do not have experience marketing and selling our products or
training healthcare providers and people with diabetes on the use of Eversense. To achieve commercial success in the United
States for Eversense, we will need to establish and expand our sales and marketing infrastructure to drive adoption of our
products, and we plan to include a team of diabetes educators that will train healthcare providers and people with diabetes on the
use of Eversense. There is significant competition for sales personnel experienced in relevant medical device sales. We expect
that we will face significant challenges as we recruit and subsequently grow our sales and marketing infrastructure. If we are
unable to attract and retain sufficient, and skilled, sales and marketing representatives, our sales could be adversely affected. If
one of our sales or marketing representatives were to depart and be retained by one of our competitors, they could help
competitors solicit business from our existing customers, which could further harm our sales. In addition, if our sales and
marketing representatives or diabetes educators fail to achieve their objectives or if we are not able to recruit and retain a network
of diabetes educators, we may not be able to successfully train healthcare providers and people with diabetes on the use of
Eversense, which could delay new sales and harm our reputation.
As we increase our sales and marketing expenditures with respect to Eversense or future versions of Eversense, we will
need to hire, train, retain and motivate skilled sales and marketing representatives with significant industry-specific knowledge in
various areas, such as diabetes treatment techniques and technologies. Our success will depend largely on the competitive
landscape for our products and the ability of our sales personnel to obtain access to healthcare providers and persuade those
healthcare providers to recommend Eversense to people who intensively manage their diabetes. Recently hired sales
representatives require training and take time to achieve full productivity. We cannot be certain that new hires will become as
productive as may be necessary to maintain or increase our sales. In addition, the expansion of our sales and marketing personnel
will place significant burdens on our management team.
We anticipate that we will derive nearly all of our U.S. revenue from the sales of Eversense or future versions of
Eversense and that this will continue for the next several years. As a result, our financial condition and operating results will be
highly dependent on the ability of our sales representatives to adequately promote, market and sell Eversense and the ability of
our diabetes educators to train healthcare providers and people with diabetes on the use of Eversense. If we are unable to establish
and expand our sales and marketing capabilities, we may not be able to effectively commercialize our existing or planned
products, or enhance the strength of our brand, either of which could impair our projected sales growth and have an adverse
impact on our business.
Our
ability
to
maintain
and
grow
our
revenue
will
depend
on
establishing
a
customer
base
and
retaining
a
high
percentage
of
our
customer
base.
A key to maintaining and growing our revenue will be establishing a customer base and retaining a high percentage of
our customers due to the potentially significant revenue generated from ongoing purchases of disposable sensors. We intend to
develop programs to help with retention aimed at customers, their caregivers and healthcare providers, which include training
specific to Eversense, ongoing support by sales and clinical employees and 24/7 technical support and customer service. If
demand for our products fluctuates as a result of the introduction of competitive products, changes in reimbursement policies,
manufacturing problems, perceived safety issues with our or our competitors' products, the failure to secure regulatory clearance
or approvals, or for other reasons, our ability to attract and retain customers could be harmed. The failure to retain a high
percentage of our customers would negatively impact our business, financial condition and operating results.
We
have
no
operating
history
as
a
commercial-stage
company
and
may
face
difficulties
encountered
by
companies
early
in
their
commercialization
in
competitive
and
rapidly
evolving
markets.
To date, we have not commercialized any products. If approved, we plan to launch Eversense in Europe in the first half
of 2016. Accordingly, we have no operating history as a commercial-stage company upon which to evaluate our business, future
sales expectations and operating results. In assessing our business prospects, you should consider the various risks and difficulties
frequently encountered by companies early in their commercialization in competitive and
36
Table of Contents
rapidly evolving markets, particularly companies that develop and sell medical devices. These risks include our ability to:
·
·
·
·
·
obtain regulatory clearance or approval to commercialize our products;
perform clinical trials with respect to Eversense or future versions of Eversense;
implement and execute our business strategy;
expand and improve the productivity of our sales and marketing infrastructure to grow sales of Eversense or future
versions of Eversense;
increase awareness of our brand and Eversense and build loyalty among people with intensively managed diabetes,
their caregivers and healthcare providers;
· manage expanding operations;
·
expand the capabilities and capacities of our third-party manufacturers, including increasing production of current
products efficiently and having our vendors adapt their manufacturing facilities to the production of new products;
respond effectively to competitive pressures and developments;
enhance Eversense and develop future versions of Eversense; and
attract, retain and motivate qualified personnel in various areas of our business.
·
·
·
Due to our lack of operating history as a commercial-stage company, we may not have the institutional knowledge or
experience to be able to effectively address these and other risks that may face our business. In addition, we may not be able to
develop insights into trends that could emerge and negatively affect our business and may fail to respond effectively to those
trends. As a result of these or other risks, we may not be able to execute key components of our business strategy, and our
business, financial condition and operating results may suffer.
We
contract
with
third
parties
for
the
manufacture
of
Eversense
for
clinical
testing
and
expect
to
continue
to
do
so
for
commercialization.
Risks
associated
with
the
manufacturing
of
our
products
could
reduce
our
gross
margins
and
negatively
affect
our
operating
results.
We do not have any manufacturing facilities or direct manufacturing personnel. We currently rely, and expect to
continue to rely, on third parties for the manufacture of Eversense for clinical testing, as well as for commercial manufacture if
Eversense receives regulatory approval. Therefore, our business strategy depends on our third-party manufacturers' ability to
manufacture Eversense in sufficient quantities and on a timely basis so as to meet consumer demand, while adhering to product
quality standards, complying with regulatory requirements and managing manufacturing costs. We are subject to numerous risks
relating to our reliance on the manufacturing capabilities of our third-party manufacturers, including:
·
·
·
·
·
·
·
quality or reliability defects in Eversense;
inability to secure product components in a timely manner, in sufficient quantities or on commercially reasonable
terms;
failure to increase production of Eversense to meet demand;
inability to modify production lines to enable us to efficiently produce future products or implement changes in
current products in response to regulatory requirements;
difficulty identifying and qualifying alternative manufacturers in a timely manner;
inability to establish agreements with future third-party manufacturers or to do so on acceptable terms; or
potential damage to or destruction of our manufacturers' equipment or facilities.
These risks are likely to be exacerbated by our limited experience with Eversense and its manufacturing process. As
demand for our products increases, our third-party suppliers will need to invest additional resources to purchase components, hire
and train employees, and enhance their manufacturing processes. If our manufacturers fail to increase production capacity
efficiently, our sales may not increase in line with our expectations and our operating margins could fluctuate or decline. In
addition, although we expect some of our future versions of Eversense to share product features and components with our first
generation Eversense, manufacturing these future versions of Eversense may require the modification of production lines, the
identification of new manufacturers for specific components, or the
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Table of Contents
development of new manufacturing technologies. It may not be possible for us to manufacture these products at a cost or in
quantities sufficient to make these future versions of Eversense commercially viable.
We
depend
on
a
limited
number
of
third-party
suppliers
for
the
components
of
Eversense
and
the
loss
of
any
of
these
suppliers,
or
their
inability
to
provide
us
with
an
adequate
supply
of
materials,
could
harm
our
business.
We rely on third-party suppliers to supply and manufacture the components of our Eversense system. For our business
strategy to be successful, our suppliers must be able to provide us with components and Eversense systems in sufficient
quantities, in compliance with regulatory requirements and quality control standards, in accordance with agreed upon
specifications, at acceptable costs and on a timely basis. Future increases in sales of Eversense, if approved, whether expected or
unanticipated, could strain the ability of our suppliers to deliver an increasingly large supply of components and Eversense
systems in a manner that meets these various requirements.
We generally use a small number of suppliers of components for our products. Depending on a limited number of
suppliers exposes us to risks, including limited control over pricing, availability, quality and delivery schedules. Generally, we do
not have long-term supply agreements with our suppliers and, in many cases, we make our purchases on a purchase order basis.
Under most of our supply and manufacturing agreements, we have no obligation to buy any given quantity of products, and our
suppliers have no obligation to sell us or to manufacture for us any given quantity of components or products. As a result, our
ability to purchase adequate quantities of components or our products may be limited and we may not be able to convince
suppliers to make components and products available to us. Additionally, our suppliers may encounter problems that limit their
ability to supply components or manufacture products for us, including financial difficulties, damage to their manufacturing
equipment or facilities, or product discontinuations. As a result, there is a risk that certain components could be discontinued and
no longer available to us. We may be required to make significant "last time" purchases of component inventory that is being
discontinued by the supplier to ensure supply continuity. If we fail to obtain sufficient quantities of high quality components to
meet demand for our products in a timely manner or on terms acceptable to us, we would have to seek alternative sources of
supply. Because of factors such as the proprietary nature of our products, our quality control standards and regulatory
requirements, we may not be able to quickly engage additional or replacement suppliers for some of our critical components.
Failure of any of our suppliers to deliver components at the level our business requires could disrupt the manufacturing of our
products and limit our ability to meet our sales commitments, which could harm our reputation and adversely affect our business.
We may also have difficulty obtaining similar components from other suppliers that are acceptable to the FDA or other
regulatory agencies, and the failure of our suppliers to comply with strictly enforced regulatory requirements could expose us to
regulatory action including warning letters, product recalls, and termination of distribution, product seizures or civil penalties. It
could also require us to cease using the components, seek alternative components or technologies and modify our products to
incorporate alternative components or technologies, which could result in a requirement to seek additional regulatory approvals.
Any disruption of this nature or increased expenses could harm our commercialization efforts and adversely affect our operating
results.
Our
third-party
suppliers
operate
primarily
at
facilities
in
a
single
location,
and
any
disruption
to
these
facilities
could
adversely
affect
our
business
and
operating
results.
Each of our third-party suppliers operates at a facility in a single location and substantially all of our inventory of
component supplies and finished goods is held at these locations. We, and our suppliers, take precautions to safeguard facilities,
including acquiring insurance, employing back-up generators, adopting health and safety protocols and utilizing off-site storage
of computer data. However, vandalism, terrorism or a natural or other disaster, such as an earthquake, fire or flood, could damage
or destroy equipment or our inventory of component supplies or finished products, cause substantial delays in our operations,
result in the loss of key information, and cause us to incur additional expenses. Our insurance may not cover our losses in any
particular case. In addition, regardless of the level of insurance coverage, damage to our or our suppliers' facilities could harm our
business, financial condition and operating results.
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Table of Contents
Various
factors
outside
our
direct
control
may
adversely
affect
manufacturing,
sterilization
and
distribution
of
our
products.
The manufacture, sterilization and distribution of our products is challenging. Changes that our suppliers may make
outside the purview of our direct control can have an impact on our processes, quality of our products and the successful delivery
of products to our customers. Mistakes and mishandling are not uncommon and can affect supply and delivery. Some of these
risks include:
·
·
·
·
·
failure to complete sterilization on time or in compliance with the required regulatory standards;
transportation and import and export risk, particularly given the international nature of our supply and distribution
chains;
delays in analytical results or failure of analytical techniques that we will depend on for quality control and release
of products;
natural disasters, labor disputes, financial distress, raw material availability, issues with facilities and equipment or
other forms of disruption to business operations affecting our manufacturers or suppliers; and
latent defects that may become apparent after products have been released and that may result in a recall of such
products.
If any of these risks were to materialize, our ability to provide our products to customers on a timely basis would be
adversely impacted.
Potential
complications
from
Eversense
or
future
versions
of
Eversense
may
not
be
revealed
by
our
clinical
experience.
Based on our experience, complications from use of Eversense may include sensor errors, sensor failures, broken
sensors, lodged sensors or skin irritation under the adhesive dressing of the transmitter. Inflammation or redness, swelling, minor
infection, and minor bleeding at the sensor insertion site are also possible risks with an individual's use of the device. However, if
unanticipated side-effects result from the use of Eversense or future versions of Eversense, we could be subject to liability and our
systems would not be widely adopted. Additionally, we have limited clinical experience with repeated use of our CGM system in
the same patient or the same insertion site. We cannot assure you that long-term use would not result in unanticipated
complications, even after the device is removed.
Undetected
errors
or
defects
in
Eversense
or
future
versions
of
Eversense
could
harm
our
reputation,
decrease
the
market
acceptance
of
Eversense
or
expose
us
to
product
liability
claims.
Eversense or future versions of Eversense may contain undetected errors or defects. Disruptions or other performance
problems with Eversense or future versions of Eversense may harm our reputation. If that occurs, we may incur significant costs,
the attention of our key personnel could be diverted or other significant customer relations problems may arise. We may also be
subject to warranty and liability claims for damages related to errors or defects in Eversense or future versions of Eversense. A
material liability claim or other occurrence that harms our reputation or decreases market acceptance of Eversense could harm our
business and operating results. This risk exists even if a device is cleared or approved for commercial sale and manufactured in
facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Our products are designed to affect, and
any future products will be designed to affect, important bodily functions and processes. Any side effects, manufacturing defects,
misuse or abuse associated with Eversense or future versions of Eversense systems could result in patient injury or death. The
medical device industry has historically been subject to extensive litigation over product liability claims, and we cannot offer any
assurance that we will not face product liability lawsuits.
The sale and use of Eversense or future versions of Eversense could lead to the filing of product liability claims if
someone were to allege that Eversense or one of our products contained a design or manufacturing defect. A product liability
claim could result in substantial damages and be costly and time consuming to defend, either of which could materially harm our
business or financial condition. Product liability claims may be brought against us by people with diabetes, healthcare providers
or others selling or otherwise coming into contact with our products, among others. If we
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Table of Contents
cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In
addition, regardless of merit or eventual outcome, product liability claims may result in:
costs of litigation;
distraction of management's attention from our primary business;
the inability to commercialize Eversense or future versions of Eversense;
decreased demand for Eversense;
damage to our business reputation;
product recalls or withdrawals from the market;
·
·
·
·
·
·
· withdrawal of clinical trial participants;
·
·
substantial monetary awards to patients or other claimants; or
loss of revenue.
While we currently maintain product liability insurance covering claims up to $5.0 million per incident and intend to
increase our coverage in connection with our commercial launch, we cannot assure you that such insurance would adequately
protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us,
with or without merit, could increase our product liability insurance rates or prevent us from securing such insurance coverage in
the future.
If
there
are
significant
disruptions
in
our
information
technology
systems,
our
business,
financial
condition
and
operating
results
could
be
adversely
affected.
The efficient operation of our business depends on our information technology systems. We rely on our information
technology systems to effectively manage marketing data, accounting and financial functions, inventory management, product
development tasks, research and development data, and technical support functions. Our information technology systems are
vulnerable to damage or interruption from earthquakes, fires, floods and other natural disasters, terrorist attacks, attacks by
computer viruses or hackers, power losses, and computer system or data network failures. In addition, our data management
application and a variety of our software systems, including the software in our smart transmitter, are hosted by third-party
service providers whose security and information technology systems are subject to similar risks, which could be subject to
computer viruses or hacker attacks or other failures. If our or our third-party service provider's security systems are breached or
fail, unauthorized persons may be able to obtain access to sensitive data. If we or our third-party service providers were to
experience a breach compromising sensitive data, our brand and reputation could be adversely affected and the use of our
products could decrease.
The failure of our or our service providers' information technology systems or our transmitter's software to perform as
we anticipate or our failure to effectively implement new information technology systems could disrupt our entire operation or
adversely affect our products and could result in decreased sales, increased overhead costs, and product shortages, all of which
could negatively affect our reputation, business, financial condition and operating results.
We
may
enter
into
collaborations,
in-licensing
arrangements,
joint
ventures,
strategic
alliances
or
partnerships
with
third-
parties
that
may
not
result
in
the
development
of
commercially
viable
products
or
the
generation
of
significant
future
revenues.
In the ordinary course of our business, we may enter into collaborations, in-licensing arrangements, joint ventures,
strategic alliances, partnerships or other arrangements to develop products and to pursue new markets. Proposing, negotiating and
implementing collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships may be a lengthy and
complex process. Other companies, including those with substantially greater financial, marketing, sales, technology or other
business resources, may compete with us for these opportunities or arrangements. We may not identify, secure, or complete any
such transactions or arrangements in a timely manner, on a cost-effective basis, on acceptable terms or at all. We have limited
institutional knowledge and experience with respect to these business development activities, and we may also not realize the
anticipated benefits of any such transaction or arrangement. In particular, these collaborations may not result in the development
of products that achieve commercial success or result in significant revenues and could be terminated prior to developing any
products.
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Additionally, we may not be in a position to exercise sole decision making authority regarding the transaction or
arrangement, which could create the potential risk of creating impasses on decisions, and our future collaborators may have
economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals. It is
possible that conflicts may arise with our collaborators, such as conflicts concerning the achievement of performance milestones,
or the interpretation of significant terms under any agreement, such as those related to financial obligations or the ownership or
control of intellectual property developed during the collaboration. If any conflicts arise with any future collaborators, they may
act in their self-interest, which may be adverse to our best interest, and they may breach their obligations to us. In addition, we
may have limited control over the amount and timing of resources that any future collaborators devote to our or their future
products. Disputes between us and our collaborators may result in litigation or arbitration which would increase our expenses and
divert the attention of our management. Further, these transactions and arrangements will be contractual in nature and will
generally be terminable under the terms of the applicable agreements and, in such event, we may not continue to have rights to the
products relating to such transaction or arrangement or may need to purchase such rights at a premium.
If we enter into in-bound intellectual property license agreements, we may not be able to fully protect the licensed
intellectual property rights or maintain those licenses. Future licensors could retain the right to prosecute and defend the
intellectual property rights licensed to us, in which case we would depend on the ability of our licensors to obtain, maintain and
enforce intellectual property protection for the licensed intellectual property. These licensors may determine not to pursue
litigation against other companies or may pursue such litigation less aggressively than we would. Further, entering into such
license agreements could impose various diligence, commercialization, royalty or other obligations on us. Future licensors may
allege that we have breached our license agreement with them, and accordingly seek to terminate our license, which could
adversely affect our competitive business position and harm our business prospects.
We
may
seek
to
grow
our
business
through
acquisitions
of
complementary
products
or
technologies,
and
the
failure
to
manage
acquisitions,
or
the
failure
to
integrate
them
with
our
existing
business,
could
harm
our
business,
financial
condition
and
operating
results.
From time to time, we may consider opportunities to acquire other companies, products or technologies that may
enhance our product platform or technology, expand the breadth of our markets or customer base, or advance our business
strategies. Potential acquisitions involve numerous risks, including:
·
·
·
·
·
·
·
problems assimilating the acquired products or technologies;
issues maintaining uniform standards, procedures, controls and policies;
unanticipated costs associated with acquisitions;
diversion of management's attention from our existing business;
risks associated with entering new markets in which we have limited or no experience;
increased legal and accounting costs relating to the acquisitions or compliance with regulatory matters; and
unanticipated or undisclosed liabilities of any target.
We have no current commitments with respect to any acquisition. We do not know if we will be able to identify
acquisitions we deem suitable, whether we will be able to successfully complete any such acquisitions on favorable terms or at
all, or whether we will be able to successfully integrate any acquired products or technologies. Our potential inability to integrate
any acquired products or technologies effectively may adversely affect our business, operating results and financial condition.
Risks
Related
to
our
Financial
Results
and
Need
for
Financing
We
will
need
to
generate
significant
sales
to
achieve
profitable
operations.
We intend to increase our operating expenses substantially in connection with the planned launch of Eversense,
establishment of our sales and marketing infrastructure, our ongoing research and development activities, and the commensurate
development of our management and administrative functions. We will need to generate significant sales to achieve profitability,
and we might not be able to do so. Even if we do generate significant sales, we might not be able
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to achieve, sustain or increase profitability on a quarterly or annual basis in the future. If our sales grow more slowly than we
expect, or if our operating expenses exceed our expectations, our financial performance and operating results will be adversely
affected.
Our
future
capital
needs
are
uncertain
and
we
may
need
to
raise
substantial
additional
funds
in
the
future,
and
these
funds
may
not
be
available
on
acceptable
terms
or
at
all.
A
failure
to
obtain
this
necessary
capital
when
needed
could
force
us
to
delay,
limit,
scale
back
or
cease
some
or
all
operations.
As
a
result,
our
registered
public
accounting
firm
has
included
an
explanatory
paragraph
relating
to
our
ability
to
continue
as
a
going
concern
in
its
report
on
our
audited
financial
statements
included
in
this
Annual
Report.
At the time that the audit of our financial statements for the year ended December 31, 2015 was completed, we did not
have sufficient cash to fund our operations through December 31, 2016 without additional financing and, therefore, we concluded
there was substantial doubt about our ability to continue as a going concern. As a result, our independent registered public
accounting firm included an explanatory paragraph regarding this uncertainty in its report on those financial statements. At
December 31, 2015, we had approximately $3.9 million in cash and cash equivalents, and we have insufficient committed sources
of additional capital to fund our operations as described in this Annual Report for more than a limited period of time. We have
filed a registration statement with the SEC in connection with a proposed public offering of our common stock; however, our
ability to complete that offering is subject to prevailing market conditions and other circumstances which are beyond our
control. As a result, there is no guarantee that we will be able to complete our proposed public offering on favorable terms or at
all. Even if we complete our proposed public offering, we will need to access additional funds before we become financially self-
sustaining through cash flow from operations. We believe our existing cash and cash equivalents, together with potential
borrowings under our Note Purchase Agreement, or the Purchase Agreement, with Energy Capital, LLC, or Energy Capital, and
our credit facility with Oxford Finance LLC, or Oxford, will be sufficient to fund our operations through early 2016. The
continued growth of our business, including the establishment of our sales and marketing infrastructure, and research and
development activities will significantly increase our expenses. In addition, the amount of our future product sales is difficult to
predict and actual sales may not be in line with our expectations. As a result, we may be required to seek substantial additional
funds in the future. Our future capital requirements will depend on many factors, including:
·
·
·
·
·
·
·
·
·
·
the cost of obtaining and maintaining regulatory clearance or approval for Eversense or future versions of
Eversense;
the costs associated with developing and commercializing our products;
any change in our development priorities regarding our future versions of Eversense;
the revenue generated by sales of Eversense or future versions of Eversense;
the costs associated with expanding our sales and marketing infrastructure;
any change in our plans regarding the manner in which we choose to commercialize our products in the United
States;
the cost of ongoing compliance with regulatory requirements;
expenses we incur in connection with potential litigation or governmental investigations;
anticipated or unanticipated capital expenditures; and
unanticipated general and administrative expenses.
As a result of these and other factors, we do not know whether and the extent to which we may be required to raise
additional capital. We may in the future seek additional capital from public or private offerings of our capital stock, borrowings
under credit lines or other sources. If we issue equity or debt securities to raise additional funds, our existing stockholders may
experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our
existing stockholders. In addition, if we raise additional funds through collaborations, licensing, joint ventures, strategic alliances,
partnership arrangements or other similar arrangements, it may be necessary to relinquish valuable rights to our potential future
products or proprietary technologies, or grant licenses on terms that are not favorable to us.
If we are unable to raise additional capital, we may not be able to establish and expand our sales and marketing
infrastructure, enhance Eversense or future versions of Eversense, take advantage of future opportunities, or respond to
competitive pressures, changes in supplier relationships, or unanticipated changes in customer demand. Moreover, we
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may be unable to meet our obligations under the Loan and Security Agreement or other agreements, which could result in an
acceleration of our obligation to repay all amounts owed thereunder, and we may be forced to liquidate our assets. In such a
scenario, the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in
our financial statements. Any of these events could adversely affect our ability to achieve our strategic objectives, which could
negatively effect on our business, financial condition and operating results.
Our
operating
results
may
fluctuate
significantly
from
quarter
to
quarter
or
year
to
year.
We plan to begin commercial sales of Eversense, if approved, in Europe in the first half of 2016. We have no operating
history as a commercial-stage company and we anticipate that there will be meaningful variability in our operating results among
years and quarters, as well as within each year and quarter. Our operating results, and the variability of these operating results,
will be affected by numerous factors, including:
·
·
·
·
·
·
·
·
·
·
·
·
regulatory clearance or approvals affecting our products or those of our competitors;
our ability to increase sales of Eversense and to commercialize and sell our future products, and the number of our
products sold in each quarter;
our ability to establish and grow an effective sales and marketing infrastructure and third-party distribution network;
acceptance of our products by people with intensively managed diabetes, their caregivers, healthcare providers and
third-party payors;
the pricing of our products and competitive products, and the effect of third-party coverage and reimbursement
policies;
the amount of, and the timing of the payment for, insurance deductibles required to be paid by our customers and
potential customers under their existing insurance plans;
interruption in the manufacturing or distribution of our products;
seasonality and other factors affecting the timing of purchases of Eversense;
timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;
results of clinical research and trials on our products in development;
the ability of our suppliers to timely provide us with an adequate supply of components and CGM systems that meet
our requirements; and
the timing of revenue recognition associated with our product sales pursuant to applicable accounting standards.
As a result of our lack of operating history as a commercial-stage company, and due to the complexities of the industry
and regulatory framework in which we operate, it will be difficult for us to forecast demand for our future products and to
forecast our sales with any degree of certainty. For example, many of the products we will seek to develop and introduce in the
future will require regulatory approval or clearance and import licenses before we can sell such products and given that the timing
of such approvals, clearances or licenses may be uncertain, it will be difficult for us to predict sales projections for these products
with any degree of certainty before such approvals, clearances or licenses are obtained. In addition, we will be significantly
increasing our operating expenses as we expand our business. Accordingly, we may experience substantial variability in our
operating results from year to year and quarter to quarter. If our quarterly or annual operating results fall below the expectations
of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly or
annual fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially. We
believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an
indication of our future performance.
We
may
not
be
able
to
generate
sufficient
cash
to
service
our
indebtedness,
which
currently
consists
of
our
term
loans
with
Oxford.
In
addition,
although
we
have
a
borrowing
facility
with
Energy
Capital,
LLC,
we
may
be
unable
to
borrow
under
such
agreement
or
to
generate
sufficient
cash
to
service
any
such
indebtedness
that
we
do
incur.
In July and December 2014, we issued secured notes to Oxford in a private placement for gross proceeds of $10.0
million, pursuant to term loans under a Loan and Security Agreement that matures July 1, 2019, or, as amended, the Loan and
Security Agreement. We may increase the borrowings under the Loan and Security Agreement by an
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Table of Contents
additional $5.0 million if we receive a CE mark by March 31, 2016. Our obligations under the Loan and Security Agreement are
secured by a first priority security interest in substantially all of our assets, other than our intellectual property. Our Loan and
Security Agreement with Oxford also contains certain restrictive covenants that limit our ability to incur additional indebtedness
and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines
of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter
into various specified transactions, as well as financial reporting requirements. We were in compliance with the affirmative and
restrictive covenants as of December 31, 2015. We may also enter into other debt agreements in the future which may contain
similar or more restrictive terms.
In addition, on December 7, 2015, we entered into the Purchase Agreement with Energy Capital pursuant to which
Energy Capital may lend an aggregate principal amount of up to $10.0 million, or the Energy Capital note, subject to the
conditions specified in the Purchase Agreement. Under the terms of the Energy Capital note, if we have not received at least
$20.0 million from the sale of our capital stock in an offering of our equity securities (excluding any security granted, issued
and/or sold by us to any employee or consultant in such capacity) prior to February 29, 2016, or the Triggering Event, then
Energy Capital is obligated to disburse funds on or after March 15, 2016, provided however that if the Triggering Event has
occurred and we provide documentation to Energy Capital that our available cash is lower than $500,000, then Energy Capital is
obligated to disburse funds any time after March 1, 2016. If the Triggering Event has not occurred, under the terms of the Energy
Capital note, we will be unable to borrow under the Purchase Agreement. If after the Triggering Event has occurred and if our
cash on hand is higher than $500,000, under the terms of the Note, we will be unable to borrow under the Purchase Agreement
until March 15, 2016.
In the event that the Triggering Event occurs and we are able to incur indebtedness under the terms of the Energy Capital
note, we are obligated to repay the aggregate principal and accrued interest thereon if we issue and sell shares of our equity
securities in an underwritten public offering with total proceeds to us exceeding $45.0 million (excluding the Energy Capital note)
within ten business days after the closing of such public offering. In the event that we are unable to repay such amounts, we will
be in default under the terms of the Energy Capital note, which may also trigger an event of default under the Loan and Security
Agreement.
Our ability to make scheduled monthly payments or to refinance our debt obligations depends on numerous factors,
including the amount of our cash reserves and our actual and projected financial and operating performance. These amounts and
our performance are subject to certain financial and business factors, as well as prevailing economic and competitive conditions,
some of which may be beyond our control. We cannot assure you that we will maintain a level of cash reserves or cash flows
from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our existing or future
indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to
reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness.
We cannot assure you that we would be able to take any of these actions, or that these actions would permit us to meet our
scheduled debt service obligations. Failure to comply with the conditions of the Loan and Security Agreement and/or the Energy
Capital note could result in an event of default, which could result in an acceleration of amounts due under the Loan and Security
Agreement and/or the Energy Capital note. We may not have sufficient funds or may be unable to arrange for additional financing
to repay our indebtedness or to make any accelerated payments, and Oxford could seek to enforce security interests in the
collateral securing such indebtedness, which would have a material adverse effect on our business.
Prolonged
negative
economic
conditions
could
adversely
affect
us,
our
customers
and
third-party
suppliers,
which
could
harm
our
financial
condition.
We are subject to the risks arising from adverse changes in general economic and market conditions. Uncertainty about
future economic conditions could negatively impact our existing and potential customers, adversely affect the financial ability of
health insurers to pay claims, adversely impact our expenses and ability to obtain financing of our operations, and cause delays or
other problems with key suppliers.
Healthcare spending in Europe and the United States has been, and is expected to continue to be, under significant
pressure and there are many initiatives to reduce healthcare costs. As a result, we believe that some insurers are scrutinizing
insurance claims more rigorously and delaying or denying coverage and reimbursement more often.
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Table of Contents
Because the sale of Eversense will generally depend on the availability of third-party coverage and reimbursement, any delay or
decline in coverage and reimbursement will adversely affect our sales.
Risks
Related
to
Development
of
our
Products
Medical
device
development
involves
a
lengthy
and
expensive
process,
with
an
uncertain
outcome.
We
may
incur
additional
costs
or
experience
delays
in
completing,
or
ultimately
be
unable
to
complete,
the
development
and
commercialization
of
our
products.
Before obtaining marketing approval from regulatory authorities for the sale of Eversense in Europe and the United
States, we must complete the required European and U.S. pivotal clinical trials and demonstrate the accuracy and safety of
Eversense. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently
uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. For example, in our recently
completed European pivotal clinical trial, we had to suspend the trial due to a prior configuration of our sensor failing to reach the
targeted duration. Further, the outcomes of our earlier clinical trials may not be predictive of the success of later clinical trials,
and interim results of a clinical trial do not necessarily predict final results. Moreover, clinical data is often susceptible to varying
interpretations and analyses, and many companies that have believed their products performed satisfactorily in clinical trials have
nonetheless failed to obtain marketing approval.
We may experience numerous unforeseen events during or as a result of clinical trials that could delay or prevent our
ability to receive marketing approval or commercialize our products, including:
·
regulators may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a
prospective trial site;
·
·
· we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts with third
parties or clinical trial protocols with prospective trial sites, the terms of which can be subject to extensive
negotiation and may vary significantly among different trial sites;
clinical trials of Eversense may produce negative or inconclusive results, including failure to demonstrate statistical
significance, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon our
development programs;
the number of people with diabetes required for clinical trials of Eversense may be larger than we anticipate,
enrollment in these clinical trials may be slower than we anticipate or people with diabetes may drop out of these
clinical trials or fail to return for post-treatment follow-up at a higher rate than we anticipate;
our products may have undesirable side effects or other unexpected characteristics, causing us or our investigators,
regulators or institutional review boards to suspend or terminate the trials;
our third-party contractors conducting the clinical trials may fail to comply with regulatory requirements or meet
their contractual obligations to us in a timely manner, or at all;
regulators may require that we or our investigators suspend or terminate clinical development for various reasons,
including noncompliance with regulatory requirements or a finding that the participants are being exposed to
unacceptable health risks;
the cost of clinical trials of our products may be greater than we anticipate; and
the supply or quality of our products or other materials necessary to conduct clinical trials of our products may be
insufficient or inadequate.
·
·
·
·
·
If we are required to conduct additional clinical trials or other testing of Eversense beyond those that we currently
contemplate, if we are unable to successfully complete clinical trials of Eversense or other testing, if the results of these trials or
tests are not favorable or if there are safety concerns, we may:
·
·
·
·
not obtain marketing approval at all;
be delayed in obtaining marketing approval for Eversense in Europe, the United States or elsewhere;
be subject to additional post-marketing testing requirements; or
have Eversense removed from the market after obtaining marketing approval.
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Table of Contents
· Our development costs will also increase if we experience delays in testing or marketing approvals. We do not know
whether any of our clinical trials will begin as planned, will need to be restructured or will be completed on
schedule, or at all. Significant clinical trial delays also could allow our competitors to bring innovative products to
market before we do and impair our ability to successfully commercialize our products.
Changes
in
the
configuration
of
Eversense
may
result
in
additional
costs
or
delay.
As products are developed through clinical trials towards approval and commercialization, it is common that various
aspects of the development program, such as manufacturing methods and configuration, are altered along the way in an effort to
optimize processes and results. For example, we have already modified the configuration of Eversense several times in an effort
to maximize the duration of our sensor, and we may need to make future configuration modifications prior to or after
commencing sales. Most recently, in 2014, we suspended our European pivotal trial in order to allow for a configuration change
in the way the sensor was being manufactured, which resulted in a delay in our trial and slowed our development efforts. Any
changes we make carry the risk that they will not achieve the intended objectives. Any of these changes could cause our products
to perform differently and affect the results of planned clinical trials or other future clinical trials conducted with the altered
device. Such changes may also require additional testing, regulatory notification or regulatory approval. This could delay
completion of clinical trials, increase costs, delay approval of our future products and jeopardize our ability to commence sales
and generate revenue.
Risks
Related
to
Employee
Matters
and
Managing
our
Growth
Our
future
success
depends
on
our
ability
to
retain
key
executives
and
to
attract,
retain
and
motivate
qualified
personnel.
We are highly dependent on the management, research and development, clinical, financial and business development
expertise of Tim Goodnow, our Chief Executive Officer, R. Don Elsey, our Chief Financial Officer, Mukul Jain, our Vice
President, Operations, Quality and Regulatory, Mirasol Panlilio, our Vice President, Global Sales and Marketing, and Lynne
Kelley, our Chief Medical Officer, as well as the other members of our scientific and clinical teams. Although we have
employment agreements with our executive officers, each of them may terminate their employment with us at any time and will
continue to be able to do so. We do not maintain "key person" insurance for any of our executives or employees.
Recruiting and retaining qualified scientific and clinical personnel and, as we progress the development of our product
pipeline toward scaling up for commercialization, manufacturing and sales and marketing personnel, will also be critical to our
success. The loss of the services of our executive officers or other key employees could impede the achievement of our research,
development and commercialization objectives and seriously harm our ability to successfully implement our business strategy.
Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because
of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop,
gain regulatory approval of and commercialize our products. Competition to hire from this limited pool is intense, and we may be
unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous medical
device companies for similar personnel, many of which have greater financial and other resources dedicated to attracting and
retaining personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and
research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in
formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by
employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their
availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth
strategy will be limited.
Although it will be subject to restrictions on trading, a portion of the equity of our management team will not contain
other contractual transfer restrictions. This liquidity may represent material wealth to such individuals and impact retention and
focus of existing key members of management.
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The
implementation
of
a
new
enterprise
resource
planning
system
could
cause
disruption
to
our
business
and
operations.
We are in the process of implementing a new enterprise resource planning system, or an ERP system. This system will
integrate our operations, including supply-chain, order entry, manufacturing, inventory and financial reporting, among others.
ERP system implementations are complex projects that require significant investment of capital and human resources, the
reengineering of many business processes and the attention of many employees who would otherwise be focused on other aspects
of our business. Any disruptions, delays or deficiencies in the design and implementation of the improvements to our ERP system
may result in potentially much higher costs than anticipated and may adversely affect our ability to develop and launch solutions,
fulfill contractual obligations, file reports with the SEC in a timely manner or otherwise operate our business and our controls
environment. Moreover, despite our security measures, our information technology systems, including the ERP system, are
vulnerable to damage or interruption from fires, floods and other natural disasters, terrorist attacks, computer viruses or hackers,
power losses and computer system or data network failures, which could result in significant data losses or theft of sensitive or
proprietary information. Any of these consequences may harm our business.
We
expect
to
expand
our
development
and
regulatory
capabilities
and
potentially
implement
sales,
marketing
and
distribution
capabilities,
and
as
a
result,
we
may
encounter
difficulties
in
managing
our
growth,
which
could
disrupt
our
operations.
As of December 31, 2015, we had 39 employees. As our development progresses, we expect to experience significant
growth in the number of our employees and the scope of our operations, particularly in the areas of research, product
development, regulatory affairs and, if Eversense receives regulatory approval, sales, marketing and distribution. To manage our
anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand
our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited
experience of our management team in managing a company with such anticipated growth, we may not be able to effectively
manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may
lead to significant costs and may divert our management and business development resources. Any inability to manage growth
could delay the execution of our business plans or disrupt our operations.
Our
employees,
independent
contractors,
consultants,
manufacturers
and
distributors
may
engage
in
misconduct
or
other
improper
activities,
including
non-compliance
with
regulatory
standards
and
requirements.
We are exposed to the risk that our employees, independent contractors, consultants, manufacturers and distributors may
engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless or negligent
conduct or disclosure of unauthorized activities to us that violates FDA regulations, including those laws requiring the reporting
of true, complete and accurate information to the FDA, manufacturing standards, federal and state healthcare laws and
regulations, and laws that require the true, complete and accurate reporting of financial information or data. In particular, sales,
marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent
fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of
pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements.
Misconduct by these parties could also involve the improper use of individually identifiable information, including, without
limitation, information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our
reputation. We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter misconduct,
and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or
losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in
compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of
significant civil, criminal and administrative penalties, including, without limitation, damages, fines, disgorgement of profits,
imprisonment, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, and the
curtailment or restructuring of our operations.
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We
may
incur
product
liability
losses,
and
insurance
coverage
may
be
inadequate
or
unavailable
to
cover
these
losses.
Our business exposes us to potential product liability claims that are inherent in the design, manufacture, testing and sale
of medical devices. We could become the subject of product liability lawsuits alleging that component failures, manufacturing
flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe
condition, injury or death to customers. In addition, the misuse of our products or the failure of customers to adhere to operating
guidelines could cause significant harm to customers, including death, which could result in product liability claims. Product
liability lawsuits and claims, safety alerts or product recalls, with or without merit, could cause us to incur substantial costs, and
could place a significant strain on our financial resources, divert the attention of management from our core business, harm our
reputation and adversely affect our ability to attract and retain customers, any of which could harm our business, financial
condition and operating results.
Although we maintain third-party product liability insurance coverage, it is possible that claims against us may exceed
the coverage limits of our insurance policies. Even if any product liability loss is covered by an insurance policy, these policies
typically have substantial deductibles for which we are responsible. Product liability claims in excess of applicable insurance
coverage would negatively impact our business, financial condition and operating results. In addition, any product liability claim
brought against us, with or without merit, could result in an increase of our product liability insurance premiums. Insurance
coverage varies in cost and can be difficult to obtain, and we cannot guarantee that we will be able to obtain insurance coverage in
the future on terms acceptable to us or at all.
Risks
Related
to
our
Intellectual
Property
Our
ability
to
protect
our
intellectual
property
and
proprietary
technology
is
uncertain.
We rely primarily on patent, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements,
to protect our proprietary technologies. As of December 31, 2015, we held a total of approximately 350 issued patents and
pending patent applications that relate to our CGM system. Our intellectual property portfolio includes 37 issued United States
patents, 202 patents issued in countries outside the United States, and 111 pending patent applications worldwide. Our patents
expire between 2015 and 2030, subject to any patent extensions that may be available for such patents. If patents are issued on our
pending patent applications, the resulting patents are projected to expire on dates ranging from 2020 to 2035. We are also seeking
patent protection for our proprietary technology in Europe, Japan, China, Canada, Israel, Australia and other countries and regions
throughout the world. We also have 12 pending U.S. trademark applications and eight pending foreign trademark applications, as
well as four foreign trademark registrations.
We have applied for patent protection relating to certain existing and proposed products and processes. Currently,
several of our issued U.S. patents as well as various pending U.S. and foreign patent applications relate to the structure and
operation of our CGM sensor and CGM systems, which are important to the functionality of our products. If we fail to timely
file a patent application in any jurisdiction, we may be precluded from doing so at a later date. Furthermore, we cannot assure you
that any of our patent applications will be approved in a timely manner or at all. The rights granted to us under our patents, and
the rights we are seeking to have granted in our pending patent applications, may not provide us with any meaningful commercial
advantage. In addition, those rights could be opposed, contested or circumvented by our competitors, or be declared invalid or
unenforceable in judicial or administrative proceedings. The failure of our patents to adequately protect our technology might
make it easier for our competitors to offer the same or similar products or technologies. Even if we are successful in receiving
patent protection for certain products and processes, our competitors may be able to design around our patents or develop
products that provide outcomes which are comparable to ours without infringing on our intellectual property rights. Due to
differences between foreign and U.S. patent laws, our patented intellectual property rights may not receive the same degree of
protection in foreign countries as they would in the United States. Even if patents are granted outside the United States, effective
enforcement in those countries may not be available.
We rely on our trademarks and trade names to distinguish our products from the products of our competitors, and have
registered or applied to register many of these trademarks. For example, we have two pending applications in the United States
for the "Eversense" trademark. We cannot assure you that our trademark applications will be approved in a timely manner or at
all. Third-parties also may oppose our trademark applications, or otherwise challenge our use of
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the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which
could result in loss of brand recognition, and could require us to devote additional resources to marketing new brands. Further, we
cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our
trademarks.
We also rely on trade secrets, know-how and technology, which are not protectable by patents, to maintain our
competitive position. We try to protect this information by entering into confidentiality agreements and intellectual property
assignment agreements with our officers, employees, temporary employees and consultants regarding our intellectual property
and proprietary technology. In the event of unauthorized use or disclosure or other breaches of those agreements, we may not
have an adequate remedy to compensate us for our trade secrets or other proprietary information. In addition, our trade secrets
may otherwise become known or be independently discovered by competitors. To the extent that our commercial partners,
collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to
the rights in the related or resulting know-how and inventions. If any of our trade secrets, know-how or other technologies not
protected by a patent were to be disclosed to or independently developed by a competitor, our business, financial condition and
results of operations could be materially adversely affected.
If a competitor infringes upon one of our patents, trademarks or other intellectual property rights, enforcing those
patents, trademarks and other rights may be difficult and time consuming. Patent law relating to the scope of claims in the
industry in which we operate is subject to rapid change and constant evolution and, consequently, patent positions in our industry
can be uncertain. Even if successful, litigation to defend our patents and trademarks against challenges or to enforce our
intellectual property rights could be expensive and time consuming and could divert management's attention from managing our
business. Moreover, we may not have sufficient resources or desire to defend our patents or trademarks against challenges or to
enforce our intellectual property rights. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our
patent applications at risk of not issuing. Additionally, we may provoke third-parties to assert claims against us. We may not
prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially material. The
occurrence of any of these events may harm our business, financial condition and operating results.
The
medical
device
industry
is
characterized
by
patent
litigation,
and
we
could
become
subject
to
litigation
that
could
be
costly,
result
in
the
diversion
of
management's
time
and
efforts,
stop
our
development
and
commercialization
measures,
harm
our
reputation
or
require
us
to
pay
damages.
Our success will depend in part on not infringing the patents or violating the other proprietary rights of third-parties.
Significant litigation regarding patent rights exists in our industry. Our competitors in both the United States and abroad, many of
which have substantially greater resources and have made substantial investments in competing technologies, may have applied
for or obtained or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to
make and sell our products. The large number of patents, the rapid rate of new patent issuances, and the complexities of the
technology involved increase the risk of patent litigation.
The medical device industry in general, and the glucose testing sector of this industry in particular, are characterized by
the existence of a large number of patents and frequent litigation based on assertions of patent infringement. We are aware of
numerous patents issued to third parties that may relate to the technology used in our business, including the design and
manufacture of CGM sensors and CGM systems, as well as methods for continuous glucose monitoring. Each of these patents
contains multiple claims, any one of which may be independently asserted against us. The owners of these patents may assert that
the manufacture, use, sale or offer for sale of our CGM sensors or CGM systems infringes one or more claims of their patents.
Furthermore, there may be additional patents issued to third parties of which we are presently unaware that may relate to aspects
of our technology that such third parties could assert against us and materially and adversely affect our business. In addition,
because patent applications can take many years to issue, there may be patent applications that are currently pending and
unknown to us, which may later result in issued patents that third parties could assert against us and harm our business.
In preparation for commercializing our Eversense products, we are performing an analysis, the purpose of which is to review and
assess publicly available information to determine whether third parties hold any valid patent rights that we would, or might be
claimed to, infringe by commercializing our products. Although we are not aware of any such patent
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rights, we have not previously performed an exhaustive review of this type, and we cannot be certain that it will not result in our
locating patent rights relating to our products of which we were not previously aware.
In the future, we could receive communications from various industry participants alleging our infringement of their
intellectual property rights. Any potential intellectual property litigation could force us to do one or more of the following:
·
·
·
·
·
stop selling our products or using technology that contains the allegedly infringing intellectual property;
incur significant legal expenses;
pay substantial damages to the party whose intellectual property rights we are allegedly infringing;
redesign those products that contain the allegedly infringing intellectual property; or
attempt to obtain a license to the relevant intellectual property from third-parties, which may not be available on
reasonable terms or at all, and if available, may be non-exclusive, thereby giving our competitors access to the same
technology.
Patent litigation can involve complex factual and legal questions, and its outcome is uncertain. Any litigation or claim
against us, even those without merit, may cause us to incur substantial costs, and could place a significant strain on our financial
resources, divert the attention of management from our core business, stop our development and commercialization measures and
harm our reputation. Further, as the number of participants in the diabetes market increases, the possibility of intellectual property
infringement claims against us increases.
We
may
be
subject
to
damages
resulting
from
claims
that
we,
or
our
employees,
have
wrongfully
used
or
disclosed
alleged
trade
secrets
of
our
competitors
or
are
in
breach
of
non-competition
or
non-solicitation
agreements
with
our
competitors.
Many of our employees were previously employed at other medical device companies, including those that are our direct
competitors or could potentially be our direct competitors. In some cases, those employees joined our company recently. We may
be subject to claims that we, or our employees, have inadvertently or otherwise used or disclosed trade secrets or other proprietary
information of these former employers or competitors. In addition, we may in the future be subject to allegations that we caused
an employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation may be necessary to
defend against these claims. Even if we successfully defend against these claims, litigation could cause us to incur substantial
costs, and could place a significant strain on our financial resources, divert the attention of management from our core business
and harm our reputation. If our defense to those claims fails, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel. There can be no assurance that this type of litigation will not occur, and any future
litigation or the threat thereof may adversely affect our ability to hire additional direct sales representatives. A loss of key
personnel or their work product could hamper or prevent our ability to commercialize Eversense or future versions of Eversense,
which could have an adverse effect on our business, financial condition and operating results.
We
are
subject
to
the
patent
laws
of
countries
other
than
the
United
States,
which
may
not
offer
the
same
level
of
patent
protection
and
whose
rules
could
seriously
affect
how
we
draft,
file,
prosecute
and
maintain
patents,
trademarks
and
patent
and
trademark
applications.
Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may
be compelled to grant licenses to third parties (for example, the patent owner has failed to "work" the invention in that country, or
the third party has patented improvements). In addition, many countries limit the enforceability of patents against government
agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially
diminish the value of the patent. Moreover, the legal systems of certain countries, particularly certain developing countries, do not
favor the aggressive enforcement of patent and other intellectual property protection which makes it difficult to stop infringement.
We cannot be certain that the patent or trademark offices of countries outside the United States will not implement new rules that
increase costs for drafting, filing, prosecuting and maintaining patents, trademarks and patent and trademark applications or that
any such new rules will not restrict our ability to file for patent protection. For example, we may
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elect not to seek patent protection in some jurisdictions in order to save costs. We may be forced to abandon specific patents due
to a lack of financial resources.
Our
intellectual
property
rights
do
not
necessarily
address
all
potential
competitive
threats
or
confer
meaningful
competitive
benefits.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property
rights have limitations, and may not adequately protect our business, or permit us to maintain any competitive advantage. The
following examples are illustrative:
·
others may be able to make devices that are the same as or similar to Eversense but that are not covered by the
claims of the patents that we own;
· we or any collaborators might not have been the first to make the inventions covered by the issued patents or
pending patent applications that we own and, therefore, we may be unable to enforce them;
· we might not have been the first to file patent applications covering certain of our inventions;
·
others may independently develop similar or alternative technologies or duplicate any of our technologies without
infringing our intellectual property rights;
it is possible that our pending patent applications will not lead to issued patents;
issued patents that we own may not provide us with any competitive advantages, or may be held invalid or
unenforceable as a result of legal challenges;
our competitors might conduct research and development activities in the United States and other countries that
provide a safe harbor from patent infringement claims for certain research and development activities, as well as in
countries where we do not have patent rights, and then use the information learned from such activities to develop
competitive products for sale in our major commercial markets; and
·
·
·
· we may not develop additional proprietary technologies that are patentable.
Risks
Related
to
our
Legal
and
Regulatory
Environment
Our
products
and
operations
are
subject
to
extensive
governmental
regulation,
and
failure
to
comply
with
applicable
requirements
could
cause
our
business
to
suffer.
The medical device industry is regulated extensively by governmental authorities, principally the FDA and
corresponding state regulatory agencies in the United States and the European Commission and corresponding Notified Body in
the European Union and the EEA. The regulations are very complex and are subject to rapid change and varying interpretations.
Regulatory restrictions or changes could limit our ability to carry on or expand our operations or result in higher than anticipated
costs or lower than anticipated sales. These governmental authorities enforce laws and regulations that are meant to assure
product safety and effectiveness, including the regulation of, among other things:
product design and development;
pre-clinical studies and clinical trials;
product safety;
establishment registration and product listing;
labeling and storage;
·
·
·
·
·
· marketing, manufacturing, sales and distribution;
·
·
·
·
pre-market clearance or approval;
servicing and post-market surveillance;
advertising and promotion; and
recalls and field safety corrective actions.
The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory
changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than
anticipated revenues.
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Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement
actions such as fines, civil penalties, injunctions, warning letters, recalls of products, delays in the introduction of products into
the market, refusal of the regulatory agency or other regulators to grant future clearances or approvals, and the suspension or
withdrawal of existing approvals by such regulatory agencies. Any of these sanctions could result in higher than anticipated costs
or lower than anticipated sales and harm our reputation, business, financial condition and operating results.
The
FDA
regulatory
clearance
process
is
expensive,
time-consuming
and
uncertain,
and
the
failure
to
obtain
and
maintain
required
regulatory
clearances
and
approvals
could
prevent
us
from
commercializing
Eversense
and
future
versions
of
Eversense.
Before we can market or sell a new regulated product or a significant modification to an existing product in the United
States, we must obtain either clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act or approval of a pre-
market approval, or PMA, application from the FDA, unless an exemption from pre-market review applies. In the 510(k)
clearance process, the FDA must determine that a proposed device is "substantially equivalent" to a device legally on the market,
known as a "predicate" device, with respect to intended use, technology and accuracy and safety, in order to clear the proposed
device for marketing. Clinical data is sometimes required to support substantial equivalence. The PMA pathway requires an
applicant to demonstrate the accuracy and safety of the device based on extensive data. The PMA process is typically required for
devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. Products that are
approved through a PMA application generally need FDA approval before they can be modified. Similarly, some modifications
made to products cleared through a 510(k) may require a new 510(k). The process of obtaining regulatory clearances or approvals
to market a medical device can be costly and time-consuming, and we may not be able to obtain these clearances or approvals on
a timely basis, or at all for our products.
If the FDA requires us to go through a more rigorous examination for future products or modifications to existing
products than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our
sales to decline or to not increase in line with our expectations. In addition, the FDA may determine that future products will
require the more costly, lengthy and uncertain PMA process.
The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:
· we may not be able to demonstrate that our products are safe and effective for their intended users;
·
·
the data from our clinical trials may be insufficient to support clearance or approval; and
the manufacturing process or facilities we use may not meet applicable requirements.
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing
regulations, or take other actions which may prevent or delay approval or clearance of our products under development or impact
our ability to modify our currently cleared or approved products on a timely basis.
Any delay in, or failure to receive or maintain, clearance or approval for our products under development could prevent
us from generating revenue from these products or achieving profitability. Additionally, the FDA and other regulatory authorities
have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some
people with diabetes from using our products and adversely affect our reputation and the perceived accuracy and safety of our
products.
If
we
or
our
third-party
suppliers
fail
to
comply
with
the
FDA's
good
manufacturing
practice
regulations,
this
could
impair
our
ability
to
market
our
products
in
a
cost-effective
and
timely
manner.
We and our third-party suppliers are required to comply with the FDA's QSR, which covers the methods and
documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and
shipping of our products. The FDA audits compliance with the QSR through periodic announced and unannounced inspections of
manufacturing and other facilities. The FDA may impose inspections or audits at any time. If we or our suppliers have significant
non-compliance issues or if any corrective action plan that we or our suppliers propose in
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response to observed deficiencies is not sufficient, the FDA could take enforcement action against us. Any of the foregoing
actions could impair our reputation, business, financial condition and operating results.
A
recall
of
our
products,
or
the
discovery
of
serious
safety
issues
with
our
products,
could
have
a
significant
negative
impact
on
us.
The FDA has the authority to require the recall of commercialized products in the event of material deficiencies or
defects in design or manufacture or in the event that a product poses an unacceptable risk to health. Our third-party suppliers may,
under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary
recall by us or one of our third-party distributors could occur as a result of an unacceptable risk to health, component failures,
manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert
managerial and financial resources and have an adverse effect on our reputation, financial condition and operating results, which
could impair our ability to produce our products in a cost-effective and timely manner.
Further, under the FDA's medical device reporting regulations, we are required to report to the FDA any incident in
which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the
malfunction were to recur, would likely cause or contribute to death or serious injury. Repeated product malfunctions may result
in a voluntary or involuntary product recall, which could divert managerial and financial resources, impair our ability to
manufacture our products in a cost-effective and timely manner and have an adverse effect on our reputation, financial condition
and operating results.
Any adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer
notifications, or regulatory agency action, which could include inspection, mandatory recall or other enforcement action. Any
corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from
operating our business and may harm our reputation and financial results.
We
will
be
subject
to
the
U.K.
Bribery
Act,
the
U.S.
Foreign
Corrupt
Practices
Act
and
other
anti-corruption
and
anti-money-
laundering
laws,
as
well
as
export
control
laws,
customs
laws,
sanctions
laws
and
other
laws
governing
our
future
global
operations.
If
we
fail
to
comply
with
these
laws,
we
could
be
subject
to
civil
or
criminal
penalties,
other
remedial
measures
and
legal
expenses,
which
could
adversely
affect
our
business,
results
of
operations
and
financial
condition.
Our future global operations will expose us to trade and economic sanctions and other restrictions imposed by the United
States, the European Union and other governments and organizations. The U.S. Departments of Justice, Commerce, State and
Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose
against corporations and individuals for violations of economic sanctions laws, export control laws, the Foreign Corrupt Practices
Act, or the FCPA, and other federal statutes and regulations, including those established by the Office of Foreign Assets Control,
or OFAC. In addition, the U.K. Bribery Act of 2010, or the Bribery Act, prohibits both domestic and international bribery, as well
as bribery across both private and public sectors. An organization that "fails to prevent bribery" by anyone associated with the
organization can be charged under the Bribery Act unless the organization can establish the defense of having implemented
"adequate procedures" to prevent bribery. Under these laws and regulations, as well as other anti-corruption laws, anti-money-
laundering laws, export control laws, customs laws, sanctions laws and other laws governing our operations, various government
agencies may require export licenses, may seek to impose modifications to business practices, including cessation of business
activities in sanctioned countries or with sanctioned persons or entities and modifications to compliance programs, which may
increase compliance costs, and may subject us to fines, penalties and other sanctions. A violation of these laws or regulations
could adversely impact our business, results of operations and financial condition.
We will implement and maintain policies and procedures designed to ensure compliance by us, and our directors,
officers, employees, representatives, third-party distributors, consultants and agents with the FCPA, OFAC restrictions, the
Bribery Act and other export control, anticorruption, anti-money-laundering and anti-terrorism laws and regulations. We cannot
assure you, however, that our policies and procedures will be sufficient or that directors, officers, employees, representatives,
third-party distributors, consultants and agents have not engaged and will not engage in
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conduct for which we may be held responsible, nor can we assure you that our business partners have not engaged and will not
engage in conduct that could materially affect their ability to perform their contractual obligations to us or even result in our being
held liable for such conduct. Violations of the FCPA, OFAC restrictions, the Bribery Act or other export control, anti-corruption,
anti-money-laundering and anti-terrorism laws or regulations may result in severe criminal or civil sanctions, and we may be
subject to other liabilities, which could have a material adverse effect on our business, financial condition, cash flows and results
of operations.
We
are
subject
to
additional
federal,
state
and
foreign
laws
and
regulations
relating
to
our
healthcare
business;
our
failure
to
comply
with
those
laws
could
have
an
adverse
impact
on
our
business.
Although we will not provide healthcare services, submit claims for third-party reimbursement, or receive payments
directly from government health insurance programs or other third-party payors for Eversense, we are subject to healthcare fraud
and abuse regulation and enforcement by federal, state and foreign governments, which could adversely impact our business.
Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our operations include:
·
·
·
the federal Anti-Kickback Statute, which will apply to our marketing practices, educational programs, pricing
policies and relationships with healthcare providers, by prohibiting, among other things, soliciting, receiving,
offering or providing remuneration intended to induce the purchase or recommendation of an item or service
reimbursable under a federal healthcare program, such as the Medicare or Medicaid programs. A person or entity
does not need to have actual knowledge of this statute or specific intent to violate it to have committed a violation;
federal civil and criminal false claims laws and civil monetary penalty laws, including civil whistleblower or qui
tam actions that prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment
or approval to the federal government that are false or fraudulent, knowingly making a false statement material to an
obligation to pay or transmit money or property to the federal government or knowingly concealing or knowingly
and improperly avoiding or decreasing an obligation to pay or transmit money or property to the federal
government. The government may assert that a claim including items or services resulting from a violation of the
federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and its implementing
regulations, which created federal criminal laws that prohibit, among other things, executing a scheme to defraud
any healthcare benefit program or making false statements relating to healthcare matters;
·
· HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act also imposes
certain regulatory and contractual requirements regarding the privacy, security and transmission of individually
identifiable health information;
federal "sunshine" requirements imposed by the Patient Protection and Affordable Care Act of 2010, or the PPACA,
on device manufacturers regarding any "transfer of value" made or distributed to physicians and teaching hospitals.
Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per
year (or up to an aggregate of $1 million per year for "knowing failures"), for all payments, transfers of value or
ownership or investment interests that are not timely, accurately, and completely reported in an annual submission.
The period between August 1, 2013 and December 31, 2013 was the first reporting period, and manufacturers were
required to report aggregate payment data by March 31, 2014, and to report detailed payment data and submit legal
attestation to the accuracy of such data by June 30, 2014. Thereafter, manufacturers must submit reports by the
90th day of each subsequent calendar year;
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and
activities that potentially harm consumers;
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply
to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require
device companies to comply with the industry's voluntary compliance guidelines and the relevant compliance
guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare
providers; state laws that require device manufacturers to report information related to payments and other transfers
of value to physicians and other healthcare providers or marketing
·
·
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expenditures; and state laws governing the privacy and security of certain health information, many of which differ from each
other in significant ways and often are not preempted by HIPAA; and
·
foreign data privacy regulations, such as the EU Data Protection Directive (Directive 95/46/EC), and the country-
specific regulations that implement Directive 95/46/EC, which impose strict obligations and restrictions on the
ability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event
reporting, and may be stricter than U.S. laws.
The risk of our being found in violation of these laws and regulations is increased by the fact that the scope and
enforcement of these laws is uncertain, many of them have not been fully interpreted by the regulatory authorities or the courts,
their provisions are open to a variety of interpretations, or they vary country by country. We are unable to predict what additional
federal, state or foreign legislation or regulatory initiatives may be enacted in the future regarding our business or the healthcare
industry in general, or what effect such legislation or regulations may have on us. Federal, state or foreign governments may
(i) impose additional restrictions or adopt interpretations of existing laws that could have a material adverse effect on us or
(ii) challenge our current or future activities under these laws. Any of these challenges could impact our reputation, business,
financial condition and operating results.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations
that apply to us now or in the future, we may be subject to penalties, including civil and criminal penalties, damages, fines,
disgorgement of profits, exclusion from governmental health care programs, and the curtailment or restructuring of our
operations, any of which could adversely affect our ability to operate our business and our financial results. Any federal, state or
foreign regulatory review to which we may become subject, regardless of the outcome, would be costly and time-consuming.
For example, to enforce compliance with the federal laws, the U.S. Department of Justice, or DOJ, has recently
increased its scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of
investigations, prosecutions, convictions and settlements in the healthcare industry. Dealing with investigations can be time and
resource consuming and can divert management's attention from our core business. Additionally, if we settle an investigation with
law enforcement or other regulatory agencies, we may be forced to agree to additional onerous compliance and reporting
requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our
costs or otherwise have an adverse effect on our business.
We
may
be
liable
if
the
FDA
or
another
regulatory
agency
concludes
that
we
have
engaged
in
the
off-label
promotion
of
our
products.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations,
including the prohibition of the promotion of the off-label use of our products. Healthcare providers may use our products, if
approved, off-label, as the FDA does not restrict or regulate a physician's choice of treatment within the practice of medicine.
However, if the FDA determines that our promotional materials or training constitute promotion of an off-label use, it could
request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the
issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other
federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to
constitute promotion of an unapproved use, which could result in significant fines or penalties. Although we intend to train our
marketing and direct sales force to not promote our products for uses outside of their cleared uses and our policy will be to refrain
from statements that could be considered off-label promotion of our products, the FDA or another regulatory agency could
disagree and conclude that we have engaged in off-label promotion. In addition, the off-label use of our products may increase the
risk of product liability claims. Product liability claims are expensive to defend and could result in substantial damage awards
against us and harm our reputation.
Further, the advertising and promotion of our products is subject to the laws of EEA Member States implementing
Directive 93/42/EEC concerning medical devices, Directive 2006/114/EC concerning misleading and comparative advertising,
and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State legislation governing the
advertising and promotion of medical devices. EEA Member State legislation may also restrict or impose limitations on our
ability to advertise our products directly to the general public. In addition, voluntary EU and
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national codes of conduct provide guidelines on the advertising and promotion of our products to the general public and may
impose limitations on our promotional activities with healthcare providers harming our business, operating results and financial
condition.
Off-label
use
of
our
product
by
patients
could
lead
to
product
liability
claims
and
regulatory
action.
Currently marketed CGM systems, are intended as adjunctive to SMBG, which means that the devices (including
Eversense, if approved) are not intended to provide definitive data regarding a patient's blood glucose levels for purposes of self-
medication with insulin. Rather, patients are instructed to obtain confirmation of blood glucose levels, by means of a real-time
test-strip reading using blood obtained by means of a fingerstick, prior to administering insulin. The CGM manufacturer has no
control over whether patients adhere to labeling instructions and confirm blood glucose levels prior to administering insulin. If a
patient fails to do so and has an adverse reaction to self-medication, the patient might make a claim against the CGM
manufacturer. While we do not believe that, as a general matter, such a claim would have merit, the possibility of an adverse
result to the manufacturer cannot be dismissed, and in any event the manufacturer could incur significant defense costs. Also, if
there should be widespread off-label use of CGMs by patients, and resulting adverse medical events, the FDA or other regulatory
bodies might require CGM manufacturers, including us, if we commercialize Eversense, to implement additional measures to
reduce off-label use, which could be costly or reduce adoption of CGMs.
Legislative
or
regulatory
healthcare
reforms
may
make
it
more
difficult
and
costly
for
us
to
obtain
regulatory
clearance
or
approval
of
our
products.
Recent political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. The
sales of our products depend in part on the availability of coverage and reimbursement from third-party payors such as
government health administration authorities, private health insurers, health maintenance organizations and other healthcare-
related organizations. Both the federal and state governments in the United States continue to propose and pass new legislation
and regulations designed to contain or reduce the cost of healthcare. This legislation and regulation may result in decreased
reimbursement for medical devices, which may further exacerbate industry-wide pressure to reduce the prices charged for
medical devices. This could harm our ability to market our products and generate sales.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly
affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose
additional costs or lengthen review times of our products. Delays in receipt of or failure to receive regulatory clearances or
approvals for our products would harm our business, financial condition and operating results.
While the goal of healthcare reform is to expand coverage to more individuals, it also involves increased government
price controls, additional regulatory mandates and other measures designed to constrain medical costs. For example, the PPACA
was enacted in March 2010. The PPACA substantially changes the way healthcare is financed by both governmental and private
insurers, encourages improvements in the quality of healthcare items and services and significantly impacts the medical device
industries. Among other things, the PPACA:
·
·
·
establishes a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct
comparative clinical effectiveness research;
implements payment system reforms including value-based payment programs, increased funding for comparative
effectiveness research, reduced hospital payments for avoidable readmissions and hospital acquired conditions, and
pilot programs to evaluate alternative payment methodologies that promote care coordination (such as bundled
physician and hospital payments); and
creates an independent payment advisory board that will submit recommendations to reduce Medicare spending if
projected Medicare spending exceeds a specified growth rate.
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At this time, we cannot predict which, if any, additional healthcare reform proposals will be adopted, when they may be
adopted or what impact they, or the PPACA, may have on our business and operations, and any of these impacts may be adverse
on our operating results and financial condition.
Our
financial
performance
may
be
adversely
affected
by
medical
device
tax
provisions
in
the
healthcare
reform
laws.
The PPACA imposes, among other things, an annual excise tax of 2.3% on any entity that manufactures or imports
medical devices offered for sale in the United States beginning in 2013. We do not believe that Eversense is currently subject to
this tax based on the retail exemption under applicable Treasury Regulations. However, the availability of this exemption is
subject to interpretation by the Internal Revenue Service, or IRS, and the IRS may disagree with our analysis. In addition, future
products that we manufacture, produce or import may be subject to this tax. The financial impact this tax may have on our
business is unclear and there can be no assurance that our business will not be materially adversely affected by it.
Risks
Related
to
our
Common
Stock
An
active
trading
market
for
our
common
stock
may
not
develop
and
you
may
not
be
able
to
resell
your
shares
of
our
common
stock
at
or
above
the
offering
price,
if
at
all.
There currently is no liquid market for our common stock. Until the completion of our proposed public offering, any
trading in our common stock is likely to be extremely sporadic. The public offering price for our common stock in our proposed
public offering will be determined through negotiations with the underwriters and may not bear any relation to the price at which
our common stock has traded prior to the offering, and may not be indicative of the price at which our common stock will trade
after the closing of our proposed public offering. Although we intend to apply to list our common stock on the NYSE-MKT in
connection with our proposed public offering, an active trading market for our shares may never develop or be sustained
following the offering. If an active market for our common stock does not develop or is not sustained, it may be difficult for you
to sell shares of our common stock at an attractive price or at all.
The
issuance
of
additional
stock
in
connection
with
financings,
acquisitions,
investments,
our
stock
incentive
plan,
or
otherwise
will
dilute
our
existing
stockholders.
Subject to compliance with applicable rules and regulations, we may issue our shares of common stock or securities
convertible into our common stock from time to time in connection with a financing, acquisition, investment, our stock incentive
plan or otherwise, including in our proposed public offering. Any such issuance could result in substantial dilution to our existing
stockholders and cause the trading price of our common stock to decline.
In addition, as of December 31, 2015, we had outstanding stock options to purchase an aggregate of 9,251,164 shares of
common stock at a weighted average exercise price of $0.74 per share and warrants to purchase an aggregate of 5,010,604 shares
of our common stock at a weighted average exercise price of $1.79 per share. To the extent these outstanding options or warrants
are exercised, there will be further dilution to investors.
We
do
not
intend
to
pay
cash
dividends
in
the
foreseeable
future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and
any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. In addition, pursuant to the Loan and Security Agreement with Oxford, we are precluded from paying any cash
dividends. Accordingly, you may have to sell some or all of your shares of our common stock in order to generate cash flow from
your investment. You may not receive a gain on your investment when you sell shares and you may lose the entire amount of the
investment.
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Provisions
in
our
corporate
charter
documents
and
under
Delaware
law
may
prevent
or
frustrate
attempts
by
our
stockholders
to
change
our
management
and
hinder
efforts
to
acquire
a
controlling
interest
in
us,
and
the
market
price
of
our
common
stock
may
be
lower
as
a
result.
There are provisions in our certificate of incorporation and bylaws as they will be in effect following our proposed
public offering that may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a
change of control was considered favorable by you and other stockholders. For example, our board of directors will have the
authority to issue up to 5,000,000 shares of preferred stock. The board of directors can fix the price, rights, preferences,
privileges, and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of
preferred stock may delay or prevent a change of control transaction. As a result, the market price of our common stock and the
voting and other rights of our stockholders may be adversely affected. An issuance of shares of preferred stock may result in the
loss of voting control to other stockholders.
Our charter documents will also contain other provisions that could have an anti-takeover effect, including:
·
·
·
·
·
only one of our three classes of directors will be elected each year;
stockholders will not be entitled to remove directors other than by a 66 / 3 % vote and only for cause;
stockholders will not be permitted to take actions by written consent;
stockholders will not be permitted to call a special meeting of stockholders; and
stockholders will be required to give advance notice of their intention to nominate directors or submit proposals for
consideration at stockholder meetings.
2
In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions by prohibiting Delaware corporations from engaging in specified business combinations
with particular stockholders of those companies. These provisions could discourage potential acquisition proposals and could
delay or prevent a change of control transaction. They could also have the effect of discouraging others from making tender offers
for our common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our
management or limit the price that investors are willing to pay for our stock.
We
may
be
unable
to
utilize
our
federal
net
operating
loss
carryforwards
to
reduce
our
income
taxes
as
a
result
of
our
proposed
public
offering.
As of December 31, 2015, we had federal and state net operating loss, or NOL, carryforwards of $103.0 million, which,
if not utilized, will begin to expire at various dates starting in 2018. These NOL carryforwards could expire unused and be
unavailable to offset future income tax liabilities. In addition, under Section 382 of the Internal Revenue Code of 1986, as
amended, or the Code, and corresponding provisions of state law, if a corporation undergoes an "ownership change," which
generally occurs if the percentage of the corporation's stock owned by 5% stockholders increases by more than 50% over a three-
year period, the corporation's ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its
post-change income may be limited. We have not determined if we have experienced Section 382 ownership changes in the past
and if a portion of our NOL and tax credit carryforwards are subject to an annual limitation under Section 382. In addition, we
may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, including our proposed
public offering, some of which may be outside of our control. If we determine that an ownership change has occurred and our
ability to use our historical NOL and tax credit carryforwards is materially limited, it would harm our future operating results by
effectively increasing our future tax obligations.
Our
management
team
may
invest
or
spend
the
proceeds
of
our
proposed
public
offering
in
ways
with
which
you
may
not
agree
or
in
ways
which
may
not
yield
a
return.
Our management will have considerable discretion in the application of the net proceeds that we receive from our
proposed public offering. We expect to use the net proceeds from our proposed public offering primarily to complete our U.S.
pivotal clinical trial and to seek regulatory approval of Eversense in the United States, to fund continued research and
development of future configurations of Eversense and to begin developing a direct sales force to market Eversense in the United
States. We intend to use the remaining proceeds for working capital and general corporate
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purposes. However, we do not have any specific uses of the net proceeds planned. These net proceeds may be used for corporate
purposes that do not favorably affect our financial condition or result of operations. In addition, until we use the net proceeds,
they may be placed in investments that do not produce income or that lose value. Our failure to apply the net proceeds from our
proposed public offering effectively could compromise our ability to pursue our growth strategy and we might not be able to yield
a significant return, if any, on our investment of these net proceeds. You will not have the opportunity to influence our decisions
on how to use our net proceeds from our proposed public offering.
We
will
incur
increased
costs
and
demands
upon
management
as
a
result
of
being
a
public
company.
As a public company in the United States, we expect to incur significant additional legal, accounting and other costs,
which we anticipate could be between $1.0 million and $2.0 million annually. These additional costs could negatively affect our
financial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure,
including regulations implemented by the SEC and the NYSE-MKT, may increase legal and financial compliance costs and make
some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations and, as a result,
their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to
invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and
administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance
activities. If, notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory
authorities may initiate legal proceedings against us and our business may be harmed.
Failure to comply with these rules might also make it more difficult for us to obtain some types of insurance, including
director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract
and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior
management.
Failure
to
establish
and
maintain
an
effective
system
of
internal
controls
could
result
in
material
misstatements
of
our
financial
statements
or
cause
us
to
fail
to
meet
our
reporting
obligations
or
fail
to
prevent
fraud
in
which
case,
our
stockholders
could
lose
confidence
in
our
financial
reporting,
which
would
harm
our
business
and
could
negatively
impact
the
price
of
our
stock.
We currently voluntarily file reports under the Securities Exchange Act of 1934, or the Exchange Act. As a result, we
are subject to certain provisions of the Sarbanes-Oxley Act. Upon completion of our proposed public offering, we will register
our common stock under the Exchange Act, at which time we will become subject to additional provisions of the Sarbanes-Oxley
Act. Following our proposed public offering, we will also be subject to the rules and regulations of the NYSE-MKT. Even though
we are voluntary filers under the Exchange Act, the Sarbanes-Oxley Act requires, among other things, that we certify to the
effectiveness of our disclosure controls and procedures. Commencing with our fiscal year ending December 31, 2016, we must
perform system and process evaluation and testing of our internal control over financial reporting to allow management to report
on the effectiveness of our internal control over financial reporting in our Form 10-K filing for that year, as required by
Section 404 of the Sarbanes-Oxley Act. This will require that we incur substantial additional professional fees and internal costs
to expand our accounting and finance functions and that we expend significant management efforts. Prior to the Acquisition, we
have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in
meeting these reporting requirements in a timely manner. In addition, we may identify material weaknesses in our internal control
over financial reporting that we may not be able to remediate in time to meet the applicable deadline imposed upon us for
compliance with the requirements of Section 404. A material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely basis.
Prior to the Acquisition, our subsidiary, Senseonics, Incorporated, was a private company with limited accounting
personnel and other resources with which to address internal controls and procedures. In connection with Senseonics,
Incorporated's 2013 audit, management identified a material weakness whereby Senseonics, Incorporated did not have a control
designed and in place to identify and properly account for complex equity transactions. This
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Table of Contents
resulted in a material balance sheet reclassification adjustment and the restatement of financial statements as of and for the years
ended December 31, 2011 and 2012. We remediated this material weakness primarily by implementing a new control over the
process and engaging external accounting experts with the appropriate knowledge to supplement internal resources in the
computation and review processes. While this material weakness was remediated, we cannot assure you that we or our
independent registered public accounting firm will not identify additional material weaknesses or significant deficiencies in the
future. If we identify such issues or if we are unable to produce accurate and timely financial statements, our stock price may be
adversely affected and we may be unable to maintain compliance with the applicable listing requirements.
Even if we conclude that our internal control over financial reporting provides reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or
detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet our future reporting obligations.
Our reporting obligations as a public company will place a significant strain on our management, operational and
financial resources and systems for the foreseeable future. If we fail to timely achieve and maintain the adequacy of our internal
control over financial reporting, we may not be able to produce reliable financial reports or help prevent fraud. Our failure to
achieve and maintain effective internal control over financial reporting could prevent us from filing our periodic reports on a
timely basis which could result in the loss of investor confidence in the reliability of our financial statements, harm our business
and negatively impact the trading price of our common stock.
A
significant
portion
of
our
total
outstanding
shares
are
restricted
from
immediate
resale
but
may
be
sold
into
the
market
in
the
future.
This
could
cause
the
market
price
of
our
common
stock
to
drop
significantly,
even
if
our
business
is
doing
well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our
stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the
public market, the market price of our common stock could decline significantly.
The shares to be sold in our proposed public offering will be freely tradable without restriction by stockholders who are
not our affiliates. In addition, 18,000,108 additional shares, representing 23.8% of our common stock outstanding as of December
31, 2015, consisting of shares held by legacy ASN Technologies stockholders, including Energy Capital LLC, SBLE, LLC and
Kato Consulting, LLC, are not subject to lock-up agreements and are freely tradable without restriction. Of our outstanding
shares, 20,000 shares that were outstanding before the Acquisition are "restricted securities" as defined in Rule 144. We issued an
aggregate of 57,739,953 shares of our common stock to the former Senseonics, Incorporated stockholders pursuant to an
exemption from the registration requirements of the Securities Act of 1933, as amended, or the Securities Act, and such shares are
also "restricted securities" as defined in Rule 144. These restricted securities may be publicly resold under Rule 144 beginning on
December 10, 2016.
In addition, in the future, we intend to file one or more registration statements on Form S-8 registering the issuance of
approximately 27 million shares of common stock subject to options or other equity awards issued, reserved for issuance, and to
be reserved for issuance under our equity incentive plans, including an additional 8,000,000 shares of common stock to be
reserved for issuance pursuant to our amended and restated 2015 equity incentive plan effective upon the pricing of our proposed
public offering and 800,000 shares of common stock to be reserved for future issuance under our 2016 employee stock purchase
plan effective upon the pricing of our proposed public offering. Shares registered under these registration statements on Form S-8
will be available for sale in the public market subject to vesting arrangements and exercise of options and the restrictions of
Rule 144 in the case of our affiliates.
Additionally, the holders of an aggregate of up to 55,300,420 shares of our common stock, or their transferees, have
rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their
shares in registration statements that we may file for ourselves or other stockholders. If we were to
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Table of Contents
register the resale of these shares, they could be freely sold in the public market. If these additional shares are sold, or if it is
perceived that they will be sold, in the public market, the trading price of our common stock could decline.
If
securities
or
industry
analysts
do
not
publish
research
or
reports,
or
publish
unfavorable
research
or
reports,
about
us,
our
business
or
our
market,
our
stock
price
and
trading
volume
could
decline.
The trading market for our common stock will be influenced by the research and reports that securities or industry
analysts publish about us and our business. We do not currently have and may never obtain research coverage by securities or
industry analysts. Securities or industry analysts may elect not to provide coverage of our common stock after the completion of
our proposed public offering, and such lack of coverage may adversely affect the market price of our common stock. In the event
we do have securities or industry analyst coverage, we will not have any control over the analysts or the content and opinions
included in their reports. The price of our stock could decline if one or more securities or industry analysts downgrade our stock
or issue other unfavorable commentary or research. If one or more securities or industry analysts ceases coverage of our company
or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or
trading volume to decline.
Our
common
stock
is
currently
considered
to
be
a
"penny
stock"
and,
if
it
is
considered
to
be
penny
stock
after
the
offering,
broker/dealers
may
not
want
to
make
a
market
in
our
shares
which
could
affect
your
ability
to
sell
your
shares
in
the
future.
Our common stock is currently considered a "penny stock" under rules of the SEC. Although our common stock would
cease to be considered penny stock if our shares are listed on the NYSE-MKT following the completion of our proposed public
offering, if we were unable to achieve or maintain the listing of our shares on the NYSE-MKT, our common stock may once
again be considered penny stock.
The SEC's penny stock rules impose additional sales practice requirements on broker/dealers who sell penny stocks to
persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouses).
As a result, many broker/dealers may not want to make a market in such shares or conduct any transactions in such shares. In
addition, the Financial Industry Regulatory Authority, or FINRA, has adopted rules that relate to the application of the SEC's
penny stock rules that require a broker/dealer have reasonable grounds for believing that an investment in a penny stock is
suitable for that customer, prior to recommending the investment. Prior to recommending speculative, low priced securities to
their non-institutional customers, broker/dealers must make reasonable efforts to obtain information about the customer's financial
status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a
high probability that speculative, low priced securities will not be suitable for at least some customers.
At any time that our common stock is considered to be penny stock under SEC rules, these SEC and FINRA rules would
make it more difficult for broker/dealers to recommend that their customers buy our common stock which may have the effect of
reducing the level of trading activity and liquidity of our common stock. Further, many brokers charge higher transactional fees
for penny stock transactions. As a result, fewer broker/dealers may be willing to make a market in our common stock if it
constitutes penny stock, thereby reducing a stockholder's ability to resell shares of our common stock.
Our
amended
and
restated
certificate
of
incorporation
will
provide
that
the
Court
of
Chancery
of
the
State
of
Delaware
is
the
exclusive
forum
for
certain
litigation
that
may
be
initiated
by
our
stockholders,
which
could
limit
our
stockholders'
ability
to
obtain
a
favorable
judicial
forum
for
disputes
with
us
or
our
directors,
officers
or
employees.
Our amended and restated certificate of incorporation, as we expect it to be in effect upon the closing of our proposed
public offering, will provide that the Court of Chancery of the State of Delaware is the exclusive forum for (i) any derivative
action or proceeding brought on our behalf, (ii) any action asserting a claim for breach of a fiduciary duty owed by any of our
directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision
of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated
bylaws or (iv) any action asserting a claim governed by the internal affairs
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doctrine. The choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable
for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our
directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our
amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs
associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
Risks
Related
to
our
Acquisition
by
ASN
Technologies,
Inc.
We
may
be
subject
to
unknown
risks
as
a
result
of
our
recently
completed
acquisition
by
ASN
Technologies.
Prior to the Acquisition, ASN Technologies, which was renamed Senseonics Holdings, Inc., conducted a business
related to the design and development of a location-based mobile application to allow users to share information about nearby
social and other events. In connection with the Acquisition, we sold this business, including the associated assets and liabilities of
the business, to the founder of ASN Technologies. Even though we and our advisers conducted a due diligence investigation of
ASN Technologies prior to committing to the Acquisition, there may be unknown liabilities, or liabilities that were known but
believed to be immaterial, related to the business of ASN Technologies that may become material liabilities we are subject to in
the future. If we are subject to material liability as a result of the conduct of ASN Technologies, we may have limited recourse for
such liabilities, which could have a material impact on our business and stock price.
Item
1B.
Unresolved
Staff
Comments
None.
Item
2.
Properties
Our principal offices occupy approximately 22,000 square feet of leased office space in Germantown, Maryland.
Pursuant to an amendment to the lease agreement that expires in 2023, we will expand the leased premises by approximately
11,000 square feet for a total of approximately 33,000 square feet. We believe that our current facilities are suitable and adequate
to meet our current needs. We intend to add new facilities or expand existing facilities as we add employees, and we believe that
suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.
Item
3.
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
4.
Mine
Safety
Disclosures
Not applicable.
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Table of Contents
Item
5.
Market
for
Registrant’s
Common
Equit
y,
Related
Stockholder
Matters
and
Issuer
Purchases
of
Equity
Securities
Market
Information
for
Common
Stock
Our common stock has been qualified for quotation, since December 23, 2015, on the electronic marketplace operated
by OTC Markets Group, Inc. under the symbol "SENH." Prior to this date, shares of our common stock never traded publicly. To
date, our shares have traded on a limited basis. The following table sets forth for the periods indicate the high and low bid prices
of our common stock on the electronic marketplace operated by OTC Markets Group, Inc . The below quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
2016
First Quarter (through February 18, 2016)
2015
Fourth Quarter (since December 23, 2015)
High
Low
$
$
3.30 $
3.50 $
3.25
3.25
On February 18, 2016, the last reported bid price for our common stock was $ 3.30 per share. W e intend to apply to
list our common stock on the NYSE-M K T under the symbol “SENS.”
Penny
Stock
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny
stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national
securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a
description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b)
contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer
with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative
description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid
and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the
disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form,
including language, type size and format, as the SEC shall require by rule or regulation.
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and
offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the
number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of
the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the
customer's account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those
rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to
transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore,
stockholders may have difficulty selling our securities.
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Table of Contents
Dividend
Policy
We have never declared or paid any dividends on our common stock. We anticipate that we will retain all of our future
earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the
foreseeable future. Our ability to pay dividends on shares of our common stock is further limited by restrictions on our ability to
pay dividends or make distributions under the terms of the agreements governing our indebtedness and may be limited by future
similar agreements.
Stockholders
As of February 18, 2016, there were 189 registered stockholders of record for our common stock.
Recent
Sales
of
Unregistered
Securities
Issuance
of
Senseonics,
Incorporated
Series
E
Convertible
Preferred
Stock
In August 2015, Senseonics, Incorporated issued an aggregate of 2,544,529 shares of its Series E convertible preferred
stock (or 5,337,144 post-exchange shares of our common stock) to 10 investors at a purchase price of $3.93 per share, for
aggregate consideration of $10.0 million. In September 2015, Senseonics, Incorporated issued an aggregate of 167,397 shares of
its Series E convertible preferred stock (or 351,106 post-exchange shares of our common stock) to 18 investors at a purchase
price of $3.93 per share, for aggregate consideration of $0.66 million.
Stock
Option
Grants
During the year ended December 31, 2015, Senseonics, Incorporated granted options to purchase an aggregate of
1,540,612 shares of common stock to employees, consultants and directors, having exercise prices ranging from $1.37 to $1.95
per share. Of these, options to purchase an aggregate of 561,161 shares were cancelled without being exercised and 121,150
shares were issued upon the exercise of stock options, at a weighted average exercise price of $0.51 per share, for aggregate
proceeds of approximately $61,399.
The offers, sales and issuances of the securities described in the foregoing paragraph were exempt from registration under
Rule 701 promulgated under the Securities Act in that the transactions were under compensatory benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of such securities were Senseonics, Incorporated employees,
directors or consultants and received the securities under our 1997 stock option plan, or the 1997 plan, or our 2015 equity
incentive plan, or our 2015 plan. Appropriate legends were affixed to the securities issued in these transactions.
Securities
Issued
Pursuant
to
Acquisition
On December 7, 2015, pursuant to and in connection with the Closing of the Acquisition, we issued:
57,739,953 Company Shares to the former stockholders of Senseonics, Incorporated;
·
· Company Options for the purchase of an aggregate of 9,251,164 shares of our common stock; and
· Company Warrants for the purchase of an aggregate of 5,010,604 shares of our common stock.
The 57,739,953 shares issued to the former Senseonics, Incorporated stockholders were issued with a restrictive legend
that the shares had not been registered under the Securities Act of 1933.
Exemptions
from
Registration
The offers, sales and issuances of the Series E convertible preferred stock by Senseonics, Incorporated described above
were exempt from registration under Section 4(a)(2) of the Securities Act and Regulation D promulgated under the Securities Act.
Each of the purchasers represented to Senseonics, Incorporated that they acquired the securities for investment only and not with
a view to or for sale in connection with any distribution thereof and
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Table of Contents
appropriate legends were affixed to the securities issued in these transactions. The purchasers also represented to Senseonics,
Incorporated that they were accredited investors as defined in Rule 501 promulgated under the Securities Act.
The issuance of the Company Shares and Company Warrants in conjunction with the Acquisition was exempt from
registration under Regulation D promulgated under the Securities Act and Section 4(a)(2) of the Securities Act as an offering not
involving a public offering. Each of the recipients of the Company Shares and Company Warrants represented that they were
accredited investors and/or sophisticated, with fewer than 35 non-accredited investors. The issuance of the Company Options was
exempt under Rule 701 under the Securities Act.
None of the stock options or warrants, nor the underlying shares of common stock issuable upon exercise, have been
registered under the Securities Act; and all documents have been issued with a restrictive legend prohibiting further transfer of the
shares without such securities either being first registered or otherwise exempt from registration in any further resale or
disposition.
Purchases
of
Equity
Securities
by
the
Issuer
and
Affiliated
Parties
The following table summarizes the purchases made by or on behalf of us of shares of our common stock during the quarterly
period ended December 31, 2015:
Period
October 1, 2015 to October 31, 2015
November 1, 2015 to November 30, 2015
December 1, 2015 to December 31, 2015
Total
(a)
Total
Number
of
Shares
(or
Units)
Purchased
(b)
Average
Price
Paid
per
Share
(or
Unit)
—
—
119,979,892 (1) $
119,979,892 (1) $
—
—
0.0001 (1)
0.0001 (1)
(c)
Total
Number
of
Shares
(or
Units)
Purchased
as
Part
of
Publicly
Announced
Plans
or
Programs
(d)
Maximum
Number
(or
Approximate
Dollar
Value)
of
Shares
(or
Units)
that
May
Yet
Be
Purchased
Under
the
Plans
or
Programs
—
—
—
—
—
—
—
—
(1) On December 4, 2015, we and Laura Magrone, one of our former stockholders, entered into a Repurchase Agreement
pursuant to which she sold an aggregate of 119,979,892 Company Shares, or the Repurchase Shares, to us at $0.0001 per
share, for an aggregate consideration of $11,998 in connection with the Acquisition. The Repurchase Shares were
immediately canceled and returned to our authorized but unissued shares.
Item
6.
Selected
Consolidated
Financial
Data
The following selected financial data as of and for the years ended December 31, 2015 and 2014 is derived from our
audited financial statements included elsewhere in this Annual Report. The balance sheet data as of December 31, 2015 and 2014
has been derived from our audited financial statements which are not included herein. Our historical results are not necessarily
indicative of the results to be expected in the future. The selected financial data should be read together with Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
65
Table of Contents
Operations” and in conjunction with the financial statements, related notes, and other financial information included elsewhere in
this Annual Report.
Year
Ended
December
31,
Statement
of
Operations
Data:
Revenue
Expenses:
Sales and Marketing expenses
Research and development expenses
Administrative expenses
Operating loss
Other income (expense):
Interest income
Interest expense
Other income
Net loss
Series E preferred stock beneficial conversion feature
Net loss available to common shareholders
Basic and diluted loss per common share
Basic and diluted weighted-average shares outstanding
Balance
Sheet
Data:
Cash and cash equivalents
Working capital
Total assets
Notes payable, net of discount, including current portion
Total liabilities
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity (deficit)
2015
2014
(in
thousands,
except
share
and
per
share
data)
$
38
$
792
18,251
9,807
(28,812)
9
(1,100)
26
(29,877)
(407)
(30,284)
(4.32)
7,002,317
$
$
—
95
12,881
5,726
(18,702)
—
(191)
8
(18,885)
—
(18,885)
(9.89)
1,908,587
As
of
December
31,
2015
2014
(in
thousands)
$
3,939
(2,371)
5,492
9,888
15,189
151,019
(160,792)
(9,697)
18,923
17,593
19,995
9,815
12,082
138,673
(130,915)
7,913
$
$
$
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Table of Contents
Item
7.
Management’s
Discussion
and
Analysi
s
of
Financial
Condition
and
Results
of
Operations
You
should
read
the
following
discussion
and
analysis
of
our
financial
condition
and
results
of
operations
together
with
our
financial
statements
and
the
related
notes
included
elsewhere
in
this
Annual
Report.
Some
of
the
information
contained
in
this
discussion
and
analysis
or
set
forth
elsewhere
in
this
Annual
Report,
including
information
with
respect
to
our
plans
and
strategy
for
our
business,
includes
forward
‑looking
statements
that
involve
risks
and
uncertainties.
You
should
review
the
“Risk
Factors”
section
of
this
Annual
Report
for
a
discussion
of
important
factors
that
could
cause
actual
results
to
differ
materially
from
the
results
described
in
or
implied
by
the
forward
‑looking
statements
contained
in
the
following
discussion
and
analysis.
Overview
On December 7, 2015, the closing date of the Acquisition, we acquired 100% of Senseonics, Incorporated in exchange
for the issuance of shares of our common stock. Our sole business is the business of Senseonics, Incorporated. Our management’s
discussion and analysis below is based on the financial results of Senseonics, Incorporated. The following discussion and analysis
provides information which we believe to be relevant to an assessment and understanding of our results of operations and
financial condition.
We are a medical technology company focused on the design, development and commercialization of glucose
monitoring systems to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative
ease and accuracy. Our first generation continuous glucose monitoring, or CGM, system, Eversense, is a reliable, long ‑term,
implantable CGM system that we have designed to continually and accurately measure glucose levels in people with diabetes for
a period of up to 90 days, as compared to five to seven days for currently available CGM systems. We believe Eversense will
provide people with diabetes with a more convenient method to monitor their glucose levels in comparison with the traditional
method of self ‑monitoring of blood glucose, or SMBG, as well as currently available CGM systems. In our European pivotal
clinical trial, we observed that Eversense measured glucose levels over 90 days with a degree of accuracy comparable or superior
to that of other currently available CGM systems.
From our founding in 1996 until 2010, we devoted substantially all of our resources to researching various sensor
technologies and platforms. Beginning in 2010, we narrowed our focus to designing, developing and refining a commercially
viable glucose monitoring system. However, we do not yet have regulatory approval in any jurisdiction to sell any products and,
to date, we have not generated any significant revenue from product sales. Since our inception, we have funded our activities
primarily through equity and debt financings.
We have never been profitable and our net losses were $29.9 million and $18.9 million for the years ended
December 31, 2015 and 2014, respectively. As of December 31, 2015, our accumulated deficit totaled $160.8 million, primarily
as a result of expenses incurred in connection with our research and development programs and from general and administrative
expenses associated with our operations. We expect to continue to incur significant expenses and increasing operating and net
losses for the foreseeable future.
We do not expect to generate revenue from product sales unless and until we obtain marketing authorization to sell
Eversense from applicable regulatory authorities. We have filed for regulatory approval for Eversense in Europe. In July 2015, we
applied for, and in the first half of 2016, we anticipate receiving our CE mark, which will allow us to market and sell Eversense in
Europe. Subject to regulatory approval, we expect to begin commercializing Eversense in select European markets through a third
‑party distributor network, in the first half of 2016. Our initial distribution efforts in Europe will be in the markets of Sweden,
Norway and Denmark, pursuant to a distribution agreement with Rubin Medical, or Rubin. Rubin markets and sells medical
products for diabetes treatment in the Scandinavian region, including as the exclusive Scandinavian distributor for the insulin
pump manufacturer Animas Corporation.
We also initiated a single pivotal clinical trial in the United States in the first quarter of 2016. This trial will be
conducted at seven to ten sites in the United States and enroll approximately 90 subjects. In the trial, we will measure the
accuracy of Eversense measurements through 90 days after insertion. We will also assess safety through 90 days after insertion or
sensor removal. If the results of the trial are favorable, we intend to apply for regulatory approval as promptly as possible to
market our product in the United States. We believe that we could file for U.S. marketing
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Table of Contents
approval as early as the second half of 2016 and expect that the PMA process could take between six and 18 months. For
commercialization in the United States, we intend to distribute our product through our own direct sales and marketing
organization.
If we obtain marketing authorization to sell Eversense, we expect to incur significant commercialization expenses
related to product sales, marketing, manufacturing and distribution. In addition, we expect that our expenses will increase
substantially as we continue the research and development of our other products and maintain, expand and protect our intellectual
property portfolio and seek regulatory approvals in other jurisdictions. Furthermore, we expect to incur additional costs associated
with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not
incur as a private company. We may need to obtain substantial additional funding in connection with our continuing operations
through public or private equity or debt financings or other sources, which may include collaborations with third parties.
However, we may be unable to raise additional funds when needed on favorable terms or at all. Our failure to raise such capital as
and when needed would have a negative impact on our financial condition and our ability to develop and commercialize
Eversense and future products and our ability to pursue our business strategy. We will need to generate significant revenues to
achieve profitability, and we may never do so.
On December 4, 2015, we entered into a Merger Agreement with Senseonics, Incorporated and SMSI Merger Sub, Inc.
to acquire Senseonics, Incorporated. The transactions contemplated by the Merger Agreement were consummated on
December 7, 2015 and pursuant to the terms of the Merger Agreement, (i) all outstanding Senseonics Shares were exchanged for
Company Shares based on the exchange ratio of 2.0975 shares of Senseonics Holdings for every one share of Senseonics,
Incorporated, or the Exchange Ratio, and (ii) all Senseonics Options and Senseonics Warrants were each exchanged or replaced
with Company Options and Company Warrants based on the Exchange Ratio, with corresponding adjustments to their respective
exercise prices. Accordingly, Senseonics, Incorporated became our wholly ‑owned subsidiary. Immediately prior to the closing of
the Acquisition, all issued and outstanding shares of Senseonics, Incorporated’s preferred stock were converted into shares of
Senseonics, Incorporated common stock. Except as otherwise indicated herein, all share and per share information in this
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” section gives retroactive effect to the
exchange of Senseonics Shares, Senseonics Options and Senseonics Warrants for Company Shares, Company Options and
Company Warrants, respectively, in the Acquisition, as well as the corresponding exercise price adjustments for the such options
and warrants.
Financial
Overview
Revenue
To date, we have generated an insignificant amount of revenue from the sale of oxygen sensors used as subcomponents
for several commercial applications unrelated to Eversense, as well as various grants. We do not expect to generate revenue from
product sales unless and until we obtain regulatory approvals to begin marketing Eversense. We have filed for regulatory
approval for Eversense in Europe. In July 2015, we applied for, and in the first half of 2016, we anticipate receiving our CE mark,
which would allow us to market Eversense in Europe. Subject to regulatory approval, we expect to begin commercializing
Eversense in Sweden, Norway and Denmark in the first half of 2016, pursuant to a distribution agreement with Rubin. We will
continue to seek to distribute Eversense in other select European markets through a third ‑party distributor network, but have yet
to enter into any distribution agreements other than the agreement with Rubin. We expect our revenue from European product
sales will increase as we ramp up our commercialization efforts in 2016 and 2017. In the future, subject to regulatory approval,
we also intend to seek to commercialize Eversense in the United States, as well as other international markets, including Canada,
Australia and Israel. If we fail to complete the development of Eversense and obtain regulatory approval, our ability to generate
future revenue, and our results of operations and financial position, will be adversely affected.
Sales
and
Marketing
Sales and marketing expenses consist primarily of operating expenses for marketing programs, research, advertisements,
promotions and other brand ‑building activities. We intend to continue to invest in sales and marketing
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Table of Contents
activities as we begin marketing Eversense, if approved, in select European markets and the United States, as well as other
international markets.
Research
and
Development
The largest component of our total operating expenses has historically been research and development expenses.
Research and development expenses consist of expenses incurred in performing research and development activities in
developing Eversense, including our clinical trials and feasibility studies. Research and development expenses include
compensation and benefits for research and development employees including stock ‑based compensation, overhead expenses,
cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees
paid to contract research organizations, or CROs, and other consultants, and other outside expenses. Research and development
costs are expensed as incurred.
We have incurred significant research and development expenses from inception, with the substantial majority of the
expenses spent on the development of Eversense. We expect to continue to commit significant resources to continue to develop
Eversense and future product enhancements and to conduct ongoing and future clinical trials. We expect that our overall research
and development expenses will continue to increase in absolute dollars, but to decline as a percentage of total expenses as we
commercialize our products.
The following table summarizes our research and development expenses by functional area for the years ended
December 31, 2015 and 2014.
Clinical development
Contract R&D and consulting
Contract fabrication and manufacturing
Personnel related
Other R&D expenses
Total R&D expenses
Administrative
Year
Ended
December
31,
2015
2014
(in
thousands)
4,145 $
3,158
4,796
4,525
1,627
18,251 $
1,940
1,631
3,518
4,178
1,614
12,881
$
$
Administrative expenses consist primarily of salaries and other related costs, including stock ‑based compensation, for
personnel in our executive, finance, accounting, business development, and human resources functions. Other significant costs
include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate
matters and fees for accounting and consulting services.
We anticipate that our administrative expenses will increase in the future if we obtain regulatory approval and begin
commercializing Eversense as our needs for sales, marketing and administrative personnel increase. We have applied for and, in
the first half of 2016, anticipate receiving European regulatory approval and, subject to such regulatory approval and our ability to
secure agreements with third party distributors, we expect to begin commercializing Eversense in select European markets in the
first half of 2016. In addition, we anticipate increased administrative expenses as a result of operating as a public company. These
increases will include increased costs related to the hiring of additional personnel and increased fees to outside consultants,
lawyers and accountants as well as expenses related to maintaining compliance with applicable listing rules and SEC
requirements, insurance, and investor relations costs. These expenses may further increase when we no longer qualify as an
“emerging growth company” under the JOBS Act, which will require us to comply with certain reporting requirements from
which we are currently exempt.
Other
Income
(Expense),
Net
Interest income consists of interest earned on our cash equivalents and interest expense primarily consists of interest
expense on the secured notes we have issued to Oxford, or the Oxford notes. This interest expense primarily
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Table of Contents
consists of (i) contractual interest on the Oxford notes, and (ii) the accrual into interest expense of a final payment obligation that
we are required to pay to Oxford at maturity of the Oxford notes.
Other income (expense) primarily includes the change in the fair value of the warrant liability of Senseonics,
Incorporated during the particular period, which results from the marking to market at the end of every reporting period of the fair
value of the warrant liability related to the warrants to purchase Series D convertible preferred stock issued to Oxford in
connection with the Oxford notes, or the Oxford warrants. The fair value of this warrant liability will fluctuate based on the
change in the price of our common stock in the public markets until these warrants are exercised or expire.
Results
of
Operations
Comparison
of
the
Years
Ended
December
31,
2015
and
2014
The following table sets forth our results of operations for the years ended December 31, 2015 and 2014.
Revenue
Expenses:
Sales and marketing expenses
Research and development expenses
Administrative expenses
Operating loss
Other income (expense):
Interest expense, net
Other income
Total other expense, net
Net loss
Revenue
Year
Ended
December
31,
2015
2014
Period-to-
Period
Change
$
(in
thousands)
38 $
— $
792
18,251
9,807
(28,812)
(1,091)
26
(1,065)
95
12,881
5,726
(18,702)
(191)
8
(183)
$ (29,877) $ (18,885) $
38
697
5,370
4,081
(10,110)
(900)
18
(882)
(10,992)
Revenue for the year ended December 31, 2015 was $38,000. This revenue consisted of grant revenue for delivery of
sensors for a National Health Institute grant from the University of California Santa Barbara. However, we do not expect this to
be a meaningful source of revenue in the future. We did not generate any revenue for the year ended December 31, 2014.
Research
and
development
expenses
Research and development expenses were $18.3 million for the year ended December 31, 2015, compared to
$12.9 million for the year ended December 31, 2014, an increase of $5.4 million. The increase was primarily due to an increase in
clinical development expenses of $2.2 million as a result of our completed European pivotal trial, a $1.3 million increase in
contract fabrication and manufacturing, a $1.5 million increase in contract research and development and consulting expenses for
future versions of Eversense and a $0.4 million increase in personnel expenses.
Administrative
expenses
Administrative expenses were $9.8 million for the year ended December 31, 2015, compared to $5.7 million for the year
ended December 31, 2014, an increase of $4.1 million. The increase was primarily due to an increase in legal and accounting
expenses of $2.4 million, an increase in personnel related expenses of $1.2 million and an increase of $0.4 million of other
expenses.
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Total
other
expense,
net
Total other expense, net, for the year ended December 31, 2015 was $1.1 million, consisting primarily of interest
expense on the Oxford notes.
Liquidity
and
Capital
Resources
Sources
of
Liquidity
From our founding in 1996 until 2010, we devoted substantially all of our resources to researching various sensor
technologies and platforms. Beginning in 2010, we narrowed our focus to designing, developing and refining a commercially
viable glucose monitoring system. However, we do not yet have regulatory approval in any jurisdiction to sell any products and,
to date, we have not generated any significant revenue from product sales. Since our inception, we have funded our activities
primarily through equity and debt financings. We have incurred substantial losses and cumulative negative cash flows from
operations since our inception in October 1996. We have never been profitable and our net losses were $29.9 million and
$18.9 million for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, we had an accumulated
deficit of $160.8 million.
To date, we have funded our operations principally through the issuance of preferred stock, common stock and debt. As
of December 31, 2015, we had cash and cash equivalents of $3.9 million. Under the terms of a Note Purchase Agreement with
Energy Capital, LLC, or Energy Capital, we may borrow an aggregate principal amount up to $10.0 million, subject to the
conditions specified in the Note Purchase Agreement, as described in “-Indebtedness” below. Additionally, under our credit
facility with Oxford, if we receive the CE mark for Eversense, we may borrow an additional $5.0 million until the earlier of
(i) March 31, 2016, if we receive net cash proceeds of at least $2.5 million from the sale of equity securities or a convertible note
to Energy Capital, which we refer to as an Equity Event, by March 4, 2016, or (ii) March 4, 2016, if an Equity Event does not
occur by March 4, 2016. Currently, our funds are primarily held in money market funds consisting of U.S. government ‑backed
securities.
Our ability to generate revenue and achieve profitability depends on our completion of the development of Eversense
and future product candidates and obtaining of necessary regulatory approvals for the manufacture, marketing and sales of those
products. These activities, including our planned significant research and development efforts, will require significant uses of
working capital through 2016 and beyond. Upon the completion of the audit of our financial statements for the year ended
December 31, 2015, we did not have sufficient cash to fund our operations beyond early 2016 without additional financing and,
therefore, we concluded there was substantial doubt about our ability to continue as a going concern. As a result, our independent
registered public accounting firm included an explanatory paragraph regarding this uncertainty in its report on those financial
statements. The financial information throughout this Annual Report and the financial statements included elsewhere in this
Annual Report have been prepared on a basis that assumes that we will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities and commitments in the normal course of business. This financial
information and these statements do not include any adjustments that may result from the outcome of this uncertainty.
Indebtedness
On July 31, 2014 and December 23, 2014, we issued the Oxford notes in connection with a term loan for gross proceeds
of $4.0 million and $6.0 million, respectively. The maturity date of the Oxford notes is July 1, 2019. The Oxford notes bear
interest at a fixed annual rate of 6.95% and require monthly payments. The monthly payments initially consist of interest only.
The monthly payments will convert to payments of principal and interest, beginning on August 1, 2016, with the principal amount
being amortized over the ensuing 36 months, if (i) we receive a CE mark for Eversense by March 4, 2016 or (ii) an Equity Event
occurs by March 4, 2016 and we receive a CE mark for Eversense by March 31, 2016. We refer to (i) and (ii) above, each, as a
CE Mark Approval Event. If a CE Mark Approval Event does not occur, the monthly payments will convert to payments of
principal and interest beginning on April 1, 2016, with the principal amount being amortized over the ensuing 40 months. The
Oxford notes are collateralized by all of our assets other than our intellectual property. Our Loan and Security Agreement with
Oxford also contains certain restrictive covenants that limit our ability to incur additional indebtedness and liens, merge with
other companies or
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consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay
dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions, as well as
financial reporting requirements. We incurred issuance costs related to the Oxford notes of approximately $121,200, which are
being amortized as additional interest expense over the term of the Oxford notes using the effective interest method. In connection
with the issuance of the Oxford notes, we also issued to Oxford 10 ‑year stock purchase warrants to purchase an aggregate of
79,892 shares of Senseonics, Incorporated Series D convertible preferred stock at an exercise price of $3.75 per share (in
connection with the Acquisition, these warrants were exchanged for warrants to purchase an aggregate of 167,570 shares of
Senseonics Holdings common stock at an exercise price of $1.790207 per share). The fair value of the warrants, which we
estimated to be $205,150, was recorded as a discount to the Oxford notes, which is also being amortized as additional interest
expense over the term of the Oxford notes using the effective interest method. In addition, we are obligated to pay a final fee to
Oxford at maturity of the Oxford notes of $940,000. This fee is being accrued as additional interest expense over the term of the
Oxford notes using the effective interest method.
In December 2015 and February 2016, we amended our Loan and Security Agreement with Oxford to allow us to
borrow up to an additional $5.0 million on the same terms and conditions of the existing Oxford notes described above if a CE
Mark Approval Event occurs, until the earliest of (i) March 4, 2016, if an Equity Event does not occur by March 4, 2016,
(ii) March 31, 2016, if an Equity Event occurs by March 4, 2016, (iii) 30 days after the CE Mark Approval Event or (iv) the
occurrence of an Event of Default (as defined in the Loan and Security Agreement). To the extent that we borrow such additional
funds, we are required to issue additional warrants, which would be exercisable for 167,570 shares of common stock if we borrow
the full $5.0 million, at an exercise price equal to $1.790207 per share. In addition, we are obligated to pay Oxford $25,000 and
the additional borrowed $5.0 million will have a fixed annual interest rate of 6.76% plus the greater of (i) 0.19% or (ii) 30 day
U.S. LIBOR rate five business days prior to the funding date. The maturity date for this additional $5.0 million is July 1, 2019.
On December 7, 2015, we entered into a Note Purchase Agreement with Energy Capital pursuant to which Energy
Capital may lend us an aggregate principal amount of up to $10.0 million, or the Energy Capital note, subject to the conditions
specified in the Note Purchase Agreement.
The Energy Capital note bears interest at the rate of 6.95% per annum. Under the terms of the Energy Capital note, if we
have not received at least $20.0 million from the sale of our capital stock in an offering of our equity securities (excluding any
security granted, issued and/or sold by us to any employee or consultant in such capacity) prior to February 29, 2016, or the
Triggering Event, then Energy Capital is obligated to disburse funds on or after March 15, 2016, provided however that if the
Triggering Event has occurred and we provide documentation to Energy Capital that our available cash is lower than $500,000,
then Energy Capital is obligated to disburse funds any time after March 1, 2016. The disbursements under the Energy Capital note
will be split into multiple disbursements of no more than $2.5 million each during successive thirty ‑day periods beginning after
the first disbursement. In the event that we issue and sell shares of our equity securities in an underwritten public offering with
total proceeds to us exceeding $45.0 million (excluding the Energy Capital note), the Energy Capital note, including all unpaid
accrued interest thereon, will become due within ten days after the closing of such public offering. The Energy Capital note is
unsecured and will be subordinated to our indebtedness incurred from Oxford subject to a subordination agreement between
Energy Capital and Oxford.
Upon an “Event of Default” under the Energy Capital note, Energy Capital may declare the entire outstanding principal
and accrued interest due and immediately payable. As defined under the Energy Capital note, an Event of Default includes our
failure to pay any principal, interest or other amount owing under the Energy Capital note when due, our default of any covenant
under the Note Purchase Agreement, or the commencement of a bankruptcy or similar insolvency proceeding
Funding
Requirements
and
Outlook
Our primary uses of capital are, and we expect will continue to be, research and development, compensation and related
expenses, costs associated with product launch and establishment of a direct sales force in the United States,
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costs related to clinical trials, laboratory and related supplies, supplies and materials used in manufacturing, legal and other
regulatory expenses and general overhead costs.
We believe our existing cash and cash equivalents, together with potential borrowings under our Note Purchase
Agreement with Energy Capital and our credit facility with Oxford, will be sufficient to fund our operating expenses through
early 2016. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources
sooner than we currently expect. Additionally, the process of clinical and regulatory development of medical devices is costly,
and the timing of progress of these efforts is uncertain. Eversense has not yet received a CE mark, which would permit
commercialization of our product in Europe, or marketing authorization from the FDA. Therefore, we cannot estimate the actual
amounts necessary to successfully complete the clinical and regulatory development of our CGM system or when, if ever, we
may begin generating revenues from product sales or achieve profitability.
We anticipate that we will continue to incur losses for the foreseeable future. We expect that our research and
development expenses and administrative expenses will continue to increase and, as a result, we will need additional capital to
fund our operations. Until such time, if ever, as we can generate substantial revenue, we expect to finance our cash needs through
a combination of equity offerings, debt financings and revenue from potential research and development and other collaboration
agreements. To the extent that we raise additional capital through the future sale of equity or debt, 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 raise additional funds in the future, we may have to relinquish valuable
rights to our technologies, future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to
raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our
product development or future commercialization efforts or grant licenses to develop and market products that we would
otherwise prefer to develop and market ourselves.
Cash
Flows
The following is a summary of cash flows for each of the periods set forth below.
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Net
cash
used
in
operating
activities
Year
Ended
December
31,
2015
2014
(in
thousands)
$ (25,465) $ (19,270)
(29)
29,976
$ (14,984) $ 10,677
(202)
10,683
Net cash used in operating activities was $25.5 million for the year ended December 31, 2015, and consisted primarily of
a net loss of $29.9 million, partially offset by a net change in assets and liabilities of $2.8 million (consisting primarily of an
increase in accounts payable and accrued expenses of $3.2 million), stock ‑based compensation expense of $1.4 million and
depreciation expense of $0.1 million.
Net cash used in operating activities was $19.3 million for the year ended December 31, 2014, and consisted primarily of
a net loss of $18.9 million and a net change in assets and liabilities of $1.2 million (consisting of a decrease in accounts payable
and accrued expenses of $0.7 million and an increase in prepaid expenses, deposits and other assets of $0.5 million), partially
offset by stock ‑based compensation expense of $0.5 million and depreciation expense of $0.2 million.
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Net
cash
used
in
investing
activities
Net cash used in investing activities was $202,000 for the year ended December 31, 2015, and consisted entirely of
capital expenditures for laboratory equipment.
Net cash used in investing activities was $29,000 for the year ended December 31, 2014, and consisted entirely of capital
expenditures for laboratory equipment.
Net
cash
provided
by
financing
activities
Net cash provided by financing activities was $10.7 million for the year ended December 31, 2015, and consisted
primarily of the net proceeds of $10.6 million from our issuance of Series E convertible preferred stock.
Net cash provided by financing activities was $30.0 million for the year ended December 31, 2014, and consisted
primarily of the net proceeds of $20.1 million from our issuance of Series D convertible preferred stock, and the net proceeds of
$9.9 million from the issuance of the Oxford notes.
Contractual
Obligations
The following summarizes our contractual obligations as of December 31, 2015.
Payment
due
by
period
Contractual
Obligations
Total
Less
than
1
year
1
-
3
years 3
-
5
years
(in
thousands)
More
than
5
Years
(1)
Operating lease obligations
Payments under corporate development agreement
Principal payments under Oxford notes
(3)
Interest payments under Oxford notes
Total contractual obligations
(3)
(2)
$
968 $
820
10,000
2,202
393 $
820
2,389
627
575 $
—
5,771
683
— $
—
1,840
893
$ 13,990 $ 4,229 $ 7,029 $ 2,733 $
—
—
—
—
—
(1)
In January 2016, we amended our existing lease agreement related to our corporate offices to expand the leased premises by
an additional 11,889 square feet for a total of 32,805 square feet. The existing lease term is through May 2018 and was
extended for an additional five years through May 2023. With respect to the expanded premises only during the remaining
lease term and the entire premises during the expanded lease term, the future total minimum lease payments under the
amended lease will be an additional $3.6 million and will expire May 2023. We have an option to extend the term of the
lease for an additional five-year period with respect to the entire premises.
(2) Represents minimum payment obligations under a corporate development agreement to purchase current application
‑specific integrated circuits, which are subcomponents of the sensors used in Eversense.
(3) Represents the principal and interest payment schedule for the $10.0 million principal amount of the Oxford notes that were
outstanding as of December 31, 2015, assuming that we do not receive our CE mark by March 4, 2016, in which case,
principal payments will begin on April 1, 2016. In the event we do receive our CE mark by March 4, 2016, the principal
payments will begin on August 1, 2016. In such event, the schedule for principal payments on the Oxford notes will be as
follows: $1,268 in less than one year; $6,622 in 1 ‑3 years; and $2,111 in 3 ‑5 years, and the schedule for interest payments
on the Oxford notes will be as follows: $680 in less than one year; $783 in 1 ‑3 years and $959 in 3 ‑5 years. For additional
information, see “—Liquidity and Capital Resources—Indebtedness.”
Critical
Accounting
Policies
and
Significant
Judgments
and
Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of
America, or GAAP. The preparation of these financial statements requires us to make estimates,
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judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities
as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In
accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are
reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates
and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in
circumstances, facts and experience. The effects of material revisions in estimates are reflected in our financial statements
prospectively from the date of the change in estimate.
While our significant accounting policies are more fully described in the notes to our financial statements appearing
elsewhere in this Annual Report, we believe the following are the critical accounting policies used in the preparation of our
financial statements that require significant estimates and judgments.
Revenue
Recognition
Subject to regulatory approval and our ability to secure agreements with third party distributors, we expect to begin
commercializing Eversense in select European markets through a third ‑party distributor network in the first half of 2016. Subject
to the completion and the results of our planned pivotal trial in the United States, which we initiated in the first quarter of 2016,
we also intend to seek FDA approval to commercialize Eversense in the United States. We intend to distribute Eversense in the
United States through our own direct sales and marketing organization.
We will recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have
been rendered, the price is fixed or determinable, and collectability is reasonably assured.
Stock
‑‑Based
Compensation
We issue stock ‑based compensation awards to our employees and non ‑employee directors, including stock options. We
measure stock ‑based compensation expense related to these awards based on the fair value of the award on the date of grant and
date of any modification, and recognize stock ‑based compensation expense on a straight ‑line basis over the requisite service
period for each separately vesting portion of the award for those awards with service conditions only. For awards that also contain
performance conditions, expense is recognized beginning at the time the performance condition is considered probable of being
met over the remaining vesting period.
We have selected the Black ‑Scholes option pricing model to determine the fair value of stock option awards, which
requires management to apply judgment and make assumptions and estimates, including:
·
·
·
·
·
the fair value of our common stock;
the expected volatility of the price of our common stock;
dividend yields;
future employee turnover rates; and
future employee stock option exercise behaviors.
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The following summarizes the assumptions used for estimating the fair value of stock options granted to employees for
the periods indicated. Options to purchase 1,540,614 shares and 4,024,339 shares were granted during the years ended
December 31, 2015 and 2014, respectively.
Assumptions:
Risk-free interest rate
Expected life in years
Expected volatility
Expected dividend yield
Weighted-average grant date fair value
2015
0.7 -
Year
Ended
December
31,
2014
1.9 % 2.0 - 2.1 %
6.5
6.25 - 6.5
54.0 - 54.3 % 55.5 - 56.4 %
— %
— %
$ 1.02
$ 0.34
We have assumed no dividend yield because we do not expect to pay dividends in the future, which is consistent with
our history of not paying dividends. The risk ‑free interest rate assumption is based on observed interest rates for constant
maturity U.S. Treasury securities consistent with the expected life of our employee stock options. The expected life represents the
period of time the stock options are expected to be outstanding and is based on the simplified method. Under the simplified
method, the expected life of an option is presumed to be the mid ‑point between the vesting date and the end of the contractual
term. We used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon
which to otherwise estimate the expected life of the stock options. Expected volatility is based on the daily closing prices of a
peer group of comparable publicly traded companies in similar stages of development.
The amount of stock ‑based compensation expense recognized during a period is based on the value of the portion of the
awards that are ultimately expected to vest. Our estimate of pre ‑vesting forfeitures, or forfeiture rate, is based on our analysis of
historical behavior by stock option holders. The estimated forfeiture rate is applied to the total estimated fair value of the awards,
as derived from the Black ‑Scholes model, to compute the stock ‑based compensation expense, net of pre ‑vesting forfeitures, to
be recognized in our statements of operations. We estimate forfeitures for employee grants at the time of grant, and revise the
estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the actual expense
recognized over the vesting period will only represent those options that vest.
Our assumptions may differ from those used in prior periods, and changes in the assumptions may have a significant
impact on the fair value of future equity awards, which could have a material impact on our consolidated financial statements. We
grant stock options with exercise prices equal to the estimated fair value of our common stock on the date of grant.
The following table summarizes the classification of our stock ‑based compensation expenses recognized in our
statements of operations.
Year
Ended
December
31,
2015
2014
Research and development
Administrative
Total stock-based compensation
Fair
value
of
common
stock
on
grant
and
modification
dates
$
(in
thousands)
462
971
$ 1,433
$
$
105
434
539
Prior to the Acquisition, we were a private company with no active public market for our common stock. Therefore, we
have historically periodically determined for financial reporting purposes the estimated per share fair value of our common stock
at various dates using contemporaneous valuations performed in accordance with the
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guidance outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately ‑Held Company
Equity Securities Issued as Compensation, also known as the Practice Aid. We performed these contemporaneous valuations on
an as ‑needed basis. In conducting the contemporaneous valuations, we considered all objective and subjective factors that we
believed to be relevant for each valuation conducted, including our best estimate of our business condition, prospects and
operating performance at each valuation date.
Common
stock
valuation
methodology
The contemporaneous valuations that we conducted were prepared in accordance with the guidelines in the Practice Aid,
which prescribes several valuation approaches for setting the value of an enterprise, such as the cost, market and income
approaches, and various methodologies for allocating the value of an enterprise to its common stock. In determining the fair value
of the common stock underlying the stock options granted, our board of directors has historically considered, among other things,
the most recent estimate of fair value provided by an independent third ‑party valuation specialist and our assessment of
additional objective and subjective factors to determine the common stock fair market value each valuation date. The following
factors, among others, were considered:
·
·
·
·
·
·
our financial condition and operating results, including our projected results;
our stage of development and business strategy;
the financial condition and operating results of publicly owned companies with similar lines of business and their
historical volatility;
external market conditions that could affect companies in the life sciences and medical device sectors;
the prices of our convertible preferred stock sold to outside investors and the rights, preferences and privileges of
our convertible preferred stock as compared to those of our common stock, including the liquidation preference of
our convertible preferred stock; and
the likelihood of a liquidity event such as an initial public offering, a merger or the sale of our company.
Following the Acquisition, our board of directors determines the fair value of our common stock based on its closing
trading price on the date of grant.
There are significant judgments and estimates inherent in the determination of fair value of our common stock, including
the contemporaneous valuations. These judgments and estimates include assumptions regarding our future operating performance,
and the determination of the appropriate valuation methods. If we had made different assumptions, our stock ‑based
compensation expense, net loss and net loss per common share could have been significantly different.
In each of our contemporaneous valuations through December 31, 2015, we generally used the income and market
approaches to derive an estimated enterprise value. The income approach utilizes a discounted cash flow, or DCF, analysis, to
determine our enterprise value. The DCF analysis involves applying appropriate discount rates to estimated cash flows that were
based on forecasts of revenue, costs and capital requirements. Our assumptions underlying the estimates were consistent with the
plans and estimates that we use to manage the business. The risks associated with achievement of our forecasts were assessed in
selecting the appropriate discount rates and selecting probability weightings for forecasted cash flows. The market approach
utilizes the option pricing method, or OPM, backsolve method to determine our enterprise value. Under this method, an implied
equity value of the company is derived from recent transactions involving the company’s securities in arms ‑length transactions.
In accordance with the Practice Aid, for all valuations through December 31, 2015, we used the OPM to allocate our
estimated enterprise value across our classes and series of capital stock to determine the fair value of our common stock. Under
the OPM, shares are valued by creating a series of call options with exercise prices based on the
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liquidation preferences and conversion terms of each equity class. The values of the preferred and common stock are inferred by
analyzing these options.
Option
grants
and
modifications
The following table summarizes by grant date, or modification date, the number of shares of common stock subject to
stock options granted or repriced from January 1, 2014 through December 31, 2015.
(1)
(1)
Event
Date
June 4, 2014
November 21, 2014
December 5, 2014
December 5, 2014
June 2, 2015
July 24, 2015
December 4, 2015
(2)
Number
of
Shares
Underlying
Options Exercise
Price
Granted/Repriced
per
Share
3,144,892 $
83,900 $
795,546 $
3,178,452 $
145,776 $
1,331,912 $
62,924 $
Estimated
Fair
Value
per
Share
of
Common
Stock
0.70
0.54
0.54
0.54
1.75
1.95
1.95
0.70 $
0.70 $
0.54 $
0.54 $
1.37 $
1.95 $
1.95 $
(1) On December 5, 2014, our board of directors determined that the exercise prices of these stock options were substantially
above the then estimated fair market value of our common stock of $0.54 per share. Accordingly, the board of directors
amended the terms of these options to reset their respective exercise prices to $0.54 per share. See footnote (2) below.
(2) Represents the repricing of stock options to purchase an aggregate of 3,178,452 shares of common stock having exercise
prices of $0.70 per share, which were held by then current employees and directors as of December 5, 2014. These options
were originally granted on June 4, 2014 and November 21, 2014. Pursuant to this repricing, the exercise prices of these
options were decreased to $0.54 per share, the then estimated fair market value of our common stock.
On June 2, 2015, we amended the terms of certain stock options to purchase an aggregate of 1,211,390 shares of
common stock that originally had both service and performance conditions. The amendments to these options replaced the
original vesting schedule with a vesting schedule providing that the options vest in 48 equal monthly installments from their
respective original dates of grant. The modification did not result in a change to the exercise prices of the stock options.
Research
and
Development
Expenses
Research and development costs are expensed as incurred. These costs include compensation and benefits for research
and development employees, including stock ‑based compensation, facilities expenses, depreciation, overhead expenses, cost of
laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to
CROs and other consultants, and other outside expenses.
Certain of these costs, such as costs associated with our clinical trials, are recognized based on an evaluation of the
progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to
us by our vendors with respect to their actual costs incurred. We account for the expenses under these agreements according to the
progress of the trial or study, as measured by patient enrollment and progression and the timing of various aspects of the trial or
study. We determine accrual estimates through discussion with applicable personnel and outside service providers as to the
progress or state of completion of the applicable clinical trials or feasibility studies. Payments for these activities are based on the
terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in our financial
statements as prepaid or accrued expenses, as the case may be. During the course of a clinical trial or feasibility study, we adjust
the rate of clinical trial expense recognition if actual results differ from our estimates. We make estimates of our accrued expenses
as of each balance sheet date in our financial statements based on facts and circumstances known to us at the time. Although we
do not expect that our estimates will be materially different from amounts actually incurred, our understanding of status and
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timing of services performed relative to the actual status and timing of services performed may vary and may result in our
reporting amounts that are too high or too low for any particular period. As of December 31, 2015, we had not made any material
adjustments to our prior period estimates of accrued expenses for clinical trials. However, due to the nature of estimates, we
cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information
about the status of our clinical trials.
Income
Taxes
We recorded deferred tax assets of $65.6 million as of December 31, 2015, which have been fully offset by a valuation
allowance due to uncertainties surrounding our ability to realize these tax benefits. The deferred tax assets are primarily
composed of federal and state tax net operating loss, or NOL, carry forwards, capitalized start ‑up costs and research and
development tax credit carry forwards. As of December 31, 2015, we had federal and state NOL carry forwards of $103.0 million,
capitalized start ‑up costs of $49.5 million and research and development tax credit carry forwards net of uncertain tax posit i on
of $4.7 million available to reduce future taxable income, if any. These federal and state NOL carry forwards will begin to expire
at various dates starting in 2018. In general, if we experience a greater than 50 percentage point aggregate change in ownership of
specified significant stockholders over a three ‑year period, utilization of our pre ‑change NOL carry forwards will be subject to
an annual limitation under Section 382 of the Code, and similar state laws. Such limitations may result in expiration of a portion
of the NOL carry forwards before utilization and may be substantial. If we experience a Section 382 ownership change as a result
of future changes in our stock ownership, some of which changes are outside our control, the tax benefits related to the NOL carry
forwards may be further limited or lost.
Recent
Accounting
Pronouncements
In July 2013, the Financial Accounting Standards Board, or FASB, issued guidance for the presentation of an
unrecognized tax benefit when an NOL carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires
an entity to present in the financial statements an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a
reduction to a deferred tax asset for an NOL carryforward, a similar tax loss, or a tax credit carryforward. If the NOL
carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the
jurisdiction or the tax law of the jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred
tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be
combined with deferred tax assets. This guidance does not require any additional recurring disclosures and is effective for fiscal
years beginning after December 15, 2013. The adoption of this guidance did not have a material impact on the financial
statements.
In May 2014, the FASB issued guidance for revenue recognition for contracts, superseding the previous revenue
recognition requirements, along with most existing industry ‑specific guidance. The guidance requires an entity to review
contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate
the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature,
amount, timing and uncertainty of revenue arising from contracts with customers. The standard is effective for the reporting year
beginning January 1, 2
018. We are currently evaluating the impact, if any, that this new accounting pronouncement will have on
our financial statements.
In August 2014, the FASB issued guidance requiring management to evaluate on a regular basis whether any conditions
or events have arisen that could raise substantial doubt about the entity’s ability to continue as a going concern. The guidance
1) provides a definition for the term “substantial doubt,” 2) requires an evaluation every reporting period, interim periods
included, 3) provides principles for considering the mitigating effect of management’s plans to alleviate the substantial doubt,
4) requires certain disclosures if the substantial doubt is alleviated as a result of management’s plans, 5) requires an express
statement, as well as other disclosures, if the substantial doubt is not alleviated, and 6) requires an assessment period of one year
from the date the financial statements are issued. The standard is effective for the reporting year beginning January 1, 2017 and
early adoption is permitted in certain circumstances. We do not expect the adoption of this guidance to have a material impact on
our financial statements.
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In April 2015, the FASB issued accounting guidance requiring that debt issuance costs related to a recognized liability
be presented on the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt
discounts. The recognition and measurement guidance for debt issuance costs are not affected. The standard is effective for
reporting periods beginning after December 15, 2015. We are currently evaluating the impact, if any, that this new accounting
pronouncement will have on our consolidated financial statements.
In April 2015, the FASB issued accounting guidance related to Internal ‑Use Software specifically for the Customer’s
Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this Update provide guidance to customers
about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software
license, then the customer should account for the software license element of the arrangement consistent with the Acquisition of
other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for
the arrangement as a service contract. The standard is effective for reporting periods beginning after December 15, 2015. An
entity can elect to adopt the amendments either 1) prospectively for all arrangements entered into or materially modified after the
effective date or 2) retrospectively. We decided to adopt the standards prospectively and will be accounting for the new cloud
arrangements in accordance with the new standards.
We have evaluated all other issued and unadopted Accounting Standards Updates and believe the adoption of these
standards will not have a material impact on our results of operations, financial position, or cash flows.
JOBS
Act
In April 2012, the JOBS Act was enacted. Section 107(b) of the JOBS Act provides that an “emerging growth company”
can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new
or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until
those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended
transition period, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of
such standards is required for other public companies.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements
under the JOBS Act. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions,
including without limitation, (i) not being required to provide an auditor’s attestation report on our system of internal controls
over financial reporting pursuant to Section 404(b) of the Sarbanes ‑Oxley Act and (ii) not being required to comply with any
requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report
providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We
will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross
revenues of $1.0 billion or more; (b) the last day of our fiscal year ending December 31, 2019; (c) the date on which we have
issued more than $1.0 billion in nonconvertible debt during the previous six years; or (d) the date on which we are deemed to be a
large accelerated filer under the rules of the SEC.
Off
‑‑Balance
Sheet
Arrangements
During the periods presented, we did not have, and we do not currently have, any off ‑balance sheet arrangements, as
defined under SEC rules.
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Item
7A.
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 December 31, 2015 and 2014, we had cash and cash equivalents of $3.9 million and
$18.9 million, respectively. We generally hold our cash in interest-bearing money market accounts. 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. Additionally, the interest rate on
our Oxford notes is fixed. We do not currently engage in hedging transactions to manage our exposure to interest rate risk.
Foreign
Currency
Risk
We expect that our international sales through distributors and the costs we incur in connection with our international
operations will be denominated in U.S. dollars. Therefore, we do not expect that our results of operations will be materially
affected by foreign exchange rate risks. However, our distributors' sales of our products in international markets to their
customers will be denominated in local currencies. Therefore, it is possible that, when the U.S. dollar appreciates, products sales
could be adversely impacted, as our products will become more expensive to the customers of our distributors. We do not
currently engage in any hedging transactions to manage our exposure to foreign currency exchange rate risk.
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Item
8.
Financial
Statements
and
Supplementary
Data
INDEX
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm for the year ended December 31, 2015
Report of PricewaterhouseCoopers LLP, Independent Registered Publi c Accounting Firm for the
year ended December 31, 2014
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Operations for the years ended December 31, 2015 and 2014
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014
Notes to Financial Statements
83
84
85
86
87
88
89
82
Table of Contents
REPORT
OF
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM
The Board of Directors and Stockholders of
Senseonics Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Senseonics Holdings, Inc. as of December 31, 2015,
and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year then
ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Senseonics Holdings, Inc. at December 31, 2015, and the results of its operations and its cash flows for the
year then ended, in conformity with U.S. generally accepted accounting principles .
The accompanying financial statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the financial statements, the Company has recurring losses from operations and has a net
capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to
these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
McLean, VA
February 16 , 2016
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Table of Contents
REPORT
OF
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM
To the Board of Directors and Shareholders of
Senseonics Holdings, Inc.:
In our opinion, the accompanying balance sheet as of December 31, 2014 and the related statements of operations, of changes in
stockholders' equity and of cash flows for the year ended December 31, 2014 present fairly, in all material respects, the financial
position of Senseonics Holdings, Inc. (the "Company") at December 31, 2014, and the results of its operations and its cash flows
for the year then ended, in conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital
deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/
PricewaterhouseCoopers
LLP
Baltimore, Maryland
July 10, 2015, except for Note 1 as to which the date is January 13, 2016
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Table of Contents
Senseonics
Holdings,
Inc.
Consolidated
Balance
Sheets
(in
thousands,
except
for
share
and
per
share
data)
Assets
Current assets:
Cash and cash equivalents
Prepaid expenses and other current assets
Total current assets
Deposits and other assets
Property and equipment, net
Total assets
Liabilities
and
Stockholders’
Equity
(Deficit)
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Note payable, current portion
Total current liabilities
Note payable, net of discount
Accrued interest
Warrant liabilities
Deferred rent
Total liabilities
Commitments and contingencies (Note 6)
Stockholders’ equity (deficit):
Series A convertible preferred stock, $0.01 par value per share; 599,997 shares
authorized, issued and outstanding ($3,000 liquidation preference) as of
December 31, 2014; no shares authorized, issued and outstanding as of
December 31, 2015
Series B convertible preferred stock, $0.01 par value per share; 1,202,497 shares
authorized, issued and outstanding ($12,025 liquidation preference) as of
December 31, 2014; no shares authorized, issued and outstanding as of
December 31, 2015
Series C convertible preferred stock, $0.01 par value per share; 2,073,749 shares
authorized, issued and outstanding ($41,475 liquidation preference) as of
December 31, 2014; no shares authorized, issued and outstanding as of
December 31, 2015
Series D convertible preferred stock, $0.01 par value per share; 22,995,265 shares
authorized, 19,777,349 shares issued and outstanding ($74,165 liquidation preference)
as of December 31, 2014; no shares issued and outstanding as of December 31, 2015
Common stock, $0.001 par value per share; 250,000,000 and 65,679,406 authorized,
75,760,061, shares issued and outstanding, and 1,962,486 shares issued and 1,918,579
shares outstanding, as of December 31, 2015 and 2014, respectively
Additional paid-in capital
Treasury stock, at cost; 43,907 shares of common stock, as of December 31, 2014
Accumulated deficit
Total stockholders’ equity (deficit)
Total liabilities and stockholders’ equity (deficit)
85
$
$
$
December
31,
2015
2014
$
$
$
3,939
1,025
4,964
217
311
5,492
1,252
3,694
2,389
7,335
7,499
327
—
28
15,189
—
—
—
—
18,923
711
19,634
134
227
19,995
880
1,161
—
2,041
9,815
—
197
29
12,082
6
12
21
198
76
151,019
—
(160,792)
(9,697)
5,492
$
2
138,673
(84)
(130,915)
7,913
19,995
$
Table of Contents
The accompanying notes are an integral part of these consolidated financial statements.
Senseonics
Holdings,
Inc.
Consolidated
Statements
of
Operations
(in
thousands,
except
for
share
and
per
share
data)
Revenue
Expenses:
Sales and marketing expenses:
Research and development expenses
Administrative expenses
Operating loss
Interest income
Interest expense
Other income
Net loss
Deemed dividend as a result of Series E preferred stock beneficial conversion feature
Net loss available to common shareholders
Basic and diluted loss per common share
Basic and diluted weighted-average shares outstanding
Year
Ended
December
31,
2015
2014
$
38 $
—
792
18,251
9,807
95
12,881
5,726
(28,812)
(18,702)
9
(1,100)
26
—
(191)
8
$
(29,877) $
(18,885)
$
$
(407)
(30,284) $
(18,885)
(4.32) $
(9.89)
1,908,587
7,002,317
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
Consolidated
Statements
of
Changes
in
Stockholders’
Equit
y
(Deficit)
for
the
Years
Ended
December
31,
2015
and
2014
Senseonics
Holdings,
Inc.
Balance, December 31,
2013
Sale of Series D
preferred stock
Exercise of stock options
for cash
Stock-based compensation
expense
Net loss
Balance, December 31,
2014
Sale Series E preferred
stock
Exercise of stock options
for cash and vesting of
RSAs
Stock-based compensation
expense
Reclassification of warrant
liability
Net loss
Effect of reverse merger
and conversion of
preferred stock to
common stock
Balance, December 31,
2015
Series
A
Series
B
Preferred
Stock Preferred
Stock Preferred
Stock
Series
C
Preferred
Stock
Preferred
Stock Common
Stock
Treasury
Stock Accumulated Stockholders'
Additional
Paid-In
Shares Amount Shares Amount Shares Amount
Shares
Amount Shares Amount Shares Amount Capital
Shares Amount
Deficit
Total
Equity
(Deficit)
(in
thousands)
Series
D
Series
E
600 $
6 1,202 $ 12 2,074 $ 21 14,403 $ 144
— $ — 1,943 $
2 $ 118,088
44 $ (84) $ (112,030) $
6,159
—
—
—
—
—
—
5,374
54
—
—
—
— 20,036
—
—
—
20,090
—
—
—
—
—
—
—
—
—
—
19
—
10
—
—
—
10
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
539
—
—
—
—
—
—
539
(18,885) (18,885)
600 $
6 1,202 $ 12 2,074 $ 21 19,777 $ 198
— $ — 1,962 $
2 $ 138,673
44 $ (84) $ (130,915) $
7,913
—
—
—
—
—
—
—
— 2,712
27
— 10,606
—
—
—
10,633
—
—
—
—
—
—
—
—
—
—
520
1
62
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,433
—
—
—
—
—
—
151
—
—
—
—
—
—
(29,877)
151
(29,877)
—
—
63
1,433
(600)
(6) (1,202)
(12) (2,074)
(21) (19,777) (198) (2,712)
(27) 73,278
73
94
(44)
84
—
(13)
— $ —
— $ —
— $ —
— $ —
— $ — 75,760 $ 76 $ 151,019
— $ — $ (160,792) $ (9,697)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
Senseonics
Holdings,
Inc.
Consolidated
Statements
of
Cash
Flows
(in
thousands)
Cash
flows
from
operating
activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense
Non-cash interest expense (debt discount and deferred costs)
Change in fair value of derivative liabilities
Stock-based compensation expense
Changes in assets and liabilities:
Prepaid expenses and other current assets
Deposits and other assets
Accounts payable, accrued expenses and other current liabilities
Deferred rent (long term)
Net cash used in operating activities
Cash
flows
from
investing
activities
Capital expenditures
Net cash used in investing activities
Cash
flows
from
financing
activities
Sale of Series D convertible preferred stock, net of costs
Sale of Series E convertible preferred stock, net of costs
Repurchase shares as result of reverse merger
Net proceeds from exercise of stock options
Proceeds from notes payable, net of costs
Principal payments under capital lease obligations
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, at beginning of period
Cash and cash equivalents, at end of period
Supplemental
disclosure
of
cash
flow
information
Cash paid during the year for interest
Year
Ended
December
31,
2015
2014
$ (29,877)
$ (18,885)
118
77
(46)
1,433
(314)
(89)
3,232
1
(25,465)
(202)
(202)
—
10,633
(12)
62
—
—
10,683
(14,984)
18,923
3,939
660
$
$
189
67
(8)
539
(514)
—
(674)
16
(19,270)
(29)
(29)
20,090
—
—
10
9,879
(3)
29,976
10,677
8,246
18,923
93
$
$
The accompanying notes are an integral part of these consolidated financial statements.
88
Table of Contents
1.
Organization
Senseonics
Holdings,
Inc.
Notes
to
Consolidated
Financial
Statements
Senseonics, Incorporated, (“Senseonics”), subsequent to the Acquisition described as a wholly-owned subsidiary of
Senseonics Holdings, Inc. (“Senseonics Holdings or the “Company”), a Delaware corporation, is a medical technology company
focused on the design, development and commercialization of glucose monitoring systems to improve the lives of people with
diabetes by enhancing their ability to manage their disease with relative ease and accuracy. Senseonics was originally
incorporated on October 30, 1996 and commenced operations on January 15, 1997.
ASN Technologies, Inc. (“ASN”) was incorporated in Nevada on June 26, 2014. O n December 4, 2015, ASN
reincorporated in Delaware and changed its name to Senseonics Holdings, Inc..
On December 7, 2015, the Company acquired 100% of the outstanding capital stock of Senseonics (the "Acquisition").
While the Company was the legal acquirer of Senseonics in the transaction, since (i) former Senseonics' stockholders owned 80%
of the combined company on a fully diluted basis immediately following the transaction, and (ii) all members of the combined
company's executive management and Board of Directors were from Senseonics, Senseonics was deemed to be the acquiring
company for accounting purposes. As such, the transaction was accounted for as a reverse recapitalization in accordance with
U.S. GAAP and, in the accompanying consolidated financial statements, ASN's historical consolidated financial statements have
been replaced with Senseonics' historical consolidated financial statements.
Pursuant to the terms of the Acquisition (i) all outstanding shares of common stock of Senseonics, $0.01 par value per
share, were exchanged for 1,955,929 shares of the Company's common stock, $0.001 par value per share (reflecting an exchange
ratio of 2.0975), (ii) all outstanding shares of preferred stock were converted into shares of common stock of Senseonics, and
exchanged into 55,301,674 shares of the Company’s common stock, $0.001 par value per share, and (iii) all outstanding options
and warrants to purchase shares of common stock of Senseonics were exchanged for or replaced with options and warrants to
acquire shares of the Company’s common stock using the same exchange ratio.
In connection with the reverse recapitalization, the Company transferred its former operations to a former officer,
director and stockholder in exchange for the (i) satisfaction of a promissory note issued to the Company's former officer, director
and stockholder in the principal amount of $9,000 and (ii) assumption of liabilities related to the former operations. No gain or
loss was recorded as a result of the transfer.
Senseonics Holdings and its wholly-owned subsidiary Senseonics are hereinafter referred to as the “Company” unless
stated otherwise.
2.
Liquidity
The Company's operations are subject to certain risks and uncertainties including, among others, current and potential
competitors with greater resources, lack of operating history and uncertainty of future profitability. Since inception, the Company
has incurred substantial operating losses, principally from expenses associated with the Company’s research and development
programs. The Company has not generated significant revenues from the sale of products and its ability to generate revenue and
achieve profitability largely depends on the Company’s ability, alone or with others, to complete the development of its products
or product candidates, and to obtain necessary regulatory approvals for the manufacture, marketing and sales of those products.
These activities, including planned significant research and development efforts, will require significant uses of working capital
throughout 2016 and beyond. Based on its current operating plans, the Company believes that its existing cash and cash
equivalents will not be sufficient to meet the Company’s anticipated operating needs beyond early 2016. These factors raise
substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
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Table of Contents
Historically, the Company has financed its operating activities through the sale of equity and equity-linked securities and
the issuance of debt. The Company plans to continue financing its operations with external capital. However, the Company may
not be able to raise additional funds on acceptable terms, or at all. If the Company is unable to secure sufficient capital to fund its
research and development and other operating activities, the Company may be required to delay or suspend operations, enter into
collaboration agreements with partners that could require the Company to share commercial rights to its products to a greater
extent or at earlier stages in the product development process than is currently intended, merge or consolidate with other entities,
or liquidate.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a
going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary
course of business. The notes payable are classified as long-term in the accompanying consolidated balance sheet. The terms of
the notes include a subjective acceleration clause which management deems as remote. The propriety of using the going-concern
basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient
cash from operations, and potential other funding sources, including cash on hand, to meet the Company’s obligations as they
become due.
3.
Summary
of
Significant
Accounting
Policies
Basis
of
Accounting
The accompanying consolidated financial statements have been prepared in accordance with the requirements of U.S.
generally accepted accounting principles (“U.S. GAAP”). The consolidated financial statements reflect the accounts of
Senseonics Holdings and its wholly-owned subsidiary Senseonics as of December 31, 2015. All intercompany transactions and
balances have been eliminated in consolidation.
Reclassification
Sales and marketing expenses of $94,546 included in administrative expenses in 2014 have been reclassified to sales and
marketing expenses to conform to 2015 presentation.
Segment
Information
Operating segments are defined as components of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision-maker (CODM), or decision-making group, in deciding how to allocate
resources and in accessing performance. The Company views its operations and manages its business in one segment, glucose
monitoring systems.
Use
of
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but not
limited to, valuation of common and preferred stock, stock-based compensation, the fair value of warrant liabilities, recoverability
of long-lived assets, deferred taxes and valuation allowances, depreciable lives of property and equipment, and estimated accruals
for preclinical study costs, which are accrued based on estimates of work performed under contracts. Actual results could differ
from those estimates; however management does not believe that such differences would be material.
Fair
Value
Disclosures
The carrying amounts of short-term financial instruments, including cash and cash equivalents, prepaid expenses and
other current assets, and accounts payable and other current liabilities approximate fair value as of December 31, 2015 and 2014,
because of the relatively short-term maturity of these instruments. The fair value of the note payable
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approximates its carrying value as of December 31, 2015 and 2014 and is based on the effective interest rate compared to the
current market rates, which is a Level 2 fair value measurement as described below.
See Note 12 for further discussion of fair value measurements.
Cash
and
Cash
Equivalents
and
Concentration
of
Credit
Risk
Cash equivalents are highly-liquid instruments with original maturities of three months or less and consist of U.S.
Government and U.S. Government agency securities and money market funds with major commercial banks and financial
institutions. Cash equivalents are recorded at cost plus accrued interest.
The Company’s cash and cash equivalents potentially subject the Company to credit and liquidity risk. The Company
maintains cash deposits at major financial institutions with high credit quality and, at times, the balances of those deposits may
exceed the Federal Deposit Insurance Corporation limits of $250,000. The Company has not experienced and does not anticipate
any losses on deposits with commercial banks and financial institutions that exceed the federally insured amounts.
Property
and
Equipment
Property and equipment are stated at historical cost and depreciated on a straight-line basis over the estimated useful
lives, generally five years. Equipment under capital leases is depreciated on a straight-line basis over the lesser of its estimated
useful life or the lease term. Leasehold improvements are depreciated over the shorter of the remaining lease term or useful lives
of the assets. Upon disposition of the assets, the costs and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is included in the results of operations. Repairs and maintenance costs are included as expense in the
accompanying statement of operations.
Management reviews property and equipment for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the
carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If the undiscounted cash
flows are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the estimated fair value of the assets. Management did not identify any indicators of impairment in
2015 and 2014.
Treasury
Stock
The Company records purchases of common stock for treasury at cost, and carries the cost of treasury stock as a
reduction in stockholder’ equity. The Company maintained 43,907 shares of common stock in treasury as of December 31, 2014;
the treasury stock was retired effective with the Acquisition. There is no treasury stock outstanding as of December 31, 2015.
Revenue
Recognition
Product sales revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the
price is fixed or determinable and collectability is probable. These criteria are generally anticipated to be met as products are
shipped to customers. When revenue arrangements provide the customer with a contractual right of return, revenue is deferred
until the right of return lapses or a reasonable estimate of returns can be determined.
Research
and
Development
Costs
Research and development costs are expensed as incurred. Research and development expenses include costs related to
employee compensation, preclinical and clinical trials, manufacturing, supplies, outsource testing, consulting and depreciation
and other facilities-related expenses.
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Table of Contents
Stock-Based
Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as
stock options, based on the fair value of those awards at the date of grant. The estimated fair value of stock options on the date of
grant is amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award for
those awards with service conditions only. For awards that also contain performance conditions, expense is recognized beginning
at the time the performance condition is considered probable of being met over the remaining vesting period.
The Company uses the Black-Scholes-Merton option pricing model (“Black-Scholes Model”) to determine the fair value
of stock ‑option awards. Valuation of stock awards requires management to make assumptions and to apply judgment to
determine the fair value of the awards. These assumptions and judgments include estimating the fair value of the Company’s
common stock, future volatility of the Company’s stock price, dividend yields, future employee turnover rates, and future
employee stock option exercise behaviors. Changes in these assumptions can affect the fair value estimate.
Under Accounting Standards Codification (“ASC”) 718, the cumulative amount of compensation cost recognized for
instruments classified as equity that ordinarily would result in a future tax deduction under existing tax law shall be considered to
be a deductible difference in applying ASC 740 ,
Income
Taxes
. The deductible temporary difference is based on the
compensation cost recognized for financial reporting purposes; however, these provisions currently do not impact the Company,
as all the deferred tax assets have a full valuation allowance.
Since the Company had net operating loss (“NOL”) carryforwards as of December 31, 2015 and 2014, no excess tax
benefits for the tax deductions related to share-based awards were recognized in the statements of operations.
Comprehensive
Income
ASC 220-10, Reporting Comprehensive Income, requires the presentation of the comprehensive income or loss and its
components as part of the financial statements. For the years ended December 31, 2015 and 2014, the Company’s net loss equals
comprehensive loss.
Income
Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that are in effect when the differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The measurement of a
deferred tax asset is reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
Management uses a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return, as well as guidance on derecognition, classification,
interest and penalties and financial statement reporting disclosures. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities. In the ordinary course of business, transactions
occur for which the ultimate outcome may be uncertain. Management does not expect the outcome related to accrued uncertain
tax provisions to have a material adverse effect on the Company’s financial position, results of operations or cash flows. The
Company recognizes interest and penalties accrued on any unrecognized tax exposures as a component of income tax expense.
The Company did not have any amounts accrued relating to interest and penalties as of December 31, 2015 and 2014.
The Company is subject to taxation in various jurisdictions in the United States and remains subject to examination by
taxing jurisdictions for the year 1996 and all subsequent periods due to the availability of NOL carryforwards. In addition, all of
the net operating losses and research and development credit carryforwards that may be used in future years are still subject to
adjustment.
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Loss
per
Share
Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number
of shares of common stock outstanding during the period.
For periods of net loss, diluted 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 was 14,261,768 and 34,435,548 at
December 31, 2015 and 2014, consisting of convertible preferred shares, common stock options and stock purchase warrants,
which have been excluded from the computation of diluted loss per share, as follows:
Convertible preferred shares
Common stock options
Stock purchase warrants
Total anti-dilutive outstanding
December
31,
2015
2014
— 23,653,592
8,393,081
2,388,875
34,435,548
9,251,164
5,010,604
14,261,768
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 shareholders by the weighted-average number of shares outstanding plus the impact of all
potential dilutive common shares, consisting primarily of common stock options and stock purchase warrants using the treasury
stock method.
For periods prior to December 7, 2015, common share and per share amounts of Senseonics have been retrospectively
adjusted to reflect each historical common share for 2.0975 common shares.
Recent
Accounting
Pronouncements
Not
Yet
Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance for revenue recognition for
contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The
guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3)
determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in
enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers. The
standard is effective for the Company’s reporting year beginning January 1, 2018 and early adoption is permitted starting January
1, 2017. The Company is currently evaluating the impact, if any, that this new accounting pronouncement will have on its
consolidated financial statements.
In August 2014, the FASB issued guidance requiring management to evaluate on a regular basis whether any conditions
or events have arisen that could raise substantial doubt about the entity’s ability to continue as a going concern. The guidance 1)
provides a definition for the term “substantial doubt,” 2) requires an evaluation every reporting period, interim periods included,
3) provides principles for considering the mitigating effect of management’s plans to alleviate the substantial doubt, 4) requires
certain disclosures if the substantial doubt is alleviated as a result of management’s plans, 5) requires an express statement, as
well as other disclosures, if the substantial doubt is not alleviated, and 6) requires an assessment period of one year from the date
the consolidated financial statements are issued. The standard is effective for the Company’s reporting year beginning January 1,
2017 and early adoption is permitted. The Company is currently evaluating the impact, if any, that this new accounting
pronouncement will have on its consolidated financial statements.
In April 2015, the FASB issued accounting guidance requiring that debt issuance costs related to a recognized liability
be presented on the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt
discounts. The recognition and measurement guidance for debt issuance costs are not affected. The standard is effective for
reporting periods beginning after December 15, 2015. The Company is currently evaluating the impact, if any, that this new
accounting pronouncement will have on its consolidated financial statements.
In April 2015, the FASB issued accounting guidance related to Internal-Use Software specifically for the Customer’s
Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this Update provide
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guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing
arrangement includes a software license, then the customer should account for the software license element of the arrangement
consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license,
the customer should account for the arrangement as a service contract. The standard is effective for reporting periods beginning
after December 15, 2015. An entity can elect to adopt the amendments either 1) prospectively for all arrangements entered into or
materially modified after the effective date or 2) retrospectively. The Company decided to adopt the standards prospectively and
will be accounting for the new cloud arrangements in accordance with the new standards.
The Company has evaluated all other issued and unadopted Accounting Standards Updates and believes the adoption of
these standards will not have a material impact on the results of operations, financial position, or cash flows.
4.
Property
and
Equipment
Property and equipment consisted of the following as of December 31, 2015 and 2014 (in thousands)
Laboratory equipment
Office furniture and equipment
Software
Leasehold improvements
Less: Accumulated depreciation
Property and equipment, net
December
31,
2014
2015
$ 518 $ 404
67
45
394
910
(683)
$ 311 $ 227
57
—
394
969
(658)
Depreciation expense for the years ended December 31, 2015 and 2014 was $118,174 and $189,325, respectively and is
recorded within the administrative expenses in the consolidated statements of operations. The Company disposed of $143,155 and
$1,070,595 of fully depreciated property and equipment in 2015 and 2014, respectively.
5.
Other
Balance
Sheet
Details
Accrued expenses and other current liabilities consisted of the following as of December 31, 2015 and 2014 (in
thousands):
Clinical and preclinical
Compensation and benefits
Financing Costs
Contract manufacturing
Legal
Audit and tax related
Other
Deferred rent, current portion
Total
December
31,
2015
2014
$
327
871 $
336
605
655
—
141
754
158
243
176
376
23
183
7
—
$ 3,694 $ 1,161
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6.
Commitments
and
Contingencies
The Company leases approximately 20,000 square feet of research and office space under a non-cancelable operating
lease expiring in 2018. The Company has an option to renew the lease for one additional five-year term. Rent expense is
recognized on a straight-line basis and was $386,438 for the years ended December 31, 2015 and 2014. The contractually
required cash payments under this lease at December 31, 2015 are as follows:
2016
2017
2018
Total minimum lease payments
$
$
393
405
171
969
On May 10, 2012 the Company amended a corporate development agreement with a supplier to include a minimum
purchase commitment per year based on the delivery of the current application-specific integrated circuit . Total research and
development expense related to the minimum payment was $0 and $289,000 during the years ended December 31, 2015 and
2014, respectively. There are approximately $820,000 of future minimum payments under this commitment at
December 31, 2015.
7.
401(k)
Plan
The Company has a defined contribution 401(k) plan available to all full-time employees. Employee contributions are
voluntary and are determined on an individual basis subject to the maximum allowable under federal income tax
regulations. Participants are fully vested in their contributions. There have been no employer contributions to this
plan. Administrative expenses for the plan, which are paid by the Company, were not material in 2015 and 2014.
8.
Notes
Payable
and
Stock
Purchase
Warrants
Term
Notes
Payable
On July 31 and December 23, 2014, the Company issued secured notes (“the Oxford notes”), and detachable stock
purchase warrants to Oxford Finance LLC (“Oxford Finance”) in a private placement, for gross proceeds of $4.0 million and $6.0
million respectively. The Oxford notes bear interest at a fixed annual rate of 6.95%, require monthly interest payments, and
mature on July 1, 2019. If the Company receives its CE mark by February 1, 2016, the monthly payments will convert to
payments of principal and interest, beginning on August 1, 2016, with the principal amount being amortized over the ensuing 36
months. Alternatively, if the Company has not received its CE mark by February 1, 2016, monthly payments will convert to
payments of principal and interest beginning on February 1, 2016, with the principal amount being amortized over the ensuing 42
months. The Oxford notes are collateralized by all of the Company’s assets other than its intellectual property. The Company
incurred issuance costs related to the notes of approximately $121,200 which were initially deferred and are being amortized as
additional interest expense over the term of the notes using the effective interest method. The fair value of the warrants was
recorded as a discount to the notes, which is also being amortized as additional interest expense over the term of the notes using
the effective interest method. In addition, the Company is obligated for a final fee at maturity of $0.9 million; this fee is being
accrued as additional interest expense over the term of the note using the effective interest method. For the years ended
December 31, 2015 and 2014, the Company recorded accretion of debt discount of $72,229 and $20,514, respectively within
interest expense in the accompanying consolidated statement of operations.
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The following are the scheduled maturities of the Oxford notes as of December 31, 2015, assuming the Company does
not receive its CE mark by February 1, 2016, in which case, principal payments will begin on February 1, 2016 (in thousands):
2016
2017
2018
2019
$ 2,389
2,786
2,985
1,840
Energy
Capital,
LLC
Borrowing
Facility
On December 7, 2015, the Company entered into a note purchase agreement (the “Purchase Agreement”) with Energy
Capital, LLC (“Energy Capital”) pursuant to which Energy Capital may lend an aggregate principal amount of up to $10.0
million. Under the terms of the agreement, if the Company has not received at least $20.0 million from the sale of the Company’s
capital stock in an offering of the Company’s equity prior to February 29, 2016 (the “Triggering Event”), then Energy Capital is
obligated to disburse funds on or after March 15, 2016. If the Triggering Event has occurred and the Company provides
documentation to Energy Capital that the Company’s available cash is lower than $500,000, then Energy Capital is obligated to
disburse funds any time after March 1, 2016. If after the Triggering Event has occurred and if the Company’s cash on hand is
higher than $500,000 the Company will be unable to borrow under the Purchase Agreement until March 15, 2016. In the event
that the Triggering Event occurs and the Company is able to incur indebtedness under the terms of the Energy Capital note, the
Company is obligated to repay the aggregate principal and accrued interest thereon if the Company issues and sells shares of the
Company’s equity securities in an underwritten public offering with total proceeds to the Company exceeding $45.0 million
(within ten business days after the closing of such public offering). In the event that the Company is unable to repay such
amounts, the Company will be in default under the terms of the Energy Capital note, which may also trigger an event of default
under the Oxford notes.
Stock
Purchase
Warrants
In 2014, in connection with the issuance of the Oxford notes, the Company issued to Oxford Finance four 10-year stock
purchase warrants to acquire an aggregate of 79,892 shares of the Company’s Series D Convertible Preferred Stock (the “Series D
Stock”) or shares issued in a future qualified financing, at an initial exercise price of approximately $3.75 per share. Following
the reverse merger the warrants were exchanged for warrants for common stock using the exchange ratio of one share for 2.0975
shares (167,573 shares with an exercise price of approximately $1.79 per share). These warrants expire on July 31, 2024. The
warrants were initially recorded at their fair value of $205,150 and were classified as a warrant liability on the Company’s
balance sheet due to the presence of non-standard anti-dilution provisions. The Company recorded the fair value of the warrants
as a discount on debt and is amortizing the discount over the term of the notes using the effective interest method.
Prior to the Acquisition, the warrant instruments required liability accounting which was recorded in the balance sheet
based on their fair values determined using the Black-Scholes Model and the fair value of underlying preferred stock. The warrant
instruments were re-valued for the last time immediately prior to the Acquisition and reclassified into stockholders’ equity in
2015.
In connection with the issuance of convertible notes in prior years that were subsequently converted into Series D Stock
in 2011 (see Note 9), the Company issued to the investors 10-year stock purchase warrants to purchase an aggregate of 2,308,972
shares of the Series D Stock with an original exercise price of $3.75 per share. Following the reverse merger the warrants were
exchanged for warrants for common stock using the exchange ratio of one share for 2.0975 shares (4,843,031 shares with an
exercise price of approximately $1.79 per share). These warrants expire on November 2, 2020, July 14, 2021 and August 19,
2021, and are classified as equity.
9.
Stockholders’
Equity
(Deficit)
Pursuant to the terms of the Acquisition (i) all outstanding shares of common stock of Senseonics, $0.01 par value per
share, were exchanged for 1,955,929 shares of the Company's common stock, $0.001 par value per share (reflecting
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an exchange ratio of 2.0975), (ii) all outstanding shares of preferred stock were converted into shares of common stock of
Senseonics, and exchanged into 55,301,674 shares of the Company’s common stock, $0.001 par value per share, and (iii) all
outstanding options and warrants to purchase shares of common stock of Senseonics were exchanged for or replaced with options
and warrants to acquire shares of the Company’s common stock using the same exchange ratio.
For periods prior to December 7, 2015, common share and per share amounts of Senseonics have been retrospectively
adjusted to reflect the exchange ratio of one share for 2.0975 shares of common stock, except for the preferred stock, which was
disclosed as its historical values prior to December 7, 2015.
Common
Stock
At December 31, 2015, the Company had authorized 250,000,000 shares of common stock and 75,760,061 shares of
common stock were issued and outstanding.
Preferred
Stock
In 1997, the Company completed a private offering of 599,997 shares of Series A Convertible Preferred Stock (the
“Series A Stock”) for gross proceeds of $3.0 million at a purchase price of $5.00 per share. In 1998, the Company completed a
private offering of 682,497 shares of Series B Convertible Preferred Stock (the “Series B Stock”) for gross proceeds of $6.8
million, and in 2000 completed a private offering of 520,000 shares of Series B Stock for gross proceeds of $5.2 million, both at a
purchase price of $10.00 per share. In 2002, 2005 and 2009, the Company completed private offerings of an aggregate of
2,073,749 shares of Series C Convertible Preferred Stock (the “Series C Stock”) for aggregate gross proceeds of $41.5 million, at
a purchase price of $20.00 per share. In 2011 and 2012, the Company completed private offerings of an aggregate of 11,984,151
shares of Series D Stock, for aggregate gross proceeds of $44.9 million at a purchase price of $3.75 per share. In addition, in
2011, $8.7 million in principal amount and accrued interest of convertible notes were converted into 2,418,864 shares of Series D
Stock at a conversion price of $3.75 per share. In 2014, the Company completed private offerings of an aggregate of 5,374,334
shares of Series D Stock at a purchase price of $3.75 per share, for total proceeds of $20.2 million.
In August 2015, the Company completed a private offering of 2,711,926 shares of Series E Convertible Preferred Stock
(the “Series E Stock”) at a purchase price of $3.93 per share to total proceeds of $10.7 million. The Company recognized a
beneficial conversion feature of $406,783 associated with the Series E Stock since the initial effective conversion price was
determined to be less than the fair value of the underlying common stock into which the Series E Stock is convertible. The
beneficial conversion feature was recognized as a “deemed dividend” at issuance since the Series E Stock is convertible at any
time at the option of the holders.
The Series A Stock, Series B Stock, Series C Stock, Series D Stock and Series E Stock (together, the “Preferred Stock”)
are classified in permanent equity. As a part of the Acquisition, all shares of Preferred Stock were converted into shares of the
Company’s common stock and the above balances subsequently converted at the stated exchange ratio of one share for 2.0975
shares.
Voting
The Preferred Stock vote together with all other classes and series of stock of the Company, as a single class, on all
actions to be taken by the stockholders of the Company, except as otherwise required by law. Each share of Preferred Stock
entitles each holder to a number of votes per share equal to the number of shares of common stock into which each share of
Preferred Stock is then convertible.
Dividend and Liquidation Preference
The holders of Preferred Stock are entitled to receive such dividends as may be declared by the Board of Directors. In
the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, holders of Series E
Stock and Series D Stock are entitled to be paid before any payment is made to holders of any other series of Preferred Stock or
common stock. Holders of Series A Stock, Series B Stock, and Series C Stock, together, the “Junior
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Preferred,” are entitled to be paid before any payment is made to any holder of common stock. Payments are equal to the greater
of (i) $3.93 per shares for Series E Stock, $3.75 per share for Series D Stock, $5.00 per share for Series A Stock, $10.00 per share
for Series B Stock, and $20.00 per share for Series C Stock, plus declared but unpaid dividends or (ii) such amount per share as
would have been payable had each such share been converted to common stock, as described below immediately prior to such
liquidation, dissolution or winding up of the Company.
Redemption
None of the Preferred Stock contain redemption provisions.
Stock-Based
Compensation
On May 8, 1997, the Company adopted the 1997 Stock Option Plan (the “Plan”), under which incentive stock options
and non-qualified stock options may be granted to the Company’s employees and certain other persons in accordance with the
Plan provisions. The Plan was amended in September 2001, to clarify certain provisions regarding the method of exercise,
amendment and termination of the Plan, and the effect of changes in capitalization of the Company. The Board of Directors,
which administers the Plan, determines the number of options granted, the vesting period and the exercise price. The Board of
Directors may terminate the Plan at any time. Options granted under the Plan expire ten years after the date of grant. The
Company retains the right of first offer to buy any shares issued under the Plan. The total number of shares of common stock that
may be issued pursuant to options under the Plan may not exceed, in the aggregate, 9,175,860 shares of common stock, less any
shares of common stock issued by the Company as restricted common stock.
The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as
stock options, based on the fair value of those awards at the date of grant. The estimated fair value of stock options on the date of
grant is amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award for
those awards with service conditions only. For awards that also contain performance conditions, expense is recognized beginning
at the time the performance condition is considered probable of being met over the remaining vesting period.
Prior to the completion of the Acquisition, the fair value of the common stock was determined and approved by the
Board of Directors after considering several factors, including the results obtained from an independent third-party valuation, the
Company’s historical financial performance and financial position, the Company’s future prospects and opportunity for liquidity
events, the price per share of its convertible preferred stock offerings and general industry and economic trends. In establishing
the estimated fair value of the common stock, the Company considered the guidance set forth in American Institute of Certified
Public Accountants Practice Guide, Valuation
of
Privately-Held-Company
Equity
Securities
Issued
as
Compensation.
Subsequent
to the completion of the Acquisition , the fair value of the common s tock was obtained from quoted market prices on the Over-
the-Counter Bulletin Board (OTCBB) as provided by OTC Market Groups, Inc.
Fair value is estimated at each grant date using the Black-Scholes Model with assumptions summarized in the following
table:
Expected term of options
Expected volatility rate
Risk-free rate
Expected dividend yield
2015
For
the
year
ended
December
31,
2014
6.25 - 6.5
55.52 - 56.42%
2.00 - 2.10 %
0 %
6.5
54.02 - 54.25%
0.7 - 1.9 %
0 %
years
years
The risk-free interest rate assumption is based upon observed U.S. treasury yields for a period consistent with the
expected term of the Company’s employee stock options. The expected term is the period of time for which the stock-based
options are expected to be outstanding. Given the lack of historic exercise data, the expected life is determined using
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the “simplified method” which is defined as the mid-point between the vesting date and the end of the contractual term. The
Company does not pay a dividend, and is not expected to pay a dividend in the foreseeable future.
Due to a lack of a public market for the Company’s common stock for an extended period of time, the Company utilized
comparable public companies’ volatility rates as a proxy of its expected volatility for purposes of the Black-Scholes Model.
Stock-based compensation expense is recorded net of estimated forfeitures and is adjusted periodically for actual forfeitures. Pre-
vesting forfeitures are based on the Company’s historical experience for the years ended December 31, 2015 and 2014 and have
not been material.
Employee stock-based compensation expense for employee granted stock options was $1.0 million and $0.5 million for
the years ended December 31, 2015 and 2014, respectively, of which $462,006 and $105,465 was classified as research and
development expenses and $0.6 million and $433,733 was classified as administrative expenses in the accompanying
consolidated statements of operations in the 2015 and 2014 periods, respectively. Stock-based compensation for expense
restricted stock awards was $387,600 for the year ended December 31, 2015, all of which was classified as administrative
expense in the accompanying consolidated statements of operations in 2015. There was no stock-based compensation expense for
restricted stock awards for the year ended December 31, 2014.
As of December 31, 2015, there was $2.6 million of total unrecognized compensation cost related to non-vested
employee stock option awards, which is expected to be recognized over a weighted average period of 3.04 years. The aggregate
intrinsic value of stock options outstanding at December 31, 2015 was $23.1 million, which approximated the aggregate intrinsic
value of options vested and expected to vest as of December 31, 2015 as a result of immaterial pre-vesting forfeitures. The total
fair value of options that vested during 2015 and 2014 were approximately $0.8 million and $0.5 million, respectively.
Stock option activity under the Plan during the year ended December 31, 2015 is as follows:
Options outstanding as of December 31, 2014
Options granted
Options exercised
Options canceled/forfeited
Options outstanding as of December 31, 2015
Options vested and expected to vest as of December 31, 2015
Weighted-
Number
of Average
Shares
in Exercise
(in
thousands)
Price
8,393 $
1,540 $
(121) $
(561) $
9,251 $
0.53
1.90
0.51
0.50
0.74
9,251 $
0.74
Certain of the outstanding options to purchase shares of common stock provide for performance based-conditions
required for vesting in addition to service-based vesting. Vesting of these options is based on the Company obtaining CE Mark
enabling the sale of the Company’s product in Europe; vesting begins once the Company has deemed it probable that the
performance condition will be met.
Outstanding stock options at December 31, 2015 have a weighted-average remaining contractual life of 7.8 years, which
approximates the weighted-average remaining contractual life of the options vested and expected to vest at December 31, 2015,
and will vest ratably over a minimum period of two years. At December 31, 2015, there were 4,369,239 exercisable stock options
with a weighted-average exercise price of $0.57 and a weighted-average remaining contractual life of 6.6 years. The aggregate
intrinsic value of the options currently exercisable at December 31, 2015 was $11.7 million. For the years ended
December 31, 2015 and 2014, 121,250 and 18,664 options were exercised, respectively, with an aggregate intrinsic value at the
time of exercise of $123,224 and $1,557, respectively.
During the second quarter of 2015, the Company modified certain outstanding stock options, including acceleration of
vesting on certain options, and the removal of certain performance conditions on other options. No other
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terms of the awards were modified. The modification of the vesting period resulted in $34,912 of additional expense on the date
of modification. The modification of the performance conditions resulted in incremental compensation cost of $0.9 million, of
which $245,636 was expensed upon modification. The remaining incremental compensation cost will be recognized over the
remaining vesting of two years for the 2013 grants and between 2.68 and 3.18 years for the 2014 grants.
The weighted average grant date fair value of the unvested stock option awards outstanding at December 31, 2015 and
2014 was $0.62 and $0.35, respectively. The weighted average grant-date fair value of stock options granted in 2015 and 2014
was $1.02 and $0.34 per share, respectively. The weighted average grant date fair value of the stock option awards vested,
exercised and forfeited/cancelled for the year ended December 31, 2015 were $0.65, $0.33 and $0.33, respectively.
Restricted
Stock
Awards
At times, the Company may grant shares of common stock that contain ownership restrictions based on service,
performance, or other measures (“Restricted Stock Awards”). Restricted Stock Awards vest as the stated restrictions lapse, and
do not require the payment by the recipient.
The Company granted 398,525 Restricted Stock Awards during year ended December 31, 2015, half of which were
vested upon grant and half of which will not vest until specific performance conditions are met. The Restricted Stock Award has
no expiration date. The total fair value of the Restricted Stock Awards granted during the year ended December 31, 2015, based
on the fair market value of the Company’s common stock on the date of grant of $1.95 per share, was $0.8 million. The aggregate
intrinsic value of unvested Restricted Stock Awards as of December 31, 2015, based on the fair market value of the Company’s
common stock at the end of the reporting period, was $0.6 million.
The fair value at the time of the grant is expensed in coordination with the vesting schedule; 50% upon issuance of the
grant and 50% upon fulfillment of the agreed upon performance condition. Pre-vesting forfeitures were estimated to be
approximately 0%. The total fair value of Restricted Stock Awards vested during the year ended December 31, 2015 was
approximately $0.6 million.
A summary of the Company’s Restricted Stock Awards as of December 31, 2015 is presented below:
Restricted
Stock
Awards
nonvested
at
December
31,
2014
Granted
Vested
Cancelled and forfeited
Restricted
Stock
Awards
nonvested
at
December
31,
2015
Vested
and
expected
to
vest
at
December
31,
2015
Number
of
Shares
(in
thousands)
—
398
(199)
—
199
398
As of December 31, 2015, there was approximately $387,600 remaining in unrecognized compensation cost related to
Restricted Stock Awards. The cost is expected to be recognized upon fulfillment of the performance condition.
10.
Income
Taxes
No provision for U.S. federal or state income taxes has been recorded as the Company has incurred net operating losses
since inception and provides a full valuation allowance against its net deferred income tax assets. The
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tax effect of temporary differences that give rise to the net deferred income tax asset at December 31, 2015 and 2014 is as
follows:
in
thousands
Deferred
income
tax
assets
(Liabilities
)
Net operating loss carryforwards
Capitalized start-up costs
R&E credit carryforwards
Stock based compensation
Other
Deferred income tax assets
Valuation allowance
Net deferred income tax assets (liabilities)
December
31,
2015
2014
$ 40,617 $ 33,361
16,090
4,098
—
(17)
53,532
(53,532)
—
19,546
4,698
777
(6)
65,632
(65,632)
— $
$
At December 31, 2015 and 2014, the Company provided a full valuation allowance against its net deferred tax assets
since realization of these benefits could not be reasonably assured. Changes in the valuation allowance during years ended
December 31, 2015 and 2014 are as follows (in thousands):
Year
2014
2015
Beginning
of
Year
$ 45,743 $ 7,789 $
$ 53,532 $12,100 $
Balance
at
Additions Deductions End
of
Year
— $ 53,532
— $ 65,632
The increase in valuation allowance is primarily due to net losses and credits incurred in both 2015 and 2014. This
increase in valuation allowance is based on management's assessment that it is more likely than not that the Company will not
realize these deferred tax assets. Capitalized start-up costs represent expenses incurred in the organization and start-up of the
Company. For U.S. federal and state tax purposes, start-up and organizational costs incurred before October 22, 2004 will be
amortized over sixty months and those incurred on and after October 22, 2004 will be amortized over one hundred and eighty
months once an active trade or business commences. At December 31, 2015, the Company had NOL carryforwards of
$103.0 million and had research and experimental credit carryforwards of $5.1 million. These carryforwards will expire in
varying amounts between 2018 and 2034. Under the provisions of the Internal Revenue Code, certain substantial changes in the
Company’s ownership may result in a limitation on the amount of NOL carryforwards and research and development credit
carryforwards which can be available in future years. No income tax benefit was recognized in the Company’s Statement of
Operations for stock-based compensation arrangements due to the Company’s net loss position.
A reconciliation of the Company’s estimated U.S. federal statutory rate to the Company’s effective income tax rate for
the years ended December 31, 2015 and 2014 is as follows:
Tax at U.S. Federal Statutory rate
State taxes, net
Research and development credit
Other non-deductible items
Increase in valuation allowance
Effective income tax rate
2015
2014
34.00 % 34.00 %
5.45
2.01
(1.05)
(40.41)
5.39
3.05
(1.20)
(41.24)
0.00 % 0.00 %
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A breakdown of the Company’s uncertain tax position during 2015 and 2014 is as follows (in thousands):
Gross unrecognized tax benefit at beginning of year
Increase from tax positions taken in prior years
Increase from tax positions in current year
Settlements with taxing authorities
Lapse of statute of limitations / expiration
Gross unrecognized tax benefit at end of year
2014
2015
$ 1,025 $
922
(12)
115
—
—
$ 1,174 $ 1,025
—
149
—
—
As of December 31, 2015 and 2014, the Company had uncertain tax positions totaling $1.2 million and $1.0 million,
respectively. The Company did not incur any penalties or interest payable to taxing authorities in 2015 and 2014.
The Company’s U.S. Federal and state income tax returns from 1996 to 2014 remain subject to examination by the tax
authorities. The Company’s 1996 through 2010 years remain open for examination, even though the statute of limitations has
expired, due to the net operating losses and credits carried forward for use in prospective years.
11.
Related
Party
Transactions
In December 2015, a board member received a Restricted Stock Award of 398,525 shares of common stock pursuant to
an agreement entered into with the board member to supersede a pre-existing agreement. One half of the shares covered by this
Restricted Stock Award were fully vested on grant. The remainder will vest in full upon our completion of a public offering or
private placement of our equity securities in which gross proceeds of at least $40.0 million are raised, which we refer to as a
qualified financing. Additionally, upon a qualified financing, the board member will be entitled to receive a cash payment that,
when combined with the value of the restricted stock grant, equals a percentage of the Company’s valuation ranging between
0.75% to 1.25% of the Company’s valuation, with the actual percentage determined based on the Company’s valuation.
On December 7, 2015, the Company entered into a note purchase agreement with a stockholder, Energy Capital,
pursuant to which Energy Capital may lend an aggregate principal amount of up to $10.0 million. See Note 8 for a further
discussion of the Energy Capital borrowing facility
12.
Fair
Value
Measurements
Fair value is defined as the price that would be received to sell an asset or paid to settle a liability in an orderly
transaction between market participants at the measurement date. Fair value has a three level hierarchy from highest priority
(Level 1) to lowest priority (Level 3). The fair value hierarchy reflects whether the inputs are observable from independent
sources or rely on unobservable inputs based on our market assumptions. The three levels of the fair value hierarchy are
described below:
·
·
·
Level 1 - Quoted prices for identical assets or liabilities (unadjusted) in active markets.
Level 2 - Observable inputs other than quoted prices that are either directly or indirectly observable for the assets or
liability.
Level 3 - Unobservable inputs that are supported by little or no market activity.
The levels are not necessarily an indication of the risk of liquidity associated with the financial assets or liabilities
disclosed.
Financial
Assets
and
Liabilities
Measured
at
Fair
Value
on
a
Recurring
Basis
The Company has segregated its financial assets and liabilities that are measured at fair value on a recurring basis into
the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement
date in the table below. The inputs used in measuring the fair value of the Company’s money market funds included in cash
equivalents are considered to be Level 1 in accordance with the three-tier fair value hierarchy. The fair
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market values are based on period-end statements supplied by the various banks and brokers that held the majority of the funds.
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 December 31, 2015 and 2014
December
31,
2015
(in thousands)
Money market funds
(in thousands)
Money market funds
Warrant liability
Total
$ 3,938 $ 3,938 $
Level
1 Level
2 Level
3
— $ —
Total
December
31,
2014
Level
1
$ 18,876 $ 18,876 $
— $
$
197 $
Level
2 Level
3
— $ —
— $ 197
Prior to the Acquisition, the warrant instruments required liability accounting, as a result of their non-standard anti-
dilutions provisions, and recorded at fair value using the Black-Scholes Model.
These warrants were measured on a recurring basis at their fair value with inputs categorized as Level 3 in the fair value
hierarchy. The resulting gain or loss on revaluation was recorded as other income (expense) in the consolidated statements of
operations. The Company revalued the warrants for the final time immediately prior to the Acquisition and reclassified it into
stockholders’ equity.
When determining the fair value of the Company’s financial instruments using the Black-Scholes Model, the Company
is required to use various estimates and unobservable inputs, including, among other things, fair value of the underlying stock,
expected volatility of stock price, expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to
the unobservable inputs identified above may change the fair value of the instrument. Increases in the fair value of the underlying
stock, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable
inputs generally result in decreases in fair value.
The fair value of the warrant liability was measured upon issuance of the warrants and again as of December 31, 2014.
The key assumptions used in the Black-Scholes Model with respect to these valuations are summarized in the following table:
Expected term of warrants
Expected volatility rate
Risk-free rate
Expected dividend yield
Issuance
Date
As
of
December
31,
2014
Immediately
prior
to
the
Acquisition
10 years
58.01 %
2.44 %
0.00 %
9.59 years
56 %
2.42 %
0.00 %
8.65 years
53.94 %
2.23 %
0.00 %
The expected term assumption is based on the warrant's contractual term. Since the Company was not a publicly traded
company in 2014, the expected volatility rate is based on historical volatility of similar companies within the diabetes device
industries. The risk-free rate is based on the U.S. Treasury implied yield at the time of measurement. The Company estimates the
fair value per share of its Series D Stock at the date of measurement taking into account recent transactions.
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Table of Contents
The following table presents a summary of changes in the fair value of Level 3 warrant liability measured at fair value
on a recurring basis for the years ended December 31, 2015 and 2014
Reclassification
of
warrant
Balance
at
December
31,
2014
Established
in
2015
Change
in
fair
value
during
2015
liability
to
stockholders'
equity
Balance
at
December
31,
2015
Description
(in
thousands)
Warrant liability
$
197 $
— $
(46) $
(151) $
—
Description
(in
thousands)
Warrant liability
Balance
at
December
31,
2013
Established
in
2014
Balance
at
Change
in December
31,
Fair
Value
2014
$
— $
205 $
(8) $
197
Financial
Assets
and
Liabilities
Measured
at
Fair
Value
on
a
Non-Recurring
Basis
The Company has no financial assets and liabilities that are measured at fair value on a non-recurring basis.
Non-Financial
Assets
and
Liabilities
Measured
at
Fair
Value
on
a
Recurring
Basis
The Company has no non-financial assets and liabilities that are measured at fair value on a recurring basis.
Non-Financial
Assets
and
Liabilities
Measured
at
Fair
Value
on
a
Non-Recurring
Basis
The Company measures its long-lived assets, including property and equipment, at fair value on a non-recurring basis.
These assets are recognized at fair value when they are deemed to be impaired. No such fair value impairment was recognized in
2015 and 2014.
13.
Subsequent
Events
On February 4, 2016, the Company entered into a Second Amendment (the “Amendment”) to Loan and Security
Agreement with Oxford Finance, effective as of January 29, 2016. The Amendment, among other things, modifies the
amortization schedule of the loan and security agreement's required monthly payments. If (i) the Company receives a CE mark for
its continuous glucose monitoring system, Eversense, by March 4, 2016 or (ii) the Company receives net cash proceeds of at least
$2.5 million from the sale of equity securities or a convertible note to Energy Capital by March 4, 2016 (a “Second Equity
Event”) and receives a CE mark for Eversense by March 31, 2016 ((i) and (ii), each, a “CE Mark Approval”) the monthly
payments will convert to payments of principal and interest, beginning on August 1, 2016, with the principal amount being
amortized over the ensuing 36 months. If a CE Mark Approval does not occur, the monthly payments will convert to payments of
principal and interest beginning on April 1, 2016, with the principal amount being amortized over the ensuing 40 months. In
addition, the Amendment extends the amount of time the Company has to borrow an additional $5.0 million under the loan
agreement on the same terms and conditions of the existing Oxford notes. The Company can borrow the additional $5.0 million
following a CE Mark Approval until the earliest of (i) March 4, 2016, if a Second Equity Event does not occur by March 4, 2016,
(ii) March 31, 2016, if a Second Equity Event occurs by March 4, 2016.
In January 2016, the Company amended the lease agreement related to its corporate offices to expand the leased
premises an additional 11,889 square feet for a total of 32,805 square feet. The existing lease term is through May 2018 and was
extended for an additional five years through May 2023. With respect to the expanded premises only during the remaining lease
term and the entire premises during the expanded lease term, the future total minimum lease payments under the amended lease
will be an additional $3.6 million and will expire May, 2023. The Company has one option to extend the term of the lease for an
additional five-year period with respect to the entire premises.
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Table of Contents
Item
9.
Changes
in
and
Disagreements
with
Accountants
on
Accounting
and
Financial
Disclosure
None.
Item
9A.
Controls
and
Procedures
Evaluation
of
Disclosure
Controls
and
Procedures
Under the supervision of and with the participation of our management, including our chief executive officer, who is our
principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an evaluation of
the effectiveness of our disclosure controls and procedures as of December 31, 2015, the end of the period covered by this Annual
Report. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to
provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms
promulgated by the Securities and Exchange Commission (the “SEC”). Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal
executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. 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. Based on the evaluation of our disclosure controls and procedures as of December 31, 2015, 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 was no change 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 December 31, 2015 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s
Report
on
Internal
Control
over
Financial
Reporting
and
Attestation
Report
of
the
Registered
Public
Accounting
Firm
On December 7, 2015, we consummated a reverse acquisition of Senseonics Incorporated, the accounting acquirer, and,
as a result, our internal control over financial reporting was supplanted by the internal controls of Senseonics, Incorporated prior
to the reverse acquisition. Accordingly, all of our internal controls that materially affected, or were reasonably likely to materially
affect, our internal control over financial reporting changed during our last fiscal year. Therefore, in accordance with SEC
Regulation S-K Compliance and Disclosure Interpretations, Section 215.02, we have not provided a report on management’s
assessment of our internal control over financial reporting for the year ended December 31, 2015.
We will undertake management’s assessment on internal control over financial reporting for the year ending December
31, 2016. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange
Act. The assessment will include the full documentation of our routine, non-routine and estimation processes and internal controls
as well as our entity level controls, including the effect of informational technology on our processes, as well as the necessary
internal control testing .
Item
9B.
Other
Information
Not applicable.
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Table of Contents
Item
10.
Directors,
Executive
Officer
s
and
Corporate
Governance
PART
III
The following table sets forth information concerning our directors and executive officers, including their ages as of
February 18, 2016. There are no family relationships among any of our directors or executive officers.
We seek to assemble a board that, as a whole, possesses the appropriate balance of professional and industry knowledge, financial
expertise and high-level management experience necessary to oversee and direct our business. To that end, our board intends to
maintain membership of directors who complement and strengthen the skills of other members and who also exhibit integrity,
collegiality, sound business judgment and other qualities that we view as critical to effective functioning of the board. The brief
biographies below include information, as of the date of this report, regarding the specific and particular experience,
qualifications, attributes or skills of each director that led the board to believe that the director should serve on the board.
Name
Executive
Officers:
Timothy T. Goodnow, Ph.D.
R. Don Elsey
Mukul Jain, Ph.D.
Mirasol Panlilio
Lynne Kelley , M.D., FACS
Non-Management
Directors:
Stephen P. DeFalco
M. James Barrett, Ph.D.
Edward J. Fiorentino
Peter Justin Klein, M.D., J.D.
Douglas S. Prince
Douglas A. Roeder
Executive
Officers
Timothy
T.
Goodnow,
Ph.D.
Age
Position
54 President, Chief Executive Officer and Director
62 Chief Financial Officer, Secretary and Treasurer
43 Vice President, Operations, Quality and Regulatory
51 Vice President, Global Sales and Marketing
53 Chief Medical Officer
54 Chairman of the Board of Directors
73 Director
57 Director
38 Director
62 Director
45 Director
Dr. Goodnow was elected as one of our directors and was appointed as our President and Chief Executive Officer in
December 2015. From December 2010 to December 2015, Dr. Goodnow served on the board of directors of Senseonics,
Incorporated and he served as the President and Chief Executive Officer of Senseonics, Incorporated from March 2011 to
December 2015. Dr. Goodnow served as Vice President, Technical Operations of Abbott Diabetes Care, a healthcare company,
from 2000 to February 2011. Prior to that, he held positions at TheraSense, Verax Biomedical, Inc. and Dade Behring and Baxter
Healthcare. Dr. Goodnow received his Ph.D. and B.S. in chemistry from The University of Miami. Our board of directors
believes that Dr. Goodnow's experience as our Chief Executive Officer, his background in medical device development and his
knowledge of the diabetes industry qualify him to serve as a director of our company.
R.
Don
Elsey
Mr. Elsey was appointed as our Chief Financial Officer in December 2015. Mr. Elsey served as the Chief Financial
Officer of Senseonics, Incorporated from February 2015 to December 2015. He previously served as the Senior Vice President,
Finance and Chief Financial Officer of Regado Biosciences, Inc., a public biopharmaceutical company, from May 2014 to
February 2015. He also served as the Chief Financial Officer of LifeCell, Inc., a private regenerative medicine company, from
December 2012 to February 2014 and as Senior Vice President and Chief Financial Officer of Emergent BioSolutions, Inc., a
public biopharmaceutical company, from 2005 to December 2012. Prior to that, Mr. Elsey served as the Director of Finance and
Administration at IGEN International, Inc., a public biotechnology company, and its successor BioVeris Corporation, from 2000
to 2005. Prior to joining IGEN, he served as Director of Finance at Applera, a genomics and sequencing company, and in several
finance positions at International Business
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Machines, Inc. Mr. Elsey serves on the board of directors of RegeneRx Biopharmaceuticals, Inc., a public biopharmaceuticals
company, as well as on the board of the Cancer Support Community. Mr. Elsey received his M.B.A. in finance and his B.A. in
economics from Michigan State University.
Mukul
Jain,
Ph.D.
Dr. Jain was appointed as our Vice President Operations, Quality and Regulatory in December 2015. Dr. Jain served as
Senior Director, Quality and Regulatory of Senseonics, Incorporated from January 2012 to January 2014 and as Vice President
Operations, Quality and Regulatory of Senseonics, Incorporated from January 2014 to December 2015. Prior to that, Dr. Jain held
various positions at Medtronic, Inc., a medical technology and services company, from 1999 to January 2012, most recently as a
senior program manager. Dr. Jain received his M.B.A. from the University of Minnesota, Carlson School of Management, his
Ph.D. in chemical engineering from the University of South Carolina and his B.Tech. from the Indian Institute of Technology,
Kanpur.
Mirasol
Panlilio
Ms. Panlilio was appointed as our Vice President, Global Sales and Marketing in December 2015. Ms. Panlilio served as
the Vice President, Global Sales and Marketing of Senseonics, Incorporated from June 2014 to December 2015. Prior to joining
Senseonics, Incorporated, Ms. Panlilio served as Vice President, Global Marketing and Sales at Viveve, Inc. from October 2012
to May 2014, an Independent Marketing Consultant at MGP Retail Consulting, LLC from May 2011 to June 2014, Vice President
of Sales and Marketing for Arkal Medical, Inc. from 2010 to May 2011 and Vice President of Marketing and Sales at
VeraLight, Inc. from 2007 to 2010. From 2003 to 2007, Ms. Panlilio worked at Abbott Diabetes Care. Ms. Panlilio received her
B.S. in business administration from San Jose State University.
Lynne
Kelley
,
M.D.,
FACS
Dr. Kelley was appointed as our Chief Medical Officer in January 2016. From January 2011 to January 2016, Dr. Kelley
was the World Wide Vice President of Medical Affairs Medical Surgical Systems of Becton, Dickinson & Company. Prior to
that, Dr. Kelley was the Vice President Medical Director for Kimberly Clark from November 2007 to December 2010. From 2005
to 2007, Dr. Kelley served as the medical director for the peripheral interventions and vascular surgery business of Boston
Scientific. Before her assignment with Boston Scientific, Dr. Kelley was an assistant professor of vascular surgery and radiology
at Yale University from 2003 to 2005. Dr. Kelley is a board certified general and vascular surgeon. Dr. Kelley received her M.D.
from Dartmouth Medical School and her B.A. in Biology from Boston University.
Non-Management
Directors
Stephen
P.
DeFalco
Mr. DeFalco was elected as a director and our chairman in December 2015. Mr. DeFalco served as chairman of the
Senseonics, Incorporated board of directors from June 2010 to December 2015 and served as Senseonics, Incorporated's interim
Chief Executive Officer from 2010 to March 2011. Since October 2011, Mr. DeFalco has served as the Chief Executive Officer of
Crane & Co, Inc., a global technology company, and also serves on its board of directors. Previously, from May 2005 to July
2010, he served as the Chief Executive Officer and on the board of directors of MDS, Inc., a public life sciences company.
Mr. DeFalco received his M.B.A. from the Massachusetts Institute of Technology—Sloan School of Management, his M.S.E.E.
from Syracuse University and his B.S.M.E. from the Massachusetts Institute of Technology. Our board of directors believes that
Mr. DeFalco's leadership, executive, managerial and business experience with life sciences companies qualifies him to serve as a
director of our company.
M.
James
Barrett,
Ph.D.
Dr. Barrett was elected to our board of directors in December 2015. Dr. Barrett founded Senseonics, Incorporated and
served as a member of the board of directors of Senseonics, Incorporated from November 1996 to December 2015. He served as
the Chief Executive Officer of Senseonics, Incorporated from 1997 to 2001. He currently
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serves as a General Partner of New Enterprise Associates, or NEA, a venture capital firm, where he specializes in biotechnology
and works with members of NEA's healthcare investment group on medical devices, healthcare information systems and
healthcare services companies. Prior to joining NEA and Senseonics, Incorporated, he led three NEA-funded companies, serving
from 1987 to 1995 as Chairman and Chief Executive Officer at Genetic Therapy, Inc. and from 1982 to 1987 as President and
Chief Executive Officer at Life Technologies, Inc. and its predecessor, Bethesda Research Laboratories, Inc. Previously,
Dr. Barrett worked at SmithKline Beecham Corporation, where he held a variety of positions, including President of its In Vitro
Diagnostic Division and President of SmithKline Clinical Laboratories. He currently serves on the boards of directors of the
publicly-held life sciences companies GlycoMimetics, Inc., Clovis Oncology, Inc., Loxo Oncology, Inc., Roka Bioscience, Inc.,
Zosano Pharma Corporation and Supernus Pharmaceuticals, Inc. In the past five years, he has served on the boards of directors of
the publicly traded companies Amicus Therapeutics, Inc., Inhibitex, Inc. (acquired by Bristol-Myers Squibb Co.), YM
Biosciences, Inc. and Targacept, Inc. Dr. Barrett received his Ph.D. in biochemistry from the University of Tennessee, his M.B.A.
from the University of Santa Clara and his B.S. from Boston College. Our board of directors believes that Dr. Barrett's experience
overseeing NEA's investments in biotechnology, serving as a member of the board of directors of other public companies, prior
senior management experience, including as President and Chief Executive Officer of biopharmaceutical companies, and his
strong capital markets experience qualify him to serve as a director of our company.
Edward
J.
Fiorentino
Mr. Fiorentino was elected to our board of directors in December 2015. Mr. Fiorentino served on the Senseonics,
Incorporated board of directors from March 2012 to December 2015. Since August 2013, Mr. Fiorentino has served as Chairman
and Chief Executive Officer of Crealta Pharmaceuticals. Previously, from March 2009 to June 2013 he was the Chief Executive
Officer of Actient Pharmaceuticals. Prior to Actient, Mr. Fiorentino served in various positions at Abbott Laboratories, including
Corporate Vice President of Pharmaceutical Commercial Operations, for more than 20 years. He also previously served as Senior
Vice President and President of Abbott Diabetes Care and was Executive Vice President of TAP Pharmaceuticals. Mr. Fiorentino
received his B.S. in Business Administration from the State University of New York and his M.B.A. from Syracuse University.
Our board of directors believes that Mr. Fiorentino's substantial healthcare and pharmaceutical experience qualifies him to serve
as a director of our company.
Peter
Justin
Klein,
M.D.,
J.D.
Dr. Klein was elected to our board of directors in December 2015. Dr. Klein served on the Senseonics, Incorporated
board of directors from September 2013 to December 2015. Dr. Klein has served as a Partner at NEA since 2006. Prior to joining
NEA, Dr. Klein worked for the Duke University Health System. Dr. Klein currently serves as a director of several private life
sciences companies. Dr. Klein received his A.B., B.S. and M.D. from Duke University and his J.D. from Harvard Law School.
Our board of directors believes that Dr. Klein's significant legal and medical expertise in healthcare and his services as a venture
capital investor and director of multiple biotechnology and medical device companies qualify him to serve as a director of our
company.
Douglas
S.
Prince
Mr. Prince was elected to our board of directors in December 2015. Mr. Prince served on the Senseonics, Incorporated
board of directors from February 2015 to December 2015. Mr. Prince has acted as the Chief Financial Officer of
Crane & Co. Inc., a global technology company, since February 2013. Prior to Crane & Co., from October 2010 to January 2013,
Mr. Prince served as the Chief Financial Officer of Northern Power Systems Corp., an energy technology company. From 2007 to
2010, Mr. Prince served as Chief Financial Officer of MDS Inc., a public life sciences company. Mr. Prince received his B.B.A.
in Business Administration from the University of Kentucky. Our board of directors believes that Mr. Prince's executive
experience and financial expertise qualify him to serve as a director of our company.
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Table of Contents
Douglas
A.
Roeder
Mr. Roeder was elected to our board of directors in December 2015. Mr. Roeder served on the Senseonics, Incorporated
board of directors from October 2011 to December 2015. Mr. Roeder joined Delphi Ventures as an Associate in 1998, and has
been a Partner of Delphi Ventures since 2000, focusing on medical devices, diagnostics and biotechnology. Prior to joining
Delphi Ventures, Mr. Roeder was an Associate with Alex, Brown & Sons Healthcare Investment Banking Group. Mr. Roeder
currently serves on the boards of directors of Tandem Diabetes, Inc., TriVascular Technologies, Inc. and several private
companies. Mr. Roeder received his A.B. from Dartmouth College. Our board of directors believes that Mr. Roeder's substantial
experience with companies in the healthcare sector and his venture capital, financial and business experience qualify him to serve
as a director of our company.
Section
16(a)
Beneficial
Ownership
Reporting
Compliance
Section 16(a) of the Exchange Act will require our directors and executive officers, and persons who own more than ten
percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of our company. Officers, directors and greater than ten percent
stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
Our officers, directors and ten percent stockholders were not subject to the reporting requirements of Section 16(a) until
during the fiscal year ended December 31, 2015 and, therefore, there were no reports required during the fiscal year ended
December 31, 2015.
Code
of
Business
Conduct
and
Ethics
for
Employees,
Executive
Officers
and
Directors
We have adopted a Code of Business Conduct and Ethics, or the Code of Conduct, applicable to all of our employees,
executive officers and directors. The Code of Conduct is available on our website at www.senseonics.com
. The nominating and
corporate governance committee of our board of directors will be responsible for overseeing the Code of Conduct and must
approve any waivers of the Code of Conduct for employees, executive officers and directors. In addition, we intend to post on our
website all disclosures that are required by law or the NYSE-MKT listing standards concerning any amendments to, or waivers
from, any provision of the Code of Conduct.
Audit
Committee
and
Audit
Committee
Financial
Expert
We have a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act. Our audit committee reviews our internal accounting procedures and consults with and reviews the services
provided by our independent registered public accountants. Our audit committee consists of three directors, Mr. Prince,
Mr. Fiorentino and Dr. Klein, and our board of directors has determined that each of them is independent within the meaning of
NYSE-MKT listing requirements and the independence requirements contemplated by Rule 10A-3 under the Securities Exchange
Act of 1934, as amended, or the Exchange Act. Mr. Prince is the chairman of the audit committee and our board of directors has
determined that Mr. Prince is an "audit committee financial expert" as defined by SEC rules and regulations implementing
Section 407 of the Sarbanes-Oxley Act. Our board of directors has determined that the composition of our audit committee meets
the criteria for independence under, and the functioning of our audit committee complies with, the applicable requirements of the
Sarbanes-Oxley Act, NYSE-MKT listing requirements and SEC rules and regulations. We intend to continue to evaluate the
requirements applicable to us and we intend to comply with the future requirements to the extent that they become applicable to
our audit committee.
Stockholder
Recommendation
of
Director
Nominees
Our nominating and corporate governance committee will consider director candidates recommended by stockholders.
The nominating and corporate governance committee does not intend to alter the manner in which it evaluates candidates, based
on whether or not the candidate was recommended by a stockholder. Stockholders who wish to recommend individuals for
consideration by the nominating and corporate governance committee to become nominees for election to our board of directors
may do so by delivering a written recommendation to the nominating and corporate
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governance committee at the following address: 20451 Seneca Meadows Parkway, Germantown, Maryland 20876-7005 at least
90 days, but not more than 120 days, prior to the anniversary date of the mailing of our proxy statement for the last annual
meeting. Submissions must include the full name of the proposed nominee, a description of the proposed nominee’s business
experience for at least the previous five years, complete biographical information, a description of the proposed nominee’s
qualifications as a director and a representation that the nominating stockholder is a beneficial or record holder of our stock and
has been a holder for at least one year. Any such submission must be accompanied by the written consent of the proposed
nominee to be named as a nominee and to serve as a director if elected.
Item
11.
Executive
Compensation
All
shares
of
Senseonics,
Incorporated
common
stock
converted
into
shares
of
Senseonics
Holdings
common
stock,
and
all
Senseonics
Options
converted
into
Company
Options,
in
connection
with
the
Closing
of
the
Acquisition
pursuant
to
the
Exchange
Ratio.
With
respect
to
the
options,
corresponding
adjustments
were
also
made
to
their
exercise
prices.
The
share
and
per
share
information
included
in
this
"Executive
Compensation"
section
gives
effect
to
the
conversion
of
such
shares
and
options
in
the
Acquisition
and
related
exercise
price
adjustments.
The
Summary
Compensation
Table
and
the
Narrative
to
Summary
Compensation
Table
below
reflect
compensation
earned
by
our
named
executive
officers
for
their
service
to
Senseonics,
Incorporated
from
January
1,
2014
to
December
7,
2015,
the
date
of
the
Closing
of
the
Acquisition,
and
for
their
service
to
Senseonics
Holdings,
Inc.
beginning
on
December
7,
2015.
Our Chief Executive Officer and our two other most highly compensated executive officers for the year ended
December 31, 2015 were:
Timothy T. Goodnow, Ph.D., President and Chief Executive Officer;
·
· Mirasol Panlilio, Vice President, Global Sales and Marketing; and
·
R. Don Elsey, Chief Financial Officer.
We refer to these executive officers in this Annual Report as our named executive officers.
Summary
Compensation
Table
The following table presents the compensation awarded to, earned by or paid to each of our named executive officers for
the years ended December 31, 2015 and 2014.
Name
and
Principal
Position
Timothy T. Goodnow
President and Chief Executive Officer
R. Don Elsey
(3)
Chief Financial Officer
Salary
($)
Year
2015 365,791
2014 355,137
2015 286,667
Non-Equity
Option Incentive
Plan All
Other
Awards
($)
Compensation Compensation
($)
($)
(1)
(2)
Total
($)
Bonus
($)
(5)
— 231,704
— 153,986
— 141,229
(5)
—
106,541
—
— 597,495
— 615,664
— 427,896
Mirasol Panlilio
(4)
Vice President, Global Sales and
Marketing
2015 221,450
— 255,977
(5)
—
60,585
(6)
538,012
2014 125,417 36,000
(7)
123,189
18,812
17,635
(8)
321,053
(1) The amounts include the full grant date fair value for awards granted during 2014. The grant date fair value was computed in
accordance with ASC Topic 718, Compensation—Stock
Compensation
. Unlike the calculations contained in our audited
financial statements, this calculation does not give effect to any estimate of forfeitures related to service-based vesting, but
assumes that the executive will perform the requisite service for the award to vest in full. The assumptions we used in
valuing options are described in Note 9 to our audited financial statements included in this Annual Report. Also includes the
incremental fair value, computed in accordance with ASC Topic 718, in connection with the repricing of certain stock
options held by our named executive officers in December 2014, as follows: Dr. Goodnow, $17,540; and Ms. Panlilio,
$14,032. See "—Narrative to Summary Compensation Table—Stock Option Repricing" below.
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(2) The amounts reflect bonus paid on the achievement of specified corporate goals, as discussed further below under "—
Narrative to Summary Compensation Table—Annual Bonus.”
(3) Mr. Elsey became an executive officer of Senseonics, Incorporated in February 2015 and amounts represent compensation
earned since that date.
(4) Ms. Panlilio became an executive officer of Senseonics, Incorporated in June 2014 and amounts represent compensation
earned since that date.
(5) Our compensation committee has not yet determined the bonus amounts payable to our named executive officers for
performance during 2015. Bonus amounts for services during 2015, if any, will be determined by our compensation
committee in 2016.
(6) Consists of $37,808 for a tax gross-up payment and $22,777 for a temporary housing allowance pursuant to Ms. Panlilio's
employment offer letter.
(7) Represents a signing bonus paid to Ms. Panlilio in connection with the commencement of her employment.
(8) Represents a temporary housing allowance pursuant to Ms. Panlilio's employment offer letter.
Narrative
to
Summary
Compensation
Table
We review compensation annually for all employees, including our named executive officers. In setting executive base
salaries and bonuses and granting equity incentive awards, we consider compensation for comparable positions in the market, the
historical compensation levels of our executives, individual performance as compared to our expectations and objectives, our
desire to motivate our employees to achieve short- and long-term results that are in the best interests of our stockholders, and a
long-term commitment to our company. We do not target a specific competitive position or a specific mix of compensation
among base salary, bonus or long-term incentives.
The compensation committee of Senseonics, Incorporated historically determined its executives' compensation.
Senseonics, Incorporated's compensation committee typically reviewed and discussed management's proposed compensation with
the chief executive officer for all executives other than the chief executive officer. Based on those discussions and its discretion,
the compensation committee then approved the compensation of each executive officer after discussions without members of
management present.
Senseonics, Incorporated's compensation committee engaged Radford, a compensation consultant, and reviewed
Radford's compensation data for executives at similarly sized medical device companies when determining executive
compensation.
Annual
Base
Salary
Senseonics, Incorporated entered into employment agreements with each of its named executive officers that establish
their base salaries and target bonus opportunities. In connection with the Acquisition, we assumed those employment agreements.
The base salaries will be reviewed periodically by our compensation committee. The following table presents the annual base
salaries for each of our named executive officers for 2014 and 2015. The 2014 base salaries became effective on January 1, 2014
and the 2015 base salaries became effective on January 1, 2015 for all of the named executive officers.
2014
2015
Base
Salary Base
Salary
Name
Timothy T. Goodnow
R. Don Elsey
Mirasol Panlilio
Annual
Bonus
($)
355,137
N/A
215,000
($)
365,791
320,000
221,450
We seek to motivate and reward our executives for achievements relative to our corporate goals and expectations for
each fiscal year. Each named executive officer has a target bonus opportunity, defined as a percentage of his or her annual salary.
The following table presents the annual target bonus opportunity, as a percentage of annual base salary, for each of our named
executive officers for 2014 and 2015.
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Name
Timothy T. Goodnow
R. Don Elsey
Mirasol Panlilio
Target
Bonus
(as
a
%
of
Base
Salary)
(%)
50
35
25
For 2014, bonuses were based on Senseonics, Incorporated's achievement of specified corporate goals, including
submitting regulatory approval documents related to its European pivotal clinical trial, initiating its European clinical trial in the
second quarter of 2014, completing the enrollment of its European pivotal clinical trial, demonstrating an increase in sensor
manufacturing capacity and completing a successful surveillance audit. Based on the level of achievement, the Senseonics,
Incorporated compensation committee awarded Dr. Goodnow and Ms. Panlilio 60% of their target bonuses based on their 2014
base salary, respectively. These actual bonus amounts are reflected in the "Non-Equity Incentive Plan Compensation" column of
the Summary Compensation Table above.
Our compensation committee has not yet determined the bonus amounts payable to our named executive officers for
performance during 2015. We anticipate bonuses awarded for performance during 2015, if any, will be discretionary and will be
determined in 2016.
Long-Term
Incentives
Our 1997 plan and 2015 plan authorizes us to make grants to eligible recipients of non-qualified stock options and
incentive stock options.
We award stock options on the date the compensation committee approves the grant. We set the option exercise price
and grant date fair value based on its per-share valuation on the date of grant.
In June 2014, the Senseonics, Incorporated board of directors awarded to Dr. Goodnow and Ms. Panlilio options to
purchase 524,375 and 419,500 shares of our common stock, respectively. Each of these options was originally issued with an
exercise price of $0.70 per share. The options issued to Dr. Goodnow and Ms. Panlilio were granted with a four-year service-
based vesting schedule and vest in 48 equal monthly installments from the date of grant. In December 2014, the Senseonics,
Incorporated board of directors awarded Mr. Elsey an option to purchase 650,225 shares of our common stock, with an exercise
price of $0.54 per share. 162,556 shares underlying this option vested on February 9, 2016, and the remainder of the shares vest in
36 equal monthly installments through February 9, 2019. In July 2015, the Senseonics, Incorporated board of directors awarded to
Dr. Goodnow, Mr. Elsey and Ms. Panlilio options to purchase 220,237, 134,240 and 243,310 shares of our common stock,
respectively. Each of these options was originally issued with an exercise price of $1.95 per share. All shares subject to vesting
under these option grants will vest in full and become immediately exercisable upon the closing of a change in control of our
company.
Stock
Option
Repricing
On December 5, 2014, the Senseonics, Incorporated board of directors determined that the exercise prices of certain
stock options then held by its employees were substantially above the then estimated fair market value of our common stock of
$0.54 per share. Accordingly, the Senseonics, Incorporated board of directors amended the terms of these options to reduce their
respective exercise prices to $0.54 per share, based upon the fair market value of Senseonics, Incorporated's common stock as of
December 5, 2014, as determined by its board of directors. The options that were repriced consisted of all outstanding stock
options with exercise prices of $0.70 then held by employees and directors. Pursuant to this repricing, options to purchase an
aggregate of 3,178,452 shares of common stock held by Senseonics, Incorporated's then current employees and directors were
repriced, including options to purchase 524,375 and 419,500 shares of our common stock held by Dr. Goodnow and Ms. Panlilio,
respectively.
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Other
Compensation
Except for the temporary housing allowance under her employment offer letter and the tax gross-up payment made to
Ms. Panlilio included in the Summary Compensation Table above, Senseonics, Incorporated did not, and we do not, provide
perquisites or personal benefits to our named executive officers. Senseonics, Incorporated did, however, pay a portion of the
premiums for life, medical and dental insurance for all employees, including our named executive officers.
Outstanding
Equity
Awards
at
End
of
2015
The following table provides information about outstanding Company Options held by each of our named executive
officers at December 31, 2015. All of these options were granted under the 1997 plan. None of our named executive officers held
any other stock awards at the end of 2015.
Name
Timothy T. Goodnow
R. Don Elsey
Mirasol Panlilio
(1)
Number
of
Number
of
Securities
Securities
Underlying Underlying
Unexercised Unexercised
Options
(#)
Options
(#)
Exercisable Unexercisable
2,038,610
—
569,456
196,549
22,941
—
13,983
157,312
25,344
19,637
327,825
197,296
650,225
120,257
262,187
217,966
(2)
(3)
(4)
(5)
(4)
(6)
(4)
Option
Exercise Option
Expiration
Date
Price
($)
0.54 12/2/2020
0.54 2/28/2021
0.54
6/4/2024
1.95 7/22/2025
0.54 12/4/2024
1.95 7/22/2025
0.54
6/4/2024
1.95 7/22/2025
(1) All shares subject to vesting under these options will vest in full and become immediately exercisable upon the closing of a
change in control of our company.
(2) The unvested shares underlying this option vest in two equal monthly installments, subject to the officer's continued service
(3) The unvested shares underlying this option vest in 30 equal monthly installments, subject to the officer's continued service
through each applicable vesting date.
through each applicable vesting date.
(4) The unvested shares underlying this option vest in 43 equal monthly installments, subject to the officer's continued service
through each applicable vesting date.
(5) The shares underlying this option vest as to 25% of the shares in February 2016 and the remaining shares vest in 36 equal
monthly installments thereafter, subject to the officer's continued service through each applicable vesting date.
(6) The unvested shares underlying this option vest in 30 equal monthly installments, subject to the officer's continued service
through each applicable vesting date.
Pension
Benefits
Our named executive officers did not participate in, or otherwise receive any benefits under, any pension or retirement
plan sponsored by us or Senseonics, Incorporated during 2014 or 2015.
Nonqualified
Deferred
Compensation
Our named executive officers did not participate in, or otherwise receive any benefits under, any nonqualified deferred
compensation plan sponsored by us or Senseonics, Incorporated during 2014 or 2015.
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Employment
Agreements
Below are descriptions of employment agreements that our named executive officers entered into with Senseonics,
Incorporated. We assumed these employment agreements in connection with the Acquisition.
Agreement
with
Dr.
Goodnow
In July 2015, Senseonics, Incorporated entered into an amended and restated employment agreement with Dr. Goodnow
that governs the terms of his employment with us. Pursuant to the agreement, Dr. Goodnow is entitled to an annual base salary of
$365,791 and is eligible to receive an annual performance bonus of up to 50% of his base salary, as determined by our board of
directors. If Dr. Goodnow's employment is terminated by us for reasons other than for cause or if he resigns for good reason (each
as defined in his employment agreement), he would be entitled to receive severance payments equal to continued payment of his
base salary for 18 months, 100% of his target bonus, employee benefit coverage for up to 18 months, and reimbursement of
expenses owed to him through the date of his termination. If Dr. Goodnow's employment is terminated by us other than for cause
or if he resigns for good reason, coincident with a change in control (as defined in his employment agreement), he would be
entitled to the benefits described above, although he would be entitled to 150%, rather than 100%, of his target bonus, and 50% of
his then unvested equity awards would become fully vested. Additionally, if Dr. Goodnow's employment is terminated by us or
any successor entity without cause within 12 months following a change in control, then 100% of his then unvested equity awards
shall become fully vested.
Agreement
with
Mr.
Elsey
In July 2015, Senseonics, Incorporated entered into an amended and restated employment agreement with Mr. Elsey that
governs the terms of his employment with us. Pursuant to the agreement, Mr. Elsey is entitled to an annual base salary of
$320,000 and is eligible to receive an annual performance bonus of up to 35% of his base salary, as determined by our board of
directors. If Mr. Elsey's employment is terminated by us for reasons other than for cause or if he resigns for good reason (each as
defined in his employment agreement), he would be entitled to receive severance payments equal to continued payment of his
base salary for one year, a prorated portion of his target bonus for the year in which his service is terminated, employee benefit
coverage for up to one year, and reimbursement of expenses owed to him through the date of his termination. If Mr. Elsey's
employment is terminated by us other than for cause or if he resigns for good reason, coincident with a change in control (as
defined in his employment agreement), he would be entitled to the benefits described above, although in lieu of the bonus
described above, he would be entitled to 125% of his target bonus, and 50% of his then unvested equity awards would become
fully vested. Additionally, if Mr. Elsey's employment is terminated by us or any successor entity without cause within 12 months
following a change in control, then 100% of his then unvested equity awards shall become fully vested.
Agreement
with
Ms.
Panlilio
In August 2015, Senseonics, Incorporated entered into an employment agreement with Ms. Panlilio that governs the
terms of her employment with us. Pursuant to the agreement, Ms. Panlilio is entitled to an annual base salary of $221,450 and is
eligible to receive an annual performance bonus of up to 25% of her base salary, as determined by our board of directors. If
Ms. Panlilio's employment is terminated by us for reasons other than for cause or if she resigns for good reason (each as defined
in her employment agreement), she would be entitled to receive severance payments equal to continued payment of her base
salary for nine months, a prorated portion of her target bonus for the year in which her service is terminated, employee benefit
coverage for up to nine months, and reimbursement of expenses owed to her through the date of her termination. If Ms. Panlilio's
employment is terminated by us other than for cause or if she resigns for good reason, coincident with a change in control (as
defined in her employment agreement), she would be entitled to the benefits described above, although in lieu of the bonus
described above, she would be entitled to the larger of 75% of her target bonus or her pro rata portion of her target bonus.
Additionally, if Ms. Panlilio's employment is terminated by us or any successor entity without cause within 12 months following
a change in control, then 100% of her then unvested equity awards shall become fully vested.
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401(k)
Plan
We maintain a defined contribution employee retirement plan for our employees. Our 401(k) plan is intended to qualify
as a tax-qualified plan under Section 401 of the Internal Revenue Code so that contributions to our 401(k) plan, and income
earned on such contributions, are not taxable to participants until withdrawn or distributed from the 401(k) plan. Our 401(k) plan
provides that each participant may contribute a portion of his or her pre-tax compensation, up to the statutory limit. Under our
401(k) plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and
invested by the plan's trustee, subject to participants' ability to give investment directions by following specified procedures. We
do not currently make discretionary contributions or matching contributions to our 401(k) plan.
Equity Incentive Plans
2015 Equity Incentive Plan
The Senseonics, Incorporated board of directors adopted our 2015 Equity Incentive Plan, or the 2015 plan, on
December 1, 2015, and the Senseonics, Incorporated stockholders subsequently approved the 2015 Plan on December 4, 2015. In
connection with the Acquisition, we assumed the 2015 plan, including all awards that were then outstanding under the 2015 plan.
In connection with our proposed public offering, in February 2016, our board of directors adopted, and we expect our
stockholders will approve, an Amended and Restated 2015 Equity Incentive Plan, or the amended and restated 2015 plan. The
amended and restated 2015 plan will become effective upon the pricing our proposed public offering.
Authorized
Shares
The number of shares of common stock that may be issued pursuant to equity awards under the 2015 plan was initially
839,000 shares. This number was subject to increase by up to an additional 9,190,875 shares, in the event that options that were
outstanding under the 1997 plan as of December 1, 2015 expire or otherwise terminate without having been exercised (in such
case, the shares not acquired will revert to and become available for issuance under the 2015 plan). As of December 31, 2015, a
total of 410,475 shares were available for future issuance, options to purchase 30,000 shares of common stock at a weighted
average exercise price of $1.95 per share were outstanding and an additional 398,525 shares subject to a restricted stock award
were outstanding, and an additional 9,221,164 shares were still available to revert and become available for issuance under the
2015 plan.
Pursuant to the amended and restated 2015 plan, which will become effective upon the pricing of our proposed public
offering, the number of shares of common stock that may be issued pursuant to equity awards will be up to 17,251,115 shares,
representing 8,000,000 shares plus up to an additional 9,251,115 shares, in the event that options that were outstanding under the
1997 plan as of February 16, 2016 expire or otherwise terminate without having been exercised (in such case, the shares not
acquired will revert to and become available for issuance under the amended and restated 2015 plan). The number of shares of
our common stock reserved for issuance under our amended and restated 2015 plan will automatically increase on January 1 of
each year, beginning on January 1, 2017 and ending on January 1, 2026, by 3.5% of the total number of shares of our common
stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by our
board of directors. The maximum number of shares that may be issued pursuant to exercise of incentive stock options under the
amended and restated 2015 plan will be 17,251,115 shares.
Shares issued under our 2015 plan may be authorized but unissued or reacquired shares of our common stock. Shares
subject to stock awards granted under our 2015 plan that expire or terminate without being exercised in full, or that are paid out in
cash rather than in shares, will not reduce the number of shares available for issuance under our 2015 plan. Additionally, shares
issued pursuant to stock awards under our 2015 plan that we repurchase or that are forfeited, as well as shares reacquired by us as
consideration for the exercise or purchase price of a stock award or to satisfy tax withholding obligations related to a stock award,
will become available for future grant under our 2015 plan.
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Administration
Our board of directors, or a duly authorized committee thereof, has the authority to administer our 2015 plan. Our board
of directors has delegated its authority to administer our 2015 plan to our compensation committee under the terms of the
compensation committee's charter. Our board of directors may also delegate to one or more of our officers the authority to
(i) designate employees other than officers to receive specified stock awards and (ii) determine the number of shares of our
common stock to be subject to such stock awards. Subject to the terms of our 2015 plan, the administrator has the authority to
determine the terms of awards, including recipients, the exercise price or strike price of stock awards, if any, the number of shares
subject to each stock award, the fair market value of a share of our common stock, the vesting schedule applicable to the awards,
together with any vesting acceleration, the form of consideration, if any, payable upon exercise or settlement of the stock award
and the terms and conditions of the award agreements for use under our 2015 plan.
The administrator has the power to modify outstanding awards under our 2015 plan. Subject to the terms of our 2015
plan, the administrator has the authority to reprice any outstanding option or stock appreciation right, cancel and re-grant any
outstanding option or stock appreciation right in exchange for new stock awards, cash or other consideration or take any other
action that is treated as a repricing under GAAP with the consent of any adversely affected participant.
Section
162(m)
Limits
No participant may be granted stock awards covering more than 1,000,000 shares of our common stock under our 2015
plan during any calendar year pursuant to stock options, stock appreciation rights and other stock awards whose value is
determined by reference to an increase over an exercise price or strike price of at least 100% of the fair market value of our
common stock on the date of grant. Additionally, no participant may be granted in a calendar year a performance stock award
covering more than 1,000,000 shares of our common stock or a performance cash award having a maximum value in excess of
$3.0 million under our 2015 plan. These limitations enable us to grant awards that will be exempt from the $1.0 million limitation
on the income tax deductibility of compensation paid per covered executive officer imposed by Section 162(m) of the Code.
Performance
Awards
Our 2015 plan permits the grant of performance-based stock and cash awards that may qualify as performance-based
compensation that is not subject to the $1.0 million limitation on the income tax deductibility of compensation paid per covered
executive officer imposed by Section 162(m) of the Code. To enable us to grant performance-based awards that will qualify, our
compensation committee can structure such awards so that the stock or cash will be issued or paid pursuant to such award only
following the achievement of specified pre-established performance goals during a designated performance period.
Corporate
Transactions
Our 2015 plan provides that in the event of a specified corporate transaction, including without limitation a
consolidation, merger or similar transaction involving our company, the sale, lease or other disposition of all or substantially all of
the assets of our company or the consolidated assets of our company and our subsidiaries, or a sale or disposition of at least 50%
of the outstanding capital stock of our company, the administrator will determine how to treat each outstanding equity award. The
administrator may:
• arrange for the assumption, continuation or substitution of a stock award by a successor corporation;
• arrange for the assignment of any reacquisition or repurchase rights held by us to a successor corporation;
• accelerate the vesting of the stock award and provide for its termination prior to the effective time of the corporate
transaction;
• arrange for the lapse, in whole or in part, of any reacquisition or repurchase right held by us; or
• cancel the stock award prior to the transaction in exchange for a cash payment, which may be reduced by the exercise
price payable in connection with the stock award.
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The administrator is not obligated to treat all equity awards or portions of equity awards, even those that are of the same
type, in the same manner. The administrator may take different actions with respect to the vested and unvested portions of an
equity award.
Change
of
Control
The administrator may provide, in an individual award agreement or in any other written agreement between us and the
participant, which the equity award will be subject to additional acceleration of vesting and exercisability in the event of a change
of control. In the absence of such a provision, no such acceleration of the award will occur.
Plan
Amendment
or
Termination
Our board has the authority to amend, suspend or terminate our 2015 plan, provided that such action does not materially
impair the existing rights of any participant without such participant's written consent. No incentive stock options may be granted
after the tenth anniversary of the date our board of directors adopted our 2015 plan.
1997 Stock Option Plan
The board of directors and stockholders of Senseonics, Incorporated approved the 1997 plan, which became effective in
March 1997, and it was further amended and restated by the Senseonics, Incorporated board of directors and stockholders most
recently in June 2011. In connection with the Acquisition, we assumed the 1997 plan. As of December 31, 2015, there were
outstanding stock options covering a total of 9,251,164 shares granted under the 1997 plan.
Upon the effectiveness of the 2015 Plan, we no longer grant awards under the 1997 plan.
Types
of
Awards.
The 1997 plan provided for the grant of incentive stock options and nonqualified stock options.
Nonqualified stock options may be granted to employees, including officers, non-employee directors and consultants of us and
our affiliates. Incentive stock options may be granted only to employees.
Share
Reserve.
The aggregate number of shares of common stock reserved for issuance pursuant to stock options
under the 1997 plan was 10,644,109 shares, less any shares issued as restricted stock, which was also the maximum number of
shares that may be issued upon the exercise of ISOs under the 1997 plan.
If a stock option granted under the 1997 plan expires, terminates or is otherwise canceled without being exercised in full,
or if we reacquire shares of unvested common stock issued pursuant to the founder's stock purchase agreements, the shares of our
common stock not acquired pursuant to the stock option or forfeited will again become available for subsequent issuance as
options under the 2015 plan.
Administration.
Our board of directors, or a duly authorized committee thereof, has the authority to administer the
1997 plan. Subject to the terms of the 1997 plan, the our board of directors or the authorized committee, referred to herein as the
plan administrator, has full power and authority to take all actions and make all determinations required or provided under the
1997 plan and any stock option agreement for stock options granted under the 1997 plan. The plan administrator determines
recipients, dates of grant, the numbers and types of stock options to be granted and the terms and conditions of the stock options,
including the period of their exercisability and vesting schedule. Subject to the limitations set forth below, the plan administrator
will also determine the exercise price of stock options granted and the types of consideration to be paid upon exercise of stock
options.
Stock
Options.
Incentive stock options and nonqualified stock options are granted pursuant to stock option agreements
adopted by the plan administrator. The plan administrator determines the exercise price for a stock option, within the terms and
conditions of the 1997 plan, provided that the exercise price of a stock option cannot be less than
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the greater of par value or 100% of the fair market value of our common stock on the date of grant. Options granted under the
1997 plan vest at the rate specified by the plan administrator.
The plan administrator determines the term of stock options granted under the 1997 plan. In accordance with an
optionholder's stock option agreement, if an optionholder's service relationship with us, or any of our affiliates, ceases for any
reason other than disability, death or cause, the optionholder may generally exercise any vested options for a period of three
months following the cessation of service. If an optionholder's service relationship with us or any of our affiliates ceases due to
disability or death, the optionholder may generally exercise any vested options for a period of 12 months following disability or
death. In the event of a termination for cause, options generally terminate immediately upon the termination of the individual for
cause. In no event may an option be exercised beyond the expiration of its term.
Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be
determined by the plan administrator and included in the option agreement and may include (i) cash or check, (ii) the tender of
shares of the common stock of Senseonics, Incorporated previously owned by the optionholder, (iii) a combination of the
foregoing, and (iv) after our shares of common stock become publicly traded on an established securities market, a broker-
assisted cashless exercise.
Unless the plan administrator provides otherwise in the stock option agreement governing the terms of the option,
options generally are not transferable except by will, the laws of descent and distribution, or pursuant to a domestic relations
order.
Tax
Limitations
on
Incentive
Stock
Options.
The aggregate fair market value, determined at the time of grant, of our
common stock with respect to incentive stock options that are exercisable for the first time by an optionholder during any
calendar year under all of our stock plans may not exceed $100,000. Options or portions thereof that exceed such limit will
generally be treated as nonqualified stock options. No incentive stock option may be granted to any person who, at the time of the
grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our
affiliates unless (i) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date
of grant, and (ii) the option is not exercisable after the expiration of five years from the date of grant.
Changes
to
Capital
Structure.
In the event that there is a specified type of change in our capital structure, such as a
stock split or recapitalization, appropriate adjustments will be made to (i) the class and maximum number of shares reserved for
issuance under the 1997 plan and (ii) the class and number of shares and exercise price, strike price, or purchase price of all
outstanding stock options.
Certain
Reorganizations
and
Mergers.
If we are the surviving corporation in any reorganization, merger or
consolidation with any other corporation, the number and class of shares and the exercise price subject to stock options previously
granted under the 1997 plan will be proportionately adjusted to reflect the transaction.
Other
Corporate
Transactions.
In the event of (i) our dissolution or liquidation, (ii) a merger, consolidation or
reorganization following which we are not the surviving corporation, (iii) a sale of substantially all of our assets to another person
or entity or (iv) any transaction that results in a change in control, the 1997 plan and all stock options granted under the 1997 plan
will terminate, unless in connection with the transaction the board approves the continuation of the 1997 plan, the assumption of
outstanding stock options by the successor corporation or the substitution of outstanding options for new options covering stock
of the successor corporation or its parent, with appropriate adjustments to the number and kind of shares and the exercise prices of
the stock options. In the event the 1997 plan and outstanding stock options are terminated in connection with a transaction, the
optionholders will have an opportunity to exercise their vested outstanding stock options before the occurrence of the transaction
during such period as determined by the board in its sole discretion.
Under the 1997 plan, a change in control is generally defined as any transaction that results in any person or entity, other
than a person or entity who was a holder of Senseonics, Incorporated securities on June 30, 1998, owning
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50% or more of the combined voting power of all classes of our stock, unless (i) the person or entity becomes the owner of 50%
or more of the combined voting power of our stock due to our issuing new securities to the person or entity (other than an
issuance pursuant to an underwritten public offering in which the acquisition is not approved by the board) or (ii) at least two-
thirds of members of the board determine that the transaction does not constitute a change in control for purposes of the 1997
plan.
Amendment
and
Termination.
The Senseonics, Incorporated board of directors has the authority to amend, suspend, or
terminate the 1997 plan, provided that such action does not alter or impair the existing rights or obligations of any participant
without such participant's written consent.
2016 Employee Stock Purchase Plan
In February 2016, our board of directors adopted a 2016 Employee Stock Purchase Plan, or our 2016 ESPP. We expect
our stockholders will approve our 2016 ESPP prior to the pricing of our proposed public offering. We expect that the 2016 ESPP
will become effective upon the pricing of our proposed public offering, but we have no current plans to grant purchase rights
under our 2016 ESPP.
The maximum number of shares of our common stock that may be issued under our 2016 ESPP is 800,000 shares.
Additionally, the number of shares of our common stock reserved for issuance under our 2016 ESPP will automatically increase
on January 1 of each year, beginning on January 1 of the year after the completion of our proposed public offering and ending on
and including January 1, 2026, by 1.0% of the total number of shares of our common stock outstanding on December 31 of the
preceding calendar year; provided, however, our board of directors may act prior to the first day of any calendar year to 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. Shares subject to purchase rights granted under our 2016 ESPP
that terminate without having been exercised in full will not reduce the number of shares available for issuance under our 2016
ESPP.
Our board of directors, or a duly authorized committee thereof, will administer our 2016 ESPP. We expect our board of
directors will delegate its authority to administer our 2016 ESPP to our compensation committee under the terms of the
compensation committee's charter.
Employees, including executive officers, of ours or any of our designated affiliates may have to satisfy one or more of
the following service requirements before participating in our 2016 ESPP, as determined by the administrator: (i) customary
employment with us or one of our affiliates for more than 20 hours per week and more than five months per calendar year; or
(ii) continuous employment with us or one of our affiliates for a minimum period of time, not to exceed two years, prior to the
first date of an offering. An employee may not be granted rights to purchase stock under our 2016 ESPP if such employee
(i) immediately after the grant would own stock possessing 5% or more of the total combined voting power or value of all classes
of our common stock, or (ii) holds rights to purchase stock under our 2016 ESPP that would accrue at a rate that exceeds $25,000
worth of our stock for each calendar year that the rights remain outstanding.
A component of our 2016 ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code
and the provisions of this component will be construed in a manner that is consistent with the requirements of Section 423 of the
Code. In addition, the 2016 ESPP authorizes the grant of options to purchase shares of our common stock that do not meet the
requirements of Section 423 of the Code because of deviations necessary to permit participation in the 2016 ESPP by employees
who are foreign nationals or employed outside of the United States while complying with applicable foreign laws. Any such
options must be granted pursuant to rules, procedures or subplans adopted by our board designed to achieve these objectives for
eligible employees and our company. The administrator may specify offerings with a duration of not more than 27 months, and
may specify one or more shorter purchase periods within each offering. Each offering will have one or more purchase dates on
which shares of our common stock will be purchased for the employees who are participating in the offering. The administrator,
in its discretion, will determine the terms of offerings under our 2016 ESPP.
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Our 2016 ESPP permits participants to purchase shares of our 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 our common stock on the first day of an offering or on the date of purchase. Participants may end their
participation at any time during an offering and will be paid their accrued contributions that have not yet been used to purchase
shares. Participation ends automatically upon termination of employment with us.
A participant may not transfer purchase rights under our 2016 ESPP other than by will, the laws of descent and
distribution or as otherwise provided under our 2016 ESPP.
In the event of a specified corporate transaction, such as a merger or change in control of our company, a successor
corporation may assume, continue or substitute each outstanding purchase right. If the successor corporation does not assume,
continue or substitute for the outstanding purchase rights, the offering in progress will be shortened and a new exercise date will
be set. The participants' purchase rights will be exercised on the new exercise date and such purchase rights will terminate
immediately thereafter.
Our board of directors has the authority to amend, suspend or terminate our 2016 ESPP, at any time and for any reason.
Our 2016 ESPP will remain in effect until terminated by our board of directors in accordance with the terms of the 2016 ESPP.
Non-Employee
Director
Compensation
All
shares
of
Senseonics,
Incorporated
common
stock
converted
into
Company
Shares,
and
all
Senseonics
Options
converted
into
Company
Options,
in
connection
with
the
Closing
of
the
Acquisition
pursuant
to
the
Exchange
Ratio.
With
respect
to
the
options,
corresponding
adjustments
were
also
made
to
their
exercise
prices.
The
share
and
per
share
information
included
in
this
"—Non-Employee
Director
Compensation"
section
gives
effect
to
the
conversion
of
such
shares
and
options,
and
related
exercise
price
adjustments,
in
the
Acquisition.
We have not paid, and Senseonics, Incorporated did not historically pay, cash retainers or other cash compensation with
respect to service on the board of directors, except for reimbursement of direct expenses incurred in connection with attending
board or committee meetings. Senseonics, Incorporated at times granted stock options to some of its non-employee directors
under its 1997 plan. In March 2012, Senseonics, Incorporated awarded an option to purchase 83,900 shares of common stock to
Mr. Fiorentino at an exercise price of $0.54 per share. In November 2014, Senseonics, Incorporated awarded an option to
purchase 83,900 shares of common stock to Mr. Prince at an exercise price of $0.70 per share. In connection with a stock option
repricing described in "Executive Compensation—Narrative to Summary Compensation Table—Stock Option Repricing," in
December 2014, Senseonics, Incorporated amended Mr. Prince's stock option to reset its exercise price to $0.54 per share, which
was the fair market value as of December 5, 2014 as determined by the Senseonics, Incorporated board of directors. Other than
Messrs. Fiorentino and Prince, none of the Senseonics, Incorporated non-employee directors serving as of December 31, 2015
held any options to purchase Senseonics, Incorporated common stock.
In December 2015, Mr. DeFalco received a restricted stock award of 398,525 shares of common stock pursuant to an
agreement we entered into with Mr. DeFalco to supersede a pre-existing agreement. One half of the shares covered by this
restricted stock award were fully vested on grant. The remainder will vest in full upon our completion of a public offering or
private placement of our equity securities in which gross proceeds of at least $40 million are raised, which we refer to as a
qualified financing. Additionally, upon a qualified financing, Mr. DeFalco will be entitled to receive a cash payment that, when
combined with the value of the restricted stock grant, equals a percentage of our company valuation ranging between 0.75% to
1.25% of our company valuation, with the actual percentage determined based on the company valuation. For additional
information regarding this arrangement, see "Certain Relationships and Related Party Transactions—Letter agreement with
Stephen P. DeFalco."
In February 2016, our board of directors approved a non-employee director compensation policy to be effective upon the
completion of our proposed public offering. Under this director compensation policy, we will pay each of our
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non-employee directors a cash retainer for service on the board of directors and for service on each committee on which the
director is a member. The chairman of each committee will receive a higher retainer for such service. These retainers are payable
in arrears in four equal quarterly installments on the last day of each quarter, provided that the amount of such payment will be
prorated for any portion of such quarter that the director is not serving on our board of directors. No retainers will be paid in
respect of any period prior to the completion of our proposed public offering. The retainers paid to non-employee directors for
service on the board of directors and for service on each committee of the board of directors on which the director is a member
are as follows:
Board of Directors
Audit Committee
Compensation Committee
Nominating and Corporate Governance Committee
MEMBER
ANNUAL
SERVICE
RETAINER
CHAIRMAN
ADDITIONAL
ANNUAL
SERVICE
RETAINER
$
35,000 $
7,500
6,000
4,000
20,000
11,250
6,600
3,625
In addition, under our non-employee director compensation policy, each non-employee director elected to our board of
directors after the completion of our proposed public offering will receive an option to purchase shares of common stock with an
aggregate Black-Scholes option value of $212,500. The shares subject to each such stock option will vest monthly over a three
year period, subject to the director’s continued service as a director. Further, on the date of each annual meeting of stockholders
held after the completion of our proposed public offering, each non-employee director that continues to serve as a non-employee
member on our board of directors will receive an option to purchase shares of common stock with an aggregate Black-Scholes
option value of $106,500. The shares subject to each such stock option will vest on the on the one year anniversary of the grant
date, subject to the director’s continued service as a director. The exercise price of these options will equal the fair market value
of our common stock on the date of grant.
This policy is intended to provide a total compensation package that enables us to attract and retain qualified and
experienced individuals to serve as directors and to align our directors’ interests with those of our stockholders.
Director
Compensation
Table
The following table sets forth information regarding compensation earned during the year ended December 31, 2015 by
our non-employee directors for service on the Senseonics, Incorporated board of directors from January 1, 2015 to December 7,
2015 and our board of directors from December 7, 2015 to December 31, 2015. Timothy T. Goodnow, our President and Chief
Executive Officer, also served on the Senseonics, Incorporated board of directors and on our board of directors, but did not
receive any additional compensation for his service as a director and therefore is not
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included in the table below. Dr. Goodnow's compensation as an executive officer is set forth below under "Executive
Compensation—Summary Compensation Table."
Name
Stephen P. DeFalco
M. James Barrett
Edward J. Fiorentino
Justin Klein
Douglas S. Prince
Douglas A. Roeder
Stock
Awards
(1)
($)
775,200
—
—
—
—
—
(1) This column reflects the full grant date fair value for restricted stock granted during the year as measured pursuant to ASC
Topic 718 as stock-based compensation in our financial statements. Unlike the calculations contained in our financial
statements, this calculation does not give effect to any estimate of forfeitures related to service-based vesting but assumes
that the director will perform the requisite service for the award to vest in full. The assumptions we used in valuing stock
awards are described in Note 9 to our audited financial statements included in this Annual Report.
Non-Employee
Director
Equity
Outstanding
at
2015
Year
End
The following table provides information about Company Options held by our non-employee directors as of
December 31, 2015. All of these options were granted under the 1997 plan, which is described under the caption "Executive
Compensation—Equity Incentive Plans—1997 Stock Option Plan." The restricted stock award held by Mr. DeFalco was granted
under our 2015 Plan, which is described under the caption "Executive Compensation—Equity Incentive Plans—2015 Equity
Incentive Plan."
Name
Stephen P. DeFalco
Edward J. Fiorentino
Douglas S. Prince
Aggregate
Aggregate
Stock
Awards Option
Awards
Outstanding
(#)
Outstanding
(#)
199,263
(1)
—
—
—
(2)
83,900
83,900
(3)
(1) As of December 31, 2015, 199,263 shares underlying the restricted stock award granted to Mr. DeFalco in 2015 were
unvested. These shares will vest upon our completion of a public offering or private placement of our equity securities in
which we raise gross proceeds of at least $40 million.
(2) As of December 31, 2015, all shares underlying this option were vested.
(3) As of December 31, 2015, 45,444 shares underlying this option were vested and the remaining 38,456 shares vest in equal
monthly installments through November 21, 2016. All shares subject to vesting under this option will vest in full upon the
holder's death or disability or upon a change in control of our company.
Item
12.
Security
Ownership
of
Certain
Beneficial
Owners
and
Management
and
Related
Stockholder
Matters
The following table sets forth certain information regarding the ownership of our common stock as of December 31,
2015 by (i) each director; (ii) each of our named executive officers; (iii) all currently serving executive officers and directors as a
group; and (iv) all those known by us to be beneficial owners of more than five percent of our common stock. Except as otherwise
noted below, the address for persons listed in the table is c/o Senseonics Holdings, Inc., 20451 Seneca Meadows Parkway,
Germantown, MD 20876.
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This table is based upon information supplied by our named executive officers, directors and principal stockholders.
Unless otherwise indicated in the footnotes to the table and subject to common property laws where applicable, we believe that
each stockholder named in the table has sole voting and investment power with regard to the shares indicated as being
beneficially owned. Applicable percentages are based on 75,760,061 shares of common stock outstanding as of December 31,
2015, adjusted as required by the rules promulgated by the SEC.
Name
of
Beneficial
Owner
Principal
Stockholders:
(1)
(2)
Entities affiliated with New Enterprise Associates, Inc.
HealthCare Ventures VI, L.P.
Entities affiliated with Delphi Ventures
(4)
Roche Finance Ltd.
Kato Consulting, LLC
(6)
Energy Capital, LLC
SBLE, LLC
(7)
(5)
(3)
Named
Executive
Officers
and
Directors:
(8)
(9)
(10)
Timothy T. Goodnow, Ph.D.
Mirasol Panlilio
(9)
R. Don Elsey
M. James Barrett, Ph.D.
Peter Justin Klein, M.D., J.D.
Stephen P. DeFalco
Edward J. Fiorentino
Douglas S. Prince
Douglas A. Roeder
All current directors and executive officers as a group (11 persons)
(12)
(11)
(3)
(9)
(9)
Number
of
Shares
Beneficially
Percentage
of
Shares
Beneficially
Owned
Owned
25,622,210
5,643,296
10,118,876
8,042,414
3,999,996
7,466,772
5,030,004
3,051,959
210,270
182,130
14,966,242
6,683
398,525
83,900
52,437
10,118,876
29,407,469
33.0 %
7.4
13.4
10.5
5.3
9.9
6.6
3.9
*
*
19.5
*
*
*
*
13.4
36.5
(13)
* Represents beneficial ownership of less than 1%.
(1) Consists of (a) 13,240,038 shares of common stock and 1,079,436 shares of common stock underlying immediately
exercisable warrants held by New Enterprise Associates 10, Limited Partnership, or NEA 10, (b) 7,896,661 shares of
common stock and 701,630 shares of common stock underlying immediately exercisable warrants held by New Enterprise
Associates 9, Limited Partnership, or NEA 9, (c) 2,534,912 shares of common stock and 139,645 shares of common stock
underlying immediately exercisable warrants held by New Enterprise Associates VII, Limited Partnership, or NEA VII,
(d) 27,791 shares of common stock held by NEA Presidents' Fund, L.P., or NEA Presidents, and (e) 2,097 shares of common
stock held by NEA Ventures 1997, L.P., or NEA 1997. The shares held by NEA 10 are indirectly held by NEA Partners 10,
Limited Partnership, or Partners 10, the sole general partner of NEA 10. The individual general partners of Partners 10 are
M. James Barrett, a member of our board of directors, Peter J. Barris and Scott D. Sandell, or the NEA 10 GPs. Partners 10
and the NEA 10 GPs may be deemed to share voting and dispositive power over, and be the indirect beneficial owners of,
the shares held by NEA 10. The shares held by NEA 9 are indirectly held by NEA Partners 9 Limited Partnership, or
Partners 9, the sole general partner of NEA 9. The individual general partner of Partners 9 is Peter J. Barris. Partners 9 and
Peter J. Barris may be deemed to share voting and dispositive power over, and be the indirect beneficial owners of, the
shares held by NEA 9. The shares held by NEA VII are indirectly held by NEA Partners VII, Limited Partnership, or
Partners VII, the sole general partner of NEA VII. The individual general partner of Partners VII is Peter J. Barris. Partners
VII and Peter J. Barris may be deemed to share voting and dispositive power over, and be the indirect beneficial owners of,
the shares held by NEA VII. The shares held by NEA Presidents are indirectly held by NEA General Partners L.P., the sole
general partner of NEA Presidents. The individual general partner of NEA General Partners, L.P. is Peter J. Barris.
NEA General Partners, L.P. and Peter J. Barris may be deemed to share voting and dispositive power over, and be the
indirect beneficial owners of, the shares held by NEA Presidents. Pamela J. Clark, the general partner of NEA 1997, may be
deemed to share voting and dispositive power over, and be the indirect beneficial owner of, the
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shares held by NEA 1997. The principal business address of NEA 10, NEA 9, NEA VII, NEA Presidents and NEA 1997 is 1954
Greenspring Drive, Suite 600, Timonium, MD 21093.
(2) Consists of 5,050,633 shares of common stock and 592,663 shares of common stock underlying immediately exercisable
warrants held by HealthCare Ventures VI, L.P., or HealthCare VI. The general partner of HealthCare VI is HealthCare
Partners VI, L.P. John W. Littlechild, James Cavanaugh, Augustine Lawlor, Christopher Mirabelli and Harold Werner are
the general partners of HealthCare Partners VI, L.P., or the HealthCare Partners VI General Partners. HealthCare Partners
VI, L.P. and the HealthCare Partners VI General Partners may be deemed to share voting and dispositive power over, and be
the indirect beneficial owners of, the shares held by HealthCare VI. The principal business address of HealthCare VI is
47 Thorndike Street, Suite B1-1, Cambridge, MA 02141.
(3) Consists of (a) 10,021,026 shares of common stock held by Delphi Ventures VIII, L.P., or Delphi VIII, and (b) 97,850 shares
of common stock held by Delphi BioInvestments VIII, L.P., or Delphi Bio. Delphi Management Partners VIII, LLC, or DMP
VIII, is the general partner of each of Delphi VIII and Delphi Bio, collectively referred to herein as the Delphi VIII Funds.
DMP VIII and each of Douglas A. Roeder, a member of our board of directors, James J. Bochnowski, David L. Douglass
and Deepika R. Pakianathan, the Managing Members of DMP VIII, may be deemed to share voting and dispositive power
over the shares held by the Delphi VIII Funds. The address of each of the persons and entities affiliated with Delphi
Ventures is 3000 Sand Hill Road, 1-135, Menlo Park, CA 94025.
(4) Consists of 7,068,679 shares of common stock and 973,735 shares of common stock underlying immediately exercisable
warrants held by Roche Finance Ltd. Roche Finance Ltd is a wholly-owned subsidiary of Roche Holding Ltd, a publicly-
held corporation. The principal business address of Roche Finance Ltd is Grenzacherstrasse 122, 4070 Basel, Switzerland.
(5) Steve Virtue, the sole Managing Member of Kato Consulting, LLC, may be deemed to have voting and dispositive power
over the shares held by Kato Consulting, LLC. The address of Kato Consulting, LLC is 3205 Harrington Dr., Boca Raton,
FL 33496.
(6) Robert L. Smith, the sole Managing Member of Energy Capital, LLC, may be deemed to have voting and dispositive power
over the shares held by Energy Capital, LLC. The address of Energy Capital, LLC is 13650 Fiddlesticks Blvd., Suite 202-
324, Ft. Myers, FL 33912.
(7) Susan Coyne, the sole Managing Member of SBLE, LLC, may be deemed to have voting and dispositive power over the
shares held by SBLE, LLC. The address of SBLE, LLC is 15011 Hawks Shadow, Ft. Myers, FL 33905.
(8) Consists of (a) 145,725 shares of common stock, (b) 27,928 shares of common stock underlying immediately exercisable
warrants and (c) 2,878,306 shares of common stock underlying options that are exercisable within 60 days of December 31,
2015.
(9) Consists of shares of common stock underlying options that are exercisable within 60 days of December 31, 2015.
(10) Consists of (a) 494,689 shares of common stock held directly by Dr. Barrett, (b) 152,079 shares of common stock held by
Dr. Barrett's wife, (c) 13,240,038 shares of common stock held by NEA 10 and (d) 1,079,436 shares of common stock
underlying immediately exercisable warrants held by NEA 10.
(11) Consists of (a) 3,892 shares of common stock and (b) 2,791 shares of common stock underlying immediately exercisable
warrants.
(12) Includes 199,263 shares of restricted stock that will vest in full upon our completion of a public offering or private
placement of our equity securities in which gross proceeds of at least $40 million are raised. Until such shares vest,
Mr. DeFalco has voting but not dispositive power with respect to these restricted shares
(13) Consists of (a) 24,553,824 shares of common stock, (b) 1,110,155 shares of common stock underlying immediately
exercisable warrants and (c) 3,743,490 shares of common stock underlying options that are exercisable within 60 days of
December 31, 2015.
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Table of Contents
Equity
Compensation
Plan
Information
The following table provides certain information with respect to our 1997 plan and our 2015 plan, which were our only
equity compensation plans in effect as of December 31, 2015.
Weighted-average
exercise
Number
of
securities
to
be
issued
upon
exercise price
of
outstanding
of
outstanding
options,
warrants
and
rights
options,
warrants
and
rights reflected
in
column
(a))
Number
of
securities
remaining
available
for
future
issuance
under
equity
compensation
plans
(excluding
securities
Plan
Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(a)
9,251,164 $
—
— $
(b)
(c)
0.74
—
—
380,171
—
—
Item
13.
Certain
Relationshi
ps
and
Related
Transactions,
and
Director
Independence
Except as described below, there have been no transactions since January 1, 2015 to which we have been a participant in
which the amount involved exceeded or will exceed $120,000, and in which any of our directors, executive officers or holders of
more than 5% of our capital stock, or any members of their immediate family, had or will have a direct or indirect material
interest, other than compensation arrangements which are described in this Annual Report under “Executive Compensation.”
Senseonics,
Incorporated
Sales
of
Series
E
Convertible
Preferred
Stock
In August 2015, Senseonics, Incorporated sold an aggregate of 2,711,926 shares of its Series E convertible preferred
stock, 2,457,101 shares of which were sold to holders of more than 5% of its voting securities, at a price of $3.93 per share for
aggregate proceeds of $10.0 million. Each share of Series E convertible preferred stock converted into one Senseonics Share and
was exchanged for 2.0975 Company Shares in connection with the Acquisition.
The table below summarizes these sales:
Purchaser
Entities affiliated with New Enterprise Associates
HealthCare Ventures
Entities affiliated with Delphi Ventures
Roche Finance Ltd.
Total
(3)
(2)
(1)
Shares
of
Series
E
Convertible
Preferred
Stock
Purchased
Aggregate
Purchase
Price
4,836,293
1,041,764
2,368,988
1,409,361
9,656,406
1,230,609 $
265,080
602,796
358,616
2,457,101 $
(1) Consists of 743,534 shares purchased by New Enterprise Associates 10, Limited Partnership and 487,075 shares purchased
by New Enterprise Associates 9, Limited Partnership. Entities affiliated with New Enterprise Associates are holders of more
than 5% of our voting securities, and M. James Barrett and Peter Justin Klein, members of our board of directors, are
affiliated with New Enterprise Associates.
(2) Consists of 265,080 shares purchased by HealthCare Ventures VI, L.P. Healthcare Ventures VI, L.P. is a holder of more than
5% of our voting securities.
(3) Consists of 596,967 shares purchased by Delphi Ventures VIII, L.P. and 5,829 shares purchased by Delphi BioInvestments
VIII, L.P. Entities affiliated with Delphi Ventures are holders of more than 5% of our voting securities, and Douglas A.
Roeder, a member of our board of directors, is affiliated with Delphi Ventures.
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Table of Contents
Registration
Rights
Agreement
In connection with the Acquisition, we entered into a registration rights agreement with certain of our stockholders,
including each of the persons and entities listed in the table above.
The registration rights agreement, among other things grants certain of our stockholders specified registration rights with
respect to shares of our common stock issued upon conversion of the shares of Senseonics, Incorporated stock previously held by
them.
Letter
Agreement
with
Stephen
P.
DeFalco
In June 2010, Senseonics, Incorporated entered into a letter agreement with Stephen P. DeFalco, pursuant to which
Mr. DeFalco provided Senseonics, Incorporated his services as the chairman of the Senseonics, Incorporated board of directors
and, from June 2010 to November 2010, provided Senseonics, Incorporated with consulting services. Pursuant to the letter
agreement, for his service as the chairman of the Senseonics, Incorporated board of directors, Mr. DeFalco was entitled to a fee of
between 0.75% and 1.25% of the valuation of our company upon the closing of a public offering or a merger or consolidation
with another company, a sale, disposition or lease of all or substantially all of their assets.
In December 2015, Senseonics, Incorporated and Mr. DeFalco terminated this agreement and entered into a new
agreement that superseded the prior agreement. Under the new agreement, Mr. DeFalco received a restricted stock grant of
190,000 shares of Senseonics, Incorporated common stock, which converted into 398,525 shares of Senseonics Holdings common
stock in the Acquisition. One half of the shares covered by this restricted stock grant were fully vested on grant. The remainder
will vest in full upon our completion of a public offering or private placement of our equity securities in which gross proceeds of
at least $40 million are raised, which we refer to as a qualified financing. Additionally, upon a qualified financing, Mr. DeFalco
will be entitled to receive a cash payment that, when combined with the value of the restricted stock grant, equals a percentage of
our company valuation ranging between 0.75% to 1.25% of our company valuation, with the actual percentage determined based
on the company valuation.
Energy
Capital,
LLC
Borrowing
Facility
In connection with the Acquisition, we entered into a Note Purchase Agreement with Energy Capital, LLC, which holds
more than five percent of our capital stock, pursuant to which Energy Capital may lend us an aggregate principal amount of up to
$10.0 million, subject to specified conditions. See "Management's Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Indebtedness."
Repurchase
of
Outstanding
Company
Shares
At the same time we entered into the Merger Agreement, we and Laura Magrone, one of our former stockholders,
entered into a Repurchase Agreement pursuant to which she sold an aggregate of 119,979,892 shares of our common stock, or the
Repurchase Shares, to us at $0.0001 per share, for an aggregate consideration of $11,998 in connection with the closing of the
Acquisition. The Repurchase Shares were immediately canceled and returned to our authorized but unissued shares.
Spin-Out
of
the
Company's
Former
Operating
Business
At the same time we entered into the Merger Agreement, we and Daniel Davis, the former sole director, executive
officer and controlling stockholder of ASN Technologies, Inc., executed a Spin-Out Agreement pursuant to which, in connection
with the closing of the Acquisition, our former business was transferred to Mr. Davis in exchange for $9,000 and the assumption
by Mr. Davis of all liabilities related to our former business. Pursuant to the Spin-Out Agreement, we transferred to Mr. Davis the
assets of our former business, including (i) the name "ASN Technologies, Inc.", (ii) the website http://death-valley.asnti.com and
(iii) our former business operations as they existed on December 4, 2015, including any operations on the above-listed website.
Immediately after the Acquisition, the business of Senseonics, Incorporated became our sole focus.
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Table of Contents
Indemnification
Agreements
Our amended and restated certificate of incorporation will contain provisions limiting the liability of directors, and our
amended and restated bylaws will provide that we will indemnify each of our directors to the fullest extent permitted under
Delaware law. Our amended and restated certificate of incorporation and amended and restated bylaws will also provide our
board of directors with discretion to indemnify our officers and employees when determined appropriate by the board.
In addition, we have entered into an indemnification agreement with our directors and executive officers.
Related
Person
Transaction
Policy
We have adopted a related party transaction policy that sets forth our procedures for the identification, review,
consideration and approval or ratification of related party transactions. For purposes of our policy only, a related party transaction
is a transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we and
any related party are, were or will be participants in which the amount involved exceeds $120,000. Transactions involving
compensation for services provided to us as an employee or director are not covered by this policy. A related party is any
executive officer, director or beneficial owner of more than 5% of any class of our voting securities, including any of their
immediate family members and any entity owned or controlled by such persons.
Under the policy, if a transaction has been identified as a related party transaction, including any transaction that was not
a related party transaction when originally consummated or any transaction that was not initially identified as a related party
transaction prior to consummation, our management must present information regarding the related p a rty transaction to our audit
committee, or, if audit committee approval would be inappropriate, to another independent body of our board of directors, for
review, consideration and approval or ratification. The presentation must include a description of, among other things, the
material facts, the interests, direct and indirect, of the related parties, the benefits to us of the transaction and whether the
transaction is on terms that are comparable to the terms available to or from, as the case may be, an unrelated third party or to or
from employees generally. Under the policy, we will collect information that we deem reasonably necessary from each director,
executive officer and, to the extent feasible, significant stockholder to enable us to identify any existing or potential related-
person transactions and to effectuate the terms of the policy. In addition, under our Code of Conduct, our employees and directors
will have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to
a conflict of interest. In considering related party transactions, our audit committee, or other independent body of our board of
directors, will take into account the relevant available facts and circumstances including:
·
·
·
·
the risks, costs and benefits to us;
the impact on a director's independence in the event that the related party is a director, immediate family member of
a director or an entity with which a director is affiliated;
the availability of other sources for comparable services or products; and
the terms available to or from, as the case may be, unrelated third parties or to or from employees generally.
The policy requires that, in determining whether to approve, ratify or reject a related party transaction, our audit
committee, or other independent body of our board of directors, must consider, in light of known circumstances, whether the
transaction is in, or is not inconsistent with, our best interests and those of our stockholders, as our audit committee, or other
independent body of our board of directors, determines in the good faith exercise of its discretion.
Director
Independence
We are not currently listed on a national securities exchange or in an inter-dealer quotation system that has requirements
that a majority of the board of directors be independent, although we intend to list our shares on the NYSE-MKT upon the
completion of our proposed public offering. Our board of directors has undertaken a review of the independence of the directors
and considered whether any director has a material relationship with us that could compromise his ability to exercise independent
judgment in carrying out his or her responsibilities. As a result of this
127
Table of Contents
review, our board of directors has determined that Messrs. DeFalco, Fiorentino, Prince and Roeder and Drs. Barrett and Klein,
representing six of our seven directors, are "independent directors" as defined under the rules of the NYSE-MKT.
Item
14.
Principal
Accountan
t
Fees
and
Services
The following table represents aggregate fees billed to us for the fiscal years ended December 31, 2015 and 2014 by our
principal accountants. All such fees described below were approved by the audit committee.
2015
2014
Audit fees
Tax Fees
Total
$ 378,752 $ 238,953
—
$ 403,752 $ 238,953
25,000
( 1)
(1) Tax fees were principally for services related to tax compliance and reporting and analysis services.
Our audit committee has adopted a policy and procedures for the pre-approval of audit and, if applicable, non-audit
services rendered by our independent registered public accounting firm. The policy generally pre-approves specified services in
the defined categories of audit services, audit-related services, and tax services up to specified amounts. Pre-approval may also be
given as part of the audit committee’s approval of the scope of the engagement of the independent registered public accounting
firm or on an individual explicit case-by-case basis before the independent registered public accounting firm is engaged to
provide each service. On a periodic basis, the independent registered public accounting firm reports to the audit committee on the
status of actual costs for approved services against the approved amounts.
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Table of Contents
Item
15.
Exhibits
and
Financi
al
Statement
Schedules.
(a)(1) Financial Statements.
The response to this portion of Item 15 is set forth under Part II, Item 8 above.
(a)(2) Financial Statement Schedules.
All financial schedules have been omitted because the required information is either presented in the consolidated financial
statements or the notes thereto or is not applicable or required.
(a)(3) Exhibits.
The exhibits filed as part of this Annual Report are set forth on the Exhibit Index immediately following the signatures to this
report. The Exhibit Index is incorporated herein by reference.
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Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
SENSEONICS
HOLDINGS,
INC.
By:
/s/ Timothy T. Goodnow, Ph.D.
Timothy T. Goodnow, Ph.D.
President
and
Chief
Executive
Officer
Date: February 19 , 2016
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Timothy T. Goodnow, Ph.D., R. Don Elsey and Darren K. DeStefano , jointly and severally, as his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and
stead, in any and all capacities, to sign this Annual Report on Form 10-K of Senseonics Holdings, Inc., and any or all amendments
(including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing requisite or necessary to be done in and about the premises hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Timothy T. Goodnow, Ph.D.
Timothy T. Goodnow, Ph.D.
President, Chief Executive Officer and Director
(Principal
Executive
Officer)
/s/ R. Don Elsey
R. Don Elsey
Chief Financial Officer
(Principal
Financial
Officer
and
Principal
Accounting
Officer)
Date
February 19 , 2016
February 19, 2016
/s/ Stephen P. DeFalco
Stephen P. DeFalco
/s/ M. James Barrett, Ph.D.
M. James Barrett, Ph.D.
/s/ Edward J. Fiorentino
Edward J. Fiorentino
/s/ Peter Justin Klein, M.D., J.D.
Peter Justin Klein, M.D., J.D.
/s/ Douglas Prince
Douglas Prince
/s/ Douglas A. Roeder
Douglas A. Roeder
Chairman of the Board of Directors
February 19, 2016
Director
Director
Director
Director
Director
130
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
Table of Contents
EXHIBIT
INDEX
Exhibit
Number
Description
of
Document
2.1 Agreement and Plan of Merger by and among ASN Technologies, Inc., SMSI Merger Sub, Inc. and Senseonics,
Incorporated, dated as of December 4, 2015 (incorporated by reference to Exhibit 2.1 to the Registrant’s Current
Report on Form 8-K (File No. 333-198168 filed on December 10, 2015).
3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current
Report on Form 8-K (File No. 333-198168 filed on December 10, 2015).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K
(File No. 333-198168 filed on December 10, 2015) .
4.1 Registration Rights Agreement by and among the Registrant and certain of its stockholders, dated as of December 7,
2015 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 333-
198168 filed on December 10, 2015) .
10.1 Lease Agreement, dated as of February 4, 2008, by and between Senseonics, Incorporated and Seneca Meadows
Corporate Center III Limited Partnership, as amended by the First Amendment to Lease, dated as of September 25,
2012 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 333-
198168 filed on December 10, 2015) .
10.1.1 Second Amendment to Lease, by and between Senseonics, Incorporated and Seneca Meadows
Corporate Center III L.L.L.P., dated as of January 21, 2016 (incorporated by reference to Exhibit 10.1.1 to
Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-208984) filed on February
17, 2016).
10.2+ Transaction Bonus Agreement by and between Senseonics, Incorporated and Stephen DeFalco, dated as of
December 4, 2015 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File
No. 333-198168 filed on December 10, 2015) .
10.3+ Amended and Restated 1997 Stock Option Plan of Senseonics, Incorporated, as amended to date (incorporated by
reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 333-198168 filed on
December 10, 2015) .
10.4+ Form of Incentive Stock Option Agreement under Senseonics, Incorporated Amended and Restated 1997 Stock
Option Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File
No. 333-198168 filed on December 10, 2015) .
10.5+ Form of Nonqualified Stock Option Agreement under Senseonics, Incorporated Amended and Restated 1997 Stock
Option Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File
No. 333-198168 filed on December 10, 2015) .
2015 Equity Incentive Plan of Senseonics, Incorporated (incorporated by reference to Exhibit 10.6 to the
Registrant’s Current Report on Form 8-K (File No. 333-198168 filed on December 10, 2015) .
10.6+
10.6.1*+ Form of Amended and Restated 2015 Equity Incentive Plan, to be in effect upon completion of the Registrant’s
proposed public offering.
10.7+ Form of Stock Option Grant Notice and Stock Option Agreement under 2015 Equity Incentive Plan (incorporated by
reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K (File No. 333-198168 filed on
December 10, 2015) .
10.8+ Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under 2015 Equity
Incentive Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K (File
No. 333-198168 filed on December 10, 2015) .
10.9+ Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated by
reference to Exhibit 10.9 to the Registrant’s Current Report on Form 8-K (File No. 333-198168 filed on
December 10, 2015).
10.10+ Amended and Restated Executive Employment Agreement by and between Senseonics, Incorporated and Timothy
T. Goodnow, dated as of July 24, 2015 (incorporated by reference to Exhibit 10.10 to the Registrant’s Current
Report on Form 8-K (File No. 333-198168 filed on December 10, 2015).
10.11+ Amended and Restated Executive Employment Agreement by and between Senseonics, Incorporated and Mukul
Jain, dated as of July 30, 2015 (incorporated by reference to Exhibit 10.11 to the Registrant’s Current Report on
Form 8-K (File No. 333-198168 filed on December 10, 2015).
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Table of Contents
10.12+ Executive Employment Agreement by and between Senseonics, Incorporated and Mirasol Panlilio, dated as of
August 10, 2015 (incorporated by reference to Exhibit 10.12 to the Registrant’s Current Report on Form 8-K (File
No. 333-198168 filed on December 10, 2015).
10.13+ Amended and Restated Executive Employment Agreement by and between Senseonics, Incorporated and R. Don
Elsey, dated as of July 27, 2015 (incorporated by reference to Exhibit 10.13 to the Registrant’s Current Report on
Form 8-K (File No. 333-198168 filed on December 10, 2015).
10.14 Loan and Security Agreement, by and between Senseonics, Incorporated and Oxford Finance LLC, dated as of
July 31, 2014, as amended by the Consent and First Amendment to Loan and Security Agreement, dated as of
December 7, 2015 (incorporated by reference to Exhibit 10.14 to the Registrant’s Current Report on Form 8-K (File
No. 333-198168 filed on December 10, 2015) .
10.14.1 Second Amendment to Loan and Security Agreement, by and among Oxford Finance, LLC, Senseonics,
Incorporated and Senseonics Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K (File No. 333-198168) filed on February 9, 2016).
10.15 Form of Secured Promissory Note issued to Oxford Finance LLC by Senseonics, Incorporated, dated as of July 31,
2014 and December 23, 2014 (incorporated by reference to Exhibit 10.15 to the Registrant’s Current Report on
Form 8-K (File No. 333-198168 filed on December 10, 2015) .
10.16 Form of Secured Promissory Note issued to Oxford Finance LLC by Senseonics, Incorporated, dated as of
December 7, 2015 (incorporated by reference to Exhibit 10.16 to the Registrant’s Current Report on Form 8-K (File
No. 333-198168 filed on December 10, 2015) .
10.17 Form of Replacement Warrant to Purchase Common Stock issued to Oxford Finance LLC by Senseonics,
Incorporated, dated as of December 7, 2015 (incorporated by reference to Exhibit 10.17 to the Registrant’s Current
Report on Form 8-K (File No. 333-198168 filed on December 10, 2015).
10.18 Form of Warrant to Purchase Preferred Stock issued by Senseonics, Incorporated in bridge loan financings
(incorporated by reference to Exhibit 10.18 to the Registrant’s Current Report on Form 8-K (File No. 333-198168
filed on December 10, 2015).
10.19 Common Stock Repurchase Agreement, by and between ASN Technologies, Inc. and Laura Magrone, dated as of
December 4, 2015 (incorporated by reference to Exhibit 10.19 to the Registrant’s Current Report on Form 8-K (File
No. 333-198168 filed on December 10, 2015) .
10.20 Spin-out Agreement by and between Daniel Davis and ASN Technologies, Inc., dated as of December 4, 2015
(incorporated by reference to Exhibit 10.20 to the Registrant’s Current Report on Form 8-K (File No. 333-198168
filed on December 10, 2015).
10.21 Note Purchase Agreement by and between the Registrant and Energy Capital LLC, dated as of December 7, 2015
(incorporated by reference to Exhibit 10.21 to the Registrant’s Current Report on Form 8-K (File No. 333-198168
filed on December 10, 2015).
10.22 Unsecured Promissory Note issued by the Registrant to Energy Capital LLC, dated as of December 7, 2015
(incorporated by reference to Exhibit 10.22 to the Registrant’s Current Report on Form 8-K (File No. 333-198168
filed on December 10, 2015) .
10.23 Resignation Letter of Daniel Davis (incorporated by reference to Exhibit 10.23 to the Registrant’s Current Report on
Form 8-K (File No. 333-198168 filed on December 10, 2015) .
10.24# Exclusive Distribution Agreement, by and between Senseonics, Incorporated and Rubin Medical, dated as of
September 14, 2015 (incorporated by reference to Exhibit 10.24 to the Registrant’s Current Report on Form 8-K
(File No. 333-198168 filed on December 10, 2015) .
10.25*+ Form of 2016 Employee Stock Purchase Plan, to be in effect upon completion of the Registrant’s proposed public
offering.
10.26*+ Non-Employee Director Compensation Policy to be in effect upon completion of the Registrant’s proposed public
offering.
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registrant's Current
Report on Form 8-K (File No. 333-198168) filed on December 10, 2015) .
24.1* Power of Attorney (contained on signature page hereto).
31.1* Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
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Table of Contents
32 *† Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a- 14(b) and 15d-
14(b) promulgated under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of The Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
† These certifications are being furnished solely to accompany this Annual Report pursuant to 18 U.S.C. Section 1350, and are
not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, 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.
+ Indicates management contract or compensatory plan.
# Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment and have
been separately filed with the Securities and Exchange Commission.
133
Exhibit
10.25
Senseonics
Holdings
,
Inc.
2016
Employee
Stock
Purchase
Plan
Adopted
by
the
Board
of
Directors:
February
16
,
2016
Approved
by
the
Stockholders:
Febr
uary
[__],
2016
1.
General;
Purpose
.
(a)
The Plan provides a means by which Eligible Employees of the Company and certain
designated Related Corporations may be given an opportunity to purchase shares of Common Stock. The
Plan permits the Company to grant a series of Purchase Rights to Eligible Employees under an Employee
Stock Purchase Plan.
(b)
The Company, by means of the Plan, seeks to retain the services of such Employees, to
secure and retain the services of new Employees and to provide incentives for such persons to exert
maximum efforts for the success of the Company and its Related Corporations.
2.
Administration.
(a)
The Board will administer the Plan unless and until the Board delegates administration of
the Plan to a Committee or Committees, as provided in Section 2(c) .
(b)
The Board will have the power, subject to, and within the limitations of, the express
provisions of the Plan:
(i)
To determine how and when Purchase Rights will be granted and the provisions of
each Offering (which need not be identical).
(ii)
To designate from time to time which Related Corporations of the Company will
be eligible to participate in the Plan.
(iii)
To construe and interpret the Plan and Purchase Rights, and to establish, amend
and revoke rules and regulations for its administration. The Board, in the exercise of this power, may
correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it deems necessary
or expedient to make the Plan fully effective.
(iv)
To settle all controversies regarding the Plan and Purchase Rights granted under
the Plan.
(v)
To suspend or terminate the Plan at any time as provided in Section 12 .
(vi)
To amend the Plan at any time as provided in Section 12 .
1
(vii)
Generally, to exercise such powers and to perform such acts as it deems
necessary or expedient to promote the best interests of the Company and its Related Corporations and to
carry out the intent that the Plan be treated as an Employee Stock Purchase Plan.
(viii)
To adopt such procedures and sub-plans as are necessary or appropriate to permit
participation in the Plan by Employees who are foreign nationals or employed outside the United States.
(c)
The Board may delegate some or all of the administration of the Plan to a Committee or
Committees. If administration is delegated to a Committee, the Committee will have, in connection with
the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to
the Committee, including the power to delegate to a subcommittee any of the administrative powers the
Committee is authorized to exercise (and references in this Plan to the Board will thereafter be to the
Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions
of the Plan, as may be adopted from time to time by the Board. The Board may retain the authority to
concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or
all of the powers previously delegated. Whether or not the Board has delegated administration of the
Plan to a Committee, the Board will have the final power to determine all questions of policy and
expediency that may arise in the administration of the Plan.
(d)
All determinations, interpretations and constructions made by the Board in good faith will
not be subject to review by any person and will be final, binding and conclusive on all persons.
3.
Shares
of
Common
Stock
Subject
to
the
Plan
.
(a)
Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the
maximum number of shares of Common Stock that may be issued under the Plan will not exceed 800,000
shares of Common Stock, plus the number of shares of Common Stock that are automatically added on
January 1st of each year for a period of up to ten years, commencing on the first January 1 following the
IPO Date and ending on (and including) January 1, 202 6 , in an amount equal to 1 % of the total
number of shares of Capital Stock outstanding on December 31st of the preceding calendar
year. Notwithstanding the foregoing, the Board may act prior to the first day of any calendar year to
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
than would otherwise occur pursuant to the preceding sentence.
st
(b)
If any Purchase Right granted under the Plan terminates without having been exercised in
full, the shares of Common Stock not purchased under such Purchase Right will again become available
for issuance under the Plan.
(c)
The stock purchasable under the Plan will be shares of authorized but unissued or
reacquired Common Stock, including shares repurchased by the Company on the open market.
2
4.
Grant
of
Purchase
Rights;
Offering
.
(a)
The Board may from time to time grant or provide for the grant of Purchase Rights to
Eligible Employees under an Offering (consisting of one or more Purchase Periods) on an Offering Date
or Offering Dates selected by the Board. Each Offering will be in such form and will contain such terms
and conditions as the Board will deem appropriate, and will comply with the requirement of Section
423(b)(5) of the Code that all Employees granted Purchase Rights will have the same rights and
privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and
treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering
will include (through incorporation of the provisions of this Plan by reference in the document
comprising the Offering or otherwise) the period during which the Offering will be effective, which
period will not exceed 27 months beginning with the Offering Date, and the substance of the provisions
contained in Sections 5 through 8 , inclusive.
(b)
If a Participant has more than one Purchase Right outstanding under the Plan, unless he or
she otherwise indicates in forms delivered to the Company: (i) each form will apply to all of his or her
Purchase Rights under the Plan, and (ii) a Purchase Right with a lower exercise price (or an earlier-
granted Purchase Right, if different Purchase Rights have identical exercise prices) will be exercised to
the fullest possible extent before a Purchase Right with a higher exercise price (or a later-granted
Purchase Right if different Purchase Rights have identical exercise prices) will be exercised.
(c)
The Board will have the discretion to structure an Offering so that if the Fair Market
Value of a share of Common Stock on the first Trading D ay of a new Purchase Period within that
Offering is less than or equal to the Fair Market Value of a share of Common Stock on the Offering Date
for that Offering , then (i) that Offe ring will terminate immediately as of that first Trading Day , and (ii)
the Participants in such terminated Offering will be automatically enrolled in a new Offering beginning
on the first Trading D ay of such new Purchase Period.
5.
Eligibility.
(a)
Purchase Rights may be granted only to Employees of the Company or, as the Board may
designate in accordance with Section 2(b) , to Employees of a Related Corporation. Except as provided
in Section 5(b) , an Employee will not be eligible to be granted Purchase Rights unless, on the Offering
Date, the Employee has been in the employ of the Company or the Related Corporation, as the case may
be, for such continuous period preceding such Offering Date as the Board may require, but in no event
will the required period of continuous employment be equal to or greater than two years. In addition, the
Board may provide that no Employee will be eligible to be granted Purchase Rights under the Plan
unless, on the Offering Date, such Employee’s customary employment with the Company or the Related
Corporation is more than 20 hours per week and more than five months per calendar year or such other
criteria as the Board may determine consistent with Section 423 of the Code.
(b)
The Board may provide that each person who, during the course of an Offering, first
becomes an Eligible Employee wil l, on a date or dates specified in the Offering which coincides with the
day on which such pers on becomes an Eligible Employee or which occurs thereafter, receive a Purchase
Right under that Offering, which Purchase Right will thereafter be deemed to be a part of
3
that Offering. Such Purchase Right will have the same characteristics as any Purchase Rights originally
granted under that Offering, as described herein, except that:
(i)
the date on which such Purchase Right is granted will be the “Offering Date” of
such Purchase Right for all purposes, including determination of the exercise price of such Purchase
Right;
(ii)
the period of the Offering with respect to such Purchase Right will begin on its
Offering Date and end coincident with the end of such Offering; and
(iii)
the Board may provide that if such person first becomes an Eligible Employee
within a specified period of time before the end of the Offering, he or she will not receive any Purchase
Right under that Offering.
(c)
No Employee will be eligible for the grant of any Purchase Rights if, immediately after
any such Purchase Rights are granted, such Employee owns stock possessing five percent or more of the
total combined voting power or value of all classes of stock of the Company or of any Related
Corporation. For purposes of this Section 5(c) , the rules of Section 424(d) of the Code will apply in
determining the stock ownership of any Employee, and stock which such Employee may purchase under
all outstanding Purchase Rights and options will be treated as stock owned by such Employee.
(d)
As specified by Section 423(b)(8) of the Code, an Eligible Employee may be granted
Purchase Rights only if such Purchase Rights, together with any other rights granted under all Employee
Stock Purchase Plans of the Company and any Related Corporations, do not permit such Eligible
Employee’s rights to purchase stock of the Company or any Related Corporation to accrue at a rate which
exceeds $25,000 of Fair Market Value of such stock (determined at the time such rights are granted, and
which, with respect to the Plan, will be determined as of their respective Offering Dates) for each
calendar year in which such rights are outstanding at any time.
(e)
Officers of the Company and any designated Related Corporation, if they are otherwise
Eligible Employees, will be eligible to participate in Offerings under the Plan. Notwithstanding the
foregoing, the Board may provide in an Offering that Employees who are highly compensated Employees
within the meaning of Section 423(b)(4)(D) of the Code will not be eligible to participate.
6.
Purchase
Rights;
Purchase
Price
.
(a)
On each Offering Da te, each Eligible Employee, pursuant to an Offering made under the
Plan, will be granted a Purchase Right to purchase up to that number of shares of Common Stock
purchasable either with a percentage or with a maximum dollar amount, as designated by the Board , but
in either case not exceeding 15% of such Employee’s earnings (as defined by the Board in each Offering)
during the period that begins on the Offering Date (or such later date as the Board determines for a
particular Offering) and ends on the date stated in the Offering, which date will be no later than the end of
the Offering.
4
(b)
The Board will establish one or more Purchase Dates during an Offering on which
Purchase Rights granted for that Offering will be exercised and shares of Common Stock will be
purchased in accordance with such Offering.
(c)
In connection with each Offering made under the Plan, the Board may specify (i) a
maximum number of shares of Common Stock that may be purchased by any Participant on any Purchase
Date during such Offering, (ii) a maximum aggregate number of shares of Common Stock that may be
purchased by all Participants pursuant to such Offering and/or (iii) a maximum aggregate number of
shares of Common Stock that may be purchased by all Participants on any Purchase Date under the
Offering. If the aggregate purchase of shares of Common Stock issuable upon exercise of Purchase
Rights granted under the Offering would exceed any such maximum aggregate number, then, in the
absence of any Board action otherwise, a pro rata (based on each Participant’s accumulated
Contributions) allocation of the shares of Common Stock available will be made in as nearly a uniform
manner as will be practicable and equitable.
(d)
The purchase price of shares of Common Stock acquired pursuant to Purchase Rights will
be not less than the lesser of:
(i)
an amount equal to 85% of the Fair Market Value of the shares of Common Stock
on the Offering Date; or
(ii)
an amount equal to 85% of the Fair Market Value of the shares of Common Stock
on the applicable Purchase Date.
7.
Participation;
Withdrawal;
Termination
.
(a)
An Eligible Employee may elect to authorize payroll deductions as the means of making
Contributions by completing and delivering to the Company, within the time specified in the Offering, an
enrollment form provided by the Company. The enrollment form will specify the amount of
Contributions not to exceed the maximum amount specified by the Board. Each Participant’s
Contributions will be credited to a bookkeeping account for such Participant under the Plan and will be
deposited with the general funds of the Company except where applicable law requires that Contributions
be deposited with a third party. If permitted in the Offering, a Participant may begin such Contributions
with the first payroll occurring on or after the Offering Date (or, in the case of a payroll date that occurs
after the end of the prior Offering but before the Offering Date of the next new Offering, Contributions
from such payroll will be included in the new Offering). If permitted in the Offering, a Participant may
thereafter reduce (including to zero) or increase his or her Contributions. If specifically provided in the
Offering, in addition to making Contributions by payroll deductions, a Participant may make
Contributions through the payment by cash or check prior to a Purchase Date.
(b)
During an Offering, a Participant may cease making Contributions and withdraw from the
Offering by delivering to the Company a withdrawal form provided by the Company. The Company may
impose a deadline before a Purchase Date for withdrawing. Upon such withdrawal, such Participant’s
Purchase Right in that Offering will immediately terminate and the Company will distribute to such
Participant all of his or her accumulated but unused Contributions and such Participant’s Purchase Right
in that Offering shall thereupon terminate . A Participant’s withdrawal
5
from that Offering will have no effect upon his or her eligibility to participate in any other Offerings
under the Plan, but such Participant will be required to deliver a new enrollment form to participate in
subsequent Offerings.
(c)
Purchase Rights granted pursuant to any Offering under the Plan will terminate
immediately if the Participant either (i) is no longer an Employee for any reason or for no reason (subject
to any post-employment participation period required by law) or (ii) is otherwise no longer eligible to
participate. The Company will distribute to such individual all of his or her accumulated but unused
Contributions.
(d)
During a Participant’s lifetime, Purchase Rights will be exercisable only by such
Participant. Purchase Rights are not transferable by a Participant, except by will, by the laws of descent
and distribution, or, if permitted by the Company, by a beneficiary designation as described in Section 10
.
(e)
Unless otherwise specified in the Offering, t he Company will have no obligation to pay
interest on Contributions.
8.
Exercise
of
Purchase
Rights.
(a)
On each Purchase Date, each Participant’s accumulated Contributions will be applied to
the purchase of shares of Common Stock, up to the maximum number of shares of Common Stock
permitted by the Plan and the applicable Offering, at the purchase price specified in the Offering. No
fractional shares will be issued unless specifically provided for in the Offering.
(b)
If any amount of accumulated Contributions remains in a Participant’s account after the
purchase of shares of Common Stock and such remaining amount is less than the amount required to
purchase one share of Common Stock on the final Purchase Date of an Offering , then such remaining
amount will be held in such Participant’s account for the purchase of shares of Common Stock under the
next Offering under the Plan, unless such Participant withdraws from or is not eligible to participate in
such Offering, in which case such amount will be distributed to such Participant after the final Purchase
Date, without interest. If the amount of Contributions remaining in a Participant’s account after the
purchase of shares of Common Stock is at least equal to the amount required to purchase one whole share
of Common Stock on the final Purchase Date of an Offering , then such remaining amount will not roll
over to the next Offering and will instead be distributed in full to such Participan t after the final Purchase
Date of such Offering without interest.
(c)
No Purchase Rights may be exercised to any extent unless the shares of Common Stock to
be issued upon such exercise under the Plan are covered by an effective registration statement pursuant to
the Securities Act and the Plan is in material compliance with all applicable federal, state, foreign and
other securities and other laws applicable to the Plan . If on a Purchase Date the shares of Common
Stock are not so registered or the Plan is not in such compliance, no Purchase Rights will be exercised on
such Purchase Date, and the Purchase Date will be delayed until the shares of Common Stock are subject
to such an effective registration statement and the Plan is in material compliance, except that the Purchase
Date will in no event be more than 6 months from the Offering Date. If, on the Purchase Date, as delayed
to the maximum extent permissible, the shares of Common Stock are
6
not registered and the Plan is not in material compliance with all applicable laws, no Purchase Rights will
be exercised and all accumulated but unused Contributions will be distributed to the Participants without
interest.
9.
Covenants
of
the
Company
.
The Company will seek to obtain from each federal, state, foreign or other regulatory commission
or agency having jurisdiction over the Plan such authority as may be required to grant Purchase Rights
and issue and sell shares of Common Stock thereunder. If, after commercially reasonable efforts, the
Company is unable to obtain the authority that counsel for the Company deems necessary for the grant of
Purchase Rights or the lawful issuance and sale of Common Stock under the Plan, and at a commercially
reasonable cost, the Company will be relieved from any liability for failure to grant Purchase Rights
and/or to issue and sell Common Stock upon exercise of such Purchase Rights.
10.
Designation
of
Beneficiary
.
(a)
The Company may, but is not obligated to, permit a Participant to submit a form
designating a beneficiary who will receive any shares of Common Stock and/or Contributions from the
Participant’s account under the Plan if the Participant dies before such shares and/or Contributions are
delivered to the Participant. The Company may, but is not obligated to, permit the Participant to change
such designation of beneficiary. Any such designation and/or change must be on a form approved by the
Company.
(b)
If a Participant dies, and in the absence of a valid beneficiary designation, the Company
will deliver any shares of Common Stock and/or Contributions to the executor or administrator of the
estate of the Participant. If no executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its sole discretion, may deliver such shares of Common Stock and/or
Contributions to the Participant’s spouse, dependents or relatives, or if no spouse, dependent or relative is
known to the Company, then to such other person as the Company may designate.
11.
Adjustments
upon
Changes
in
Common
Stock;
Corporate
Transactions
.
(a)
In the event
of a Capitalization Adjustment,
appropriately and
proportionately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to
Section 3(a) , (ii) the class(es) and maximum number of securities by which the share reserve is to
increase automatically each year pursuant to Section 3(a) , (iii) the class(es) and number of securities
subject to, and the purchase price applicable to outstanding Offerings and Purchase Rights, and (iv) the
class(es) and number of securities that are the subject of the purchase limits under each ongoing
Offering. The Board will make these adjustments, and its determination will be final, binding and
conclusive.
the Board will
(b)
In the event of a Corporate Transaction, then: (i) any surviving corporation or acquiring
corporation (or the surviving or acquiring corporation’s parent company) may assume or continue
outstanding Purchase Rights or may substitute similar rights (including a right to acquire the same
7
consideration paid to the stockholders in the Corporate Transaction) for outstanding Purchase Rights, or
(ii) if any surviving or acquiring corporation (or its parent company)
does not assume or continue such
Purchase Rights or does not substitute similar rights for such Purchase Rights, then the Participants’
accumulated Contributions will be used to purchase shares of Common Stock within ten business days
prior to the Corporate Transaction under the outstanding Purchase Rights, and the Purchase Rights will
terminate immediately after such purchase.
12.
Amendment,
Termination
or
Suspension
of
the
Plan
.
(a)
The Board may amend the Plan at any time in any respect the Board deems necessary or
advisable. However, except as provided in Section 11(a) relating to Capitalization Adjustments,
stockholder approval will be required for any amendment of the Plan for which stockholder approval is
required by applicable law or listing requirements, including any amendment that either (i) materially
increases the number of shares of Common Stock available for issuance under the Plan, (ii) materially
expands the class of individuals eligible to become Participants and receive Purchase Rights, (iii)
materially increases the benefits accruing to Participants under the Plan or materially reduces the price at
which shares of Common Stock may be purchased under the Plan, (iv) materially extends the term of the
Plan, or (v) expands the types of awards available for issuance under the Plan, but in each of (i) through
(v) above only to the extent stockholder approval is required by applicable law or listing requirements.
(b)
The Board may suspend or terminate the Plan at any time. No Purchase Rights may be
granted under the Plan while the Plan is suspended or after it is terminated.
(c)
Any benefits, privileges, entitlements and obligations under any outstanding Purchase
Rights granted before an amendment, suspension or termination of the Plan will not be materially
impaired by any such amendment, suspension or termination except (i) with the consent of the person to
whom such Purchase Rights were granted, (ii) as necessary to comply with any laws, listing
requirements, or governmental regulations (including, without limitation, the provisions of Section 423 of
the Code and the regulations and other interpretive guidance issued thereunder relating to Employee
Stock Purchase Plans) including without limitation any such regulations or other guidance that may be
issued or amended after the date the Plan is adopted by the Board , or (iii) as necessary to obtain or
maintain favorable tax, listing, or regulatory treatment. To be clear, the Board may amend outstanding
Purchase Rights without a Participant’s consent if such amendment is necessary to ensure that the
Purchase Right and/or the Plan complies with the requirements of Section 423 of the Code.
13.
Effective
Date
of
Plan
.
The Plan will become effective immediately prior to and contingent upon the IPO Date. No
Purchase Rights will be exercised unless and until the Plan has been approved by the stockholders of the
Company, which approval must be within 12 months before or after the date the Plan is adopted (or if
required under Section 12(a) above, materially amended) by the Board.
8
14.
Miscellaneous
Provisions
.
(a)
Proceeds from the sale of shares of Common Stock pursuant to Purchase Rights will
constitute general funds of the Company.
(b)
A Participant will not be deemed to be the holder of, or to have any of the rights of a
holder with respect to, shares of Common Stock subject to Purchase Rights unless and until the
Participant’s shares of Common Stock acquired upon exercise of Purchase Rights are recorded in the
books of the Company (or its transfer agent).
(c)
The Plan and Offering do not constitute an employment contract. Nothing in the Plan or
in the Offering will in any way alter the at will nature of a Participant’s employment or be deemed to
create in any way whatsoever any obligation on the part of any Participant to continue in the employ of
the Company or a Related Corporation, or on the part of the Company or a Related Corporation to
continue the employment of a Participant.
(d)
The provisions of the Plan will be governed by the laws of the State of Delaware without
resort to that state’s conflicts of laws rules.
15.
Definitions.
As used in the Plan, the following definitions will apply to the capitalized terms indicated below:
(a)
“ Board
”
means the Board of Directors of the Company.
(b)
“ Capital
Stock
”
means each and every class of common stock of the Company,
regardless of the number of votes per share.
(c)
“ Capitalization
Adjustment
” means any change that is made in, or other events that
occur with respect to, the Common Stock subject to the Plan or subject to any Purchase Right after the
date the Plan is adopted by the Board without the receipt of consideration by the Company through
merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in
property other than cash, large nonrecurring cash dividend, stock split, liquidating dividend, combination
of shares, exchange of shares, change in corporate structure or other similar equity restructuring
transaction, as that term is used in Financial Accounting Standards Board Accounting Standards
Codification Topic 718 (or any successor thereto). Notwithstanding the foregoing, the conversion of any
convertible securities of the Company will not be treated as a Capitalization Adjustment.
(d)
“ Code
”
means the Internal Revenue Code of 1986, as amended , including any
applicable regulations and guidance thereunder .
(e)
“ Committee
”
means a committee of one or more members of the Board to whom
authority has been delegated by the Board in accordance with Section 2(c) .
9
(f)
“ Common
Stock
” means, as of the IPO Date, the common stock of the Company,
having 1 vote per share.
(g)
“ Company
” means Senseonics Holdings , Inc. , a Delaware corporation.
(h)
“Contributions
” means the payroll deductions and other additional payments specifically
provided for in the Offering that a Participant contributes to fund the exercise of a Purchase Right. A
Participant may make additional payments into his or her account if specifically provided for in the
Offering, and then only if the Participant has not already had the maximum permitted amount withheld
during the Offering through payroll deductions.
(i)
“ Corporate
Transaction
” means the consummation , in a single transaction or in a series
of related transactions, of any one or more of the following events:
(i)
a sale
or other disposition of all or substantially all, as determined by the Board
in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii)
a sale or other disposition of at least 5 0 % of the outstanding securities of the
Company;
(iii)
a merger, consolidation or similar transaction following which the Company is
not the surviving corporation; or
(iv)
a merger, consolidation or similar transaction following which the Company is
the surviving corporation but the shares of Common Stock outstanding immediately preceding the
merger, consolidation or similar transaction are converted or exchanged by virtue of the merger,
consolidation or similar transaction into other property, whether in the form of securities, cash or
otherwise.
(j)
“ Director
”
means a member of the Board.
(k)
“ Eligible
Employee
”
means an Employee who meets the requirements set forth in the
document(s) governing the Offering for eligibility to participate in the Offering, provided that such
Employee also meets the requirements for eligibility to participate set forth in the Plan.
(l)
“ Employee
”
means any person, including an Officer or Director, who is “employed”
for purposes of Section 423(b)(4) of the Code by the Company or a Related Corporation. However,
service solely as a Director, or payment of a fee for such services, will not cause a Director to be
considered an “Employee” for purposes of the Plan.
(m)
“ Employee
Stock
Purchase
Plan
”
means a plan that grants Purchase Rights intended
to be options issued under an “employee stock purchase plan,” as that term is defined in Section 423(b) of
the Code.
(n)
“ Exchange
Act
”
means the Securities Exchange Act of 1934, as amended and the rules
and regulations promulgated thereunder .
10
(o)
“ Fair
Market
Value
” means, as of any date, the value of the Common Stock determined
as follows:
(i)
If the Common Stock is listed on any established stock exchange or traded on any
established market, the Fair Market Value of a share of Common Stock will be the closing
sales
price
for
such stock as quoted on such exchange or market (or the exchange or market with the greatest volume of
trading in the Common Stock) on
the
date
of
determination
, as reported in such source as the Board
deems reliable. Unless otherwise provided by the Board, if there is no closing sales price for the
Common Stock on the date of determination, then the Fair Market Value will be the closing sales price on
the last preceding date for which such quotation exists.
(ii)
In the absence of such markets for the Common Stock, the Fair Market Value will
be determined by the Board in good faith in compliance with applicable laws and in a manner that
complies with Sections 409A of the Code .
(iii)
Notwithstanding the foregoing, for any Offering that commences on the IPO
Date, the Fair Market Value of the shares of Common Stock on the Offering Date will be the price per
share at which shares are first sold to the public in the Company’s initial public offering as specified in
the final prospectus for that initial public offering.
(p)
“ IPO
Date
”
means the date of the underwriting agreement between the Company and
the underwriter(s) managing the initial public offering of the Common Stock, pursuant to which the
Common Stock is priced for the initial public offering.
(q)
“ Offering
”
means the grant to Eligible Employees of Purchase Rights, with the
exercise of those Purchase Rights automatically occurring at the end of one or more Purchase Periods.
The terms and conditions of an Offering will generally be set forth in the “ Offering
Document
”
approved by the Board for that Offering.
(r)
“ Offering
Date
” means a date selected by the Board for an Offering to commence.
(s)
“ Officer
”
means
a person who is an officer of the Company or a Related Corporation
within the meaning of Section 16 of the Exchange Act.
(t)
“ Participant
”
means an Eligible Employee who holds an outstanding Purchase Right.
(u)
“ Plan
”
means thi s Senseonics Holdings , Inc. 201 6 Employee Stock Purchase
Plan.
(v)
“ Purchase
Date
”
means one or more dates during an Offering selected by the Board on
which Purchase Rights will be exercised and on which purchases of shares of Common Stock will be
carried out in accordance with such Offering.
(w)
“ Purchase
Period
” means a period of time specified within an Offering, generally
beginning on the Offering Date or on the first Trading Day following a Purchase Date, and ending on a
Purchase Date. An Offering may consist of one or more Purchase Periods.
11
(x)
“ Purchase
Right
”
means an option to purchase shares of Common Stock granted
pursuant to the Plan.
(y)
“ Related
Corporation
”
means any “parent corporation” or “subsidiary corporation” of
the Company whether now or subsequently established, as those terms are defined in Sections 424(e) and
(f), respectively, of the Code.
(z)
“ Securities
Act
”
means the Securities Act of 1933, as amended.
(aa)
“ Trading
Day
”
means any day on which the exchange(s) or market(s) on which shares
of Common Stock are listed, including but not limited to the NYSE, Nasdaq Global Select Market, the
Nasdaq Global Market, the Nasdaq Capital Market or any successors thereto, is open for trading.
12
Senseonics
Holdings
,
Inc.
Non-Employee
Director
Compensation
Policy
Exhibit
10.26
Each member of the Board of Directors (the “ Board
” ) who is not also serving as an employee of
Senseonics Holdings , Inc. ( the “ Company
” ) or any of its subsidiaries (each such member, an “
Eligible
Director
” ) will receive the compensation described in this Non-Employee Director
Compensation Policy for his or her Board service following the closing of the initial public offering (the
“ Offering
”) of the Company’s common stock (the “ Common
Stock
”) . This Non-Employee Director
Compensation Policy will be effective upon the execution of the underwriting agreement in connection
with the Offering (the date of such execution being referred to as the “ Effective
Date
”). A Non-
Employee Director may decline all or any portion of his or her compensation by giving notice to the
Company prior to the date cash is to be paid or equity awards are to be granted, as the case may be. This
policy may be amended at any time in the sole discretion of the Board or the Compensation Committee of
the Board.
Annual
Cash
Compensation
The annual cash compensation amount set forth below is payable in equal quarterly installments, payable
in arrears on the last day of each fiscal quarter in which the service occurred. If an Eligible Director joins
the Board or a committee of the Board at a time other than effective as of the first day of a fiscal quarter,
each annual retainer set forth below will be pro-rated based on days served in the applicable fiscal year,
with the pro-rated amount paid for the first fiscal quarter in which the Eligible Director provides the
service, and regular full quarterly payments thereafter. All annual cash fees are vested upon payment.
1. Annual Board Service Retainer :
a. All Eligible Directors: $ 35,000
b. Chairman of the Board Service Retainer (in addition to Eligible Director Service
Retainer) : $ 20,000
2 . Annual Committee Member Service Retainer :
a. Member of the Audit Committee: $ 7,500
b. Member of the Compensation Committee: $ 6,000
c. Member of the Nominating and Corporate Governance Committee: $ 4,000
3 . Annual Committee Chair Service Retainer (in addition to Committee Member Service Retainer)
:
a. Chairman of the Audit Committee: $ 11,250
b. Chairman of the Compensation Committee: $ 6,600
c. Chairman of the Nominating and Corporate Governance Committee: $ 3,625
1
Equity
Compensation
The equity compensation set forth below will be granted under the Company’s Amended and Restated
201 5 Equity Incentive Plan (the “ Plan
” ), subject to the approval of the Plan by the Company’s
stockholder s . All stock options granted under this policy will be nonstatutory stock options, with an
exercise price per share equal to 100% of the Fair Market Value (as defined in the Plan) of the underlying
Common Stock on the date of grant, and a term of ten years from the date of grant (subject to earlier
termination in connection with a termination of service as provided in the Plan).
1. Initial Grant : For each Eligible Director who is first elected or appointed to the Board
following the Effective Date , o n the date of such Eligible Director’s initial election or appointment to
the Board (or, if such date is not a market trading day, the first market trading day thereafter), the
Eligible Director will be automatically, and without further action by the Board or Compensation
Committee of the Board, granted a stock option to purchase shares of comm on stock with an aggregate Black
Scholes option value of $212,500 . The shares subject to each such stock option will vest monthly over a
three year period , subject to the Eligible Director’s Continuous Service (as defined in the Plan) through
such vesting date.
2. Annual Grant : On the date of each annual stockholder s meeting of the Company held after the
Effective Date , each Eligible Director who continues to serve as a member of the Board following such
stockholders meeting will be automatically, and without further action by the Board or Compensation
Committee of the Board, granted a stock option to purchase shares of common stock with an aggregate Black
Scholes option value of $106,500 . The shares subject to each such stock option will vest on the on the one
year anniversary of the grant date , subj ect to the Eligible Director’s Continuous Service (as defined in the
Plan) through such vesting date.
2
Exhibt
10.6.1
Senseonics
Holdings
,
Incorporated
2015
Equity
Incentive
Plan
Adopted
by
the
Board
of
Directors:
December
1
,
20
1
5
Approved
by
the
Stockholders:
December
3
,
20
1
5
Amended
and
Restated
by
th
e
Board
of
Directors:
February
16
,
2016
Approved
by
the
Stockholders:
February
[__],
2016
1.
General.
(a)
Successor
to
and
Continuation
of
Prior
Plan.
The Plan is intended as the successor to
and continuation of the Amended and Restated 1997 Stock Option Plan, as amended (the “ Prior
Plan
”).
Following the Effective Date , no additional stock awards will be granted under the Prior Plan. All
Awards granted on or after the Effective Date will be granted under this Plan. All stock awards granted
under the Prior Plan will remain subject to the terms of the Prior Plan.
(i)
Any shares that would otherwise remain available for future grants under the Prior
Plan as of the Effective Date will cease to be available under the Prior Plan at such time.
(ii)
From and after the Effective Date, any shares subject, at such time, to outstanding
stock awards granted under the Prior Plan that (i) expire or terminate for any reason prior to exercise or
settlement; (ii) are forfeited because of the failure to meet a contingency or condition required to vest
such shares or otherwise return to the Company; or (iii) are reacquired, withheld (or not issued) to satisfy
a tax withholding obligation in connection with an award or to satisfy the purchase price or exercise price
of a stock award (such shares the “ Returning
Shares
”) will immediately be added to the Share Reserve
(as further described in Section 3(a) below) as and when such shares become Returning Shares, up to the
maximum number set forth in Section 3(a) below.
(b)
Eligible
Award
Recipients.
Employees, Directors and Consultants are eligible to receive
Awards.
(c)
Available
Awards.
The Plan provides for the grant of the following Awards: (i)
Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Stock Appreciation Rights (iv) Restricted
Stock Awards, (v) Restricted Stock Unit Awards, (vi) Performance Stock Awards, (vii) Performance
Cash Awards, and (viii) Other Stock Awards.
(d)
Purpose.
The Plan, through the grant of Awards, is intended to help the Company secure
and retain the services of eligible award recipients, provide incentives for such persons to exert maximum
efforts for the success of the Company and any Affiliate, and provide a means by which the eligible
recipients may benefit from increases in value of the Common Stock.
1 .
2.
Administration.
(a)
Administration
by
Board.
The Board will administer the Plan. The Board may delegate
administration of the Plan to a Committee or Committees, as provided in Section 2(c) .
(b)
Powers
of
Board.
The Board will have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(i)
To determine: (A) who will be granted Awards; (B) when and how each Award
will be granted; (C) what type of Award will be granted; (D) the provisions of each Award (which need
not be identical), including when a person will be permitted to exercise or otherwise receive cash or
Common Stock under the Award; (E) the number of shares of Common Stock subject to, or the cash
value of, an Award; and (F) the Fair Market Value applicable to a Stock Award.
(ii)
To construe and interpret the Plan and Awards granted under it, and to establish,
amend and revoke rules and regulations for administration of the Plan and Awards. The Board, in the
exercise of these powers, may correct any defect, omission or inconsistency in the Plan or in any Award
Agreement or in the written terms of a Performance Cash Award, in a manner and to the extent it will
deem necessary or expedient to make the Plan or Award fully effective.
(iii)
To settle all controversies regarding the Plan and Awards granted under it.
(iv)
To accelerate, in whole or in part, the time at which an Award may be exercised
or vest (or the time at which cash or shares of Common Stock may be issued in settlement thereof).
(v)
To suspend or terminate the Plan at any time. Except as otherwise provided in the
Plan or an Award Agreement, suspension or termination of the Plan will not materially impair a
Participant’s rights under the Participant’s then-outstanding Award without the Participant’s written
consent, except as provided in subsection (viii) below.
(vi)
To amend the Plan in any respect the Board deems necessary or advisable,
including, without limitation, by adopting amendments relating to Incentive Stock Options and certain
nonqualified deferred compensation under Section 409A of the Code and/or bringing the Plan or Awards
granted under the Plan into compliance with the requirements for Incentive Stock Options or ensuring
that they are exempt from, or compliant with, the requirements for nonqualified deferred compensation
under Section 409A of the Code , subject to the limitations, if any, of applicable law. If required by
applicable law or listing requirements, and except as provided in Section 9(a) relating to Capitalization
Adjustments, the Company will seek stockholder approval of any amendment of the Plan that (A)
materially increases the number of shares of Common Stock available for issuance under the Plan, (B)
materially expands the class of individuals eligible to receive Awards under the Plan, (C) materially
increases the benefits accruing to Participants under the Plan, (D) materially reduces the price at which
shares of Common Stock may be issued or purchased under the Plan, (E) materially extends the term of
the Plan, or (F) materially expands the types of Awards available for issuance under the Plan. Except as
otherwise provided in the Plan or an Award Agreement, no amendment of the Plan will materially impair
a Participant’s rights under an outstanding Award without the Participant’s written consent.
2 .
(vii)
To submit any amendment to the Plan for stockholder approval, including, but
not limited to, amendments to the Plan intended to satisfy the requirements of (A) Section 162(m) of the
Code regarding the exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to Covered Employees, (B) Section 422 of the Code regarding
“incentive stock options” or (C) Rule 16b-3.
(viii)
To approve forms of Award Agreements for use under the Plan and to amend the
terms of any one or more Awards, including, but not limited to, amendments to provide terms more
favorable to the Participant than previously provided in the Award Agreement, subject to any specified
limits in the Plan that are not subject to Board discretion; provided,
however,
that a Participant’s rights
under any Award will not be impaired by any such amendment unless (A) the Company requests the
consent of the affected Participant, and (B) such Participant consents in writing. Notwithstanding the
foregoing, (1) a Participant’s rights will not be deemed to have been impaired by any such amendment if
the Board, in its sole discretion, determines that the amendment, taken as a whole, does not materially
impair the Participant’s rights, and (2) subject to the limitations of applicable law, if any, the Board may
amend the terms of any one or more Awards without the affected Participant’s consent (A) to maintain
the qualified status of the Award as an Incentive Stock Option under Section 422 of the Code; (B) to
change the terms of an Incentive Stock Option, if such change results in impairment of the Award solely
because it impairs the qualified status of the Award as an Incentive Stock Option under Section 422 of the
Code; (C) to clarify the manner of exemption from, or to bring the Award into compliance with, Section
409A of the Code; or (D) to comply with other applicable laws or listing requirements.
(ix)
Generally, to exercise such powers and to perform such acts as the Board deems
necessary or expedient to promote the best interests of the Company and that are not in conflict with the
provisions of the Plan or Awards.
(x)
To adopt such procedures and sub-plans as are necessary or appropriate to permit
participation in the Plan by Employees, Directors or Consultants who are foreign nationals or employed
outside the United States (provided that Board approval will not be necessary for immaterial
modifications to the Plan or any Award Agreement that are required for compliance with the laws of the
relevant foreign jurisdiction).
(xi)
To effect, with the consent of any adversely affected Participant, (A) the
reduction of the exercise, purchase or strike price of any outstanding Stock Award; (B) the cancellation of
any outstanding Stock Award and the grant in substitution therefor of a new (1) Option or SAR,
(2) Restricted Stock Award, (3) Restricted Stock Unit Award, (4) Other Stock Award, (5) cash and/or (6)
other valuable consideration determined by the Board, in its sole discretion, with any such substituted
award (x) covering the same or a different number of shares of Common Stock as the cancelled Stock
Award and (y) granted under the Plan or another equity or compensatory plan of the Company ; or (C)
any other action that is treated as a repricing under generally accepted accounting principles.
(c)
Delegation
to
Committee.
(i)
General.
The Board may delegate some or all of the administration of the Plan to
a Committee or Committees. If administration of the Plan is delegated to a Committee, the
3 .
Committee will have, in connection with the administration of the Plan, the powers theretofore possessed
by the Board that have been delegated to the Committee, including the power to delegate to a
subcommittee of the Committee any of the administrative powers the Committee is authorized to exercise
(and references in this Plan to the Board will thereafter be to the Committee or subcommittee, as
applicable). Any delegation of administrative powers will be reflected in resolutions, not inconsistent
with the provisions of the Plan, adopted from time to time by the Board or Committee (as
applicable). The Board may retain the authority to concurrently administer the Plan with the Committee
and may, at any time, revest in the Board some or all of the powers previously delegated.
(ii)
Section
162(m)
and
Rule
16b-3
Compliance.
T he Committee may consist
solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, or solely of two
or more Non-Employee Directors, in accordance with Rule 16b-3.
(d)
Delegation
to
an
Officer.
The Board may delegate to one (1) or more Officers the
authority to do one or both of the following (i) designate Employees who are not Officers to be recipients
of Options and SARs (and, to the extent permitted by applicable law, other Stock Awards) and, to the
extent permitted by applicable law, the terms of such Awards, and (ii) determine the number of shares of
Common Stock to be subject to such Stock Awards granted to such Employees; provided,
however
,
that
the Board resolutions regarding such delegation will specify the total number of shares of Common Stock
that may be subject to the Stock Awards granted by such Officer and that such Officer may not grant a
Stock Award to himself or herself. Any such Stock Awards will be granted on the form of Stock Award
Agreement most recently approved for use by the Committee or the Board, unless otherwise provided in
the resolutions approving the delegation authority. The Board may not delegate authority to an Officer
who is acting solely in the capacity of an Officer (and not also as a Director) to determine the Fair Market
Value pursuant to Section 13(x)(iii) below.
(e)
Effect
of
Board’s
Decision.
All determinations, interpretations and constructions made
by the Board in good faith will not be subject to review by any person and will be final, binding and
conclusive on all persons.
3.
Shares
Subject
to
the
Plan.
(a)
Share
Reserve.
(i)
Subject to Section 9(a) relating to Capitalization Adjustments, the aggregate
number of shares of Common Stock that may be issued pursuant to Stock Awards will not exceed
17,251,115 shares (the “ Share
Reserve
”) , which number is the sum of (i) 8,000,000 shares, plus
(ii) the
number of shares that are Returning Shares, as such shares become available from time to time .
(ii)
In addition, the Share Reserve will automatically increase on January 1st of each
year, for a period of not more than ten years, commencing on January 1st of the year following the year in
which the IPO Date occurs and ending on (and including) January 1, 202 6 , in an amount equal to 3.5 %
of the total number of shares of Capital Stock outstanding on December 31st of the preceding calendar
year. Notwithstanding the foregoing, the Board may act prior to January 1st of a given year to provide
that there will be no January 1st increase in the Share Reserve for such year or
4 .
that the increase in the Share Reserve for such year will be a lesser number of shares of Common Stock
than would otherwise occur pursuant to the preceding sentence.
(iii)
For clarity, the Share Reserve in this Section 3(a) is a limitation on the number of
shares of Common Stock that may be issued pursuant to the Plan. Accordingly, this Section 3(a) does not
limit the granting of Stock Awards except as provided in Section 7(a).
(b)
Reversion
of
Shares
to
the
Share
Reserve.
If a Stock Award or any portion thereof (i)
expires or otherwise terminates without all of the shares covered by such Stock Award having been
issued or (ii) is settled in cash ( i.e.
, the Participant receives cash rather than stock), such expiration,
termination or settlement will not reduce (or otherwise offset) the number of shares of Common Stock
that may be available for issuance under the Plan. If any shares of Common Stock issued pursuant to a
Stock Award are forfeited back to or repurchased by the Company because of the failure to meet a
contingency or condition required to vest such shares in the Participant, then the shares that are forfeited
or repurchased will revert to and again become available for issuance under the Plan. Any shares
reacquired by the Company in satisfaction of tax withholding obligations on a Stock Award or as
consideration for the exercise or purchase price of a Stock Award will again become available for
issuance under the Plan.
(c)
Incentive
Stock
Option
Limit.
Subject to the provisions of Section 9(a) relating to
Capitalization Adjustments, the aggregate maximum number of shares of Common Stock that may be
issued pursuant to the exercise of Incentive Stock Options will be 4,781,824 shares of Common Stock.
(d)
Section
162(m)
Limitations
. Subject to the provisions of Section 9(a) relating to
Capitalization Adjustments, the following limitations shall apply.
(i)
A maximum of 1,000,000 shares of Common Stock subject to Options, SARs and
Other Stock Awards whose value is determined by reference to an increase over an exercise or strike
price of at least 100% of the Fair Market Value on the date the Stock Award is granted may be granted to
any one Participant during any one calendar year. Notwithstanding the foregoing, if any additional
Options, SARs or Other Stock Awards whose value is determined by reference to an increase over an
exercise or strike price of at least 100% of the Fair Market Value on the date the Stock Award are granted
to any Participant during any calendar year, compensation attributable to the exercise of such additional
Stock Awards will not satisfy the requirements to be considered “qualified performance-based
compensation” under Section 162(m) of the Code unless such additional Stock Award is approved by the
Company’s stockholders.
(ii)
A maximum of 1,000,000 shares of Common Stock subject to Performance Stock
Awards may be granted to any one Participant during any one calendar year (whether the grant, vesting or
exercise is contingent upon the attainment during the Performance Period of the Performance Goals).
(iii)
A maximum of $ 3,000,000
may be granted as a Performance Cash Award to
any one Participant during any one calendar year.
5 .
(e)
Source
of
Shares.
The stock issuable under the Plan will be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the Company on the open
market or otherwise.
4.
Eligibility.
(a)
Eligibility
for
Specific
Stock
Awards
. Incentive Stock Options may be granted only to
employees of the Company or a “parent corporation” or “subsidiary corporation” thereof (as such terms
are defined in Sections 424(e) and 424(f) of the Code). Stock Awards other than Incentive Stock Options
may be granted to Employees, Directors and Consultants; provided,
however
, that Stock Awards may not
be granted to Employees, Directors and Consultants who are providing Continuous Service only to any
“parent” of the Company, as such term is defined in Rule 405 of the Securities Act, unless (i) the stock
underlying such Stock Awards is treated as “service recipient stock” under Section 409A of the Code (for
example, because the Stock Awards are granted pursuant to a corporate transaction such as a spin off
transaction), (ii) the Company, in consultation with its legal counsel, has determined that such Stock
Awards are otherwise exempt from Section 409A of the Code, or (iii) the Company, in consultation with
its legal counsel, has determined that such Stock Awards comply with the distribution requirements of
Section 409A of the Code.
(b)
Ten
Percent
Stockholders.
A Ten Percent Stockholder will not be granted an Incentive
Stock Option unless the exercise price of such Option is at least 110% of the Fair Market Value on the
date of grant and the Option is not exercisable after the expiration of five years from the date of grant.
5.
Provisions
Relating
to
Options
and
Stock
Appreciation
Rights.
Each Option or SAR will be in such form and will contain such terms and conditions as the Board
deems appropriate. All Options will be separately designated Incentive Stock Options or Nonstatutory
Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will
be issued for shares of Common Stock purchased on exercise of each type of Option. If an Option is not
specifically designated as an Incentive Stock Option, or if an Option is designated as an Incentive Stock
Option but some portion or all of the Option fails to qualify as an Incentive Stock Option under the
applicable rules, then the Option (or portion thereof) will be a Nonstatutory Stock Option. The provisions
of separate Options or SARs need not be identical; provided,
however
, that each Award Agreement will
conform to (through incorporation of provisions hereof by reference in the applicable Award Agreement
or otherwise) the substance of each of the following provisions:
(a)
Term.
Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, no
Option or SAR will be exercisable after the expiration of ten years from the date of its grant or such
shorter period specified in the Award Agreement.
(b)
Exercise
Price.
Subject to the provisions of Section 4(b) regarding Ten Percent
Stockholders, the exercise or strike price of each Option or SAR will be not less than 100% of the Fair
Market Value of the Common Stock subject to the Option or SAR on the date the Award is
granted. Notwithstanding the foregoing, an Option or SAR may be granted with an exercise or strike
price lower than 100% of the Fair Market Value of the Common Stock subject to the Award if such
Award
6 .
is granted pursuant to an assumption of or substitution for another option or stock appreciation right
pursuant to a Corporate Transaction and in a manner consistent with the provisions of Section 409A and,
if applicable, Section 424(a) of the Code. Each SAR will be denominated in shares of Common Stock
equivalents.
(c)
Purchase
Price
for
Options.
The purchase price of Common Stock acquired pursuant to
the exercise of an Option may be paid, to the extent permitted by applicable law and as determined by the
Board in its sole discretion, by any combination of the methods of payment set forth below. The Board
will have the authority to grant Options that do not permit all of the following methods of payment (or
otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the
Company to use a particular method of payment. The permitted methods of payment are as follows:
(i)
by cash, check, bank draft or money order payable to the Company;
(ii)
pursuant to a program developed under Regulation T as promulgated by the
Federal Reserve Board that, prior to the issuance of the stock subject to the Option, results in either the
receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the sales proceeds;
(iii)
by delivery to the Company (either by actual delivery or attestation) of shares of
Common Stock;
(iv)
if an Option is a Nonstatutory Stock Option, by a “net exercise” arrangement
pursuant to which the Company will reduce the number of shares of Common Stock issuable upon
exercise by the largest whole number of shares with a Fair Market Value that does not exceed the
aggregate exercise price; provided,
however
, that the Company will accept a cash or other payment from
the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such
reduction in the number of whole shares to be issued. Shares of Common Stock will no longer be subject
to an Option and will not be exercisable thereafter to the extent that (A) shares issuable upon exercise are
used to pay the exercise price pursuant to the “net exercise,” (B) shares are delivered to the Participant as
a result of such exercise, and (C) shares are withheld to satisfy tax withholding obligations; or
(v)
in any other form of legal consideration that may be acceptable to the Board and
specified in the applicable Award Agreement.
(d)
Exercise
and
Payment
of
a
SAR.
To exercise any outstanding SAR, the Participant
must provide written notice of exercise to the Company in compliance with the provisions of the Stock
Appreciation Right Agreement evidencing such SAR. The appreciation distribution payable on the
exercise of a SAR will be not greater than an amount equal to the excess of (A) the aggregate Fair Market
Value (on the date of the exercise of the SAR) of a number of shares of Common Stock equal to the
number of Common Stock equivalents in which the Participant is vested under such SAR, and with
respect to which the Participant is exercising the SAR on such date, over (B) the aggregate strike price of
the number of Common Stock equivalents with respect to which the Participant is exercising the SAR on
such date . The appreciation distribution may be paid in Common Stock, in cash, in any
7 .
combination of the two or in any other form of consideration, as determined by the Board and contained
in the Award Agreement evidencing such SAR.
(e)
Transferability
of
Options
and
SARs.
The Board may, in its sole discretion, impose
such limitations on the transferability of Options and SARs as the Board will determine. In the absence
of such a determination by the Board to the contrary, the following restrictions on the transferability of
Options and SARs will apply:
(i)
Restrictions
on
Transfer.
An Option or SAR will not be transferable except by
will or by the laws of descent and distribution (or pursuant to subsections (ii) and (iii) below), and will be
exercisable during the lifetime of the Participant only by the Participant. The Board may permit transfer
of the Option or SAR in a manner that is not prohibited by applicable tax and securities laws. Except as
explicitly provided in the Plan, neither an Option nor a SAR may be transferred for consideration.
(ii)
Domestic
Relations
Orders.
Subject to the approval of the Board or a duly
authorized Officer, an Option or SAR may be transferred pursuant to the terms of a domestic relations
order, official marital settlement agreement or other divorce or separation instrument as permitted by
Treasury Regulations Section 1.421-1(b)(2) . If an Option is an Incentive Stock Option, such Option may
be deemed to be a Nonstatutory Stock Option as a result of such transfer.
(iii)
Beneficiary
Designation.
Subject to the approval of the Board or a duly
authorized Officer, a Participant may, by delivering written notice to the Company, in a form approved
by the Company (or the designated broker), designate a third party who, on the death of the Participant,
will thereafter be entitled to exercise the Option or SAR and receive the Common Stock or other
consideration resulting from such exercise. In the absence of such a designation, upon the death of the
Participant, the executor or administrator of the Participant’s estate will be entitled to exercise the Option
or SAR and receive the Common Stock or other consideration resulting from such exercise. However, the
Company may prohibit designation of a beneficiary at any time, including due to any conclusion by the
Company that such designation would be inconsistent with the provisions of applicable laws.
(f)
Vesting
Generally.
The total number of shares of Common Stock subject to an Option
or SAR may vest and become exercisable in periodic installments that may or may not be equal. The
Option or SAR may be subject to such other terms and conditions on the time or times when it may or
may not be exercised (which may be based on the satisfaction of Performance Goals or other criteria) as
the Board may deem appropriate. The vesting provisions of individual Options or SARs may vary. The
provisions of this Section 5(f) are subject to any Option or SAR provisions governing the minimum
number of shares of Common Stock as to which an Option or SAR may be exercised.
(g)
Termination
of
Continuous
Service.
Except as otherwise provided in the applicable
Award Agreement or other agreement between the Participant and the Company, if a Participant’s
Continuous Service terminates (other than for Cause and other than upon the Participant’s death or
Disability), the Participant may exercise his or her Option or SAR (to the extent that the Participant was
entitled to exercise such Award as of the date of termination of Continuous Service) within the period of
time ending on the earlier of (i) the date three months following the termination of the
8 .
Participant’s Continuous Se rvice (or such longer or shorter period specified in the applicable Award
Agreement), and (ii) the expiration of the term of the Option or SAR as set forth in the Award
Agreement. If, after termination of Continuous Service, the Participant does not exercise his or her
Option or SAR (as applicable) within the applicable time frame, the Option or SAR will terminate.
(h)
Extension
of
Termination
Date.
If the exercise of an Option or SAR following the
termination of the Participant’s Continuous Service (other than for Cause and other than upon the
Participant’s death or Disability) would be prohibited at any time solely because the issuance of shares of
Common Stock would violate the registration requirements under the Securities Act, then the Option or
SAR will terminate on the earlier of (i) the expiration of a total period of time (that need not be
consecutive) equal to the applicable post termination exercise period after the termination of the
Participant’s Continuous Service during which the exercise of the Option or SAR would not be in
violation of such registration requirements, and (ii) the expiration of the term of the Option or SAR as set
forth in the applicable Award Agreement. In addition, unless otherwise provided in a Participant’s
Award Agreement, if the sale of any Common Stock received on exercise of an Option or SAR following
the termination of the Participant’s Continuous Service (other than for Cause) would violate the
Company’s insider trading policy, then the Option or SAR will terminate on the earlier of (i) the
expiration of a period of months (that need not be consecutive) equal to the applicable post-termination
exercise period after the termination of the Participant’s Continuous Service during which the sale of the
Common Stock received upon exercise of the Option or SAR would not be in violation of the Company’s
insider trading policy, or (ii) the expiration of the term of the Option or SAR as set forth in the applicable
Award Agreement.
(i)
Disability
of
Participant.
Except as otherwise provided in the applicable Award
Agreement or other agreement between the Participant and the Company, if a Participant’s Continuous
Service terminates as a result of the Participant’s Disability, the Participant may exercise his or her
Option or SAR (to the extent that the Participant was entitled to exercise such Option or SAR as of the
date of termination of Continuous Service), but only within such period of time ending on the earlier of
(i) t he date 12 months following such te rmination of Continuous Service (or such longer or shorter
period specified in the Award Agreement), and (ii) the expiration of the term of the Option or SAR as
set forth in the Award Agreement. I f, after termination of Continuous Service, the Participant does not
exercise his or her Option or SAR within the applicable time frame, the Option or SAR (as applicable)
will terminate.
(j)
Death
of
Participant.
Except as otherwise provided in the applicable Award
Agreement or other agreement between the Participant and the Company, if (i) a Participant’s Continuous
Service terminates as a result of the Participant’s death, or (ii) the Participant dies within the period (if
any) specified in the Award Agreement for exercisability after the termination of the Participant’s
Continuous Service for a reason other than death, then the Option or SAR may be exercised (to the extent
the Participant was entitled to exercise such Option or SAR as of the date of death) by the Participant’s
estate, by a person who acquired the right to exercise the Option or SAR by bequest or inheritance or by a
person designated to exercise the Option or SAR upon the Participant’s death, but only within the period
ending on the earlier of (i) the date 18 months following the date of death (or such longer or shorter
period specified in the Award Agreement), and (ii) the expiration of the term of such Option or SAR as
set forth in the Award Agreement. If, after the
9 .
Participant’s death, the Option or SAR is not exercised within the applicable time frame, the Option or
SAR (as applicable) will terminate.
(k)
Termination
for
Cause.
Except as explicitly provided otherwise in a Participant’s
Award Agreement or other individual written agreement between the Company or any Affiliate and the
Participant , if a Participant’s Continuous Service is terminated for Cause, the Option or SAR will
terminate immediately upon such Participant’s termination of Continuous Service, and the Participant
will be prohibited from exercising his or her Option or SAR from and after the time of such termination
of Continuous Service.
(l)
Non-Exempt
Employees
. If an Option or SAR is granted to an Employee who is a non-
exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, the Option or SAR
will not be first exercisable for any shares of Common Stock until at least six months following the date
of grant of the Option or SAR (although the Award may vest prior to such date). Consistent with the
provisions of the Worker Economic Opportunity Act, (i) if such non-exempt Employee dies or suffers a
Disability, (ii) upon a Corporate Transaction in which such Option or SAR is not assumed, continued, or
substituted, (iii) upon a Change in Control, or (iv) upon the Participant’s retirement (as such term may be
defined in the Participant’s Award Agreement in another agreement between the Participant and the
Company, or, if no such definition, in accordance with the Company's then current employment policies
and guidelines), the vested portion of any Options and SARs may be exercised earlier than six months
following the date of grant. The foregoing provision is intended to operate so that any income derived by
a non-exempt employee in connection with the exercise or vesting of an Option or SAR will be exempt
from his or her regular rate of pay. To the extent permitted and/or required for compliance with the
Worker Economic Opportunity Act to ensure that any income derived by a non-exempt employee in
connection with the exercise, vesting or issuance of any shares under any other Stock Award will be
exempt from the employee’s regular rate of pay, the provisions of this Section 5(l) will apply to all Stock
Awards and are hereby incorporated by reference into such Stock Award Agreements.
6.
Provisions
of
Stock
Awards
other
than
Options
and
SARs.
(a)
Restricted
Stock
Awards.
Each Restricted Stock Award Agreement will be in such form
and will contain such terms and conditions as the Board will deem appropriate. To the extent consistent
with the Company’s bylaws, at the Board’s election, shares of Common Stock may be (x) held in book
entry form subject to the Company’s instructions until any restrictions relating to the Restricted Stock
Award lapse; or (y) evidenced by a certificate, which certificate will be held in such form and manner as
determined by the Board. The terms and conditions of Restricted Stock Award Agreements may change
from time to time, and the terms and conditions of separate Restricted Stock Award Agreements need not
be identical. Each Restricted Stock Award Agreement will conform to (through incorporation of the
provisions hereof by reference in the agreement or otherwise) the substance of each of the following
provisions:
(i)
Consideration.
A Restricted Stock Award may be awarded in consideration for
(A) cash, check, bank draft or money order payable to the Company, (B) past services to the Company or
an Affiliate, or (C) any other form of legal consideration that may be acceptable to the Board, in its sole
discretion, and permissible under applicable law.
10 .
(ii)
Vesting.
Shares of Common Stock awarded under the Restricted Stock Award
Agreement may be subject to forfeiture to the Company in accordance with a vesting schedule to be
determined by the Board.
(iii)
Termination
of
Participant’s
Continuous
Service.
If
a Participant’s
Continuous Service terminates, the Company may receive through a forfeiture condition or a repurchase
right any or all of the shares of Common Stock held by the Participant that have not vested as of the date
of termination of Continuous Service under the terms of the Restricted Stock Award Agreement.
(iv)
Transferability.
Rights to acquire shares of Common Stock under the Restricted
Stock Award Agreement will be transferable by the Participant only upon such terms and conditions as
are set forth in the Restricted Stock Award Agreement, as the Board will determine in its sole discretion,
so long as Common Stock awarded under the Restricted Stock Award Agreement remains subject to the
terms of the Restricted Stock Award Agreement.
(v)
Dividends.
A Restricted Stock Award Agreement may provide that any dividends
paid on Restricted Stock will be subject to the same vesting and forfeiture restrictions as apply to the
shares subject to the Restricted Stock Award to which they relate.
(b)
Restricted
Stock
Unit
Awards.
Each Restricted Stock Unit Award Agreement will be in
such form and will contain such terms and conditions as the Board will deem appropriate. The terms and
conditions of Restricted Stock Unit Award Agreements may change from time to time, and the terms and
conditions of separate Restricted Stock Unit Award Agreements need not be identical. Each Restricted
Stock Unit Award Agreement will conform to (through incorporation of the provisions hereof by
reference in the Agreement or otherwise) the substance of each of the following provisions:
(i)
Consideration.
At the time of grant of a Restricted Stock Unit Award, the Board
will determine the consideration, if any, to be paid by the Participant upon delivery of each share of
Common Stock subject to the Restricted Stock Unit Award. The consideration to be paid (if any) by the
Participant for each share of Common Stock subject to a Restricted Stock Unit Award may be paid in any
form of legal consideration that may be acceptable to the Board, in its sole discretion, and permissible
under applicable law.
(ii)
Vesting.
At the time of the grant of a Restricted Stock Unit Award, the Board
may impose such restrictions on or conditions to the vesting of the Restricted Stock Unit Award as it, in
its sole discretion, deems appropriate.
(iii)
Payment
. A Restricted Stock Unit Award may be settled by the delivery of
shares of Common Stock, their cash equivalent, any combination thereof or in any other form of
consideration, as determined by the Board and contained in the Restricted Stock Unit Award Agreement.
(iv)
Additional
Restrictions.
At the time of the grant of a Restricted Stock Unit
Award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the
11 .
delivery of the shares of Common Stock (or their cash equivalent) subject to a Restricted Stock Unit
Award to a time after the vesting of such Restricted Stock Unit Award.
(v)
Dividend
Equivalents.
Dividend equivalents may be credited in respect of shares
of Common Stock covered by a Restricted Stock Unit Award, as determined by the Board and contained
in the Restricted Stock Unit Award Agreement. At the sole discretion of the Board, such dividend
equivalents may be converted into additional shares of Common Stock covered by the Restricted Stock
Unit Award in such manner as determined by the Board. Any additional shares covered by the Restricted
Stock Unit Award credited by reason of such dividend equivalents will be subject to all of the same terms
and conditions of the underlying Restricted Stock Unit Award Agreement to which they relate.
(vi)
Termination
of
Participant’s
Continuous
Service.
as otherwise
provided in the applicable Restricted Stock Unit Award Agreement, such portion of the Restricted Stock
Unit Award that has not vested will be forfeited upon the Participant’s termination of Continuous Service.
Except
(c)
Performance
Awards
.
(i)
Performance
Stock
Awards
. A Performance Stock Award is a Stock Award
(covering a number of shares not in excess of that set forth in Section 3(d) above) that is payable
(including that may be granted, may vest or may be exercised) contingent upon the attainment during a
Performance Period of certain Performance Goals. A Performance Stock Award may, but need not,
require the Participant’s completion of a specified period of Continuous Service. The length of any
Performance Period, the Performance Goals to be achieved during the Performance Period, and the
measure of whether and to what degree such Performance Goals have been attained will be conclusively
determined by the Committee (or, if not required for compliance with Section 162(m) of the Code, the
Board), in its sole discretion. In addition, to the extent permitted by applicable law and the applicable
Award Agreement, the Board may determine that cash may be used in payment of Performance Stock
Awards.
(ii)
Performance
Cash
Awards
. A Performance Cash Award is a cash award (for a
dollar value not in excess of that set forth in Section 3(d) above) that is payable contingent upon the
attainment during a Performance Period of certain Performance Goals. A Performance Cash Award may
also require the completion of a specified period of Continuous Service. At the time of grant of a
Performance Cash Award, the length of any Performance Period, the Performance Goals to be achieved
during the Performance Period, and the measure of whether and to what degree such Performance Goals
have been attained will be conclusively determined by the Committee (or, if not required for compliance
with Section 162(m) of the Code, the Board), in its sole discretion. The Board may specify the form of
payment of Performance Cash Awards, which may be cash or other property, or may provide for a
Participant to have the option for his or her Performance Cash Award, or such portion thereof as the
Board may specify, to be paid in whole or in part in cash or other property.
(iii)
Board
Discretion
. The Board retains the discretion to reduce or eliminate the
compensation or economic benefit due upon attainment of Performance Goals and to define the manner
of calculating the Performance Criteria it selects to use for a Performance Period. Partial
12 .
achievement of the specified criteria may result in the payment or vesting corresponding to the degree of
achievement as specified in the Stock Award Agreement or the written terms of a Performance Cash
Award.
(iv)
Section
162(m)
Compliance
. U nless otherwise permitted in compliance with
the requirements of Section 162(m) of the Code with respect to an Award intended to qualify as
“performance-based compensation” thereunder, the Committee will establish the Performance Goals
applicable to, and the formula for calculating the amount payable under, the Award no later than the
earlier of (a) the date 90 days after the commencement of the applicable Performance Period, and (b) the
date on which 25% of the Performance Period has elapsed, and in any event at a time when the
achievement of the applicable Performance Goals remains substantially uncertain. Prior to the payment
of any compensation under an Award intended to qualify as “performance-based compensation” under
Section 162(m) of the Code, the Committee will certify the extent to which any Performance Goals and
any other material terms under such Award have been satisfied (other than in cases where such
Performance Goals relate solely to the increase in the value of the Common Stock). Notwithstanding
satisfaction of, or completion of any Performance Goals, the number of shares of Common Stock,
Options, cash or other benefits granted, issued, retainable and/or vested under an Award on account of
satisfaction of such Performance Goals may be reduced by the Committee on the basis of such further
considerations as the Committee, in its sole discretion, will determine.
(d)
Other
Stock
Awards
. Other forms of Stock Awards valued in whole or in part by
reference to, or otherwise based on, Common Stock, including the appreciation in value thereof (e.g.,
options or stock rights with an exercise price or strike price less than 100% of the Fair Market Value of
the Common Stock at the time of grant) may be granted either alone or in addition to Stock Awards
provided for under Section 5 and the preceding provisions of this Section 6 . Subject to the provisions of
the Plan, the Board will have sole and complete authority to determine the persons to whom and the time
or times at which such Other Stock Awards will be granted, the number of shares of Common Stock (or
the cash equivalent thereof) to be granted pursuant to such Other Stock Awards and all other terms and
conditions of such Other Stock Awards.
7.
Covenants
of
the
Company.
(a)
Availability
of
Shares.
The Company will keep available at all times the number of
shares of Common Stock reasonably required to satisfy then-outstanding Awards.
(b)
Securities
Law
Compliance.
The Company will seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock
Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided,
however
, that this undertaking will not require the Company to register under the Securities Act the Plan,
any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after
reasonable efforts and at a reasonable cost, the Company is unable to obtain from any such regulatory
commission or agency the authority that counsel for the Company deems necessary for the lawful
issuance and sale of Common Stock under the Plan, the Company will be relieved from any liability for
failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such
authority is obtained. A Participant will not be eligible for the grant of an Award or the
13 .
subsequent issuance of cash or Common Stock pursuant to the Award if such grant or issuance would be
in violation of any applicable securities law.
(c)
No
Obligation
to
Notify
or
Minimize
Taxes.
The Company will have no duty or
obligation to any Participant to advise such holder as to the time or manner of exercising such Stock
Award. Furthermore, the Company will have no duty or obligation to warn or otherwise advise such
holder of a pending termination or expiration of an Award or a possible period in which the Award may
not be exercised. The Company has no duty or obligation to minimize the tax consequences of an Award
to the holder of such Award.
8.
Miscellaneous.
(a)
Use
of
Proceeds
from
Sales
of
Common
Stock.
Proceeds from the sale of shares of
Common Stock pursuant to Awards will constitute general funds of the Company.
(b)
Corporate
Action
Constituting
Grant
of
Awards.
Corporate action constituting a grant
by the Company of an Award to any Participant will be deemed completed as of the date of such
corporate action, unless otherwise determined by the Board, regardless of when the instrument,
certificate, or letter evidencing the Award is communicated to, or actually received or accepted by, the
Participant. In the event that the corporate records (e.g., Board consents, resolutions or minutes)
documenting the corporate action constituting the grant contain terms (e.g., exercise price, vesting
schedule or number of shares) that are inconsistent with those in the Award Agreement or related grant
documents as a result of a clerical error in the papering of the Award Agreement or related grant
documents, the corporate records will control and the Participant will have no legally binding right to the
incorrect term in the Award Agreement or related grant documents.
(c)
Stockholder
Rights.
No Participant will be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares of Common Stock subject to an Award unless and until
(i) such Participant has satisfied all requirements for exercise of, or the issuance of shares of Common
Stock under, the Award pursuant to its terms, and (ii) the issuance of the Common Stock subject to such
Award has been entered into the books and records of the Company.
(d)
No
Employment
or
Other
Service
Rights.
Nothing in the Plan, any Award Agreement
or any other instrument executed thereunder or in connection with any Award granted pursuant thereto
will confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity
in effect at the time the Award was granted or will affect the right of the Company or an Affiliate to
terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the
service of a Consultant pursuant to the terms of such Consultant’s agreement with the Company or an
Affiliate, or (iii) the service of a Director pursuant to the bylaws of the Company or an Affiliate, and any
applicable provisions of the corporate law of the state in which the Company or the Affiliate is
incorporated, as the case may be.
(e)
Change
in
Time
Commitment.
In the event a Participant’s regular level of time
commitment in the performance of his or her services for the Company and any Affiliates is reduced (for
example, and without limitation, if the Participant is an Employee of the Company and the Employee has
a change in status from a full-time Employee to a part-time Employee or takes an
14 .
extended leave of absence) after the date of grant of any Award to the Participant, the Board has the right
in its sole discretion to (x) make a corresponding reduction in the number of shares or cash amount
subject to any portion of such Award that is scheduled to vest or become payable after the date of such
change in time commitment, and (y) in lieu of or in combination with such a reduction, extend the vesting
or payment schedule applicable to such Award. In the event of any such reduction, the Participant will
have no right with respect to any portion of the Award that is so reduced or extended.
(f)
Incentive
Stock
Option
Limitations.
To the extent that the aggregate Fair Market Value
(determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionholder during any calendar year (under all plans of the
Company and any Affiliates) exceeds $100,000 (or such other limit established in the Code) or otherwise
does not comply with the rules governing Incentive Stock Options, the Options or portions thereof that
exceed such limit (according to the order in which they were granted) or otherwise do not comply with
such rules will be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the
applicable Option Agreement(s).
(g)
Investment
Assurances.
The Company may require a Participant, as a condition of
exercising or acquiring Common Stock under any Award, (i) to give written assurances satisfactory to the
Company as to the Participant’s knowledge and experience in financial and business matters and/or to
employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters and that such Participant is capable of evaluating, alone or
together with the purchaser representative, the merits and risks of exercising the Award; and (ii) to give
written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock
subject to the Award for the Participant’s own account and not with any present intention of selling or
otherwise distributing the Common Stock. The foregoing requirements, and any assurances given
pursuant to such requirements, will be inoperative if (A) the issuance of the shares upon the exercise or
acquisition of Common Stock under the Award has been registered under a then currently effective
registration statement under the Securities Act, or (B) as to any particular requirement, a determination is
made by counsel for the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in
order to comply with applicable securities laws, including, but not limited to, legends restricting the
transfer of the Common Stock.
(h)
Withholding
Obligations.
Unless prohibited by the terms of an Award Agreement, the
Company may, in its sole discretion, satisfy any federal, state or local tax withholding obligation relating
to an Award by any of the following means or by a combination of such means: (i) causing the
Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of
Common Stock issued or otherwise issuable to the Participant in connection with the Award; provided,
however,
that no shares of Common Stock are withheld with a value exceeding the minimum amount of
tax required to be withheld by law (or such lesser amount as may be necessary to avoid classification of
the Stock Award as a liability for financial accounting purposes); (iii) withholding cash from an Award
settled in cash; (iv) withholding payment from any amounts otherwise payable to the Participant; or (v)
by such other method as may be set forth in the Award Agreement.
15 .
(i)
Electronic
Delivery
. Any reference herein to a “written” agreement or document will
include any agreement or document delivered electronically, posted on the Company’s intranet (or other
shared electronic medium controlled by the Company to which the Participant has access) or, from and
after the IPO Date, filed publicly at www.sec.gov (or any successor website thereto) .
(j)
Deferrals.
To the extent permitted by applicable law, the Board, in its sole discretion,
may determine that the delivery of Common Stock or the payment of cash, upon the exercise, vesting or
settlement of all or a portion of any Award may be deferred and may establish programs and procedures
for deferral elections to be made by Participants. Deferrals by Participants will be made in accordance
with Section 409A of the Code. Consistent with Section 409A of the Code, the Board may provide for
distributions while a Participant is still an employee or otherwise providing services to the
Company. The Board is authorized to make deferrals of Awards and determine when, and in what annual
percentages, Participants may receive payments, including lump sum payments, following the
Participant’s termination of Continuous Service, and implement such other terms and conditions
consistent with the provisions of the Plan and in accordance with applicable law.
(k)
Compliance
with
Section
409A
of
the
Code.
Unless otherwise expressly provided for
in an Award Agreement, the Plan and Award Agreements will be interpreted to the greatest extent
possible in a manner that makes the Plan and the Awards granted hereunder exempt from Section 409A
of the Code, and, to the extent not so exempt, in compliance with Section 409A of the Code. If the Board
determines that any Award granted hereunder is not exempt from and is therefore subject to Section 409A
of the Code, the Award Agreement evidencing such Award will incorporate the terms and conditions
necessary to avoid the consequences specified in Section 409A(a)(1) of the Code, and to the extent an
Award Agreement is silent on terms necessary for compliance, such terms are hereby incorporated by
reference into the Award Agreement. Notwithstanding anything to the contrary in this Plan (and unless
the Award Agreement specifically provides otherwise), if the shares of Common Stock are publicly
traded, and if a Participant holding an Award that constitutes “deferred compensation” under Section
409A of the Code is a “specified employee” for purposes of Section 409A of the Code, no distribution or
payment of any amount that is due because of a “separation from service” (as defined in Section 409A of
the Code without regard to alternative definitions thereunder) will be issued or paid before the date that is
six months following the date of such Participant’s “separation from service” (as defined in Section 409A
of the Code without regard to alternative definitions thereunder) or, if earlier, the date of the Participant’s
death, unless such distribution or payment can be made in a manner that complies with Section 409A of
the Code, and any amounts so deferred will be paid in a lump sum on the day after such six month period
elapses, with the balance paid thereafter on the original schedule.
(l)
Clawback/Recovery
. All Awards granted under the Plan will be subject to recoupment
in accordance with any clawback policy that the Company may be required to adopt pursuant to the
listing standards of any national securities exchange or association on which the Company’s securities are
listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or
other applicable law. In addition, the Board may impose such other clawback, recovery or recoupment
provisions in an Award Agreement as the Board determines necessary or appropriate, including but not
limited to a reacquisition right in respect of previously acquired shares of Common Stock or other cash or
property upon the occurrence of an event
16 .
constituting Cause. No recovery of compensation under such a clawback policy will be an event giving
rise to a right to resign for “good reason” or “constructive termination” (or similar term) under any
agreement with the Company.
9.
Adjustments
upon
Changes
in
Common
Stock;
Other
Corporate
Events.
(a)
Capitalization
Adjustments
. In the event of a Capitalization Adjustment, the Board
will appropriately and proportionately adjust: (i) the class(es) and maximum number of securities subject
to the Plan pursuant to Section 3(a) , (ii) the class(es) and maximum number of securities that may be
issued pursuant to the exercise of Incentive Stock Options pursuant to Section 3(c) , (iii) the class(es) and
maximum number of securities that may be awarded to any person pursuant to Sections 3(d) , and (iv) the
class(es) and number of securities and price per share of stock subject to outstanding Stock Awards. The
Board will make such adjustments, and its determination will be final, binding and conclusive.
(b)
Dissolution
or
Liquidation
. Except as otherwise provided in the Stock Award
Agreement, in the event of a dissolution or liquidation of the Company, all outstanding Stock Awards
(other than Stock Awards consisting of vested and outstanding shares of Common Stock not subject to a
forfeiture condition or the Company’s right of repurchase) will terminate immediately prior to the
completion of such dissolution or liquidation, and the shares of Common Stock subject to the Company’s
repurchase rights or subject to a forfeiture condition may be repurchased or reacquired by the Company
notwithstanding the fact that the holder of such Stock Award is providing Continuous Service; provided,
however
, that the Board may, in its sole discretion, cause some or all Stock Awards to become fully
vested, exercisable and/or no longer subject to repurchase or forfeiture (to the extent such Stock Awards
have not previously expired or terminated) before the dissolution or liquidation is completed but
contingent on its completion.
(c)
Corporate
Transaction.
The following provisions will apply to Stock Awards in the
event of a Corporate Transaction unless otherwise provided in the Stock Award Agreement or any other
written agreement between the Company or any Affiliate and the Participant or unless otherwise
expressly provided by the Board at the time of grant of a Stock Award. In the event of a Corporate
Transaction, then, notwithstanding any other provision of the Plan, the Board may take one or more of the
following actions with respect to Stock Awards, contingent upon the closing or completion of the
Corporate Transaction:
(i)
arrange for the surviving corporation or acquiring corporation (or the surviving or
acquiring corporation’s parent company) to assume or continue the Stock Award or to substitute a similar
stock award for the Stock Award (including, but not limited to, an award to acquire the same
consideration paid to the stockholders of the Company pursuant to the Corporate Transaction);
(ii)
arrange for the assignment of any reacquisition or repurchase rights held by the
Company in respect of Common Stock issued pursuant to the Stock Award to the surviving corporation
or acquiring corporation (or the surviving or acquiring corporation’s parent company);
(iii)
accelerate the vesting, in whole or in part, of the Stock Award (and, if applicable,
the time at which the Stock Award may be exercised) to a date prior to the effective time
17 .
of such Corporate Transaction as the Board determines (or, if the Board does not determine such a date,
to the date that is five days prior to the effective date of the Corporate Transaction), with such Stock
Award terminating if not exercised (if applicable) at or prior to the effective time of the Corporate
Transaction; provided,
however
, that the Board may require Participants to complete and deliver to the
Company a notice of exercise before the effective date of a Corporate Transaction, which exercise is
contingent upon the effectiveness of such Corporate Transaction ;
(iv)
arrange for the lapse, in whole or in part, of any reacquisition or repurchase rights
held by the Company with respect to the Stock Award;
(v)
cancel or arrange for the cancellation of the Stock Award, to the extent not vested
or not exercised prior to the effective time of the Corporate Transaction, for no consideration; and
(vi)
make a payment, in such form as may be determined by the Board equal to the
excess, if any, of (A) the value of the property the Participant would have received upon the exercise of
the Stock Award immediately prior to the effective time of the Corporate Transaction, over (B) any
exercise price payable by such holder in connection with such exercise. Payments under this provision
may be delayed to the same extent that payment of consideration to the holders of Common Stock in
connection with the Corporate Transaction is delayed as a result of escrows, earn outs, holdbacks or any
other contingencies.
The Board need not take the same action or actions with respect to all Stock Awards or portions thereof
or with respect to all Participants. The Board may take different actions with respect to the vested and
unvested portions of a Stock Award.
(d)
Change
in
Control.
A Stock Award may be subject to additional acceleration of vesting
and exercisability upon or after a Change in Control as may be provided in the Stock Award Agreement
for such Stock Award or as may be provided in any other written agreement between the Company or any
Affiliate and the Participant, but in the absence of such provision, no such acceleration will occur.
10.
Plan
Term;
Earlier
Termination
or
Suspension
of
the
Plan.
The Board may suspend or terminate the Plan at any time. Unless sooner terminated by the Board
pursuant to Section 2, the Plan shall automatically terminate on the day before the tenth anniversary of
the earlier of (i) the date the Plan is adopted by the Board, or (ii) the date the Plan is approved by the
stockholders of the Company. No Stock Awards may be granted under the Plan while the Plan is
suspended or after it is terminated .
11.
Effective
Date
of
Plan
.
The Plan will come into existence on the Effective Date .
18 .
12.
Choice
of
Law.
The law of the State of Delaware will govern all questions concerning the construction, validity
and interpretation of this Plan, without regard to that state’s conflict of laws rules.
13.
Definitions.
As used in the Plan, the following definitions will apply to the capitalized terms
indicated below:
(a)
“ Affiliate
” means, at the time of determination, any “parent” or “subsidiary” of the
Company as such terms are defined in Rule 405 of the Securities Act. The Board will have the authority
to determine the time or times at which “parent” or “subsidiary” status is determined within the foregoing
definition.
(b)
“ Award
” means a Stock Award or a Performance Cash Award.
(c)
“ Award
Agreement
” means a written agreement between the Company and a Participant
evidencing the terms and conditions of an Award.
(d)
“ Board
” means the Board of Directors of the Company.
(e)
“ Capital
Stock
” means each and every class of common stock of the Company,
regardless of the number of votes per share.
(f)
“ Capitalization
Adjustment
” means any change that is made in, or other events that
occur with respect to, the Common Stock subject to the Plan or subject to any Stock Award after the
Effective Date without the receipt of consideration by the Company through merger, consolidation,
reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash,
large nonrecurring cash dividend, stock split, reverse stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or any similar equity restructuring transaction,
as that term is used in Statement of Financial Accounting Standards Board Accounting Standards
Codification Topic 718 (or any successor thereto). Notwithstanding the foregoing, the conversion of any
convertible securities of the Company will not be treated as a Capitalization Adjustment.
(g)
“ Cause
”
will have the meaning ascribed to such term in any written agreement between
the Participant and the Company defining such term and, in the absence of such agreement, such term
means, with respect to a Participant, the occurrence of any of the following events: (i) such Participant’s
commission of any felony or any crime involving fraud, dishonesty or moral turpitude under the laws of
the United States or any state thereof; (ii) such Participant’s attempted commission of, or participation in,
a fraud or act of dishonesty against the Company; (iii) such Participant’s intentional, material violation of
any contract or agreement between the Participant and the Company or of any statutory duty owed to the
Company; (iv) such Participant’s unauthorized use or disclosure of the Company’s confidential
information or trade secrets; or (v) such Participant’s gross misconduct. The determination that a
termination of the Participant’s Continuous Service is either for Cause or without Cause shall be made by
the Company in its sole discretion. Any determination by the Company that the Continuous Service of a
Participant was terminated by reason of dismissal without
19 .
Cause for the purposes of outstanding Stock Awards held by such Participant shall have no effect upon
any determination of the rights or obligations of the Company or such Participant for any other purpose.
(h)
“ Change
in
Control
” means the occurrence, in a single transaction or in a series of
related transactions, of any one or more of the following events:
(i)
any Exchange Act Person becomes the Owner, directly or indirectly, of securities
of the Company representing more than 50% of the combined voting power of the Company’s then
outstanding securities other than by virtue of a merger, consolidation or similar transaction.
Notwithstanding the foregoing, a Change in Control will not be deemed to occur (A) on account of the
acquisition of securities of the Company directly from the Company, (B) on account of the acquisition of
securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person that
acquires the Company’s securities in a transaction or series of related transactions the primary purpose of
which is to obtain financing for the Company through the issuance of equity securities, (C) on account of
the acquisition of securities of the Company by any individual who is, on the IPO Date, either an
executive officer or a Director (either, an “ IPO
Investor
”) and/or any entity in which an IPO Investor
has a direct or indirect interest (whether in the form of voting rights or participation in profits or capital
contributions) of more than 50% (collectively, the “ IPO
Entities
”) or on account of the IPO Entities
continuing to hold shares that come to represent more than 50% of the combined voting power of the
Company’s then outstanding securities as a result of the conversion of any class of the Company’s
securities into another class of the Company’s securities having a different number of votes per share
pursuant to the conversion provisions set forth in the Company’s Amended and Restated Certificate of
Incorporation ; or (D) solely because the level of Ownership held by any Exchange Act Person (the “
Subject
Person
”) exceeds the designated percentage threshold of the outstanding voting securities as a
result of a repurchase or other acquisition of voting securities by the Company reducing the number of
shares outstanding, provided that if a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of voting securities by the Company, and after such share
acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the
repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting
securities Owned by the Subject Person over the designated percentage threshold, then a Change in
Control will be deemed to occur;
(ii)
there is consummated a merger, consolidation or similar transaction involving
(directly or indirectly) the Company and, immediately after the consummation of such merger,
consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not
Own, directly or indirectly, either (A) outstanding voting securities representing more than 50% of the
combined outstanding voting power of the surviving Entity in such merger, consolidation or similar
transaction or (B) more than 50% of the combined outstanding voting power of the parent of the
surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the
same proportions as their Ownership of the outstanding voting securities of the Company immediately
prior to such transaction; provided,
however
, that a merger, consolidation or similar transaction will not
constitute a Change in Control under this prong of the definition if the outstanding voting securities
representing more than 50% of the combined voting power of the surviving Entity or its parent are owned
by the IPO Entities;
20 .
(iii)
there is consummated a sale, lease, exclusive license or other disposition of all or
substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease,
license or other disposition of all or substantially all of the consolidated assets of the Company and its
Subsidiaries to an Entity, more than 50% of the combined voting power of the voting securities of which
are Owned by stockholders of the Company in substantially the same proportions as their Ownership of
the outstanding voting securities of the Company immediately prior to such sale, lease, license or other
disposition ; provided,
however
, that a sale, lease, exclusive license or other disposition of all or
substantially all of the consolidated assets of the Company and its Subsidiaries will not constitute a
Change in Control under this prong of the definition if the outstanding voting securities representing
more than 50% of the combined voting power of the acquiring Entity or its parent are owned by the IPO
Entities ; or
(iv)
the stockholders of the Company approve or the Board approves a plan of
complete dissolution or liquidation of the Company, or a complete dissolution or liquidation of the
Company will otherwise occur, except for a liquidation into a parent corporation.
Notwithstanding the foregoing definition or any other provision of the Plan, the term Change in
Control will not include a sale of assets, merger or other transaction effected exclusively for the purpose
of changing the domicile of the Company and the definition of Change in Control (or any analogous
term) in an individual written agreement between the Company or any Affiliate and the Participant will
supersede the foregoing definition with respect to Awards subject to such agreement; provided,
however
,
that if no definition of Change in Control or any analogous term is set forth in such an individual written
agreement, the foregoing definition will apply.
(i)
“ Code
” means the Internal Revenue Code of 1986, as amended, including any applicable
regulations and guidance thereunder.
(j)
“ Committee
” means a committee of one or more Directors to whom authority has been
delegated by the Board in accordance with Section 2(c) .
(k)
“ Common
Stock
” means the common stock of the Company, having one vote per share.
(l)
“ Company
” means Senseonics Holdings , Incorporated , a Delaware corporation.
(m)
“ Consultant
” means any person, including an advisor, who is (i) engaged by the
Company or an Affiliate to render consulting or advisory services and is compensated for such services,
or (ii) serving as a member of the board of directors of an Affiliate and is compensated for such services
. However, service solely as a Director, or payment of a fee for such service, will not cause a Director to
be considered a “Consultant” for purposes of the Plan.
Notwithstanding the foregoing, a person is
treated as a Consultant under this Plan only if a Form S-8 Registration Statement under the Securities Act
is available to register either the offer or the sale of the Company’s securities to such person.
Notwithstanding the preceding sentence, for the period of time during which the Company may comply
with the requirements of Rule 701 under the Securities Act, a person is treated as a Consultant under this
Plan and the Consultant is eligible for the grant of a Stock Award if, at the time of grant, either (i) the
offer or sale of the Company’s securities to such Consultant is exempt under Rule 701 of the Securities
Act or (ii) the Company determines that such grant need not comply
21 .
with the requirements of Rule 701 of the Securities Act and will satisfy another exemption under the
Securities Act as well as comply with the securities laws of all other relevant jurisdictions.
(n)
“ Continuous
Service
” means that the Participant’s service with the Company or an
Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in
the capacity in which the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant renders such service, provided
that there is no interruption or termination of the Participant’s service with the Company or an Affiliate,
will not terminate a Participant’s Continuous Service; provided,
however
,
that if the Entity for which a
Participant is rendering services ceases to qualify as an Affiliate, as determined by the Board, in its sole
discretion, such Participant’s Continuous Service will be considered to have terminated on the date such
Entity ceases to qualify as an Affiliate. To the extent permitted by law, the Board or the chief executive
officer of the Company, in that party’s sole discretion, may determine whether Continuous Service will
be considered interrupted in the case of (i) any leave of absence approved by the Board or chief executive
officer, including sick leave, military leave or any other personal leave, or (ii) transfers between the
Company, an Affiliate, or their successors. Notwithstanding the foregoing, a leave of absence will be
treated as Continuous Service for purposes of vesting in an Award only to such extent as may be provided
in the Company’s leave of absence policy, in the written terms of any leave of absence agreement or
policy applicable to the Participant, or as otherwise required by law.
(o)
“ Corporate
Transaction
” means the consummation, in a single transaction or in a series
of related transactions, of any one or more of the following events:
(i)
a sale
or other disposition of all or substantially all, as determined by the Board,
in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii)
a sale or other disposition of at least 9 0% of the outstanding securities of the
Company;
(iii)
a merger, consolidation or similar transaction following which the Company is
not the surviving corporation; or
(iv)
a merger, consolidation or similar transaction following which the Company is
the surviving corporation but the shares of Common Stock outstanding immediately preceding the
merger, consolidation or similar transaction are converted or exchanged by virtue of the merger,
consolidation or similar transaction into other property, whether in the form of securities, cash or
otherwise.
(p)
(q)
“ Covered
Employee
” will have the meaning provided in Section 162(m)(3) of the Code.
“ Director
” means a member of the Board.
(r)
“ Disability
” means, with respect to a Participant, the inability of such Participant to
engage in any substantial gainful activity by reason of any medically determinable physical or mental
22 .
impairment that can be expected to result in death or that has lasted or can be expected to last for a
continuous period of not less than 12 months, as provided in Sections 22(e)(3) and 409A(a)(2)(c)(i) of the
Code, and will be determined by the Board on the basis of such medical evidence as the Board deems
warranted under the circumstances.
(s)
“
Effective
Date
” means the effective date of the Plan, which is the date this Plan is
adopted by the Board.
(t)
“ Employee
” means any person employed by the Company or an Affiliate. However,
service solely as a Director, or payment of a fee for such services, will not cause a Director to be
considered an “Employee” for purposes of the Plan.
(u)
“ Entity
” means a corporation, partnership, limited liability company or other entity.
(v)
“ Exchange
Act
” means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
(w)
“ Exchange
Act
Person
”
means any natural person, Entity or “group” (within the
meaning of Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” will not
include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the
Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter
temporarily holding securities pursuant to a registered public offering of such securities, (iv) an Entity
Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions
as their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within the
meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the IPO Date, is the Owner, directly or
indirectly, of securities of the Company representing more than 50% of the combined voting power of the
Company’s then outstanding securities.
(x)
“ Fair
Market
Value
” means, as of any date, the value of the Common Stock determined
as follows:
(i)
If the Common Stock is listed on any established stock exchange or traded on any
established market, the Fair Market Value of a share of Common Stock will be, unless otherwise
determined by the Board, the closing sales price for such stock as quoted on such exchange or market (or
the exchange or market with the greatest volume of trading in the Common Stock) on the date of
determination, as reported in a source the Board deems reliable.
(ii)
Unless otherwise provided by the Board, if there is no closing sales price for the
Common Stock on the date of determination, then the Fair Market Value will be the closing selling price
on the last preceding date for which such quotation exists.
(iii)
In the absence of such markets for the Common Stock, the Fair Market Value will
be determined by the Board in good faith and in a manner that complies with Sections 409A and 422 of
the Code.
23 .
(y)
“ Incentive
Stock
Option
” means an option granted pursuant to Section 5 of the Plan that
is intended to be, and qualifies as, an “incentive stock option” within the meaning of Section 422 of the
Code.
(z)
“ IPO
Date
” means the date of the underwriting agreement between the Company and
the underwriter(s) managing the first public offering of the Common Stock after the Effective Date ,
pursuant to which the Common Stock is priced for the initial public offering.
(aa)
“ Non-Employee
Director
”
means a Director who either (i) is not a current employee or
officer of the Company or an Affiliate, does not receive compensation, either directly or indirectly, from
the Company or an Affiliate for services rendered as a consultant or in any capacity other than as a
Director (except for an amount as to which disclosure would not be required under Item 404(a) of
Regulation S-K promulgated pursuant to the Securities Act (“ Regulation
S-K
”)), does not possess an
interest in any other transaction for which disclosure would be required under Item 404(a) of Regulation
S-K, and is not engaged in a business relationship for which disclosure would be required pursuant to
Item 404(b) of Regulation S-K; or (ii) is otherwise considered a “non-employee director” for purposes of
Rule 16b-3.
(bb)
“ Nonstatutory
Stock
Option
” means any Option granted pursuant to Section 5 of the
Plan that does not qualify as an Incentive Stock Option.
(cc)
“ Officer
” means a person who is an officer of the Company within the meaning of
Section 16 of the Exchange Act.
(dd)
“ Option
” means an Incentive Stock Option or a Nonstatutory Stock Option to purchase
shares of Common Stock granted pursuant to the Plan.
(ee)
“ Option
Agreement
” means a written agreement between the Company and an
Optionholder evidencing the terms and conditions of an Option grant. Each Option Agreement will be
subject to the terms and conditions of the Plan.
(ff)
“ Optionholder
” means a person to whom an Option is granted pursuant to the Plan or, if
applicable, such other person who holds an outstanding Option.
(gg)
“ Other
Stock
Award
” means an award based in whole or in part by reference to the
Common Stock which is granted pursuant to the terms and conditions of Section 6(d) .
(hh)
“ Other
Stock
Award
Agreement
”
means a written agreement between the Company
and a holder of an Other Stock Award evidencing the terms and conditions of an Other Stock Award
grant. Each Other Stock Award Agreement will be subject to the terms and conditions of the Plan.
(ii)
“ Outside
Director
” means a Director who either (i) is not a current employee of the
Company or an “affiliated corporation” (within the meaning of Treasury Regulations promulgated under
Section 162(m) of the Code), is not a former employee of the Company or an “affiliated corporation”
who receives compensation for prior services (other than benefits under a tax-qualified retirement plan)
during the taxable year, has not been an officer of the Company or an “affiliated
24 .
corporation,” and does not receive remuneration from the Company or an “affiliated corporation,” either
directly or indirectly, in any capacity other than as a Director, or (ii) is otherwise considered an “outside
director” for purposes of Section 162(m) of the Code.
(jj)
“ Own,
”
“ Owned,
”
“ Owner,
”
“ Ownership
”
means a person or Entity will be
deemed to “Own,” to have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities
if such person or Entity, directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the
voting, with respect to such securities.
(kk)
“ Participant
” means a person to whom an Award is granted pursuant to the Plan or, if
applicable, such other person who holds an outstanding Stock Award.
(ll)
“ Performance
Cash
Award
” means an award of cash granted pursuant to the terms and
conditions of Section 6(c)(ii) .
(mm)
“ Performance
Criteria
” means the one or more criteria that the Board will select for
purposes of establishing the Performance Goals for a Performance Period. The Performance Criteria that
will be used to establish such Performance Goals may be based on any one of, or combination of, the
following as determined by the Board: (i) earnings (including earnings per share and net earnings); (ii)
earnings before interest, taxes and depreciation; (iii) earnings before interest, taxes, depreciation and
amortization; (iv) earnings before interest, taxes, depreciation, amortization and legal settlements; (v)
earnings before interest, taxes, depreciation, amortization, legal settlements and other income (expense);
(vi) earnings before interest, taxes, depreciation, amortization, legal settlements, other income (expense)
and stock-based compensation; (vii) earnings before interest, taxes, depreciation, amortization, legal
settlements, other income (expense), stock-based compensation and changes in deferred revenue; (viii)
earnings before interest, taxes, depreciation, amortization, legal settlements, other income (expense),
stock-based compensation, other non-cash expenses and changes in deferred revenue; (ix) total
stockholder return; ( x) return on equity or average stockholder’s equity; (x i ) return on assets,
investment, or capital employed; (xi i ) stock price; (xii i ) margin (including gross margin); (xiv ) inco
me (before or after taxes); (xv ) operating income; (xv i ) operating income after taxes; (xvi i ) pre-tax
profit; (xvii i ) operating cash flow; (x ix) sales or revenue targets; (x x) increases in revenue or product
revenue; (xx i ) expenses and cost reduction goals; (xxi i ) improvement in or attainment of working
capital levels; (xxii i ) economic value added ( or an equivalent metric); (xxiv) market share; (xx v) cash
flow; (xxv i ) cash flow per share; (xxvii) cash balance; (xxviii) cash burn; (xxix) cash collections;
(xx x
) share price performance; ( xxxi ) debt reduction; (xx xii ) implementation or completion of projects or
processes (including, without limitation, clinical trial initiation, new and supplemental indications for
existing products, and product supply) ; (xxxiii ) stockholders’ equity; (xxx iv) capital expenditures;
(xxxv) debt levels; (xxxvi ) operating profit or net operating profit; (xxx vii ) workforce diversit y;
(xxxviii ) growth of net i ncome or operating income; (xxxix) billings; (xl ) bookings; (x li ) employee
retention; (x l i i ) initiation of phases of clinical trials and/or studies by specific dates; (xliii ) acquisition
of new customers, including institutional accounts ; (xliv) customer retention and/or repeat order rate;
(xlv) number of institutional customer accounts (xl vi) budget management; (xlvii ) improvements in
sample and test processing times ; (xlviii ) regulatory milestones; (xli x ) progress of internal re search or
clinical programs; (l ) progress of partnered programs; ( li ) partner satisfaction; ( lii ) milestones related
to samples received and/or tests run ; ( lii i) expansion of sales in
25 .
additional geographies or markets ; (liv ) research progress, including the development of programs; (lv)
patient samples processed and billed; (lvi) sample processing operating metrics (including, without
limitation, failure rate maximums and reduction of repeat rates) ; ( lvii ) strategic partnerships or
transactions (including in-licensing and out-licensing of intellectual property; and (l viii ) and to the
extent that an A ward is not intended to comply with Section 162(m) of the Code, other measures of
performance selected by the Board .
(nn)
“ Performance
Goals
” means, for a Performance Period, the one or more goals
established by the Board for the Performance Period based upon the Performance Criteria. Performance
Goals may be based on a Company-wide basis, with respect to one or more business units, divisions,
Affiliates, or business segments, and in either absolute terms or relative to the performance of one or
more comparable companies or the performance of one or more relevant indices. Unless specified
otherwise by the Board (i) in the Award Agreement at the time the Award is granted or (ii) in such other
document setting forth the Performance Goals at the time the Performance Goals are established, the
Board will appropriately make adjustments in the method of calculating the attainment of Performance
Goals for a Performance Period as follows: (1) to exclude restructuring and/or other nonrecurring
charges; (2) to exclude exchange rate effects; (3) to exclude the effects of changes to generally accepted
accounting principles; (4) to exclude the effects of any statutory adjustments to corporate tax rates; (5) to
exclude the effects of any “extraordinary items” as determined under generally accepted accounting
principles; (6) to exclude the dilutive effects of acquisitions or joint ventures; (7) to assume that any
business divested by the Company achieved performance objectives at targeted levels during the balance
of a Performance Period following such divestiture; (8) to exclude the effect of any change in the
outstanding shares of common stock of the Company by reason of any stock dividend or split, stock
repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of
shares or other similar corporate change, or any distributions to common stockholders other than regular
cash dividends; (9) to exclude the effects of stock based compensation and the award of bonuses under
the Company’s bonus plans; (10) to exclude costs incurred in connection with potential acquisitions or
divestitures that are required to be expensed under generally accepted accounting principles; (11) to
exclude the goodwill and intangible asset impairment charges that are required to be recorded under
generally accepted accounting principles; (12) to exclude the effect of any other unusual, non-recurring
gain or loss or other extraordinary item; and (13) to exclude the effects of the timing of acceptance for
review and/or approval of submissions to the U.S. Food and Drug Administration or any other regulatory
body. In addition, the Board retains the discretion to reduce or eliminate the compensation or economic
benefit due upon attainment of Performance Goals and to define the manner of calculating the
Performance Criteria it selects to use for such Performance Period. Partial achievement of the specified
criteria may result in the payment or vesting corresponding to the degree of achievement as specified in
the Stock Award Agreement or the written terms of a Performance Cash Award.
(oo)
“ Performance
Period
” means the period of time selected by the Board over which the
attainment of one or more Performance Goals will be measured for the purpose of determining a
Participant’s right to and the payment of a Stock Award or a Performance Cash Award. Performance
Periods may be of varying and overlapping duration, at the sole discretion of the Board.
26 .
(pp)
“ Performance
Stock
Award
” means a Stock Award granted under the terms and
conditions of Section 6(c)(i) .
(qq)
“ Plan
” means this Senseonics Holdings , Incorporated 201 5 Equity Incentive Plan.
(rr)
“ Restricted
Stock
Award
” means an award of shares of Common Stock which is
granted pursuant to the terms and conditions of Section 6(a) .
(ss)
“ Restricted
Stock
Award
Agreement
” means a written agreement between the Company
and a holder of a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock
Award grant. Each Restricted Stock Award Agreement will be subject to the terms and conditions of the
Plan.
(tt)
“ Restricted
Stock
Unit
Award
”
means a right to receive shares of Common Stock
which is granted pursuant to the terms and conditions of Section 6(b) .
(uu)
“ Restricted
Stock
Unit
Award
Agreement
”
means a written agreement between the
Company and a holder of a Restricted Stock Unit Award evidencing the terms and conditions of a
Restricted Stock Unit Award grant. Each Restricted Stock Unit Award Agreement will be subject to the
terms and conditions of the Plan.
(vv)
“ Rule
16b-3
” means Rule 16b-3 promulgated under the Exchange Act or any successor
to Rule 16b-3, as in effect from time to time.
(ww)
“ Securities
Act
” means the Securities Act of 1933, as amended.
(xx)
“ Stock
Appreciation
Right
” or “ SAR
”
means a right to receive the appreciation on
Common Stock that is granted pursuant to the terms and conditions of Section 5 .
(yy)
“ Stock
Appreciation
Right
Agreement
” means a written agreement between the
Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock
Appreciation Right grant. Each Stock Appreciation Right Agreement will be subject to the terms and
conditions of the Plan.
(zz)
“ Stock
Award
” means any right to receive Common Stock granted under the Plan,
including an Incentive Stock Option, a Nonstatutory Stock Option, a Restricted Stock Award, a
Restricted Stock Unit Award, a Stock Appreciation Right, a Performance Stock Award or any Other
Stock Award.
(aaa)
“ Stock
Award
Agreement
” means a written agreement between the Company and a
Participant evidencing the terms and conditions of a Stock Award grant. Each Stock Award Agreement
will be subject to the terms and conditions of the Plan.
(bbb)
“ Subsidiary
” means, with respect to the Company, (i) any corporation of which more
than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the board of
directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of
such corporation will have or might have voting power by reason of the happening of any
27 .
contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership,
limited liability company or other entity in which the Company has a direct or indirect interest (whether
in the form of voting or participation in profits or capital contribution) of more than 50%.
(ccc)
“ Ten
Percent
Stockholder
” means a person who Owns (or is deemed to Own pursuant
to Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any Affiliate.
28 .
EXHIBIT
31.1
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:
1. I have reviewed this annual report on Form 10-K of Senseonics Holdings , Inc. (the “registrant”);
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;
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;
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
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 boar d 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: February 19 , 2016
/s/ Timothy T. Goodnow, Ph.D.
Timothy T. Goodnow, Ph.D.
President & Chief Executive Officer
(principal executive officer)
EXHIBIT
31.2
EXHIBIT
31.2
CERTIFICATION
OF
PRINCIPAL
FINANCIAL
OFFICER
PURSUANT
TO
SECTION
302
OF
THE
SARBANES-OXLEY
ACT
OF
2002
I, R. Don Elsey , certify that:
1. I have reviewed this annual report on Form 10-K of Senseonics Holdings , Inc. (the “registrant”);
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;
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;
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
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 boar d 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: February 19 , 2016
/s/ R. Don Elsey
R. Don Elsey
Chief Financial Officer
(principal financial officer)
EXHIBIT
32
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
EXHIBIT
32
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 R. Don Elsey , Chief Financial Officer
of the Company, each hereby certifies that, to the best of his knowledge:
1. The Company’s Annual Report on Form 10-K for the year ended December 31, 201 5 (the “Annual 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 t he Exchange Act, and
2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition of
the Company as of the end of the period covered by the Annual Report and results of operations of the Company for
the periods covered by the Annual Report.
In
Witness
Whereof,
the undersigned have set their hands hereto as of the 19 th day of February , 201 6 .
/s/ Timothy T. Goodnow, Ph.D.
Timothy T. Goodnow, Ph.D.
President & Chief Executive Officer
R. Don Elsey
R. Don Elsey
Chief Financial Officer
* This certification accompanies the Form 10-K 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 Senseonics Holdings , Inc. under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-
K), irrespective of any general incorporation language contained in such filing.