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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,
2016
Commission
file
number
001-37717
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:
Title
of
Each
Class:
Common
Stock,
$0.001
par
value
Name
of
Each
Exchange
on
which
Registered
NYSE
MKT
LLC
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 ☒
As of June 30, 2016, the last business day of the registrant’s last completed second quarter, the aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $217.8 million based on the closing price of the registrant’s common stock, as reported by the NYSE-MKT on such date.
As of February 22, 2017, 93,955,527 shares of common stock, $0.001 par value, were outstanding.
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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 II, 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:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
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 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;
our estimates regarding the period of time for which our current capital resources will be sufficient to fund our
continued operations; 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 and the documents that we reference in this Annual Report and have filed as
exhibits to this Annual Report 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 Party Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART
IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
Page
2
25
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55
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Table of Contents
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 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 to the traditional
method of self-monitoring of blood glucose, or SMBG, as well as currently available CGM systems. In our U.S. pivotal clinical
trial, we observed that Eversense measured glucose levels over 90 days with a degree of accuracy superior to that of other
currently available CGM systems. Our Eversense system is currently approved for sale in Europe and we submitted our pre-
market approval, or PMA, application to the U.S. Food and Drug Administration, or FDA, in October 2016. We expect the PMA
process could take between six and 18 months. We intend to initiate commercial launch in the United States immediately upon
receipt of PMA approval.
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 415 million people worldwide had diabetes in 2015. The number of people with diabetes
worldwide is estimated to grow to 642 million by 2040 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 historically have required 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. Recent improvements in the accuracy of CGM systems have led
to the FDA issuing the first “non-adjunctive” label in 2016. We expect that the approval of the Eversense PMA will have an
“adjunctive” label initially. Our plans will be to pursue a “non-adjunctive” label as soon as possible. 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 provides a more convenient method of continuous glucose
monitoring by providing longer duration, equal or superior accuracy, state of
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the art communications and analytical capabilities, on-body alarms and alerts and the convenience of being able to take the
transmitter on and off with no loss of the sensor.
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
compound annual growth rate, or CAGR, 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 initiated our U.S. pivotal trial in January 2016 and completed this trial in July 2016. In November 2016, at the
Diabetes Technology Meeting we presented the trial data. This trial, which was fully enrolled with 90 subjects, was conducted at
eight sites in the United States. In the trial, we measured the accuracy of Eversense measurements through 90 days after insertion.
We also assessed safety through 90 days after insertion or through sensor removal. In the trial, we observed a mean absolute
relative difference, or MARD, of 8.8% utilizing two calibration points for Eversense across the 40-400 mg/dL range when
compared to YSI blood reference values during the 90-day continuous wear period. We also observed a MARD of 9.5% utilizing
one calibration point for Eversense across the 40-400 mg/dL range when compared to YSI blood reference values during the 90-
day continuous wear period.
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.
Members of our team have contributed to the development, regulatory approval and commercialization of several
glucose monitoring systems and insulin pumps.
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 415 million people worldwide had diabetes in 2015. The number of people with
diabetes worldwide is estimated to grow to 642 million by 2040 due to a number of reasons including changes in
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dietary trends, an aging population and increased prevalence of the disease in younger people. Based on estimates by the IDF
diabetes caused over 5 million deaths in 2015 and had a total global economic cost of over $700 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 diagnosed Type 1 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
diagnosed Type 1 diabetes in Europe in 2015.
· 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 IDF, we estimate there were approximately 20 million people with diagnosed Type 2 diabetes in
the United States in 2015. Of these people with Type 2 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. We estimate that there
were approximately 33 million people with diagnosed Type 2 diabetes in Europe in 2015.
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 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.
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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 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.
The FDA requires that CGM measurements, performed by selected systems, be confirmed with a real-time test-strip
reading using blood obtained by a fingerstick prior to self-medicating with insulin. Those systems that do not have this
requirements are considered to have the “dosing claim,” meaning that they are labeled as “non-adjunctive” devices.
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,
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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 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
CAGR 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
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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.
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.
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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 allows people
with diabetes to seamlessly blend the monitoring of their glucose levels with other uses of their mobile devices.
Eversense users do 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 allows users to conveniently
remove and reapply the transmitter at will without having to also remove the sensor. We believe these convenient
features greatly improves 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 allows the user to
intervene and potentially avoid these events entirely. Additionally, our smart transmitter provides 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.
Our initial patient feedback indicated that the procedure is quick, painless and generally well received. Feedback
from healthcare professionals in Europe indicates that the procedure is easy to learn and that the professional is able
to become adept at the procedure after only a minimal number of procedures.
Our
Strategy
Our goal is to be the global leader in providing long-term, accurate and reliable implantable glucose monitoring
systems designed help people with diabetes confidently live their lives with ease. The key elements of our strategy include:
· Expand
the
European
launch
of
Eversense
and
launch
in
United
States.
Eversense was launched in
Scandinavia, Italy, and Germany in 2016. Through our exclusive distributors, Rubin Medical and Roche, we intend
to expand the Eversense launch across Europe. We have filed for regulatory approval for Eversense in the United
States and our PMA is currently under review by the FDA. We intend to launch in the United States, through a
direct sales force, following FDA approval. We also intend to seek to commercialize Eversense in other
international markets, including Canada, Australia and Israel.
· Educate
and
train
healthcare
providers
and
people
with
diabetes
on
the
benefits
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 are utilizing
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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 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 have begun
clinical trials for pediatric indications and intend to seek approval to market to this part of the population.
· Establish
reimbursement
programs
for
coverage
of
Eversense
to
achieve
the
broadest
possible
acceptance
of
our
system.
European reimbursement of CGM systems is expanding rapidly. For example, Germany recently
instituted one of the broadest coverage policies in the world. Our distributors are working with governmental and
private payor agencies to ensure the broadest and most comprehensive coverage possible throughout Europe and
other territories. In the United States, CGM systems are generally well covered. Additionally, we have established
procedure codes in the United States, which will enable reimbursement for the endocrinologist performing the
insertion and removal procedures. We believe we will be well positioned to negotiate specific private payor
coverage in the United States, if Eversense receives FDA approval. We believe that pursuing such a reimbursement
strategy will be important in achieving the broadest possible acceptance of our system by healthcare providers and
people with diabetes.
· Maximize
profitability
through
low
cost
manufacturing.
We utilize a network of third-party manufacturers that
are experts in their respective areas. We are working with these subcontractors to implement scalable, flexible
manufacturing that can accommodate increasing volumes and new generations of the Eversense system.
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. We have completed both our European and U.S. pivotal trials. The Eversense system has received a
CE Mark in Europe and is currently being sold commercially. Our U.S. pivotal trial was completed during 2016 and we submitted
our PMA to the FDA in October 2016.
We are continuing to conduct a number of feasibility studies in which we are evaluating 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.
United
States
Pivotal
Trial
In January 2016 we began enrollment for the U.S. pivotal trial. Enrollment was completed before the end of March and
the last patient completed the trial in July 2016. The trial was a prospective, single-arm, multi-center trial designed to determine
the accuracy and safety of the Eversense system. Ninety subjects were enrolled in eight centers across the United States. Eighty-
seven of the ninety enrollees completed the 90-day trial. During the trial the subjects were blinded to the real time glucose
displays and alarms. The participants were also required to calibrate the system with two blood glucose measurement readings per
day.
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The subject clinical trial population consisted of subjects at least 18 years of age who had a clinically confirmed
diagnosis of diabetes. Subjects who had a history of severe hypoglycemia, defined as hypoglycemia resulting in loss of
consciousness or seizure, or diabetic ketoacidosis, in the six months prior to the trial, were excluded from participation in the
clinical trial. At the initial visit, our sensor was inserted and initial accuracy measurements were taken. Additional accuracy
measurements were taken at 30 days, 60 days and 90 days post-insertion. These sensor measurements were continued through the
earlier of the failure of the sensor or 90 days post-insertion.
The purpose of this clinical trial was 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 90 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 less than 13%.
During the trial, 75 subjects underwent unilateral sensor insertions and 15 subjects underwent bilateral sensor insertions
in the clinic on day 1 and used Eversense’s smart transmitter and mobile app at home for the next 90 days. Subjects were blinded
to the real-time glucose readings and trends during home-use and sensor readings were not used to adjust their treatment. Clinic
visits were scheduled at approximately 30-day intervals in order to obtain lab reference glucose values for comparison with the
sensor values and to evaluate hyperglycemic and hypoglycemic challenges in a controlled setting.
In the trial, we observed a mean absolute relative difference, or MARD, of 8.8% utilizing two calibration points for
Eversense across the 40-400 mg/dL range when compared to YSI blood reference values during the 90-day continuous wear
period. We also observed a MARD of 9.5% utilizing one calibration point for Eversense across the 40-400 mg/dL range when
compared to YSI blood reference values during the 90-day continuous wear period. Based on the data from this trial, we recently
submitted a pre-market approval, or PMA, application to the FDA to market Eversense in the United States. We 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. We have received Category III CPT codes for the insertion and
removal of Eversense. Following PMA approval, we intend to pursue a Category I CPT code.
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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 most 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 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
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also transmitted for display to the user's mobile device via Bluetooth. Our transmitter is functional for at least 36 hours without
recharging and can be fully charged in fifteen 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 of our products to people with
diabetes and healthcare providers.
In 2017, we anticipate that we will receive our CE Mark in Europe for both 180-day sensor life and our second
generation transmitter. If we receive these approvals, we plan to launch both of these products throughout Europe. Additionally,
we expect that our distributors will launch the Eversense system in a number of additional countries. In the U.S. market, we have
submitted a PMA to market Eversense in the United States for our 90-day Eversense system. Assuming we receive the PMA
approval, we intend to commercialize Eversense in the United States through our own direct sales and marketing organization.
We also plan to submit our investigational device exemption, or IDE, application for a 180-day trial in the United States.
Future developments include applying for a dosing claim, which would permit users to dose with insulin without first
confirming the blood glucose measure via a fingerstick, executing a partnership for development of an artificial pancreas system,
submitting an IDE for a pediatric trial in the United States, launching the 180-day Eversense system in the United States,
significantly reducing calibration requirements, continuing to improve accuracy, and initiating clinical trials for On-Demand, or
“swipe”, technology for Type 1 users, and extending swipe technology to Type 2 users.
Sales
and
Marketing
We are utilizing third-party distributors for our commercial activities in Europe. In 2016, we began selling Eversense in
Sweden, Denmark, Italy and Germany where there is an understanding and market acceptance of CGM. We have an exclusive
arrangement with Rubin Medical for sales in Scandinavia. We have an exclusive arrangement with Roche Diabetes Care for sales
in the rest of Europe, the Middle East and Africa, excluding Israel.
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
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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.
Distribution
Agreement
with
Rubin
Medical
In September 2015, we entered into a distribution agreement with Rubin Medical, or 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, 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.
Distribution
Agreement
with
Roche
Diabetes
Care
On May 24, 2016, we entered into an exclusive distribution agreement with Roche Diagnostics International AG and
Roche Diabetes Care GmbH, or collectively, Roche, pursuant to which we granted Roche the exclusive right to market, sell and
distribute Eversense in Germany, Italy and the Netherlands. On November 28, 2016, we amended the distribution agreement to
also grant Roche the exclusive right to market, sell and distribute Eversense in Europe, the Middle East and Africa, excluding
Sweden, Norway, Denmark, Finland and Israel. Roche is obligated to purchase from us specified minimum volumes of
Eversense components at pre-determined prices, which pricing is subject to renegotiation in certain circumstances.
The distribution agreement, as amended, has an initial term through December 31, 2018, which may be extended
through December 31, 2019 if we and Roche agree upon the minimum purchase requirements for 2019. The distribution
agreement is terminable by us under a number of circumstances, including if Roche materially breaches the terms of the
agreement or fails to make certain minimum sales requirements. The agreement is terminable by Roche under a number of
circumstances, including if we materially breach the agreement, if the distribution of Eversense is enjoined in the covered
territories or in the case of certain intellectual property infringement claims. The agreement is terminable by either party if the
other party becomes insolvent or subject to bankruptcy proceedings. The termination rights contained in the agreement are
generally subject to advance notice requirements and an opportunity to cure. Further, Roche may terminate the agreement upon a
change of control of our company with a transition period of the shorter of 18 months or the remaining term of the agreement.
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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. 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. Recently Medicare
adopted a national coverage determination with respect to one of the currently offered CGM systems. This national coverage
determination was based on the decision by FDA to indicate the approved CGM system as a “non-adjunctive” device meaning
that the user would not need to perform a confirmatory fingerstick prior to initiating treatment indicated by the information
provided by the CGM system. Additionally, CMS does reimburse patients for the cost of certain related medical services such as
data interpretation. 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. Currently most 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.
We have received Category III CPT codes for the insertion and removal of Eversense. Following PMA approval, we
intend to pursue a Category I CPT code.
We have employed a reimbursement consultant to assist us in securing reimbursement agreements with third-party
payors. In addition, we intend to commence negotiations with third-party payors in 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
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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 BSI, 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 configurations to enhance
product functionality for future generations of Eversense. Our research and development expenses were $26.3 million,
$18.3 million and $12.9 million for the years ended December 31, 2016 and 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 and Medtronic. Each of these 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.
Dexcom’s CGM system was recently approved by the FDA for marketing as a non-adjunctive device.
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 Asencia, a Panasonic Healthcare Holdings company.
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 has commercialized its FreeStyle Libre Flash Glucose Monitoring
System in Europe, which 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.
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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 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.
Patents
As of December 31, 2016, we held a total of approximately 230 issued patents and pending patent applications that
relate to our CGM system. Our intellectual property portfolio includes 42 issued United States patents, 187 patents issued in
countries outside the United States and 123 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.
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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 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, 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
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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 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 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 filed our PMA application for the Eversense system in October 2016. 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.
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.
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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;
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
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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;
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
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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. The Health Insurance Portability and Accountability Act of 1996, or 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.
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
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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 significant civil and criminal
penalties.
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 fraud and abuse 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. 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
&
HIPAA
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.
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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 influence 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 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, some of which
apply regardless of source of payment and do not have the same exceptions as the federal laws. 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
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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, 2016, we had 58 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.
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 consolidated 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.
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 NYSE-MKT 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.
24
Table of Contents
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.
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 $43.9 million, $29.9 million and
$18.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, we had an
accumulated deficit of $204.7 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, and the commercial launch of Eversense in Europe.
To implement our business strategy we need to, among other things, gain regulatory approval in the United States and
other regions where we intend to sell our products, expand our commercial launch in Europe, 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
limited
commercialization
experience
in
Europe
and
our
products
are
not
yet
approved
for
sale
in
the
United
States.
If
we
are
unable
to
successfully
receive
regulatory
approval
for
and
commercialize
Eversense
in
the
United
States,
or
if
we
experience
significant
delays
in
doing
so,
our
business
will
be
harmed.
We have no products that are approved for commercial sale in the United States and have limited commercialization
experience in Europe. 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 regulatory approval and
commercialization of products in the United States, expanded commercialization of products in Europe and on continuing
development of future generations of our Eversense system. The success of any products that we develop will depend on several
factors, including:
·
·
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 U.S. commercial sales of Eversense, if approved for marketing;
·
· market acceptance of Eversense 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;
·
·
·
25
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·
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.
Whether regulatory approval will be granted in the U.S. 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, 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, 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, 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.
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 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
26
Table of Contents
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 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 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 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 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.
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Table of Contents
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 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 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 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 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 in Europe and, if approved, 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.
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Table of Contents
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, 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.
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, 2016, most 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 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
29
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 attributes we incorporated
into the Eversense system may not be reflective of what is desired by the various constituents in the diabetes market.
Consequently our estimates of our future market share and penetration may not be accurate and our sales may be less than
estimated.
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.
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.
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
non-invasive CGM products. For example, Abbott has commercialized, in Europe, its FreeStyle Libre Flash Glucose Monitoring
System, which 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;
·
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.
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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 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 managing their diabetes with insulin 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 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
agreements
with
Rubin
and
Roche
to
market
Eversense
may
not
be
successful.
We have entered into a distribution agreement with Rubin to market Eversense in Sweden, Norway and Denmark and a
distribution agreement with Roche to market Eversense in the rest of Europe, the Middle East and Africa (EMEA), excluding
Scandinavia, Finland and Israel. Under these agreements, Rubin and Roche will generally be responsible for the promotion, sale
and distribution of Eversense in the specified countries at such prices as they determine in their sole discretion. Although Rubin
and Roche have the exclusive right to distribute Eversense in the covered countries, the agreements do not require Rubin or Roche
to sell our products exclusively, and therefore, Rubin
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and Roche are free to sell products of our competitors. Because we only recently received regulatory approval, we are not yet able
to fully assess Rubin's and Roche’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 agreements. Additionally, because the agreements with
Rubin and Roche are exclusive, we will have limited ability to terminate the agreements or to contract with any other distributor
for Europe, the Middle East and Africa, and therefore we may be entirely dependent on Rubin and Roche for sales in these
countries. If Rubin or Roche fails to perform satisfactorily under the agreements, our ability to commercialize in these territories
could be adversely affected.
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 in the United States. 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.
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.
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We
have
limited
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 launched Eversense in Europe through distributors but have not yet commercialized Eversense in the
United States. Our experience as a commercial-stage company upon which to evaluate our business, future sales expectations and
operating results is limited. In assessing our business prospects, you should consider the various risks and difficulties frequently
encountered by companies early in their commercialization in competitive and 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 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 limited 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.
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Table of Contents
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 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, 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
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Table of Contents
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.
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, 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. 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.
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Table of Contents
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 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 $10.0 million per incident 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
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Table of Contents
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.
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.
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Table of Contents
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 expanded 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 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
consolidated
financial
statements
included
in
this
Annual
Report.
At the time that the audit of our consolidated financial statements for the year ended December 31, 2016 was completed, we did
not have sufficient cash to fund our operations through December 31, 2017 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 consolidated financial
statements. At December 31, 2016, we had approximately $20.3 million in cash and cash equivalents and marketable securities,
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 believe our existing cash and cash equivalents, together with potential borrowings under
our credit facility with Oxford Finance LLC, or Oxford, and Silicon Valley Bank, or SVB, if we are able to meet the milestone
conditions for such borrowings, will be sufficient to fund our operations through the third quarter of 2017. 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.
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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 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
consolidated 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 have limited 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 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.
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Table of Contents
We
may
not
be
able
to
generate
sufficient
cash
to
service
our
indebtedness,
which
currently
consists
of
our
term
loan
with
Oxford
and
SVB.
In
addition,
although
we
potentially
have
the
ability
to
borrow
additional
funds
under
the
Amended
and
Restated
Loan
and
Security
Agreement,
we
may
be
unable
to
borrow
those
additional
funds
or
we
may
be
unable
to
generate
sufficient
cash
to
service
any
additional
indebtedness
that
we
do
incur.
In June 2016, we issued secured Notes to Oxford and SVB, or the Lenders, in a private placement for aggregate gross
proceeds of $15.0 million, pursuant to a Term Loan under our Amended and Restated Loan and Security Agreement that matures
on June 1, 2020. We used approximately $11.0 million from the proceeds from the Notes to repay the outstanding balance under
our previously existing Loan and Security Agreement with Oxford, dated as of July 31, 2014, including the applicable final
payment fee due thereunder of $1 million. In November 2016, we borrowed an additional $5 million upon the achievement of
certain milestones. Our obligations under the Amended and Restated Loan and Security Agreement are secured by a first priority
security interest in substantially all of our assets, other than our intellectual property. Our Amended and Restated Loan and
Security Agreement with the Lenders 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, 2016. We may also enter into other debt agreements in the future
which may contain similar or more restrictive terms.
In addition, pursuant to the Amended and Restated Loan and Security Agreement, we may also have the ability to
borrow up to an aggregate of an additional $10 million upon the achievement of specified milestones, and the funding of specific
tranches under the agreement, through the end of 2017. We will not be able to borrow the additional $10 million under the
Amended and Restated Loan and Security Agreement if we do not achieve the specified milestones.
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 Amended and Restated Loan and Security
Agreement could result in an event of default, which could result in an acceleration of amounts due under the Amended and
Restated Loan and Security Agreement. 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 the Lenders 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. 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.
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Table of Contents
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.
While we have completed our pivotal trials in Europe and the United States for our first generation Eversense system,
we anticipate that we will need to conduct future clinical trials in order to expand into the pediatric space and to introduce new
versions of our system. 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. 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.
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
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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. 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 Chief
Operating Officer, 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.
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, 2016, we had 58 employees. As our commercialization 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 sales, marketing and distribution. To manage our anticipated future growth,
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Table of Contents
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.
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.
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Table of Contents
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, 2016, we held a total of approximately 230 issued patents and
pending patent applications that relate to our CGM system. Our intellectual property portfolio includes 42 issued United States
patents, 187 patents issued in countries outside the United States, and 123 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 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
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Table of Contents
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 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
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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 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;
·
·
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·
·
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. 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)
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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 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.
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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 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
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Table of Contents
·
·
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 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
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Table of Contents
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 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 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) 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.
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Table of Contents
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.
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
continue
to
develop
or
be
sustained.
Prior to our public offering in March 2016, there was no liquid market for our common stock. Although our common
stock is listed on The NYSE-MKT, we cannot assure you that an active trading market for our shares will continue to develop or
be sustained. If an active market for our common stock does not continue to develop or is not
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Table of Contents
sustained, it may be difficult for investors in our common stock to sell shares without depressing the market price for the shares or
to sell the shares at all.
The
issuance
of
additional
stock
in
connection
with
financings,
acquisitions,
investments,
our
stock
incentive
plan,
or
otherwise
will
dilute
our
existing
stockholders.
Our certificate of incorporation authorizes us to issue up to 250,000,000 shares of common stock and up to 5,000,000
shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance
with applicable rules and regulations, we may issue our shares of common stock or securities convertible into our common stock
from time to time in connection with a financing, acquisition, investment, our equity incentive plans or otherwise. Any such
issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to
decline.
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 and SVB, 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.
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 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 some or all of our
stockholders. For example, our board of directors has 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 also contain other provisions that could have an anti-takeover effect, including:
·
·
·
·
·
only one of our three classes of directors is elected each year;
stockholders are not entitled to remove directors other than by a 66 2 / 3 % vote and only for cause;
stockholders are not permitted to take actions by written consent;
stockholders are not permitted to call a special meeting of stockholders; and
stockholders are required to give advance notice of their intention to nominate directors or submit proposals for
consideration at stockholder meetings.
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.
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We
may
be
unable
to
utilize
our
federal
net
operating
loss
carryforwards
to
reduce
our
income
taxes.
As of December 31, 2016, we had federal and state net operating loss, or NOL, carryforwards of $143.1 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, 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.
We
will
incur
increased
costs
and
demands
upon
management
as
a
result
of
being
a
public
company.
As a newly public company in the United States, we have begun to incur, and will continue to incur, significant
additional legal, accounting and other costs, particularly after we cease to be an “emerging growth company.” 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.
If
we
fail
to
maintain
proper
and
effective
internal
controls,
our
ability
to
produce
accurate
financial
statements
on
a
timely
basis
could
be
impaired.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act
of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations of the NYSE-
MKT. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and
internal control over financial reporting and 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. This
requires that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions
and that we expend significant management efforts.
We may in the future discover areas of our internal financial and accounting controls and procedures that need
improvement. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives
will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
If we are unable to maintain proper and effective internal controls in the future, we may not be able to produce timely
and accurate financial statements, and we may conclude that our internal controls over financial reporting are not
54
Table of Contents
effective. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations
by the NYSE-MKT, the SEC or other regulatory authorities.
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 is influenced by the research and reports that securities or industry analysts
publish about us or our business, our market and our competitors. As a newly public company, we have only limited research
coverage by securities or industry analysts. Securities or industry analysts may elect not to initiate or continue to provide coverage
of our common stock, and such lack of coverage may adversely affect the market price of our common stock. Even if we 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
amended
and
restated
certificate
of
incorporation
provides
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 provides 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 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.
Item
1B.
Unresolved
Staff
Comments
None.
Item
2.
Properties
Our principal offices occupy approximately 33,000 square feet of leased office space in Germantown, Maryland
pursuant to a lease that expires in 2023. 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.
55
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 began trading on the NYSE-MKT on March 18, 2016 under the symbol “SENS.” Beginning on
December 23, 2015 through March 17, 2016 our common stock qualified for quotation on the electronic marketplace operated by
OTC Markets Group, Inc. under the symbol "SENH." 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. and the NYSE-MKT. The below
quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual
transactions.
2017
First Quarter (through February 22, 2017)
Year
Ended
December
31,
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
Ended
December
31,
2015
Fourth Quarter (from December 23, 2015)
High
Low
$
2.92 $
2.28
$
3.45 $
4.05
4.24
3.90
2.53
2.80
3.00
2.17
$
3.50 $
3.25
On February 22, 2017, the last reported bid price for our common stock was $2.32 per share.
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 22, 2017, we had 93,955,527 shares of common stock outstanding held by 165 holders of record.
56
Table of Contents
Performance
Graph
The following graph compares the performance of our common stock since March 18, 2016, the date of which our
common stock commenced trading on the NYSE-MKT, with the NASDAQ Composite Index and the NASDAQ Healthcare
Index. The comparison assumes a $100 investment on March 18, 2016 in our common stock, the stocks comprising the NASDAQ
Composite Index and the NASDAQ Healthcare Index, and assumes reinvestment of the full amount of all dividends, if any.
Historical stockholder return is not necessarily indicative of the performance to be expected for any future periods.
The performance graph shall not be deemed to be incorporated by reference by means of any general statement
incorporating by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, except to the extent that
we specifically incorporate such information by reference, and shall not otherwise be deemed filed under the Securities Act or the
Exchange Act.
Use
of
Proceeds
from
Public
Offering
of
Common
Stock
On March 17, 2016, our Registration Statement on Form S-1, as amended (File No. 333-208984) was declared effective
in connection with our public offering, pursuant to which we sold 17,239,143 shares of our common stock, including the partial
exercise of the underwriters’ option to purchase additional shares, at a price to the public of $2.85 per share. The offering closed
on March 23, 2016 and we closed on the partial exercise of the underwriters’ option to purchase additional shares on April 5,
2016. As a result, we received aggregate net proceeds of $44.8 million (after deducting underwriters’ discounts and commissions
of $2.7 million and additional offering related costs of $1.4 million). The joint bookrunning managing underwriters of the
offering were Leerink Partners LLC and Canaccord Genuity Inc.
No expenses incurred by us in connection with our public offering were paid directly or indirectly to (i) any of our
officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii) any of
our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors as
compensation for board or board committee service.
There has been no material change in the planned use of proceeds from our public offering from that described in the
final prospectus filed by us with the Securities and Exchange Commission on March 18, 2016 pursuant to Rule 424(b) of the
Securities Act.
57
Table of Contents
Recent
Sales
of
Unregistered
Securities
In December 2016, we issued 1,768 shares of common stock upon the net exercise of warrants at an exercise price of
$1.79 per share. The issuance of these securities was exempt from registration under Section 3(a)(9) of the Securities Act.
Item
6.
Selected
Consolidated
Financial
Data
The following selected financial data for the years ended December 31, 2016, 2015 and 2014 and the balance sheet data
as of December 31, 2016 and 2015 is derived from our audited consolidated financial statements included elsewhere in this
Annual Report. The following balance sheet data as of December 31, 2014 is derived from our audited consolidated financial
statements not included in this Annual Report. 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 Operations” and in conjunction with the consolidated financial statements, related notes, and other
financial information included elsewhere in this Annual Report.
Statement
of
Operations
Data:
Revenue
Cost of sales
Gross profit
Expenses:
Sales and marketing expenses
Research and development expenses
General and administrative expenses
Operating loss
Other income (expense), net:
Interest income
Interest expense
Other income
Net loss
Year
Ended
December
31,
2015
(in
thousands,
except
share
and
per
share
data)
2016
2014
$
332 $
660
(328)
38 $
—
38
2,736
26,347
13,022
(42,433)
80
(1,602)
25
(43,930)
792
18,251
9,807
(28,812)
9
(1,100)
26
(29,877)
—
—
—
95
12,881
5,726
(18,702)
—
(191)
8
(18,885)
—
—
(18,885)
(9.89)
1,908,587
Deemed dividend as a result of Series E preferred stock beneficial conversion
feature
Net loss available to common stockholders
Basic and diluted net loss per common share
Basic and diluted weighted-average shares outstanding
—
(43,930) $
(407)
(30,284) $
(0.49) $
(4.32) $
$
$
89,243,853
7,002,317
58
Table of Contents
Balance
Sheet
Data:
Cash and cash equivalents
Working capital
Marketable securities
Total assets
Notes payable, net of discount, including current portion
Total liabilities
Additional paid-in capital
Accumulated deficit
Total stockholders’ deficit
2016
December
31,
2015
(in
thousands)
2014
13,047 $
9,806
7,291
22,271
19,066
27,148
199,751
(204,722)
(4,877)
3,939 $
(2,371)
—
5,423
9,819
15,120
151,019
(160,792)
(9,697)
18,923
17,593
—
19,995
9,815
12,082
138,673
(130,915)
(7,913)
$
59
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
consolidated
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
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. Senseonics, Incorporated was originally incorporated on October 30, 1996 and commenced operations on
January 15, 1997. The transactions contemplated by the Merger Agreement were consummated on December 7, 2015, referred to
herein 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.
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 “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” section to "the Company," "we," "our," "ours," "us" or similar terms refer to (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 and 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.
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 U.S. pivotal clinical
trial, we observed that Eversense measured glucose levels over 90 days with a degree of accuracy superior to that of other
currently available CGM systems.
Corporate
History
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. On May 10, 2016, we received regulatory approval to commercialize Eversense in Europe. In
June 2016, we made our first product shipment of Eversense through our distribution agreement with Rubin Medical, or Rubin. In
September 2016, we made our first product shipment of Eversense through our
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distribution agreement with Roche Diagnostics International AG and Roche Diabetes Care GmbH, together referred to as Roche.
Since our inception, we have funded our activities primarily through equity and debt financings.
In March 2016, we completed a public offering of our common stock, or the Offering, selling 15,800,000 shares of
common stock at a price to the public of $2.85 per share, for aggregate gross proceeds of $45.0 million. Net cash proceeds from
the Offering were approximately $40.9 million, after deducting underwriting discounts and commissions and estimated Offering-
related transaction costs payable by us. In April 2016, the underwriters for the Offering partially exercised their option to
purchase additional shares of common stock, purchasing an additional 1,439,143 shares, from which we received additional net
cash proceeds of approximately $3.9 million, after deducting underwriting discounts and commissions and estimated Offering-
related transaction costs payable by us.
On June 30, 2016 we entered into an Amended and Restated Loan and Security Agreement with Oxford Finance LLC,
or Oxford, and Silicon Valley Bank, or SVB, to potentially borrow up to an aggregate principal amount of $30.0 million. Under
the terms of the agreement, we initially borrowed an aggregate of $15 million from Oxford and SVB on June 30, 2016. We used
$11 million of the $15 million to retire existing loans with Oxford, including a final payment fee of $1 million. On November 22,
2016, we borrowed an additional $5 million upon achieving certain milestones. The agreement also permits us to borrow up to an
additional $10 million upon the achievement of specified milestones, and the funding of specific tranches under the agreement,
through the end of 2017. The agreement provides for monthly payments of interest only for a period of 12 months, followed by an
amortization period of 36 months. However, if we satisfy certain milestones and borrow an additional $5 million under the
agreement, the interest only period will be extended by an additional six months and the amortization period will be 30 months.
We have never been profitable and our net losses were $43.9 million, $29.9 million and $18.9 million for the years
ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, our accumulated deficit totaled $204.7
million, primarily as a result of expenses incurred in connection with our research and development programs and from general
and administrative expenses associated with our operations. We expect to continue to incur significant expenses and increasing
operations and net losses for the foreseeable future.
European
Commercialization
of
Eversense
In July 2015, we applied for, and in May 2016, we received our CE mark, which allows us to market and sell Eversense
in Europe. In connection with our CE Mark, we have agreed to conduct post market surveillance activities. In June 2016, we
commenced commercialization of Eversense in Sweden and in December 2016 we commenced commercialization of Eversense
in Norway through our distribution agreement with Rubin, which also has the right to distribute Eversense in Denmark. 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.
In May 2016, we entered into a distribution agreement with Roche, pursuant to which we granted Roche the exclusive
right to market, sell and distribute Eversense in Germany, Italy and the Netherlands . In November 2016, we entered into an
amendment to the distribution agreement granting Roche the exclusive right to market, sell and distribute Eversense in Europe,
the Middle East and Africa, excluding Sweden, Norway, Denmark, Finland and Israel. Roche is a pioneer in the development of
blood glucose monitoring systems and a global leader for diabetes management systems and services. We began distributing
Eversense through Roche in Germany in September 2016 and in Italy and the Netherlands in the fourth quarter of 2016.
United
States
Development
of
Eversense
We recently completed our Precise II pivotal clinical trial in the United States. This trial, which was fully enrolled with
90 subjects, was conducted at eight sites in the United States. In the trial, we measured the accuracy of Eversense measurements
through 90 days after insertion. We also assessed safety through 90 days after insertion or through sensor removal. In the trial, we
observed a mean absolute relative difference, or MARD, of 8.8% utilizing two calibration points for Eversense across the 40-400
mg/dL range when compared to YSI blood reference values during the 90-day continuous wear period. Based on the data from
this trial, in October 2016 we submitted a pre-market approval, or PMA, application to the FDA to market Eversense in the
United States. We 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
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own direct sales and marketing organization. We have received Category III CPT codes for the insertion and removal of
Eversense. Following PMA approval, we intend to pursue a Category I CPT code.
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 have begun to incur, and expect to continue 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.
Financial
Overview
Revenue
During the year ended December 31, 2016, we generated product revenue from sales of the Eversense system in Europe
pursuant to distribution agreements with Roche and Rubin, and we expect to begin marketing Eversense in additional European
countries throughout 2017. We expect our revenue from European product sales will increase as we ramp up our
commercialization efforts through the remainder of 2017 and into 2018. 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. If we fail to successfully
commercialize or are otherwise unable to complete the development of Eversense, our ability to generate future revenue, and our
results of operations and financial position, will be adversely affected.
Cost
of
Sales
We utilize contract manufacturers to produce Eversense. Cost of sales consists primarily of the components of Eversense
and assembly, as well as reserves for warranty costs. Other cost of sales includes distribution-related expenses such as logistics
and shipping costs of the Eversense product to Roche and Rubin for distribution in various regions in Europe. We calculate gross
margin as revenue less costs of sales divided by revenue. We expect our overall gross margin to improve over the long term, as
our sales increase and we have more opportunities to spread our costs over larger production volumes. However, our gross
margins may fluctuate from period to period.
Sales
and
Marketing
Sales and marketing expenses consist primarily of salaries and other related costs, including stock‑based compensation,
for personnel who perform sales and marketing functions. Other significant costs include promotional materials and tradeshow
expenses.
We anticipate that our sales and marketing expenses will increase in the future as we continue to expand our
commercialization of Eversense.
Research
and
Development
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.
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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, 2016, 2015 and 2014.
2016
Year
Ended
December
31,
2015
(in
thousands)
2014
Clinical development
Contract R&D and consulting
Contract fabrication and manufacturing
Personnel related
Other R&D expenses
Total R&D expenses
General
and
Administrative
$
4,242 $
8,071
5,536
6,491
2,007
1,940
1,631
3,518
4,178
1,614
$ 26,347 $ 18,251 $ 12,881
4,145 $
3,158
4,796
4,525
1,627
General and administrative expenses consist primarily of salaries and other related costs, including stock‑based
compensation, for personnel in our executive, finance, accounting, business development, and human resources functions. Other
significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent
and corporate matters and fees for accounting and consulting services.
Our general and administrative expenses have increased, and we expect them to continue to increase in the future, as a
result of operating as a public company. These increases include increased costs related to the hiring of additional personnel and
increased fees to outside consultants, lawyers and accountants as well as expenses related to maintaining compliance with NYSE-
MKT listing rules and SEC requirements, insurance, and investor relations costs. These expenses may further increase when we
no longer qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act,
which will require us to comply with certain reporting requirements from which we are currently exempt.
Other
Income
(Expense),
Net
Interest income consists of interest earned on our cash equivalents and interest expense primarily consists of interest
expense on the secured notes, or the Notes, we issued to Oxford in connection with our original Loan and Security Agreement in
July and December 2014 and the Notes we issued to Oxford and SVB in connection with our Amended and Restated Loan and
Security Agreement in June and November 2016. We refer to Oxford and SVB together as the Lenders. This interest expense
primarily consists of (i) contractual interest on the Notes, (ii) amortization of debt discount related to warrants, or the warrants,
that we issued to the Lenders in connection with the Notes, and (iii) the accrual into interest expense of a final payment obligation
that we are required to pay to the Lenders at maturity of the Notes.
Other income (expense) for the year ended December 31, 2016 primarily includes the change in the fair value of the
warrant liability 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 warrants issued to Oxford. In December 2015, in connection with the Acquisition, the
warrants were amended. As a result, the warrants were reclassified from a liability to equity and are no longer be marked to
market and, therefore, do not impact other income (expense) in future periods.
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Table of Contents
Results
of
Operations
Comparison
of
the
Years
Ended
December
31,
2016
and
2015
The following table sets forth our results of operations for the years ended December 31, 2016 and 2015.
Revenue
Cost of sales
Gross profit
Expenses:
Sales and marketing expenses
Research and development expenses
General and administrative expenses
Operating loss
Other income (expense), net:
Interest expense, net
Other income
Total other expense, net
Net loss
Revenue
Year
Ended
December
31,
2016
2015
Period-to-
Period
Change
(in
thousands)
332 $
660
(328)
38 $
—
38
294
660
(366)
$
2,736
26,347
13,022
(42,433)
(1,522)
25
(1,497)
(43,930)
$
792
18,251
9,807
(28,812)
(1,091)
26
(1,065)
(29,877)
$
1,944
8,096
3,215
(13,621)
(431)
(1)
(432)
(14,053)
$
Revenue for the year ended December 31, 2016 was $0.3 million. This revenue consisted of product sales of Eversense
through our distributor partners Rubin and Roche in Europe. 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, which we do not expect this to be a meaningful source of revenue in the future.
Cost
of
sales
Our cost of sales was $0.7 million for the year ended December 31, 2016, resulting from the manufacturing and
distribution of shipments of Eversense to Roche and Rubin for distribution in Europe. We did not have any cost of sales during
the year ended December 31, 2015.
Gross profit was $(0.3) million for the year ended December 31, 2016. Gross profit as a percentage of revenue, or gross
margin, was (101)% for the year ended December 31, 2016.
Sales
and
marketing
expenses
Sales and marketing expenses were $2.7 million for the year ended December 31, 2016, compared to $0.8 million for the
year ended December 31, 2015, an increase of $1.9 million. The increase was primarily due to an increase in personnel-related
expenses of $1.7 million and an increase of $0.2 million of other expenses to support the launch of Eversense in Europe.
Research
and
development
expenses
Research and development expenses were $26.3 million for the year ended December 31, 2016, compared to
$18.3 million for the year ended December 31, 2015, an increase of $8.0 million. The increase was primarily due to an increase in
contract research and development and consulting expenses for future versions of Eversense of $5.0 million,
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a $2.0 million increase in personnel-related expenses, a $0.6 million increase in contract fabrication and process development
expenses and a $0.4 million increase in other research and development expenses.
General
and
administrative
expenses
General and administrative expenses were $13.0 million for the year ended December 31, 2016, compared to
$9.8 million for the year ended December 31, 2015, an increase of $3.2 million. The increase was primarily due to an increase in
personnel-related expenses of $2.3 million, in part to support our operations as a public company, and an increase of $0.9 million
in facilities expenses related to our expansion.
Total
other
expense,
net
Total other expense, net, for the year ended December 31, 2016 and 2015 was $1.5 million and $1.1 million,
respectively, consisting primarily of interest expense on the Oxford and SVB notes.
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 expense
Research and development expenses
General and 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
(in
thousands)
Period-to-
Period
Change
$
38 $
— $
38
792
18,251
9,807
(28,812)
(1,091)
26
(1,065)
(29,877)
$
95
12,881
5,726
(18,702)
(191)
8
(183)
(18,885)
$
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
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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.
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, to date, we have not generated any significant revenue from product sales. 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 $43.9 million, $29.9 million and $18.9 million for the years ended
December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, we had an accumulated deficit of $204.7 million.
To date, we have funded our operations principally through the issuance of preferred stock, common stock and debt. As
of December 31, 2016, we had cash and cash equivalents and marketable securities of $20.3 million. Under the terms of the
Amended and Restated Loan and Security Agreement with Oxford and SVB, we may borrow up to an aggregate principal amount
of $30.0 million. Under this debt facility, we initially borrowed an aggregate of $15 million from the Oxford and SVB on June 30,
2016. We used $11 million of the $15 million to retire existing loans with Oxford, including a final payment fee of $1 million. In
November 2016, we borrowed an additional $5 million from the Oxford and SVB upon achieving certain milestones. The
agreement provides for monthly payments of interest only for a period of 12 months, followed by an amortization period of 36
months. However, if we satisfy certain milestones and borrow an additional $5 million under the agreement, the interest only
period will be extended by an additional six months and the amortization period will be 30 months.
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 2017 and beyond. Upon the completion of the audit of our consolidated financial statements for the year
ended December 31, 2016, we did not have sufficient cash to fund our operations beyond the third quarter of 2017 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 consolidated financial statements. The financial information throughout this Annual Report and the consolidated
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.
On March 23, 2016, we closed the Offering of our common stock. Additionally, we closed on the partial exercise by the
underwriters of the Offering on their option to purchase additional shares on April 5, 2016. As a result of these events, we
received aggregate net proceeds of $44.8 million (after deducting underwriters’ discounts and commissions of $2.7 million and
additional offering related costs of $1.4 million).
We expect our existing capital resources as of December 31, 2016 will enable us to fund our operations through the third
quarter of 2017. We have based this estimate on assumptions, including that we will meet the conditions to borrow the Tranche 3
Term Loan, as defined below, by completing the first commercial sale of our second-generation transmitter in the European
Union on or before April 30, 2017, and that we will meet the conditions to borrow the Tranche 4 Term Loan, as defined below, by
receiving PMA approval from the FDA for Eversense, and achieving a trailing six-month revenue for the applicable period of
measurement of at least $4.0 million, on or before September 30, 2017.
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Indebtedness
On June 30, 2016, we entered into an Amended and Restated Loan and Security Agreement with the Lenders. Pursuant
to the Amended and Restated Loan and Security Agreement, we may potentially borrow up to an aggregate principal amount of
$30.0 million in the following four tranches: $15.0 million, or the Tranche 1 Term Loan; $5.0 million, or the Tranche 2 Term
Loan; $5.0 million, or the Tranche 3 Term Loan; and $5.0 million, or the Tranche 4 Term Loan. We refer to each of the tranches
as a Term Loan, and collectively, the Term Loans. The funding conditions for the Tranche 1 Term Loan were satisfied as of June
30, 2016. Therefore, we issued secured notes to the Lenders for aggregate gross proceeds of $15.0 million, or the Notes, on June
30, 2016. We used approximately $11.0 million from the proceeds from the Notes to repay the outstanding balance under our
previously existing Loan and Security Agreement with Oxford, dated as of July 31, 2014, including the applicable final payment
fee due thereunder of $1 million. On November 22, 2016, the funding conditions for the Tranche 2 Term Loan were satisfied;
therefore we issued secured notes to the Lenders for aggregate gross proceeds of $5.0 million. We may borrow the Tranche 3
Term Loan on or before April 30, 2017 if complete the first commercial sale of our second-generation transmitter in the European
Union. We may borrow the Tranche 4 Term Loan on or before December 31, 2017 if we borrow the Tranche 2 and Tranche 3
Term Loans, receive PMA approval from the FDA for Eversense, and achieve trailing six-month revenue for the applicable
period of measurement of at least $4.0 million. The maturity date for all Term Loans is June 1, 2020, or the Maturity Date.
The Term Loans bear interest at a floating annual rate of 6.31% plus the greater of (i) 90-day U.S. Dollar LIBOR
reported in the Wall Street Journal or (ii) 0.64%, provided that the minimum floor interest rate is 6.95%, and require monthly
payments. The monthly payments initially consist of interest-only. After twelve months, the monthly payments will convert to
payments of principal and monthly accrued interest, with the principal amount being amortized over the ensuing 36 months.
However, if we borrow the Tranche 3 Term Loan, the interest-only period will be extended by an additional six months, and the
amortization period will be shortened to 30 months.
We may elect to prepay all Term Loans prior to the Maturity Date subject to a prepayment fee equal to 3.00% if the
prepayment occurs within one year of the funding date of any Term Loan, 2.00% if the prepayment occurs during the second year
following the funding date of any Term Loan, and 1.00% if the prepayment occurs more than two years after the funding date of
any Term Loan and prior to the Maturity Date.
The Amended and Restated Loan and Security Agreement contains customary events of default, including bankruptcy,
the failure to make payments when due, the occurrence of a material impairment on the Lenders’ security interest over the
collateral, a material adverse change, the occurrence of a default under certain other agreements entered into by us, the rendering
of certain types of judgments against us, the revocation of certain of our government approvals, violation of covenants, and
incorrectness of representations and warranties in any material respect. Upon the occurrence of an event of default, subject to
specified cure periods, all amounts owed by us would begin to bear interest at a rate that is 5.00% above the rate effective
immediately before the event of default, and may be declared immediately due and payable by Lenders.
Pursuant to the Amended and Restated Loan and Security Agreement, we also issued to the Lenders 10‑year stock
purchase warrants to purchase an aggregate of 116,581 and 63,025 shares of common stock with an exercise price of $3.86 and
$2.38 per share, respectively.
The Notes are collateralized by all of our consolidated assets other than our intellectual property. The Notes also contain
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 incurred issuance costs related to the Notes of approximately $568,648 that are being
amortized as additional interest expense over the term of the Notes using the effective interest method. The fair value of the stock
purchase warrants, which was estimated to be $421,840, was recorded as a discount to the Notes, which is also being amortized as
additional interest expense over the term of the Notes using the effective interest method.
At maturity (or earlier prepayment), we are also required to make a final payment equal to 9.00% of the aggregate
principal balances of the funded Term Loans. This fee is being accrued as additional interest expense over the
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term of the Notes using the effective interest method. In the event that we achieve the requirements to borrow the Tranche 3 Term
Loan or the Tranche 4 Term Loan, and elect not to borrow either tranche, we are obligated to pay the Lenders a non-utilization fee
of 2.00% of the undrawn amounts.
On December 7, 2015, we entered into a Note Purchase Agreement with Energy Capital pursuant to which we were
entitled to borrow 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. During the year ended December 31, 2016, we borrowed an aggregate of $2.5 million
from Energy Capital. We repaid these borrowings in full with a portion of the proceeds of the Offering prior to December 31,
2016, and the Note Purchase Agreement was terminated.
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, 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 credit facility with
Oxford and SVB, if we are able to meet the milestone conditions for such borrowings, will be sufficient to fund our operating
expenses through the third quarter of 2017. 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.
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.
Year
Ended
December
31,
2015
2016
(in
thousands)
2014
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Net
cash
used
in
operating
activities
$ (38,016) $ (25,465) $ (19,270)
(29)
29,976
10,677
(7,770)
54,894
9,108 $ (14,984) $
(202)
10,683
$
Net cash used in operating activities was $38.0 million for the year ended December 31, 2016, and consisted primarily of
a net loss of $43.9 million, partially offset by stock-based compensation expense of $2.4 million, other non-cash expenses of $0.7
million, and a net change in assets and liabilities of $2.7 million (consisting primarily of an increase in accounts payable and
accrued expenses of $2.7 million and a decrease in prepaid expenses, deposits and other
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assets of $0.7 million, net of an increase in inventory of $0.5 million and an increase in accounts receivable of $0.2 million).
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, partially offset by an increase in prepaid expenses, deposits
and other assets of $0.4 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.
Net
cash
used
in
investing
activities
Net cash used in investing activities was $7.8 million for the year ended December 31, 2016, and consisted of $7.3
million for the purchase of marketable securities and $0.5 million of capital expenditures for laboratory equipment.
Net cash used in investing activities was $0.2 million 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 $54.9 million for the year ended December 31, 2016, and consisted
primarily of the net proceeds of $45.7 million from our public offering of common stock, the net proceeds of $9.0 million from
the issuance of the Oxford and SVB note, and $0.2 million from the exercise of stock options.
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 $10.7 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 promissory notes to Oxford.
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Contractual
Obligations
The following summarizes our contractual obligations as of December 31, 2016.
Contractual
Obligations
Total
2017
Payment
due
by
period
2018-2019
(in
thousands)
2020-2021
After
2021
(1)
Operating lease obligations
Payments under corporate development
agreement
Principal payments under Notes
(2)
Interest payments under Notes
Total contractual obligations
(2)
$
4,053 $
608 $
1,218 $
1,277 $
2,259
20,000
2,854
29,166
$
$
970
3,889
1,387
6,854
$
381
13,333
1,416
16,348
$
908
2,778
51
5,014
$
950
—
—
—
950
(1) 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.
(2) Represents the principal and interest payment schedule for the $20.0 million principal amount of the Oxford and SVB notes
that were outstanding as of December 31, 2016, assuming that we do not launch our second generation transmitter and
borrow an additional $5 million under the credit facility by April 30, 2017, in which case, principal payments will begin on
July 1, 2017. In the event we do launch our second generation transmitter and borrow an additional $5 million under the
credit facility by April 30, 2017, the principal payments will begin on January 1, 2018. In such event, the schedule for
principal payments on the Oxford and SVB notes will be as follows (in thousands): $0 in 2017; $20,690 in 2018-2019; and
$4,310 in 2020-2021, and the schedule for interest payments on the Oxford notes will be as follows: $1,734 in 2017; $2,198
in 2018-2019 and $78 in 2020-2021. 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
consolidated 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 consolidated financial statements requires us to make estimates,
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 consolidated 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 consolidated financial statements
appearing elsewhere in this Annual Report, we believe the following are the critical accounting policies used in the preparation of
our consolidated financial statements that require significant estimates and judgments.
Revenue
Recognition
Revenue is generated from sales of sensor kits, transmitter kits, and related supplies under agreements for research and
third-party distributors that resell the product to customers. We are paid for our sales directly by third-party distributors,
regardless of whether or not the distributors resell the products to their customers.
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We recognize product sales revenue when all of the following criteria are met:
·
·
·
·
persuasive evidence of an arrangement exists;
delivery has occurred;
the price is fixed or determinable; and
collectability is reasonably assured.
We offer no rights of return and have no significant post-delivery obligations and, therefore, the above criteria are
generally met as products are shipped to, or received by, third-party distributors.
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.
Options to purchase 2,464,011 shares and 1,540,612 shares were granted during the years ended December 31, 2016 and
2015, respectively.
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. Stock-based compensation expense is recorded monthly and is adjusted periodically
for actual forfeitures. Pre-vesting forfeitures are based on our historical experience for the years ended December 31, 2016 and
2015 and have not been material. 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.
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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 consolidated
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 consolidated 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 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, 2016, 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.
Recent
Accounting
Pronouncements
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. In August 2015, the FASB issued guidance
approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early
adoption permitted only for reporting periods beginning after December 15, 2016. In March 2016, the FASB issued guidance to
clarify the implementation guidance on principal versus agent considerations for reporting revenue gross rather than net, with the
same deferred effective date. In April 2016, the FASB issued guidance to clarify the implementation guidance on identifying
performance obligations and the accounting for licenses of intellectual property, with the same deferred effective date. In May
2016, the FASB issued guidance rescinding SEC paragraphs related to revenue recognition, pursuant to two SEC Staff
Announcements at the March 3, 2016 Emerging Issues Task Force meeting. In May 2016, the FASB also issued guidance to
clarify the implementation guidance on assessing collectability, presentation of sales tax, noncash consideration, and contracts
and contract modifications at transition, with the same effective date. We do not intend to adopt the guidance early. We currently
expect that the adoption of this guidance likely will change the way we recognize revenue generated under customer contracts.
We have not yet begun to evaluate the specific impacts of this guidance nor have we determined the manner in which we will
adopt this guidance.
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
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standard is effective for the reporting periods ending December 15, 2016 and for annual periods and interim periods thereafter.
We adopted the guidance and have included expanded discussions on going concern.
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 adopted this guidance and the debt on our consolidated balance sheets
is disclosed net of issuance costs.
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. The adoption of this guidance is not expected to have a material impact on
our consolidated financial statements.
In November 2015, the FASB issued guidance simplifying the balance sheet classification of deferred taxes. The new
guidance requires that all deferred taxes be presented as noncurrent, rather than separated into current and noncurrent
amounts. The guidance is effective for reporting periods beginning after December 15, 2016 and early adoption is permitted. In
addition, the adoption of guidance can be applied either prospectively or retrospectively to all periods presented. We adopted this
guidance for the year ended December 31, 2016, on a prospective basis. The adoption of this new guidance did not have a
material impact on our consolidated financial statements.
In February 2016, the FASB issued guidance for accounting for leases. The guidance requires lessees to recognize assets
and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing
arrangements. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted.
The guidance must be adopted on a modified retrospective basis and provides for certain practical expedients. We currently
expect that the adoption of this guidance likely will change the way we account for our operating leases and likely will result in
recording the future benefits of those leases and the related minimum lease payments on our balance sheet. We have not yet
begun to evaluate the specific impacts of this guidance nor have we determined the manner in which we will adopt this guidance.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and cash payments in the
statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration
payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of
corporate-owned life insurance, and distributions received from equity method investees. The guidance is effective for public
business entities for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early
adoption is permitted, including adoption in an interim period. If an entity adopts the guidance in an interim period, any
adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The guidance must be
adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective
application would be impracticable. We are currently evaluating the impact, if any, that the adoption of this guidance will have on
our consolidated statements of cash flows.
In June 2016, the FASB issued guidance with respect to measuring credit losses on financial instruments, including trade
receivables. The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a
credit loss on financial instruments. The credit loss estimate can now reflect an entity's current estimate of all future expected
credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is
permitted for fiscal years beginning after December 15, 2018,
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including interim periods within those fiscal years. We currently expect that the adoption of this guidance likely will change the
way we assess the collectibility of our receivables and recoverability of other financial instruments. We have not yet begun to
evaluate the specific impacts of this guidance nor have we determined the manner in which we will adopt this guidance.
In March 2016, the FASB issued guidance simplifying the accounting for and financial statement disclosure of stock-
based compensation awards. We adopted this guidance as of January 1, 2017. From January 1, 2017 onward, in accordance with
the new guidance, no excess tax benefits or tax deficiencies will be recognized in additional paid-in capital. Our existing
additional paid-in capital pool balance at December 31, 2016 is $204.7 million. We will account for forfeitures as they occur,
rather than using an estimated forfeiture rate. We estimate that this change in accounting will not result in an adjustment to
retained earnings as of January 1, 2017. We will also present the impact of classifying excess tax benefits as an operating activity
in the Statement of Cash Flows on a prospective basis and prior periods will not be adjusted. The adoption of the remaining
amendments is not expected to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued guidance to reduce diversity in practice that exists in the classification and
presentation of changes in restricted cash on the statement of cash flows. The revised guidance requires that amounts generally
described as restricted cash and restricted cash equivalents be included in with cash and cash equivalents when reconciling the
beginning of period and end of period total amounts shown on the statement of cash flows. The guidance is effective for the fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. If an entity adopts the guidance in an interim period, any adjustments should be reflected
as of the beginning of the fiscal year that includes that interim period. The guidance must be adopted on a retrospective basis. We
adopted this guidance as of January 1, 2017, on a retrospective basis, and all periods will be presented under this guidance. The
adoption of this new guidance will have no impact on our consolidated financial statements.
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, 2016, 2015 and 2014, we had cash and cash equivalents of $13.0
million, $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.
75
Table of Contents
Item
8.
Financial
Statements
and
Supplementary
Data
INDEX
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm for the years ended December 31, 2016
and 2015
Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm for the year ended
December 31, 2014
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2016,
2015 and 2014
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2016, 2015 and
2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
77
78
79
80
81
82
83
76
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 sheets of Senseonics Holdings, Inc. as of December 31, 2016
and 2015, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the
years 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, 2016 and 2015, and the results of its operations and its cash flows
for the years 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 23, 2017
77
Table of Contents
REPORT
OF
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
Senseonics Holdings, Inc.:
In our opinion, the 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 results of operations and cash flows of Senseonics Holdings, Inc. (the Company)
for the year ended December 31, 2014, 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 financial 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
Marketable securities
Accounts receivable
Inventory
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
Other liabilities
Total liabilities
Commitments and contingencies (Note 7)
Stockholders’ equity (deficit):
Common stock, $0.001 par value per share; 250,000,000 shares authorized, 93,569,642
and 75,760,061 shares issued and outstanding as of December 31, 2016 and 2015
Additional paid-in capital
Accumulated deficit
Total stockholders' deficit
Total liabilities and stockholders’ equity (deficit)
December
31,
2016
2015
$
$
$
13,047
7,291
251
477
365
21,431
105
735
22,271
3,070
4,666
3,889
11,625
15,177
273
73
27,148
3,939
—
—
—
1,025
4,964
148
311
5,423
1,252
3,694
2,389
7,335
7,430
327
28
15,120
94
199,751
(204,722)
(4,877)
22,271
76
151,019
(160,792)
(9,697)
5,423
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
79
Table of Contents
Senseonics
Holdings,
Inc.
Consolidated
Statements
of
Operations
and
Comprehensive
Income
(Loss)
(in
thousands,
except
for
share
and
per
share
data)
Revenue
Cost of sales
Gross profit
Expenses:
Sales and marketing expenses
Research and development expenses
General and administrative expenses
Operating loss
Other income (expense), net:
Interest income
Interest expense
Other income (expense)
Net loss
Other comprehensive income (loss)
Total comprehensive loss
Deemed dividend as a result of Series E preferred stock beneficial
conversion feature
Net loss available to common stockholders
Basic and diluted net loss per common share
Basic and diluted weighted-average shares outstanding
$
$
$
$
Years
Ended
December
31,
2016
2015
2014
332 $
660
(328)
38 $
—
38
2,736
26,347
13,022
792
18,251
9,807
—
—
—
95
12,881
5,726
(42,433)
(28,812)
(18,702)
80
(1,602)
25
9
(1,100)
26
—
(191)
8
(43,930)
—
(43,930) $
(29,877)
—
(29,877) $
(18,885)
—
(18,885)
—
(43,930) $
(407)
(30,284) $
—
(18,885)
(0.49) $
(4.32) $
89,243,853
7,002,317
(9.89)
1,908,587
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
Changes
in
Stockholders’
Equit
y
(Deficit)
(in
thousands)
Series
A
Series
B
Preferred
Stock Preferred
Stock Preferred
Stock
Series
C
Series
D
Series
E
Preferred
Stock Preferred
Stock Common
Stock
Additional
Paid-In
Treasury
Stock Accumulated Stockholders'
Total
Shares Amount Shares Amount Shares Amount Shares
Amount Shares Amount Shares Amount Capital
Shares Amount
Deficit
Equity
(Deficit)
—
—
—
—
—
—
—
Balance,
December 31, 2013 600 $
Sale of Series D
preferred stock
Exercise of stock
options for cash
Stock-based
compensation
expense
Net loss
Balance,
December 31, 2014 600 $
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
Initial Public
Offering
Exercise of stock
options for cash
and vesting of
RSAs
Stock-based
compensation
expense
Issuance of
warrants related to
debt
Net loss
Balance,
December 31, 2016
—
—
—
—
(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)
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
—
—
—
63
—
—
—
—
—
—
—
—
—
—
—
1,433
—
—
—
1,433
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
151
—
—
—
—
—
—
151
(29,877) (29,877)
(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)
17,239 17 44,557
—
—
— 44,574
—
—
—
—
—
—
—
—
—
570
1
1,324
—
—
—
1,325
—
—
—
—
—
—
—
—
—
—
—
2,421
—
—
—
2,421
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
430
—
—
—
—
—
—
430
(43,930) (43,930)
— $ —
— $ —
— $ —
— $ —
— $ — 93,569 $ 94 $199,751
— $ — $ (204,722) $ (4,877)
The accompanying notes are an integral part of these consolidated financial statements.
81
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 warrants
Stock-based compensation expense
Changes in assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Inventory
Deposits and other assets
Accounts payable
Accrued expenses and other current liabilities
Accrued interest
Deferred rent
Net cash used in operating activities
Cash
flows
from
investing
activities
Capital expenditures
Purchase of marketable securities
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
Proceeds from issuance of common stock, net of issuance costs
Proceeds from exercise of stock options
Proceeds from notes payable, net of costs
Repayments of notes payable
Deferred financing costs and discount of notes payable
Principal payments under capital lease obligations
Net cash provided by financing activities
Net increase (decrease) 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
Years
Ended
December
31,
2015
2014
2016
$ (43,930)
$ (29,877)
$ (18,885)
155
252
430
2,421
(250)
659
(477)
43
1,817
893
(54)
25
(38,016)
(479)
(7,291)
(7,770)
—
—
—
45,737
161
22,500
(12,500)
(1,004)
—
54,894
9,108
3,939
13,047
893
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.
82
Table of Contents
1.
Organization
Senseonics
Holdings,
Inc.
Notes
to
Consolidated
Financial
Statements
Senseonics, Incorporated, (“Senseonics”), which, subsequent to the Acquisition described below, is a wholly-owned
subsidiary of Senseonics Holdings, Inc. (“Senseonics Holdings or the “Company”). The Company is 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 2017 and beyond.
On March 23, 2016, the Company effected the initial closing of its public offering of 15,800,000 shares of its common
stock at a price to the public of $2.85 per share (the “Offering”). Additionally, the Company closed on the partial exercise of the
underwriters’ option to purchase additional shares on April 5, 2016. The Company received aggregate net
83
Table of Contents
proceeds from the Offering of $44.8 million (after deducting underwriters’ discounts and commissions of $2.7 million and
additional offering related costs of $1.4 million). On June 30, 2016, the Company entered into Amended and Restated Loan and
Security Agreement with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) to potentially borrow up to an
aggregate principal amount of $30.0 million. Management has concluded that, based on the Company’s current operating plans,
the receipt of potential future borrowings under the Amended and Restated Loan and Security Agreement with Oxford and SVB,
if the Company is able to meet the milestone conditions for such borrowings, its existing cash, cash equivalents, and marketable
securities available for sale will be sufficient to meet the Company’s anticipated operating needs through the third quarter of
2017. Accordingly, since management has concluded that the Company does not have sufficient funds to support operations
through February 2018, the Company believes that doubt about the Company’s ability to continue as a going concern exists. The
Company’s auditors have also included explanatory language in their opinion that substantial doubt about the Company’s ability
to continue as a going concern exists.
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. A portion of the notes payable are classified as long-term in the accompanying consolidated balance sheet as
of December 31, 2016. 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 condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements reflect the
accounts of Senseonics Holdings and its wholly-owned subsidiary Senseonics. All intercompany transactions and balances have
been eliminated in consolidation.
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, stock-based compensation, 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.
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.
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Comprehensive
Income
(Loss)
Comprehensive income (loss) comprises net income (loss) and other changes in equity that are excluded from net
income (loss). For the years ended December 31, 2016, 2015 and 2014, the Company’s net loss equaled its comprehensive loss
and, accordingly, no additional disclosure is presented.
Inventory
Inventory consist principally of finished goods and is valued at the lower of cost to purchase or the net realizable value
of such inventory. Cost is determined using the standard cost method that approximates first in, first out. Market is determined by
the lower of replacement cost or net realizable value. The Company periodically reviews inventory to determine if a write down is
necessary for inventory that has become obsolete, inventory that has a cost basis less than net realizable value, and inventory in
excess of future demand taking into consideration the product shelf life.
Marketable
Securities
Marketable securities consist of debt securities in government-sponsored entities, corporate debt securities, U.S.
Treasury securities and commercial paper. The Company’s investments are classified as available for sale. Such securities are
carried at estimated fair value, with any unrealized holding gains or losses reported, net of any tax effects reported, as
accumulated other comprehensive income. Realized gains and losses, and declines in value judged to be other-than-temporary, if
any, are included in consolidated results of operations. A decline in the market value of any available for sale security below cost
that is deemed to be other-than-temporary results in a reduction in fair value, which is charged to earnings in that period, and a
new cost basis for the security is established. Dividend and interest income is recognized when earned. The cost of securities sold
is calculated using the specific identification method. The Company classifies all available-for-sale marketable securities with
maturities greater than one year from the balance sheet date as non-current assets.
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.
Revenue
Recognition
Revenue is generated from sales of sensor kits, transmitter kits, and related supplies under agreements for research and
third-party distributors that resell the product to customers. The Company is paid for its sales directly by third-party distributors,
regardless of whether or not the distributors resell the products to their customers.
The Company recognizes product sales revenue when all of the following criteria are met:
·
·
·
·
persuasive evidence of an arrangement exists;
delivery has occurred;
the price is fixed or determinable; and
collectability is reasonably assured.
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The Company offers no rights of return and has no significant post-delivery obligations and therefore, the above criteria
are generally met as products are shipped to, or received by, third-party distributors.
Accounts
Receivable
The Company grants credit to various customers in the normal course of business. Accounts receivable consist of
amounts due from distributors. The Company records an allowance for doubtful accounts at the time potential collection risk is
identified. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted
and when it is deemed that a balance is uncollectible.
Warranty
Reserve
The Company generally provides a warranty on Eversense to end user customers and may replace Eversense
components that do not function in accordance with the product specifications. Estimated warranty costs associated with a
product are recorded at the time of shipment. The Company estimates future warranty costs by analyzing historical warranty
experience for the timing and amount of returned product, and the Company evaluates the reserve quarterly and makes
adjustments when appropriate.
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
2016, 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 stockholders’ 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, 2016.
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.
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
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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, 2016 and 2015, no excess tax
benefits for the tax deductions related to share-based awards were recognized in the statements of operations.
Fair
Value
of
Financial
Instruments
The
carrying
amounts
of
cash
and
cash
equivalents,
accounts
receivable,
accounts
payable,
and
accrued
expenses
approximate
fair
value
because
of
their
short
maturities.
The
carrying
amount
of
our
Term
Notes
Payable
approximate
fair
value
as
they
were
issued
in
the
current
year.
The
fair
values
of
our
marketable
investments
are
reported
in
Note
13
—Fair
Value
Measurements
,
respectively
.
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, 2016 and 2015.
The Company is subject to taxation in various jurisdictions in the United States and remains subject to examination by
taxing jurisdictions for the year 1998 and all subsequent periods due to the availability of NOL carryforwards. In addition, all of
the net operating losses and research and development credit carryforwards that may be used in future years are still subject to
adjustment.
Net
Loss
per
Share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number
of shares of common stock outstanding during the period.
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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 16,574,761, 14,261,768 and 34,435,548 at
December 31, 2016, 2015 and 2014, respectively, consisting of 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
2016
—
11,389,773
5,184,988
16,574,761
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 stockholders by the weighted-average number of shares outstanding plus the impact of all
potential dilutive common shares, consisting primarily of common stock options and stock purchase warrants using the treasury
stock method.
Recent
Accounting
Pronouncements
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. In
August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods
beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016.
In March 2016, the FASB issued guidance to clarify the implementation guidance on principal versus agent considerations for
reporting revenue gross rather than net, with the same deferred effective date. In April 2016, the FASB issued guidance to clarify
the implementation guidance on identifying performance obligations and the accounting for licenses of intellectual property, with
the same deferred effective date. In May 2016, the FASB issued guidance rescinding SEC paragraphs related to revenue
recognition, pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting. In May 2016,
the FASB also issued guidance to clarify the implementation guidance on assessing collectability, presentation of sales tax,
noncash consideration, and contracts and contract modifications at transition, with the same effective date. The Company does not
intend to adopt the guidance early. The Company currently expects that the adoption of this guidance likely will change the way it
recognizes revenue generated under customer contracts. The Company has not yet begun to evaluate the specific impacts of this
guidance nor has the Company determined the manner in which it will adopt this guidance.
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 annual reporting period ending after December
15, 2016 and for annual periods and interim periods thereafter. The Company adopted the guidance and has included the
expanded discussion on going concern above.
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 adopted the guidance and the debt on the consolidated
balance sheets is disclosed net of issuance costs.
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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. The Company decided to adopt the standards prospectively and will be accounting for the new
cloud arrangements in accordance with the new standards. The adoption of this guidance will not have a material impact on the
financial statements.
In November 2015, the FASB issued guidance simplifying the balance sheet classification of deferred taxes. The new
guidance requires that all deferred taxes be presented as noncurrent, rather than separated into current and noncurrent
amounts. The guidance is effective for reporting periods beginning after December 15, 2016 and early adoption is permitted. In
addition, the adoption of guidance can be applied either prospectively or retrospectively to all periods presented. The Company
adopted this guidance for the year ended December 31, 2016, on a prospective basis. The adoption of this new guidance did not
have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued guidance for accounting for leases. The guidance requires lessees to recognize assets
and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing
arrangements. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted.
The guidance must be adopted on a modified retrospective basis and provides for certain practical expedients. The Company
currently expects that the adoption of this guidance likely will change the way the Company accounts for its operating leases and
likely will result in recording the future benefits of those leases and the related minimum lease payments on its balance sheet. The
Company has not yet begun to evaluate the specific impacts of this guidance nor has it determined the manner in which it will
adopt this guidance.
In March 2016, the FASB issued guidance simplifying the accounting for and financial statement disclosure of stock-
based compensation awards. The Company early adopted this guidance as of January 1, 2017. From January 1, 2017 onward, in
accordance with the new guidance, no excess tax benefits or tax deficiencies will be recognized in additional paid-in capital. The
Company’s existing additional paid-in capital pool balance at December 31, 2016 is $204.7 million. The Company will account
for forfeitures as they occur, rather than using an estimated forfeiture rate. The Company estimates that this change in accounting
will not result in a cumulative-effect adjustment to retained earnings as of January 1, 2017. The Company will also present the
impact of classifying excess tax benefits as an operating activity in the statement of cash flows on a prospective basis and prior
periods will not be adjusted. The adoption of the remaining amendments is not expected to have a material impact on the
Company’s consolidated financial statements.
In June 2016, the FASB issued guidance with respect to measuring credit losses on financial instruments, including trade
receivables. The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a
credit loss on financial instruments. The credit loss estimate can now reflect an entity's current estimate of all future expected
credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is
permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company
currently expects that the adoption of this guidance likely will change the way the Company assesses the collectibility of its
receivables and recoverability of other financial instruments. The Company has not yet begun to evaluate the specific impacts of
this guidance nor has it determined the manner in which it will adopt this guidance.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and cash payments in the
statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration
payments made after a business combination, proceeds from the settlement of insurance claims, proceeds
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from the settlement of corporate-owned life insurance, and distributions received from equity method investees. The guidance is
effective for public business entities for fiscal years beginning after December 15, 2017, and for interim periods within those
fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity adopts the guidance in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The guidance
must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if
retrospective application would be impracticable. The Company is currently evaluating the impact, if any, that the adoption of this
guidance will have on its consolidated statements of cash flows.
In November 2016, the FASB issued guidance to reduce diversity in practice that exists in the classification and
presentation of changes in restricted cash on the statement of cash flows. The revised guidance requires that amounts generally
described as restricted cash and restricted cash equivalents be included in with cash and cash equivalents when reconciling the
beginning of period and end of period total amounts shown on the statement of cash flows. The guidance is effective for the fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. If an entity adopts the guidance in an interim period, any adjustments should be reflected
as of the beginning of the fiscal year that includes that interim period. The guidance must be adopted on a retrospective basis. The
Company adopted this guidance as of January 1, 2017, on a retrospective basis, and all periods will be presented under this
guidance. The adoption of this new guidance will have no impact on the Company’s consolidated financial statements.
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.
Marketable
Securities
Marketable securities available for sale were as follows (in thousands):
December
31,
2016
Gross
Gross
Estimated
Amortized Unrealized Unrealized Market
Cost
$
Losses
Gains
1,201 $
6,090
7,291 $
$
— $
—
— $
Value
— $ 1,201
6,090
—
— $ 7,291
U.S.
government agencies
Commercial paper
Total
There were no marketable securities in 2015.
5.
Property
and
Equipment
Property and equipment consisted of the following as of December 31, 2016 and 2015 (in thousands):
Laboratory equipment
Office furniture and equipment
Leased equipment
Leasehold improvements
Less: Accumulated depreciation
Property and equipment, net
December
31,
2016
2015
780 $
58
159
551
1,548
(813)
735 $
518
57
—
394
969
(658)
311
$
$
Depreciation expense for the years ended December 31, 2016 and 2015, and 2014 was $154,722, $118,174 and $
189,325 , respectively and is recorded within the administrative expenses in the consolidated statements of operations. The
Company disposed of $0, $143,155, and $ 1,070,595 of fully depreciated property and equipment in 2016, 2015, and 2014,
respectively.
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6.
Other
Balance
Sheet
Details
Accrued expenses and other current liabilities consisted of the following as of December 31, 2016 and 2015 (in
thousands):
December
31,
2016
2015
Clinical and preclinical
Contract manufacturing
Compensation and benefits
Legal
Audit and tax related
Other
Financing costs
Total accrued expenses
Equipment lease, current portion
Deferred rent, current portion
Compensation and benefits
Other
Total accrued expenses and other current liabilities
7.
Commitments
and
Contingencies
$
500 $
871
754
1,328
593
1,774
243
314
376
320
183
244
655
—
3,675
4,480
79
—
7
—
12
29
78
—
$ 4,666 $ 3,694
The Company leases approximately 33,000 square feet of research and office space under a non-cancelable operating
lease expiring in 2023. The Company has an option to renew the lease for one additional five-year term. Rent expense is
recognized on a straight-line basis and was $544,504 for the year ended December 31, 2016 and $386,438 for each of the years
ended December 31, 2015 and 2014. The contractually required cash payments under this lease at December 31, 2016 are as
follows (in thousands):
2017
2018
2019
2020
2021
2022
2023
Total minimum lease payments
$
608
607
611
629
648
668
282
$ 4,053
On March 31, 2016, the Company amended a corporate development agreement with a supplier to include a minimum
purchase commitment per year. Total research and development expense related to the minimum payment was $470,000 during
the year ended December 31, 2016. There were approximately $2.3 million of future minimum payments under this commitment
at December 31, 2016.
8.
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 2016, 2015 or 2014.
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9.
Notes
Payable
and
Stock
Purchase
Warrants
Term
Notes
Payable
On June 30, 2016, the Company entered into an Amended and Restated Loan and Security Agreement with Oxford and
SVB (the “Lenders”). Pursuant to the Amended and Restated Loan and Security Agreement, the Company may potentially
borrow up to an aggregate principal amount of $30.0 million in the following four tranches: $15.0 million (“Tranche 1 Term
Loan”); $5.0 million (“Tranche 2 Term Loan”); $5.0 million (“Tranche 3 Term Loan”); and $5.0 million (“Tranche 4 Term
Loan”) (each, a “Term Loan,” and collectively, the “Term Loans”). The funding conditions for the Tranche 1 Term Loan were
satisfied as of June 30, 2016. Therefore, the Company issued secured notes to the Lenders for aggregate gross proceeds of $15.0
million (the “Notes”) on June 30, 2016. The Company used approximately $11.0 million from the proceeds from the Notes to
repay the outstanding balance under the Company’s previously existing Loan and Security Agreement with Oxford, dated as of
July 31, 2014, including the applicable final payment fee due thereunder of $1 million. The Company borrowed the Tranche 2
Term Loan in November 2016 upon the Lenders’ confirmation that the Company received positive data in its U.S. pivotal trial of
Eversense, and the Company filed a pre-market approval (“PMA”) application for Eversense in the United States with the FDA.
The Company may borrow the Tranche 3 Term Loan on or before April 30, 2017 if it completes the first commercial sale of its
second-generation transmitter in the European Union. The Company may borrow the Tranche 4 Term Loan on or before
December 31, 2017 if it borrows the Tranche 3 Term Loan, receives PMA approval from the FDA for Eversense, and achieves
trailing six-month revenue for the applicable period of measurement of at least $4.0 million. The maturity date for all Term Loans
is June 1, 2020 (the “Maturity Date”).
The Term Loans bear interest at a floating annual rate of 6.31% plus the greater of (i) 90-day U.S. Dollar LIBOR
reported in the Wall Street Journal or (ii) 0.64%, provided that the minimum floor interest rate is 6.95%, and require monthly
payments. The monthly payments initially consist of interest-only. After twelve months, the monthly payments will convert to
payments of principal and monthly accrued interest, with the principal amount being amortized over the ensuing 36 months.
However, if the Company borrows the Tranche 3 Term Loan, the interest-only period will be extended by an additional six
months, and the amortization period will be shortened to 30 months.
The Company may elect to prepay all Term Loans prior to the Maturity Date subject to a prepayment fee equal to 3.00%
if the prepayment occurs within one year of the funding date of any Term Loan, 2.00% if the prepayment occurs during the
second year following the funding date of any Term Loan, and 1.00% if the prepayment occurs more than two years after the
funding date of any Term Loan and prior to the Maturity Date.
The Amended and Restated Loan and Security Agreement contains customary events of default, including bankruptcy,
the failure to make payments when due, the occurrence of a material impairment on the Lenders’ security interest over the
collateral, a material adverse change, the occurrence of a default under certain other agreements entered into by the Company, the
rendering of certain types of judgments against the Company, the revocation of certain government approvals of the Company,
violation of covenants, and incorrectness of representations and warranties in any material respect. Upon the occurrence of an
event of default, subject to specified cure periods, all amounts owed by the Company would begin to bear interest at a rate that is
5.00% above the rate effective immediately before the event of default, and may be declared immediately due and payable by
Lenders.
Pursuant to the Amended and Restated Loan and Security Agreement, the Company also issued 10-year stock purchase
warrants to purchase an aggregate of 116,581 and 63,025 shares of common stock with an exercise price of $3.86 and $2.38 per
share, respectively, to the Lenders (see Note 10).
The Notes are collateralized by all of the Company’s consolidated assets other than its intellectual property. The Notes
also contain certain restrictive covenants that limit the Company’s ability to incur additional indebtedness and liens, merge with
other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make
certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified
transactions, as well as financial reporting requirements. The Company incurred issuance costs related to the Notes of
approximately $568,648 that are being amortized as additional interest expense over the term of the Notes using the effective
interest method. The fair value of the stock purchase warrants, which was estimated to be
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$421,840, was recorded as a discount to the Notes, which is also being amortized as additional interest expense over the term of
the Notes using the effective interest method.
At maturity (or earlier prepayment), the Company is also required to make a final payment equal to 9.00% of the
aggregate principal balances of the funded Term Loans. This fee is being accrued as additional interest expense over the term of
the Notes using the effective interest method. In the event that the Company achieves the requirements to borrow the Tranche 3
Term Loan or the Tranche 4 Term Loan, and elects not to borrow either tranche, the Company is obligated to pay the Lenders a
non-utilization fee of 2.00% of the undrawn amounts.
The following are the scheduled maturities of the Oxford and SVB notes as of December 31, 2016, assuming the
Company does not launch the second generation transmitter and borrow the Tranche 3 Term Loan by April 30, 2017, in which
case, principal payments will begin on July 1, 2017 (in thousands):
2017
2018
2019
2020
Total
$
3,889
6,667
6,667
2,777
$ 20,000
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 the Company could borrow an aggregate principal amount of up to $10.0
million from Energy Capital. During the year ended December 31, 2016, the Company borrowed an aggregate of $2.5 million
from Energy Capital under the facility, which amounts were repaid in full prior to December 31, 2016 and the facility was
terminated.
10.
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 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.
Common
Stock
At December 31, 2016, the Company had authorized 250,000,000 shares of common stock and 93,569,642 shares of
common stock were issued and outstanding.
Preferred
Stock
As of December 31, 2016 and 2015, the Company’s authorized capital stock included 5,000,000 shares and 0 shares of
undesignated preferred stock, par value $0.001 per share, respectively. No shares of preferred stock were outstanding as of
December 31, 2016 or 2015.
Stock
Purchase
Warrants
In connection with the issuance of the Notes, the Company also issued to the Lenders 10-year stock purchase warrants to
purchase an aggregate of 116,581 and 63,025 shares of common stock at an exercise price of $3.86 and $2.38 per share
respectively. The fair value of the warrants, which the Company estimated to be $421,840, was recorded as a discount to the
Notes. These warrants expire on June 30, 2026 and November 22, 2026, respectively, and are classified in equity. In connection
with the Company’s original Loan and Security Agreement with Oxford in 2014, the Company issued
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to Oxford 10-year stock purchase warrants to purchase an aggregate of 167,570 shares of common stock at an exercise price of
$1.79 per share. The fair value of the warrants, which the Company estimated to be $205,150, was recorded as a discount to the
promissory notes issued to Oxford in connection with the original Loan and Security Agreement. These warrants expire on
November 2, 2020, July 14, 2021 and August 19, 2021, and are classified in equity. The unamortized deferred financing fees and
debt discount related to the notes rollover amount will be amortized along with the deferred financing costs and the discount
created by the new issuance of the warrants over the term of the loan using the effective interest method. For the years ended
December 31, 2016 and 2015, the Company recorded amortization of discount of debt of $110,136 and $72,229, respectively,
within interest expense in the accompanying statement of operations.
Stock-Based
Compensation
In December 2015, the Company adopted the 2015 Equity Incentive Plan (the “2015 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 2015 Plan provisions. In connection with the Offering, the Company’s board of directors adopted and the Company’s
stockholders approved an Amended and Restated 2015 Equity Incentive Plan (the “amended and restated 2015 Plan”). The
amended and restated 2015 plan became effective as of the date of the pricing of the Offering. The Company’s board of directors
may terminate the amended and restated 2015 Plan at any time. Options granted under the amended and restated 2015 Plan expire
ten years after the date of grant.
Pursuant to the amended and restated 2015 Plan, the number of shares initially reserved for issuance pursuant to equity
awards was 17,251,115 shares, representing 8,000,000 shares plus up to an additional 9,251,115 shares in the event that options
that were outstanding under the Company’s equity incentive plans as of February 16, 2016 expire or otherwise terminate without
having been exercised (in such case, the shares not acquired will revert to and become available for issuance under the amended
and restated 2015 Plan). The number of shares of the Company’s common stock reserved for issuance under its 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 its common stock outstanding on December 31 of the preceding calendar year, or a
lesser number of shares as may be determined by its board of directors. As of December 31, 2016, 4,894,146 shares remained
available for grant under the amended and restated 2015 Plan. Effective January 1, 2017, by virtue of the automatic increase
described above, the total number of shares remaining available for grant under the amended and restated 2015 Plan was
increased to 8,169,083 shares.
On May 8, 1997, the Company adopted the 1997 Stock Option Plan (the “1997 Plan” and, together with the 2015 Plan,
the “Plans”), 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 1997 Plan was amended in September 2001, to clarify
certain provisions regarding the method of exercise, amendment and termination of the 1997 Plan, and the effect of changes in
capitalization of the Company. The Board of Directors, which administers the 1997 Plan, determines the number of options
granted, the vesting period and the exercise price. The Board of Directors may terminate the 1997 Plan at any time. Options
granted under the 1997 Plan expire ten years after the date of grant. The total number of shares of common stock that may be
issued pursuant to options under the 1997 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
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Securities
Issued
as
Compensation.
Subsequent to the completion of the Acquisition, the fair value of the common stock 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
2016
For
the
year
ended
December
31,
2015
years
6.5
58.99 - 61.39 %
2.30 %
1.40 -
%
0
years
6.5
54.02 -54.25 %
0.70 -1.90 %
%
0
years
2014
6.25 -6.5
55.52 -56.42 %
2.00 -2.10 %
%
0
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 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 monthly and is adjusted periodically for actual forfeitures. Pre-vesting forfeitures
are based on the Company’s historical experience for the years ended December 31, 2016 and 2015 and have not been material.
Employee stock-based compensation expense for employee granted stock options was $3.6 million, $1.4 million and
$0.5 million for the years ended December 31, 2016, 2015 and 2014 respectively of which $201,667 was classified as sales and
marketing expenses in 2016, $517,721 $462,006 and $105,465 was classified as research and development expenses and
$1,312,574, $583,653 and $433,733 was classified as administrative expenses in the accompanying consolidated statements of
operations in 2016, 2015 and 2014, respectively. Stock-based compensation expense for restricted stock awards was $1,551,600,
$387,600 and $0 for the years ended December 31, 2016, 2015 and 2014, respectively, all of which was classified as
administrative expense in the accompanying consolidated statements of operations.
As of December 31, 2016, there was $5.1 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 2.74 years. The aggregate
intrinsic value of stock options outstanding at December 31, 2016 was $16.9 million, which approximated the aggregate intrinsic
value of options vested and expected to vest as of December 31, 2016 as a result of immaterial pre-vesting forfeitures. The total
fair value of options that vested during 2016 and 2015 were approximately $1.5 million and $0.8 million, respectively.
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Stock option activity under the Plans during the years ended December 31, 2016 and 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 granted
Options exercised
Options canceled/forfeited
Options outstanding as of December 31, 2016
Options vested and expected to vest as of December 31, 2016
Number
of
Shares
in
(in
thousands)
Weighted-
Average
Exercise
Price
8,393 $
1,540 $
(121) $
(561) $
9,251 $
2,464 $
(269) $
(57) $
11,389 $
0.53
1.90
0.51
0.50
0.74
3.09
0.60
1.43
1.26
11,389 $
1.26
Outstanding stock options at December 31, 2016 have a weighted-average remaining contractual life of 7.2 years, which
approximates the weighted-average remaining contractual life of the options vested and expected to vest at December 31, 2016,
and will vest ratably over a minimum period of two years. At December 31, 2016, there were 6,134,676 exercisable stock options
with a weighted-average exercise price of $0.75 and a weighted-average remaining contractual life of 6.0 years. The aggregate
intrinsic value of the options currently exercisable at December 31, 2016 was $11.9 million. For the years ended
December 31, 2016 and 2015, 268,670 and 121,250 options were exercised, respectively, with an aggregate intrinsic value at the
time of exercise of $669,997 and $123,224, 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 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, 2016 and
2015 was $1.11 and $0.62 per share, respectively. The weighted average grant-date fair value of stock option awards granted in
2016 and 2015 was $1.76 and $1.02 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, 2016 were $0.77, $0.40 and $1.04 per share,
respectively.
Restricted
Stock
Awards
The Company issued 398,525 shares of restricted stock to the chairman of the Company’s board of directors (the
“Chairman”) in December 2015, half of which were vested upon grant and half of which vested upon the completion of the
Offering, pursuant to an agreement between the Company and the Chairman, as described in greater detail in Note 12. In June
2016, the Company issued a fully vested restricted stock award for 300,000 shares of common stock to the Chairman to settle the
outstanding obligations under the agreement. The Company recognized stock-based compensation expense of $1.2 million in the
year ended December 31, 2016, related to the grant and vesting of this restricted stock.
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A summary of the Company’s Restricted Stock Awards as of December 31, 2016 is presented below:
Restricted
Stock
Awards
nonvested
at
December
31,
2015
Granted
Vested
Cancelled and forfeited
Restricted
Stock
Awards
nonvested
at
December
31,
2016
Vested
and
expected
to
vest
at
December
31,
2016
Number
of
Shares
(in
thousands)
199
300
(499)
—
—
—
In August 2015, the Company completed a private offering of 2,711,926 shares of Series E Stock at a purchase price of
$3.93 per share for 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.
Prior to their conversion to common stock in connection with the Acquisition, all series of preferred stock were equity
classified. The holders of preferred stock were entitled to receive dividends as may be declared by the board of directors. The
Company did not declare or otherwise recognize any preferred stock dividends during the years ended December 31, 2016 and
2015.
Pursuant to the terms of the Acquisition (i) all outstanding shares of common stock of Senseonics, Incorporated $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, Incorporated 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 or preferred stock of Senseonics, Incorporated were
exchanged for or replaced with options and warrants to acquire shares of the Company’s common stock using the same exchange
ratio. As a result, the Company did not have any shares of preferred stock issued or outstanding as of December 31, 2016 or 2015.
11.
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 tax effect of temporary
differences that give rise to the net deferred income tax asset at December 31, 2016 and 2015 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,
2016
2015
$
$
56,425 $
20,483
5,533
1,290
27
83,758
(83,758)
— $
40,617
19,546
4,698
777
(6)
65,632
(65,632)
—
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Table of Contents
The increase in valuation allowance is primarily due to net losses and credits incurred in 2016, 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 beginning in the current year. At December 31, 2016, the Company had NOL carryforwards of $143.1 million and had
research and experimental credit carryforwards of $6.9 million. These carryforwards will expire in varying amounts between
2018 and 2036. 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, 2016, 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
Year
Ended
December
31,
2015
34.00 %
5.45
2.01
(1.05)
(40.41)
2016
34.00 %
5.45
1.82
0.07
(41.34)
0.00 %
0.00 %
2014
34.00 %
5.39
3.05
(1.20)
(41.24)
0.00 %
A breakdown of the Company’s uncertain tax position during 2016, 2015, and 2014 is as follows (in thousands):
2016
2015
2014
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
$ 1,174 $ 1,025 $
922
(12)
115
—
—
$ 1,383 $ 1,174 $ 1,025
9
200
—
—
—
149
—
—
As of December 31, 2016, 2015, and 2014 the Company had uncertain tax positions totaling $1.4 million, $1.2 million,
and $1.0 million, respectively. The Company did not incur any penalties or interest payable to taxing authorities in 2016, 2015 or
2014.
The Company’s U.S. Federal and state income tax returns from 1998 to 2015 remain subject to examination by the tax
authorities. The Company’s prior tax 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.
12.
Related
Party
Transactions
In December 2015, the Chairman received a restricted stock award of 398,525 shares of common stock pursuant to an
agreement entered into with the Company (the “December Agreement”) that superseded a pre-existing agreement. One half of the
shares covered by this restricted stock award were fully vested on grant. The remainder vested in full upon the completion of the
Company’s Offering, which was the specific performance condition of the award. Additionally, as a result of the completion of
the Offering, pursuant to the December Agreement, the Chairman was entitled to receive estimated compensation in the amount
of $785,000. In June 2016, the Chairman received a restricted stock award of 300,000 shares of common stock pursuant to an
agreement entered into with the Company that
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superseded the December Agreement and satisfied the outstanding compensation obligation under the December Agreement. All
of the shares covered by this restricted stock award were fully vested on date of grant.
As described in Note 9, on December 7, 2015, the Company entered into a note purchase agreement with a stockholder,
Energy Capital, pursuant to which the Company could borrow an aggregate principal amount of up to $10.0 million from Energy
Capital. During the year ended December 31, 2016, the Company borrowed an aggregate of $2.5 million from Energy Capital
under the facility, which was repaid in full in 2016 and the facility was terminated.
13.
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 the Company’s 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 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, 2016 and 2015 (in thousands):
December
31,
2016
Money market funds
U.S. government agencies
Commercial paper
Money market funds
Total
Level
1
$ 10,601 $ 10,601 $
Level
2 Level
3
—
— $
— 1,201
—
— 6,589
—
1,201
6,589
December
31,
2015
Total
$ 3,938 $ 3,938 $
Level
1 Level
2 Level
3
—
— $
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.
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Table of Contents
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
2016, 2015, and 2014.
14.
Selected
Quarterly
Financial
Data
(Unaudited)
Quarterly financial information for fiscal 2016 and 2015 is presented in the following table, in thousands, except per
share data:
2016:
Revenue
Gross profit
Operating expenses
Operating loss
Net loss
Basic and diluted net loss per share (1)
2015:
Revenue
Gross profit
Operating expenses
Operating loss
Net loss
Basic and diluted net loss per share (1)
March
31
June
30
September
30
December
31
For
the
Quarter
Ended
$
$
$
$
$
$
$
$
$
$
$
$
19 $
— $
(15) $
— $
10,928 $
11,535 $
(10,928) $ (11,550) $
(11,216) $ (11,861) $
(0.13) $
(0.15) $
37 $
(77) $
10,435 $
(10,512) $
(10,887) $
(0.12) $
15
$
23
$
15 $
23 $
6,931 $
5,414 $
(5,399) $ (6,908) $
(5,693) $ (7,185) $
(3.68) $
(2.94) $
—
$
— $
8,315 $
(8,315) $
(8,585) $
(4.39) $
276
(236)
9,207
(9,443)
(9,965)
(0.11)
—
—
8,190
(8,190)
(8,414)
(0.39)
(1) Net loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly per-share calculations will not
necessarily equal the annual per share calculation.
15.
Litigation
From time to time, the Company is subject to litigation and claims arising in the ordinary course of business. The
Company accrues for litigation and claims when it is probable that a liability has been incurred and the amount of loss can be
reasonably estimated. The Company has evaluated claims in accordance with the accounting guidance for contingencies that it
deems both probable and reasonably estimable and, accordingly, has recorded aggregate liabilities for all claims of approximately
$40,000 and $0 as of December 31, 2016 and 2015, respectively. These amounts are reported on the consolidated balance sheets
within accrued and other liabilities and other noncurrent liabilities. The Company believes, based upon information it currently
possesses and considering established accruals for liabilities and its insurance coverage, that the ultimate outcome of these
proceedings and actions is unlikely to have a material effect on the Company's consolidated financial statements.
16.
Subsequent
Events
Events occurring after December 31, 2016 and through the date that these consolidated financial statements were issued
were evaluated to ensure that any subsequent events that met the criteria for recognition have been included.
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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, 2016, 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, 2016, 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, 2016 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
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2016.
This Annual Report does not include an attestation report of our independent registered public accounting firm due to a
transition period established by the rules of the SEC for newly public companies.
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 22, 2017. 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.
Steven Edelman, M.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
55 President, Chief Executive Officer and Director
63 Chief Financial Officer, Secretary and Treasurer
44 Chief Operating Officer
52 Vice President, Global Sales and Marketing
54 Chief Medical Officer
55 Chairman of the Board of Directors
74 Director
61 Director
58 Director
39 Director
63 Director
46 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
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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 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 Chief Operating Officer in January 2017. Dr. Jain previously served as our Vice President
Operations, Quality and Regulatory from December 2015 to January 2017. 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.
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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 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., Proteostasis Therapeutics, Inc. and Roka Bioscience, 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.), Loxo Oncology, Inc., Supernus Pharmaceuticals, Inc., Targacept, Inc. and Zosano Pharma
Corporation. 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.
Steven
Edelman,
M.D.
Dr. Edelman was elected to our board of directors in September 2016. Dr. Edelman has served as a Professor of
Medicine in the Division of Endocrinology, Diabetes & Metabolism at the University of California, San Diego and the Veterans
Affairs Healthcare System of San Diego since 2001. He also currently serves as a director of Taking Control of Your Diabetes, a
non-profit organization promoting patient education, motivation and self-advocacy that he founded in 1995, and the Diabetes
Care Clinic VA Medical Center. Dr. Edelman received his B.A. and his M.S. in Biology from the University of California, Los
Angeles and his M.D. from the University of California, Davis. Our board of directors believes that Dr. Edelman’s substantial
diabetes industry experience qualifies 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 March 2016, Mr. Fiorentino has served as Chairman
and Chief Executive Officer of TerSera Therapeutics, a specialty pharmaceutical company. Previously, from August 2013 to
January 2016, Mr. Fiorentino has served as Chairman and Chief Executive Officer of Crealta Pharmaceuticals, a specialty
pharmaceutical company.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
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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.
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. and several private companies. Mr. Roeder previously served
on the board of directors of TriVascular Technologies, Inc. from 2008 to 2016. 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
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. Based solely on our review of copies of such forms that we have received, or written
representations from our reporting persons, we believe that during the fiscal year ended December 31, 2016, all of our reporting
persons complied with all applicable SEC filing requirements under Section 16(a) of the Exchange Act.
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 is 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
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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 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,
2015
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, 2016 were:
Timothy T. Goodnow, Ph.D., President and Chief Executive Officer;
·
· R. Don Elsey, Chief Financial Officer; and
·
Lynne E. Kelley, M.D., FACS Chief Medical Officer.
We refer to these executive officers in this Annual Report as our named executive officers.
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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, 2016 and 2015.
Name
and
Principal
Position
Timothy T. Goodnow
President and Chief Executive Officer
R. Don Elsey
(3)
Chief Financial Officer
Lynne E. Kelley
( 4)
Chief Medical Officer
Year
2016
2015
2016
2015
2016
Salary
($)
475,998
365,791
355,625
286,667
365,000
Option
Awards
($)
(1)
586,871
231,704
472,275
141,229
565,507
(2)
Non-Equity
Incentive
Plan
Compensation
($)
318,150
152,718
153,300
85,577
134,138
Total
($)
1,381,019
750,213
981,200
513,473
1,064,645
(1) The amounts include the full grant date fair value for awards granted during the indicated year. The grant date fair value was
computed in accordance with ASC Topic 718, Compensation—Stock
Compensation
. Unlike the calculations contained in
our audited consolidated 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 10 to our audited consolidated financial statements included in
this Annual Report.
(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. Kelley became an executive officer of Senseonics, Incorporated in January 2016 and amounts represent compensation
earned since that date.
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.
Our compensation committee has historically determined our executives' compensation. Our compensation committee
typically reviews and discusses 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, our compensation committee then approves the
compensation of each executive officer after discussions without members of management present.
Our compensation committee has engaged Towers Watson, a compensation consultant, and reviewed Towers Watson’s
compensation data for executives at similarly sized medical device companies when determining executive compensation.
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Table of Contents
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 2015, 2016 and 2017. The 2015 base salaries became effective on January 1,
2015, the 2016 base salaries became effective on March 16, 2016, and the 2017 base salaries became effective on January 1, 2017
for all of the named executive officers.
Name
Timothy T. Goodnow
R. Don Elsey
Lynne E. Kelley
Annual
Bonus
2015
2016
Base
Salary Base
Salary Base
Salary
($)
2017
($)
($)
365,791
320,000
N/A
505,000
365,000
365,000
520,000
376,000
370,000
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 2015, 2016 and 2017.
Name
Timothy T. Goodnow
R. Don Elsey
Lynne E. Kelley
Target
Bonus
Target
Bonus
Target
Bonus
(as
a
%
of
(as
a
%
of
(as
a
%
of
Base
Salary)
Base
Salary)
Base
Salary)
(%)
2015
(%)
2016
(%)
2017
50
35
N/A
60
40
35
75
50
35
For 2015, bonuses were based on Senseonics, Incorporated's achievement of specified corporate goals, including
completing enrollment in the European pivotal clinical trial, receiving IDE approval for the U.S. pivotal clinical trial, obtaining
CE Mark approval for Eversense, commercializing Eversense in at least one European market and completing a successful
surveillance audit. Based on the level of achievement, the Senseonics, Incorporated compensation committee awarded Dr.
Goodnow and Mr. Elsey 84% of their target bonuses based on their 2015 base salary, respectively.
For 2016, bonuses were based on our achievement of specified corporate goals, including submitting regulatory approval
documents related to our U.S. clinical trial, increasing manufacturing capacity, completing the enrollment of our European pivotal
clinical trial, demonstrating an increase in sensor manufacturing capacity, completing development of the second generation
transmitter, launching Eversense in multiple European markets, completing a successful surveillance audit, and managing the
total spend of the organization within the approved budget. Based on the level of achievement, our compensation committee
awarded each of Dr. Goodnow, Mr. Elsey and Dr. Kelley 105% of their target bonuses based on their 2016 base salary.
These actual bonus amounts are reflected in the "Non-Equity Incentive Plan Compensation" column of the Summary
Compensation Table above.
Long-Term
Incentives
Our 1997 stock option plan, or the 1997 plan, authorized us, and the amended and restated 2015 equity incentive plan, or
the 2015 plan, authorizes us to make grants to eligible recipients of non-qualified stock options and incentive stock options.
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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 July 2015, the Senseonics, Incorporated board of directors awarded to Dr. Goodnow and Mr. Elsey options to
purchase 220,237 and 134,240 shares of our common stock, respectively. Each of these options was originally issued with an
exercise price of $1.95 per share.
In April 2016, our board of directors awarded Dr. Kelley an option to purchase 334,996 shares of our common stock,
with an exercise price of $2.97 per share. 83,750 shares underlying this option vested on January 4, 2017, and the remainder of
the shares vest in 36 equal monthly installments through January 4, 2020. In April 2016, our board of directors also awarded to
Dr. Goodnow and Mr. Elsey options to purchase 347,652 and 279,767 shares of our common stock, respectively. Each of these
options was issued with an exercise price of $2.97 per share. The shares underlying the options granted to Dr. Goodnow and Mr.
Elsey vest in 48 equal monthly installments. All shares subject to vesting under these option grants will vest in full and become
immediately exercisable upon the closing of a change in control of our company.
Outstanding
Equity
Awards
at
End
of
2016
The following table provides information about outstanding Company Options held by each of our named executive
officers at December 31, 2016. All of these options were granted under the 1997 plan or the 2015 plan. None of our named
executive officers held any other stock awards at the end of 2016.
Name
Timothy T. Goodnow
R. Don Elsey
Lynne E. Kelley
(1)
Options
(#)
Number
of
Number
of
Securities
Securities
Underlying Underlying
Unexercised Unexercised
Options
(#)
Exercisable Unexercisable
2,038,610
—
589,093
—
267,734
78,001
57,942
298,019
47,453
46,628
—
196,640
142,235
289,710
352,205
86,787
233,139
334,996
(2)
(3)
(5)
(4)
(3)
(5)
(6)
Option
Expiration
Date
Option
Exercise
Price
($)
0.54 12/2/2020
0.54 2/28/2021
0.54
6/4/2024
1.95 7/22/2025
2.97 4/12/2026
0.54 12/4/2024
1.95 7/22/2025
2.97 4/12/2026
2.97 4/12/2026
(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 18 equal monthly installments, subject to the officer's continued service
through each applicable vesting date.
(3) The unvested shares underlying this option vest in 31 equal monthly installments, subject to the officer's continued service
(4) The unvested shares underlying this option vest in 26 equal monthly installments, subject to the officer's continued service
through each applicable vesting date.
through each applicable vesting date.
(5) The unvested shares underlying this option vest in 40 equal monthly installments, subject to the officer's continued service
through each applicable vesting date.
(6) The unvested shares underlying this option vest as to 25% of the shares in January 2017 and the remaining shares vest in 36
equal monthly installments, subject to the officers continued service through each applicable vesting date.
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Table of Contents
Employment
Agreements
Below are descriptions of employment agreements that our named executive officers entered into with us or Senseonics,
Incorporated. We assumed the employment agreements with Dr. Goodnow and Mr. Elsey 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
Dr.
Kelley
In April 2016, we entered into an employment agreement with Dr. Kelley that governs the terms of her employment with
us. Pursuant to the agreement, Dr. Kelley is entitled to an annual base salary of $365,000 and is eligible to receive an annual
performance bonus of up to 35% of her base salary, as determined by our board of directors. If Dr. Kelley’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 Dr. Kelley’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 Dr. Kelley’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 public offering, in February 2016, our board of directors adopted and our stockholders approved an
Amended and Restated 2015 Equity Incentive Plan, or the amended and restated 2015 plan. The amended and restated 2015 plan
became effective on March 17, 2016.
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. Pursuant to the amended and restated 2015 plan, which become effective upon the pricing of our public offering,
the number of shares of common stock that may be issued pursuant to equity awards was initially 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. As of December 31, 2016, a total of 4,894,146 shares were available for future
issuance and options to purchase 11,354,418 shares of common stock at a weighted average exercise price of $1.27 per share were
outstanding. As of January 1, 2017, the number of shares of common stock that may be issued under the amended and restated
2015 plan was automatically increased by 3,274,937 shares, representing 3.5% of the total number of shares of common stock
outstanding on December 31, 2016, increasing the number of shares of common stock remaining available for issuance under the
amended and restated 2015 plan to 8,169,083 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.
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
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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.
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.
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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, 2016, 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 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
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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 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.
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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 and our stockholders approved a 2016 Employee Stock Purchase Plan,
or our 2016 ESPP. The 2016 ESPP became effective on March 17, 2016. 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 was initially 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, 2017 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. As of January 1, 2017, the number of shares of common stock that may be issued under the 2016 ESPP
was automatically increased by 935,696 shares, representing 1.0% of the total number of shares of common stock outstanding on
December 31, 2016, increasing the number of shares of common stock available for issuance under the amended and restated
2015 plan to 1,735,696 shares. 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.
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.
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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
In February 2016, our board of directors approved a non-employee director compensation policy which became effective
upon the completion of our public offering. Under this director compensation policy, we pay each of our 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 receives 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 is prorated for any portion of
such quarter that the director is not serving on our board of directors. No retainers were paid in respect of any period prior to the
completion of our 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
$ 35,000 $
7,500
6,000
4,000
Chairman
Additional
Annual
Service
Retainer
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 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 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 $106,500. The shares subject to each such stock option will vest on the one year anniversary of the
grant date, subject to the director’s continued service as a director. The exercise price of these options will equal the fair market
value of our common stock on the date of grant.
This policy is intended to provide a total compensation package that enables us to attract and retain qualified and experienced
individuals to serve as directors and to align our directors’ interests with those of our stockholders.
On June 20, 2016, we entered into a letter agreement with Mr. DeFalco, pursuant to which we granted Mr. DeFalco a
fully vested restricted stock award under the 2015 plan for 300,000 shares of our common stock in full satisfaction of our
remaining obligations under that certain Transaction Bonus Agreement, dated December 4, 2015, by and between Senseonics,
Incorporated and Mr. DeFalco. For additional information, see “Certain Relationships and Related Party Transactions, and
Director Independence – Letter Agreement with Stephen P. DeFalco.”
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Director
Compensation
Table
The following table sets forth information regarding compensation earned during the year ended December 31, 2016 by
our non-employee directors for service on the board of directors from January 1, 2016 to December 31, 2016. Board and
committee retainers were prorated for the period from March 17, 2016 to December 31, 2016. Timothy T. Goodnow, our
President and Chief Executive Officer, also served on our board of directors, but did not receive any additional compensation for
his service as a director and therefore is not included in the table below. Dr. Goodnow's compensation as an executive officer is
set forth below under "Executive Compensation—Summary Compensation Table."
(3)
Name
Stephen P. DeFalco
(3)
M. James Barrett
Edward J. Fiorentino
Justin Klein
Douglas S. Prince
Douglas A. Roeder
Steven Edelman
(3)
(5)
(3)
(4)
(4)
(2)
(1)
($)
Stock
Option
Awards
Awards
Fees
Earned
or
Paid
in
Cash
($)
($)
46,969 1,164,000 107,171
— 107,171
29,250
— 107,171
36,375
— 107,171
36,375
— 107,171
43,313
— 107,171
38,700
— 212,498
28,250
Total
($)
1,318,140
136,421
143,546
143,546
150,484
145,871
240,748
(1) This column reflects the full grant date fair value of restricted stock granted during the year as measured pursuant to ASC
Topic 718 as stock-based compensation in our consolidated financial statements. The restricted stock was granted to Mr.
DeFalco was in satisfaction of our obligation to make a cash payment upon the completion of our public offering pursuant to
the Transaction Bonus Agreement, dated December 4, 2015, by and between Senseonics, Incorporated and Mr. DeFalco, as
described in “Certain Relationships and Related Party Transactions, and Director Independence – Letter Agreement with
Stephen P. DeFalco.” Unlike the calculations contained in our consolidated 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 10 to
our audited consolidated financial statements included in this Annual Report.
(2) This column reflects the full grant date fair value for stock options granted during the year as measured pursuant to ASC
Topic 718 as stock-based compensation in our consolidated financial statements. Unlike the calculations contained in our
consolidated 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 10 to our audited consolidated financial statements included in this Annual
Report.
(3) As of December 31, 2016, this director held options to purchase 54,629 shares of our common stock.
(4) As of December 31, 2016, this director held options to purchase 138,529 shares of our common stock.
(5) As of December 31, 2016, Dr. Edelman held options to purchase 94,599 shares of our common stock.
Compensation
Committee
We have a separately designated standing compensation committee. The compensation committee is composed of three
directors: Mr. Roeder, Dr. Klein and Mr. Fiorentino. Mr. Roeder serves as the chairman of the committee. All members of the
compensation committee are independent, as defined in NYSE-MKT listing rules, are non-employee directors as defined in Rule
16b-3 under the Exchange Act and are outside directors, as defined in Section 162(m) of the Internal Revenue Code of 1986, as
amended. Our board of directors has determined that the composition of our compensation committee meets the criteria for
independence under, and the functioning of our compensation 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 compensation committee.
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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,
2016 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.
This table is based upon information supplied by our named executive officers, directors and principal stockholders and
a review of Schedule 13G and Schedule 13D filings with the Securities and Exchange Commission. 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 93,569,642 shares of common stock outstanding as of December 31, 2016, adjusted as required by the
rules promulgated by the SEC.
Name
of
Beneficial
Owner
Principal
Stockholders:
(2)
Entities affiliated with New Enterprise Associates, Inc.
HealthCare Ventures VI, L.P.
Entities affiliated with Delphi Ventures
(4)
Roche Finance Ltd.
Energy Capital, LLC
SBLE, LLC
(3)
(6)
(5)
(1)
Named
Executive
Officers
and
Directors:
(7)
(9)
(8)
Timothy T. Goodnow, Ph.D.
(8)
R. Don Elsey
Lynne E. Kelley
M. James Barrett, Ph.D.
Peter Justin Klein, M.D., J.D.
Stephen P. DeFalco
Edward J. Fiorentino
Douglas S. Prince
Douglas A. Roeder
Steven Edelman, M.D.
All current directors and executive officers as a group (12 persons)
(11)
(10)
(8)
(3)
(8)
(8)
Number
of
Shares
Beneficially
Owned
Percentage
of
Shares
Beneficially
Owned
28,223,900
6,099,436
10,118,876
8,042,414
8,013,810
5,907,197
3,326,169
443,063
92,811
16,545,189
6,683
698,525
83,900
83,900
10,118,876
13,319
32,364,555
29.6 %
6.5
10.8
8.5
8.6
6.3
3.4
*
*
17.5
*
*
*
*
10.8
*
32.5
(12)
* Represents beneficial ownership of less than 1%.
(1) Consists of (a) 14,818,985 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) 8,949,292 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, and (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. 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
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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. This information has been obtained from a Schedule 13D filed on
April 4, 2016 by NEA 10, NEA 9, NEA VII, Partners 10, Partners 9, Partners VII, M. James Barrett, Peter J. Barris and Scott
D. Sandell. 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 5,506,773 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. This information has been obtained from a Schedule 13G
filed on March 28, 2016 by HealthCare VI, HealthCare Partners VI, L.P., Drs. Cavanaugh and Mirabelli and Messrs.
Werner, Littlechild and Lawlor. 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, L.L.C., 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. This information has been obtained from a Schedule 13G filed on
February 8, 2016 by Delphi VIII, Delphi Bio, DMP VIII, Douglas A. Roeder, James J. Bochnowski, David L. Douglass and
Deepika R. Pakianathan . The address of each of the persons and entities affiliated with Delphi Ventures is 160 Bovet Rd.,
Suite 408, San Mateo, CA 94402.
(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. This information has been obtained from a Schedule 13G filed on February 7, 2017 by Roche Holding Ltd
and Roche Finance Ltd. The principal business address of Roche Finance Ltd is Grenzacherstrasse 122, 4070 Basel,
Switzerland.
(5) 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.
(6) 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.
(7) Consists of (a) 205,725 shares of common stock, (b) 27,928 shares of common stock underlying immediately exercisable
warrants and (c) 3,092,516 shares of common stock underlying options that are exercisable within 60 days of December 31,
2016.
(8) Consists of shares of common stock underlying options that are exercisable within 60 days of December 31, 2016.
(9) 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) 14,818,985 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.
(10) Consists of (a) 3,892 shares of common stock and (b) 2,791 shares of common stock underlying immediately exercisable
warrants.
(11) Consists of 698,525 shares of common stock.
(12) Consists of (a) 26,492,771 shares of common stock, (b) 1,110,155 shares of common stock underlying immediately
exercisable warrants and (c) 4,761,629 shares of common stock underlying options that are exercisable within 60 days of
December 31, 2016.
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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, 2016.
Plan
Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security
holders
Total
(a)
17,251,115 $
(b)
—
17,251,115
Item
13.
Certain
Relationshi
ps
and
Related
Party
Transactions,
and
Director
Independence
Weighted-average
Number
of
securities
to
be
issued
upon
exercise price
of
outstanding
of
outstanding
options,
warrants
and
rights
warrants
and
rights
exercise
options,
Number
of
securities
remaining
available
for
future
issuance
under
equity
compensation
plans
(excluding
securities
reflected
in
column
(a))
(c)
1.86
—
4,894,146
—
4,894,146
There have been no transactions since January 1, 2016 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 as
set forth below and the compensation arrangements which are described in this Annual Report under “Executive Compensation.”
Participation
in
Public
Offering
Entities affiliated with New Enterprise Associates, Delphi Ventures, HealthCare Ventures, Energy Capital, LLC, and
SBLE, LLC, each of which is a holder of more than 5% of our common stock, purchased an aggregate of 2,631,578 shares,
1,228,070 shares, 456,140 shares, 1,578,947 and 877,193 shares, respectively, of our common stock in our public offering. All
shares were purchased at the public offering price to the public of $2.85 per share.
Registration
Rights
Agreement
We have entered into a registration rights agreement with certain of our 5% stockholders.
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
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on grant. The remainder would 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 would 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. Upon the completion of our public offering, which was a qualified
financing, the remaining unvested shares vested immediately in full.
In June 2016, we entered into a letter agreement with Stephen P. DeFalco. Under the agreement, Mr. DeFalco received a
fully vested restricted stock grant of 300,000 shares of our common stock in lieu of the cash payment required by, and in full
satisfaction of our remaining obligations under, the December 2015 agreement.
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 could lend us an aggregate principal amount of up
to $10.0 million, subject to specified conditions. During the year ended December 31, 2016, we borrowed an aggregate of $2.5
million from Energy Capital, LLC. We repaid these borrowings in full with a portion of the proceeds of our public offering prior
to December 31, 2016, and the Note Purchase Agreement was terminated. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness."
Indemnification
Agreements
Our amended and restated certificate of incorporation contains provisions limiting the liability of directors, and our
amended and restated bylaws provides 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 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.
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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 party 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
Our shares are listed on the NYSE-MKT, a national securities exchange system that has requirements that a majority of
the board of directors be independent. 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 review, our board of directors has determined that
Messrs. DeFalco, Fiorentino, Prince and Roeder and Drs. Barrett, Edelman and Klein, representing seven of our eight 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, 2016 and 2015 by our
principal accountants. All such fees described below were approved by the audit committee.
2016
2015
Audit fees
Tax Fees
Total
$ 860,689 $ 378,752
25,000
$ 879,189 $ 403,752
18,500
(1)
(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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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.
Item
16.
Form
10-K
Summary.
Not applicable.
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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 23, 2017
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 23, 2017
February 23, 2017
/s/ Stephen P. DeFalco
Stephen P. DeFalco
/s/ M. James Barrett, Ph.D.
M. James Barrett, Ph.D.
/s/ Steven Edelman, M.D.
Steven Edelman, M.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 23, 2017
Director
Director
Director
Director
Director
Director
124
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
Table of Contents
EXHIBIT
INDEX
Exhibit
Number
Description
of
Document
3.1 Amended and Restated 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. 001-37717) filed on March 23, 2016).
3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s
Current Report on Form 8-K (File No. 001-37717) filed on March 23, 2016).
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).
10.6+ 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).
10.6.1+ Amended and Restated 2015 Equity Incentive Plan, (incorporated by reference to Exhibit 10.7 to the Registrant’s
Registration Statement on Form S-8 (File No. 333-210586) filed on April 4, 2016).
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).
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).
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Table of Contents
Exhibit
Number
Description
of
Document
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).
10.14.2 Third Amendment to Loan and Security Agreement, by and among Oxford Finance, LLC, Senseonics, Incorporated
and Senseonics Holdings, Inc. (incorporated by reference to Exhibit 10.14.2 to Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 333-208984) filed on March 14, 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# 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).
10.20+ Form of 2016 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.10 to the Registrant’s
Registration Statement on Form S-8 (File No. 333-210586) filed on April 4, 2016).
10.21+ Non-Employee Director Compensation Policy.
10.22 Letter Agreement, by and among the Registrant, Senseonics, Incorporated and Stephen P. DeFalco, dated June 20,
2016 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-
37717) filed on June 21, 2016) .
10.23 Restricted Stock Award Grant Notice and Restricted Stock Award Agreement, by and between the Registrant and
Stephen P. DeFalco, dated June 20, 2016 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K (File No. 001-37717) filed on June 21, 2016) .
10.24# Distribution Agreement, by and among Senseonics, Incorporated, Roche Diagnostics International AG and Roche
Diabetes Care GmbH, dated as of May 24, 2016 (incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q (File No. 001-37717) filed on August 9, 2016).
10.25 Amended and Restated Loan and Security Agreement, by and among the Registrant, Senseonics, Incorporated,
Oxford Finance LLC and Silicon Valley Bank, dated as of June 30, 2016 (incorporated by reference to Exhibit 10.4
to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37717) filed on August 9, 2016).
10.26 Form of Warrant to Purchase Stock issued by the Registrant to Oxford Finance LLC and Silicon Valley Bank, dated
as of June 30, 2016 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q
(File No. 001-37717) filed on August 9, 2016).
10.27 Form of Secured Promissory Note issued by the Registrant to Oxford Finance LLC and Silicon Valley Bank, dated
as of June 30, 2016 (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q
(File No. 001-37717) filed on August 9, 2016).
10.28*# Amendment to Distribution Agreement, by and among Senseonics, Incorporated, Roche Diagnostics International
AG and Roche Diabetes Care GmbH, dated as of November 28, 2016.
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Table of Contents
Exhibit
Number
Description
of
Document
10.29* Employment Agreement by and between the Registrant and Lynne E. Kelley, dated as of April 22, 2016.
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).
23.1* Consent of Ernst & Young LLP, independent registered public accounting firm.
23.2* Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
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.
32.1* † 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 herewith 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.
127
EXHIBIT
10.28
AMENDMENT
TO
DISTRIBUTION
AGREEMENT
This Amendment to Distribution Agreement (“ Amendment
”) is effective as of November 28, 2016
(the “ Amendment
Effective
Date
”), by and between Roche Diagnostics International AG, Basel Branch
Diabetes Care, with offices located at Peter Merian-Weg 4, 4052 Basel, Switzerland (“ Roche
Diagnostics
”)
and Roche Diabetes Care GmbH, with offices located at Sandhofer Strasse 116, 68305 Mannheim, Germany (“
Roche
Diabetes
” and collectively with Roche Diagnostics, “ Roche
”) and Senseonics Incorporated, with
offices located at 20451 Seneca Meadows Parkway, Germantown, MD 20876‑7005, USA (“ Senseonics
”).
Roche and Senseonics are sometimes referred to herein individually as a “ Party
” and collectively as the “
Parties.
”
WHEREAS, Roche and Senseonics are parties to that certain Distribution Agreement dated May 23,
2016 (the “ Agreement
”); and
WHEREAS, the Parties desire to amend the Agreement in accordance with Section 11.11 thereof;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained in this
Amendment, the Parties agree as follows:
1.
The second and third sentences of Section 10.1 are hereby deleted and replaced with the following:
Unless terminated earlier in accordance with the terms hereof, this Agreement shall
expire on December 31, 2018. Upon agreement by the Parties to the Minimum
Requirement for 2019 (as described in Exhibit 4), this Agreement shall expire on
December 31, 2019.
2.
3.
4.
Exhibit
3
to the Agreement is hereby deleted in its entirety and replaced with the Exhibit 3 attached hereto.
Exhibit
4
to the Agreement is hereby deleted in its entirety and replaced with the Exhibit
4
attached hereto.
Except as expressly amended hereby, the terms and conditions of the Agreement shall remain unchanged and in
full force and effect. In the event of any conflict between the terms of this Amendment and the terms of the
Agreement, the terms of this Amendment shall govern. The amendments made herein shall be effective as of
the Amendment Effective Date. Capitalized terms used in this Amendment that are not otherwise defined
herein shall have the same meanings as such terms are given in the Agreement. For clarity, any cross-references
to Agreement Sections refer to those Agreement Sections as amended by this Amendment. This Amendment
may be executed in counterparts, each of which shall be deemed an original but all of which shall be considered
one and the same instrument.
[Signatures
are
on
next
page]
– 1 –
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE
INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS
EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
IN WITNESS WHEREOF, each of the Parties has caused this Amendment to be executed by its duly
authorized representative as of the Amendment Effective Date.
Senseonics Incorporated
/s/ Tim Goodnow
By:
Name: Tim Goodnow
Title: President & CEO
Roche Diagnostic International AG
Basel Branch Diabetes Care
/s/ A. Pedrazzetti
By:
Name: A. Pedrazzetti
Title: Head Bus. Dev./Roche Diabetes Care
/s/ Illegible
Illegible
Illegible
Roche Diabetes Care GmbH
/s/ Illegible
By:
Name: Illegible
Illegible
Title:
/s/ P. Hoffman
P. Hoffmann
Legal Counsel
– 2 –
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE
INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS
EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT
3
Territory
Europe, Middle East and Africa (as listed below), excluding Sweden, Norway, Denmark, Finland and
Israel from this amendment.
For clarity, the Parties acknowledge and agree that for all countries listed below, SENSEONICS AND
ROCHE must agree in advance of any commitment to enter the market (where and when). ROCHE shall have
the exclusive right, but not the obligation, to distribute the Products in the Territory.
MIDDLE
EAST
Bahrain
Benin
Egypt
Iran
Iraq
Jordan
Kuwait
Lebanon
Libya
Oman
Palestine
Qatar
Saudi Arabia
Sudan
Syna
Turkey
United Arab Emirates
Yemen
EUROPE
Albania
Andorra
Austria
Belarus
Belgium
Bosnia and Herzegovina
Bulgaria
Croatia
Cyprus
Czech Republic
Estonia
Faroe islands
Franca
Georgia
Germany
Gibraltar
Greece
Guernsey
Hungary
Iceland
Ireland
Isle Of Man
Italy
Jersey
Latvia
Liechtenstein
Lithuania
Luxembourg
Macedonia
Malta
Moldova
Monaco
Montenegro
Netherlands
Poland
Portugal
Romania
San Marino
AFRICA
Algeria
Angola
Benin
Botswana
Banana Faso
Burundi
Cameroon
Cape Verde
Central African Republic
Chad
Comoros
Democratic Republic of the Congo
Djibouti
Equatorial Guinea
Eritrea
Ethiopia
Gabon
Gambia
Ghana
Guinea
Guinea-Bissau
Ivory Coast
Kenya
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Mauritius
Morocco
Mozambique
Namibia
Niger
Nigeria
Rwanda
Sao Tome & Principe
Senegal
– 3 –
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE
INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS
EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
MIDDLE
EAST
EUROPE
Serbia
Slovakia
Slovenia
Spain
Switzerland
Turkey
Ukraine
United Kingdom
Vatican City
AFRICA
Somalia
South Africa
Swaziland
Tanzania
Togo
Tunisia
Turkey
Uganda
Western Sahara
Zambia
Zimbabwe (Rhodesia)
– 4 –
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE
INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS
EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT
4
Price:
Eversense®
Sensor
Pack
Contains the following:
1 Sensor Insertion Kit — Includes Blunt Dissector, Insertion Tool, Insertion Template, Adhesive Patch 30‑Pack (3).
Insertion and Removal Instruction Guide
1 Sensor Kit — Includes Sensor Pouch
Annual
Volume
[***]
[***]
[***]
[***]
Price
[***]
[***]
[***]
[***]
Contains the following: l Smart Transmitter, 1 Power Supply, 1 User Guide, and 1 Quick Reference Guide
Eversense®
Smart
Transmitter
Pack
Annual
Volume
[***]
[***]
[***]
[***]
Price
[***]
[***]
[***]
[***]
Annual Volume Purchased is based on units of the applicable Product purchased by ROCHE in a particular
calendar year under the Agreement.
Upon notification by SENSEONICS that a 180 day sensor product is available for inclusion under this
Agreement, the Parties shall negotiate in good faith an amendment to this Agreement to include the 180 day
sensor product as a Product under this Agreement and the corresponding price for such product and minimum
requirements for such product and the other Products under this Agreement. SENSEON1CS shall only be
entitled to offer the 180 day sensor product to third parties, if ROCHE gives its written consent. For clarity,
ROCHE shall be free to order and to distribute the 90 day sensor product even if a sensor with an extended life is
available from SENSEONICS.
– 5 –
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE
INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS
EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Minimum
Requirement:
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Eversense®
Sensor
Pack
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Eversense®
Smart
Transmitter
Pack
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
ROCHE shall provide timely written notice to SENSEON1CS if it reasonably believes it will not purchase the
minimum quantities of each Product in any particular calendar quarter as outlined above. If ROCHE does not
order enough Product to meet the Minimum Requirement for 2017, on December 15, 2017ROCHE shall be
deemed to have placed an order for the number of units of Product required to satisfy the remainder of the
Minimum Requirement for each Product for 2017 and ROCHE shall pay for such Product in accordance with
Section 3 3(b) of the Agreement. For clarity, in case the Minimum Requirement for 2017 is not fulfilled and this
is cured by a make-up order from ROCHE, SENSEONICS shall not have the right to terminate the Agreement
for material breach based on Section 10.2 of the Agreement.
In September 2017, the Parties will hold a meeting to verify, if — based on the experiences so far-the Minimum
Requirement for 2018 is to be confirmed. Factors including but not limited to Product up-take and customer
acceptance, the regulatory approvals in the countries, potential adverse reactions to the Product and other
unexpected events shall be taken into consideration when reviewing 2017 performance and confirming or
adjusting the above Minimum Requirement for 2018
Starting in September 2018, or such other time period as the Parties may agree, the Parties will negotiate in good
faith the Minimum Requirement for 2019 taking into account the Minimum Requirement for 2018,
SENSEON1CS’ product costs, ROCHE’S actual Product sales during the term of this Agreement to date and
ROCHE’S anticipated Product sales for 2019.
– 6 –
Confidential and Proprietary
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE
INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***]. A COMPLETE VERSION OF THIS
EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXECUTIVE EMPLOYMENT AGREEMENT
Exhibit
10.29
This EXECUTIVE EMPLOYMENT AGREEMENT (''Agreement')
is entered into as of the 22th day of
and
between E.
("Executive'')
Date''),
Kelley
Lynne
2016
and
by
April,
SENSEONICS, INCORPORATED ("Company'').
(''Effective
WHEREAS, the Company wishes to continue to employ Executive and Executive wishes to continue to be its
employee, subject to the terms and conditions of this Agreement;
WHEREAS, the Company and Executive desire to set forth their respective rights and obligations in this
Agreement; and
NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties
agree to the fo11owing:
1.
Employment
by
the
Company.
1.1
Position.
Subject to the terms set forth herein, the Company agrees to continue to employ
Executive in the position of Chief Medical Officer, and Executive hereby accepts such continued employment on the
terms and conditions set forth in this Agreement.
1.2
Duties.
As Chief Medical Officer, Executive will report to the Chief Executive Officer
("CEO'')
and/or such executive designated by the CEO, performing such duties as are normally associated with
Executive's position and such duties as are assigned to Executive from time to time, subject to the oversight and
direction of the CEO or his designee. During the term of Executive's employment with the Company, Executive will
work on a full time basis for the Company and will devote Executive's best efforts and substantially all of Executive's
business time and attention to the business of the Company. Executive shall perform Executive's duties under this
Agreement principally out of the Company's corporate headquarters. In addition, Executive shall make such business
trips to such places as may be necessary or advisable for the efficient operations of the Company.
1.3
Company
Policies
and
Benefits.
The employment relationship between the parties shall also
be subject to the Company's personnel policies and procedures as they may be interpreted, adopted, revised or
deleted from time to time in the Company's sole discretion. Executive will be eligible to participate on the same basis
as similarly situated employees in the Company's benefit plans in effect from time to time during Executive's
employment. All matters of eligibility for coverage or benefits under any benefit plan shall be determined in
accordance with the provisions of such plan. The Company reserves the right to change, alter, or terminate any
benefit plan in its sole discretion. Notwithstanding the foregoing, in the event that the terms of this Agreement differ
from or are in conflict with the Company's general employment policies or practices, this Agreement shall contro1.
1.
2.
Compensation.
2.1
Salary.
Executive shall receive for Executive's services to be rendered under this Agreement
an initial base salary of $365,000 on an annualized basis, subject to review and adjustment by the Company in its
sole discretion, payable subject to standard federal and state payroll withholding requirements in accordance with the
Company's standard payroll practices ("Base
Salary”).
2.2
Bonus.
During the period Executive is employed with the Company, Executive shall be
eligible to earn for Executive's services to be rendered under this Agreement a discretionary annual cash bonus of up
to 35% of Base Salary ("Target
Amount"),
subject to review and adjustment by the Company in its sole discretion,
payable subject to standard federal and state payroll withholding requirements. Whether or not Executive earns any
bonus will be dependent upon (a) Executive's continuous performance of services to the Company through the date
any bonus is paid; and (b) the actual achievement by Executive and the Company of the applicable performance
targets and goals set by the CEO. The annual period over which performance is measured for purposes of this bonus
is January 1
through December 31. The Board will determine in its sole discretion the extent to which Executive
and the Company have achieved the performance goals upon which the bonus is based and the amount of the bonus,
which could be above or below the Target Amount (and may be zero). Any bonus shall be subject to the terms of any
applicable incentive compensation plan adopted by the Company. Any bonus, if earned, will be paid to Executive
within the time period set forth in the incentive compensation plan.
2.3
Expense
Reimbursement.
The Company will reimburse Executive for reasonable business
expenses in accordance with the Company's standard expense reimbursement policy, as the same may be modified by
the Company from time to time. The Company shall reimburse Executive for all customary and appropriate business-
related expenses actually incurred and documented in accordance with Company policy, as in effect from time to
time. For the avoidance of doubt, to the extent that any reimbursements payable to Executive are subject to the
provisions of Section 409A of the Code: (a) any such reimbursements will bepaid no later than December 31 of the
year following the year in which the expense was incurred, (b) the amount of expenses reimbursed in one year will
not affect the amount eligible for reimbursement in any subsequent year, and (c) the right to reimbursement under
thisAgreement will not be subject to liquidation or exchange for another benefit.
3.
Proprietary
Information,
Inventions,
Non-Competition
and
Non-
Solicitation
Obligations.
As a
condition of employment, Executive agrees to execute and abide by an Employee Proprietary Information,
Inventions, Non-Competition and Non- Solicitation Agreement attached as Exhibit A ("Proprietary
Information
Agreement'
),
which may be amended by the parties from time to time without regard to this Agreement. The
Proprietary Information Agreement contains provisions that are intended by the parties to survive and do survive
termination of this Agreement.
4.
Outside
Activities
during
Employment.
Except with the prior written consent of the Company's
Board of Directors, including consent given to Executive prior to the signing of this Agreement, Executive will not,
while employed by the Company, undertake or engage in any other employment, occupation or business enterprise
that would interfere with Executive's responsibilities and the performance of Executive's duties hereunder except for
(i) reasonable
2.
time devoted to volunteer services for or on behalf of such religious, educational, non-profit and/or other charitable
organization as Executive may wish to serve, (ii) reasonable time devoted to activities in the non-profit and business
communities consistent with Executive's duties; and (iii) such other activities as may be specifically approved by the
CEO. This restriction shall not, however, preclude Executive (x) from owning less than one percent (1%) of the total
outstanding shares of a publicly traded company, or (y) from employment or service in any capacity with Affiliates
of the Company. As used in this Agreement, "Affiliates" means an entity under common management or control with
the Company.
5.
No
Conflict
with
Existing
Obligations.
Executive represents that Executive's performance of all the
terms of this Agreement does not and will not breach any agreement or obligation of any kind made prior to
Executive's employment by the Company, including agreements or obligations Executive may have with prior
employers or entities for which Executive has provided services. Executive has not entered into, and Executive
agrees that Executive will not enter into, any agreement or obligation, either written or oral, in conflict herewith.
6.
Termination
of
Employment.
The parties acknowledge that Executive's employment relationship
with the Company is at-will, meaning either the Company or Executive may terminate Executive's employment at
any time, with or without cause or advanced notice. The provisions in this Section govern the amount of
compensation, if any, to be provided to Executive upon termination of employment and do not alter this at-wills tat
us.
6.1
Termination
by
the
Company
without
Cause
or
for
Good
Reason.
(a) The Company shall have the right to terminate Executive's employment with the
Company pursuant to this Section 6.1 at any time, in accordance with Section 6.6, without "Cause" (as defined in
Section 6.2(b) below) by giving notice as described in Section 8.1 of this Agreement. A termination pursuant to
Section 6.5 below is not a termination without "Cause" for purposes of receiving the benefits described in this
Section 6.1.
(b) If the Company terminates Executive's employment at any time without Cause or
Executive terminates Executive's employment with the Company for Good Reason and provided that such
termination constitutes a "separation from service" (as defined under Treasury Regulation Section l.409A-l(h),
without regard to any alternative definition thereunder, a "Separation
from
Service
''),
then Executive shall be
entitled to receive the Accrued Obligations (defined below). If Executive complies with the obligations in Section
6.1(c) below, Executive shall also be eligible to receive the following severance benefits: (1) an amount equal to
Executive's then current Base Salary for nine (9) months, less all applicable withholdings and deductions
("Severance''),
paid in equal installments beginning on the Company's first regularly scheduled payroll date
following the Release Effective Date (as defined in Section 6.l(c) below), with the remaining installments occurring
on the Company's regularly scheduled payroll dates thereafter and (2) a pro rata portion of Executive's Target
Amount for the performance year in which Executive's termination occurs, with such pro rata portion calculated
based upon the number of days that Executive was employed during such performance year divided by the
3.
total number of days in such performance year, payable as a lump sum payment on the Release Effective Date (as
defined below) ("Bonus
Severance'').
(c) Executive will be paid all of the Accrued Obligations on the Company's first payroll
date after Executive's date of termination from employment or earlier if required by law. Executive shall receive the
Severance and Bonus Severance pursuant to Section 6.l(b) of this Agreement and the payments pursuant to Section
6.1(d) if: (i) by the 60th day following the date of Executive's Separation from Service, Executive has signed and
delivered to the Company a separation agreement containing an effective, general release of claims in favor of the
Company and its affiliates and representatives, in a form acceptable to the Company (the ''Release''),
which cannot
be revoked in whole or part by such date (the date that the Release can no longer be revoked is referred to as the
"Release
Effective
Date'');
and (ii) if Executive holds any other positions with the Company, Executive resigns such
position(s) to be effective no later than the date of Executive's termination date (or such other date as requested by
the Board); (iii) Executive returns all Company property; (iv) Executive complies with Executive's post-termination
obligations under this Agreement and the Proprietary Information Agreement; and (v) Executive complies with the
terms of the Release, including without limitation any non-disparagement and confidentiality provisions contained
in Release. To the extent that any severance payments are deferred compensation under Section 409A of the Code,
and are not otherwise exempt from the application of Section 409A, then, if the period during which Executive may
consider and sign the Release spans two calendar years, the payment of Severance will not be made or begin until
the later calendaryear.
(d) If Executive timely elects continued coverage under COBRA for Executive and
Executive's covered dependents under the Company's group health plans following such termination, then the
Company shall pay the COBRA premiums necessary to continue Executive's and Executive's covered dependents'
health insurance coverage in effect for Executive (and Executive's covered dependents) on the termination date
until the earliest of: (i) nine (9) months following the termination date (the "COBRA
Severance
Period");
(ii) the
date when Executive becomes eligible for substantially equivalent health insurance coverage in connection with
new employment or self-employment; or (iii) the date Executive ceases to be eligible for COBRA continuation
coverage for any reason, including plan termination (such period from the termination date through the earlier.of (i)-
(iii), (the "COBRA
Payment
Period").
Notwithstanding the foregoing, if at any time the Company determines that
its payment of COBRA premiums on Executive's behalf would result in a violation of applicable law (including, but
not limited to, the 2010 Patient Protection and Affordable Care Act, as amended by the 2010 Health Care and
Education Reconciliation Act), then in lieu of paying COBRA premiums pursuant to this Section, the Company
shall pay Executive on the last day of each remaining month of the COBRA Payment Period, a fully taxable cash
payment equal to the COBRA premium for such month, subject to applicable tax withholding (such amount, the
"Special
Severance
Payment
''),
such Special Severance Payment to be made without regard to the COBRA period
prior to the end of the COBRA Payment Period. Nothing in this Agreement shall deprive Executive of Executive's
rights under COBRA or ERISA for benefits under plans and policies arising under Executive's employment by the
Company.
(e) For purposes of this Agreement, ''Accrued
Obligations"
are (i) Executive's accrued but
unpaid salary through the date of termination, (ii) any unreimbursed business expenses incurred by Executive
payable in accordance with the Company's standard expense reimbursement policies, and (iii) benefits owed to
Executive under any
4.
qualified retirement plan or health and welfare benefit plan in which Executive was a participant in accordance with
applicable law and the provisions of such plan.
(f) The Severance and Bonus Severance provided to Executive pursuant to this Section
6.1
are in lieu of, and not in addition to, any benefits to which Executive may otherwise be entitled under any Company
severance plan, policy or program.
(g) Any damages caused by the termination of Executive's employment without Cause
would be difficult to ascertain; therefore, the Severance and Bonus Severance for which Executive is eligible
pursuant to Section
6.l(b)
above in exchange for the Release is agreed to by the parties as liquidated damages, to
serve as full compensation, and not apenalty.
(h) For purposes of this Agreement, "Good
Reason"
shall mean the occurrence of any of the
following events without Executive's consent: (i) a material reduction in Executive's Base Salary of at least 10%; (ii)
a material breach of this Agreement by the Company; (iii) any material diminution in Executive's duties,
responsibilities, authority, reporting structure, status or title, unless approved in writing by Executive; or (iv) the
relocation of Executive's principal place of employment, without Executive's consent, in a manner that lengthens
Executive's one-way commute distance by fifty (50) or more miles from Executive's then-current principal place of
employment immediately prior to such relocation; provided,
however,
that, any such termination by Executive shall
only be deemed for Good Reason pursuant to this definition if: (1) Executive gives the Company written notice of
Executive's intent to terminate for Good Reason within thirty (30) days following the first occurrence of the
condition(s) that Executive believes constitute(s) Good Reason, which notice shall describe such condition(s); (2) the
Company fails to remedy such condition(s) within thirty (30) days following receipt of the written notice (the "Cure
Period");
and (3) Executive voluntarily terminates Executive's employment within thirty (30) days following the end
of the Cure Period.
(i) Any damages caused by the termination of Executive's employment without Cause or for
Good Reason would be difficult to ascertain; therefore, the payments for which Executive is eligible pursuant to this
Section 6.1 above in exchange for the Release is agreed to by the parties as liquidated damages, to serve as full
compensation, and not apenalty.
6.2
Termination
by
the
Company
without
Cause
or
for
Good
Reason
Following
a
Change
in
Control.
(a) If Executive's employment by the Company is terminated by the Company without
"Cause" (and not due to Disability or death) or by Executive for Good Reason coincident with a Change in Control
(as defined below), then the Company shall pay or provide Executive with the Accrued Obligations and all of the
benefits described in Section
6.1
above, subject to compliance with Section
6.l(c);
provided
that:
(i) in lieu of the
bonus described in Section
6.l(b
), the Company shall pay Executive the larger of a pro-rata amount as described in
Section
6.l(b)
or 75% of the Target Amount for the performance year in which Executive's termination occurs,
payable as a lump sum payment on the Release Effective Date; and (ii) if Executive's employment by the Company
or any successor entity is terminated by the Company or the successor entity without "Cause" (and not due to
Disability or death) within twelve (12) months following a Change in Control, 100% of the then unvested portion of
the
5.
equity awards granted to Executive shall become fully vested.
(b) For purposes of this Agreement, a "Change
in
Control"
means (a) any consolidation or
merger of the Company with or into any other corporation or other entity or person, or any other corporate
reorganization, other than any such consolidation, merger or reorganization in which the stockholders of the
Company immediately prior to such consolidation, merger or reorganization, continue to hold a majority of the
voting power of the surviving entity (or, if the surviving entity is a wholly owned subsidiary, its parent) immediately
after such consolidation, merger or reorganization; (b) any transaction or series of related transactions to which the
Company is a party in which in excess of fifty percent (50%) of the Company's voting power is transferred; provided
that the foregoing shall not include any transaction or series of transactions principally for bona fide equity financing
purposes in which cash is received by the Company or indebtedness of the Company is cancelled or converted or a
combination thereof; or (c) a sale, lease, exclusive license or other disposition of all or substantially all of the assets
of the Company. In the event of any interpretation of this definition, the Board of Directors of the Company, upon
advice of legal counsel, shall have final and conclusive authority, so long as such authority is exercised in good faith.
Notwithstanding the foregoing, a Change in Control will only be deemed to occur for purposes of this Agreement it
is also meets the definition used for purposes of Treasury Regulation Section l.409A-3(a)(5), that is, as defined under
Treasury Regulation Section l.409A-3(i)(5).
(c) Any damages caused by the termination of Executive's employment without Cause or
for Good Reason following a Change in Control would be difficult to ascertain; therefore, the payments for which
Executive is eligible pursuant to Section 6.2 above in exchange for the Release is agreed to by the parties
as liquidated damages, to serve as full compensation, and not a penalty.
6.2
Termination
by
the
Company
for
Cause.
(a) The Company shall have the right to terminate Executive's employment with the
Company at any time, in accordance with Section 6.6, for Cause by giving notice as described in Section 8.1 of this
Agreement. In the event Executive's employment is terminated at any time for Cause, Executive will not receive
Severance, a Severance Bonus or any other severance compensation or benefits, except that, pursuant to the
Company's standard payroll policies, the Company shall pay to Executive the Accrued Obligations.
(b) "Cause"
for termination shall mean that the Company has determined in its sole
discretion that Executive has engaged in any of the following: (i) a material breach of any covenant or condition
under this Agreement or any other agreement between the parties; (ii) any act constituting dishonesty, fraud,
immoral or disreputable conduct; (iii) any conduct which constitutes a felony under applicable law; (iv) violation of
any written Company policy or any act of misconduct; (v) refusal to follow or implement a clear and reasonable
directive of the Company; (vi) negligence or incompetence in the performance of Executive's duties or failure to
perform such duties in a manner satisfactory to the Company after the expiration of ten (10) days without cure after
written notice of such failure;
6.
or (vii) breach of fiduciary duty.
6.4
Resignation
by
Executive.
(a)
Executive may resign from Executive's employment with the Company at any time, in
accordance with Section
6.6,
by giving notice as described in Section
8.1.
(b)
In the event Executive resigns from Executive's employment with the Company for any
reason, Executive will not receive Severance, a Severance Bonus or any other severance
compensation or benefits, except that, pursuant to the Company's standard payroll
policies, the Company shall pay to Executive the Accrued Obligations.
6.5
Termination
by
Virtue
of
Death
or
Disability
of
Executive.
(a)
In the event of Executive's death while employed pursuant to this Agreement, all
obligations of the parties hereunder shall terminate immediately, in accordance with Section
6.6,
and the Company
shall, pursuant to the Company's standard payroll policies, pay to Executive's legal representatives all Accrued
Obligations.
(b)
Subject to applicable state and federal law, the Company shall at all times have the
right, upon written notice to Executive, and in accordance with Section
6.6,
to terminate this Agreement based on
Executive's Disability. Termination by the Company of Executive's employment based on "Disability"
shall mean
termination because Executive is unable due to a physical or mental condition to perform the essential functions of
Executive's position with or without reasonable accommodation for 180 days in the aggregate during any twelve (12)
month period or based on the written certification by two licensed physicians of the likely continuation of such
condition for such period. This definition shall be interpreted and applied consistent with the Americans with
Disabilities
the
Leave
event Executive's employment is terminated based on Executive's Disability, Executive will not receive Severance, a
Severance Bonus or any other severance compensation or benefit, except that, pursuant to the Company's standard
payroll policies, the Company shall pay to Executive the Accrued Ob1igations.
applicable
Medical
Family
other
law.
Act,
Act,
and
and
the
In
6.6
Notice;
Effective
Date
of
Termination.
(a)
Termination of Executive's employment pursuant to this Agreement shall be effective
on the earliest of:
(i)
immediately after the Company gives notice to Executive of Executive's
termination, with or without Cause, unless pursuant to Section 6.3(b)(vi) in which case ten (10) days after notice if
not cured or unless the Company specifies a later date, in which case, termination shall be effective as of such later
date;
(ii)
immediately upon the Executive's death;
termination on account of Executive's Disability, unless the
(iii)
ten (10) days after the Company gives notice to
Executive of Executive's
7.
Company specifies a later date, in which case, termination shall be effective as of such later date, provided
that
Executive has not returned to the full time performance of Executive's duties prior to such date;
(iv)
ten (10) days after the Executive gives written notice to the Company of
Executive's resignation, provided
that the Company may set a termination date at any time between the date of
notice and the date of resignation,
be effective as
of such other date. Executive will receive compensation through any required notice period; or
in which case the Executive's resignation shall
satisfaction of the requirements of Section 6.1(h).
(v)
for a termination for Good Reason, immediately upon Executive's full
(b)
In the event notice of a termination under subsections (a)(i), (iii), (iii) and (iv) is given
orally, at the other party's request, the party giving notice must provide written
confirmation of such notice within five (5) business days of the request in compliance
with the requirement of Section 8.1 below. In the event of a termination for Cause or
Good Reason, written confirmation shall specify the subsection(s) of the definition of
Cause or Good Reason relied on to support the decision to terminate.
6.7
Cooperation
with
Company
after
Termination
of
Employment.
Following termination of
Executive's employment for any reason, Executive agrees to cooperate fully with the Company in connection with its
actual or contemplated defense, prosecution, or investigation of any claims or demands by or against third parties, or
other matters arising from events, acts, or failures to act that occurred during the period of Executive's employment
by the Company. Such cooperation includes, without limitation, making Executive available to the Company upon
reasonable notice, without subpoena, to provide complete, truthful and accurate information in witness interviews,
depositions and trial testimony. In addition, for six months after Executive's employment with the Company ends for
any reason, Executive agrees to cooperate fully with the Company in all matters relating to the transition of
Executive's work and responsibilities on behalf of the Company, including, but not limited to, any present, prior or
subsequent relationships and the orderly transfer of any such work and institutional knowledge to such other persons
as may be designated by the Company. The Company will reimburse Executive for reasonable out-of-pocket
expenses Executive incurs in connection with any such cooperation (excluding forgone wages, salary, or other
compensation) and will make reasonable efforts to accommodate Executive's scheduling needs.
6.8
Application
of
Section
409A.
It is intended that all of the severance payments payable under
this Agreement satisfy, to the greatest extent possible, the exemptions from the application of Section 409A of the
Code and the regulations and other guidance thereunder and any state law of similar effect (collectively, "Section
409A
'')
provided under Treasury Regulations Sections l .409A-l(b)(4) and 1.409A-l(b)(9), and this Agreement will
be construed in a manner that complies with Section 409A. If not so exempt, this Agreement (and any definitions
hereunder) will be construed in a manner that complies with Section 409A, and incorporates by reference all required
definitions and
8.
payment terms. No severance payments will be made under this Agreement unless Executive's termination of
employment constitutes a "separation from service" (as defined under Treasury Regulation Section l.409A-l (h)). For
purposes of Section 409A (including, without limitation, for purposes of Treasury Regulations Section l.409A-2(b)
(2)(iii)), Executive's right to receive any installment payments under this Agreement (whether severance payments or
otherwise) shall be treated as a right to receive a series of separate payments and, accordingly, each installment
payment hereunder shall at all times be considered a separate and distinct payment. If the Company determines that
the severance benefits provided under this Agreement constitutes "deferred compensation" under Section 409A and
if Executive is a "specified employee" of the Company, as such term is defined in Section 409A(a)(2)(B)(i) of the
Code at the time of Executive's Separation from Service, then, solely to the extent necessary to avoid the incurrence
of the adverse personal tax consequences under Section 409A, the timing of the Severance will be delayed as
follows: on the earlier to occur of (a) the date that is six months and one day after Executive's Separation from
Service, and (b) the date of Executive's death (such earlier date, the ''Delayed
Initial
Payment
Date''),
the Company
will (i) pay to Executive a lump sum amount equal to the sum of the severance benefits that Executive would
otherwise have received through the Delayed Initial Payment Date if the commencement of the payment of the
severance benefits had not been delayed pursuant to this Section 6.8 and (ii) commence paying the balance of the
severance benefits in accordance with the applicable payment schedule set forth in Section 6. No interest shall be due
on any amounts deferred pursuant to this Section 6.8.
7.
Section
280G.
7.1
Anything in this Agreement to the contrary notwithstanding, in the event that the amount of any
compensation, payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or otherwise, calculated in a manner consistent
with Section 2800 of the Code and the applicable regulations thereunder (the ''Aggregate
Payments"),
would be
subject to the excise tax imposed by Section 4999 of the Code, then the Aggregate Payments shall be reduced (but
not below zero) so that the sum of all of the Aggregate Payments shall be $1.00 less than the amount at which
Executive becomes subject to the excise tax imposed by Section 4999 of the Code; provided that such reduction shall
only occur if it would result in Executive receiving a higher After Tax Amount (as defined below) than Executive
would receive if the Aggregate Payments were not subject to such reduction. In such event, the Aggregate Payments
shall be reduced in the following order, in each case, in reverse chronological order beginning with the Aggregate
Payments that are to be paid the furthest in time from consummation of the transaction that is subject to Section 2800
of the Code: (1) cash payments not subject to Section 409A of the Code; (2) cash payments subject to Section 409A
of the Code; (3) equity-based payments and acceleration; and (4) non-cash forms of benefits; provided that in the
case of all the foregoing Aggregate Payments all amounts or payments that are not subject to calculation under Treas.
Reg. §1.2800-1, Q&A-24(b) or (c) shall be reduced before any amounts that are subject to calculation under Treas.
Reg. §1.2800-1, Q&A-24(b) or (c).
7.2
For purposes of this Section 5, the ''After
Tax
Amount'
means the
9.
amount of the Aggregate Payments less all federal, state, and local income, excise and employment taxes imposed on
Executive as a result of Executive's receipt of the Aggregate Payments. For purposes of determining the After Tax
Amount, Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income
taxation applicable to individuals for the calendar year in which the determination is to be made, and state and local
income taxes at the highest marginal rates of individual taxation in each applicable state and locality, net of the
maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.
8.
General
Provisions.
8.1
Notices.
Any notices required hereunder to be in writing shall be deemed effectively given:
(a) upon personal delivery to the party to be notified, (b) when sent by electronic mail or confirmed facsimile if sent
during normal business hours of the recipient, and if not, then on the next business day, (c) five (5) days after having
been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit
with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All
communications shall be sent to the Company at its primary office location and to Executive at either Executive's
address as listed on the Company payroll, or Company-issued email address, or at such other address as the
Company or Executive may designate by ten (10) days advance written notice to the other.
8.2
Severability.
Whenever possible, each provision of this Agreement will be interpreted in such
manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality
or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been
contained herein.
8.3
Survival.
Provisions of this Agreement which by their terms must survive the termination of
this Agreement in order to effectuate the intent of the parties will survive any such termination, whether by
expiration of the term, termination of Executive's employment, or otherwise, for such period as may be appropriate
under the circumstances.
8.4
Waiver.
If either party should waive any breach of any provisions of this Agreement, it shall
not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this
Agreement.
8.5
Complete
Agreement.
This Agreement constitutes the entire agreement between Executive
and the Company with regard to the subject matter hereof. This Agreement is the complete, final, and exclusive
embodiment of their agreement with regard to this subject matter and supersedes any prior oral discussions or written
communications and agreements, including the Employment Offer Letter from with the Company dated July 13,
2015. This Agreement is entered into without reliance on any promise or representation other than those expressly
contained herein, and it cannot be modified or amended except in writing signed by
10.
Executive and an authorized officer of the Company. The parties have entered into a separate Proprietary Information
Agreement and have or may enter into separate agreements related to equity. These separate agreements govern other
aspects of the relationship between the parties, have or may have provisions that survive termination of Executive's
employment under this Agreement, may be amended or superseded by the parties without regard to this Agreement
and are enforceable according to their terms without regard to the enforcement provision of this Agreement.
8.6
Counterparts.
This Agreement may be executed in separate counterparts, any one of which
need not contain signatures of more than one party, but all of which taken together will constitute one and the same
Agreement. The parties agree that facsimile and scanned image copies of signatures will suffice as original
signatures.
8.7
Headings.
The headings of the sections hereof are inserted for convenience only and shall not
be deemed to constitute a part hereof nor to affect the meaning thereof.
8.8
Successors
and
Assigns.
The Company shall assign this Agreement and its rights and
obligations hereunder in whole, but not in part, to any Company or other entity with or into which the Company may
hereafter merge or consolidate or to which the Company may transfer all or substantially all of its assets, if in
any such case said Company or other entity shall by operation of law or expressly in writing assume all obligations
of the Company hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this
Agreement or its rights and obligations hereunder. Executive may not assign or transfer this Agreement or any rights
or obligations hereunder, other than to Executive's estate upon Executive's death.
8.9
Choice
of
Law.
All questions concerning the construction, validity and interpretation of this
Agreement will be governed by the laws of the State of Maryland.
8.10
Dispute
Resolution.
The parties recognize that litigation in federal or state courts or before
federal or state administrative agencies of disputes arising out of the Executive's employment with the Company or
out of this Agreement, or the Executive's termination of employment or termination of this Agreement, may not be in
the best interests of either the Executive or the Company, and may result in unnecessary costs, delays, complexities,
and uncertainty. The parties agree that any dispute between the parties arising out of or relating to the negotiation,
execution, performance or termination of this Agreement or the Executive's employment, including, but not limited
to, any claim arising out of this Agreement, claims under Title VII of the Civil Rights Act of 1964, as amended, the
Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act
of 1990, Section 1981 of the Civil Rights Act of 1966, as amended, the Family Medical Leave Act, the Executive
Retirement Income Security Act, and any similar federal, state or local law, statute, regulation, or any common law
doctrine, whether that dispute arises during or after employment, shall be settled by binding arbitration in accordance
with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association;
provided
however,
that this dispute resolution provision shall not apply to any separate agreements between the
parties that do not themselves specify arbitration as an exclusive remedy. The location for the arbitration shall be the
Washington, DC metropolitan area. Any award made by such panel shall be final, binding and conclusive on the
parties for all purposes, and judgment
11.
upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitrators'
fees and expenses and all administrative fees and expenses associated with the filing of the arbitration shall be borne
by the Company;
provided
however,
that at the Executive's option, Executive may voluntarily pay up to one-half the
costs and fees. The parties acknowledge and agree that their obligations to arbitrate under this Section survive the
termination of this Agreement and continue after the termination of the employment relationship between Executive
and the Company. The parties each further agree that the arbitration provisions of this Agreement shall provide
each party with its exclusive remedy, and each party expressly waives any right it might have to seek redress in any
other forum, except as otherwise expressly provided in this Agreement. By election arbitration as the means for final
settlement of all claims, the parties hereby waive their respective rights to, and agree not to, sue each other in
any action in a Federal, State or local court with respect to such claims, but may seek to enforce in court an
arbitration award rendered pursuant to this Agreement. The parties specifically agree to waive their respective rights
to a trial by jury, and further agree that no demand, request or motion will be made for trial by jury.
[SIGNATURES TO FOLLOW ON NEXT PAGE]
12.
IN WITNESS WHEREOF,
the parties have duly executed this Agreement as of the date first
above written.
SENSEONICS INCORPORATED
By: /s/ Tim Goodnow
Tim Goodnow
President & Chief Executive Officer
EXECUTIVE
/s/ E. Lynne Kelley
E. Lynne Kelley
Consent
of
Independent
Registered
Public
Accounting
Firm
We consent to the incorporation by reference in the Registration Statement (Form S‑8 No. 001‑37717)
pertaining to the Amended and Restated 1997 Stock Option Plan, as amended, Amended and Restated 2015
Equity Incentive Plan and 2016 Employee Stock Purchase Plan of Senseonics Holdings, Inc. of our report dated
February 23, 2017, with respect to the consolidated financial statements of Senseonics Holdings, Inc. included in
this Annual Report (Form 10‑K) for the year ended December 31, 2016.
EXHIBIT
23.1
CONSENT
OF
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S‑8 (No. 333-210586) of Senseonics
Holdings, Inc. of our report dated July 10, 2015, except with respect to our opinion on the financial statements insofar as it
relates to the effects of the recapitalization described in Note 1 as to which the date is January 13, 2016, relating to the financial
statements, which appears in this Form 10‑K.
EXHIBIT
23.2
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 23, 2017
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 board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 23, 2017
/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 board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 23, 2017
/s/ R. Don Elsey
R. Don Elsey
Chief Financial Officer
(principal financial officer)
EXHIBIT
32.1
CERTIFICATIONS
OF
PRINCIPAL
EXECUTIVE
OFFICER
AND
PRINCIPAL
FINANCIAL
OFFICER
PURSUANT
TO
18
U.S.C.
SECTION
1350,
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002
EXHIBIT
32.1
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.,
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, 2016 (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
the 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 23rd day of February, 2017.
/s/ Timothy T. Goodnow, Ph.D.
Timothy T. Goodnow, Ph.D.
President & Chief Executive Officer
/s/ 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 the Company 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.