Going Concern and Liquidity Update

9 Months Ended

Sep. 30, 2020

Going Concern and Liquidity Update

Going Concern and Liquidity Update

2. Going Concern and Liquidity Update

The Company’s operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, lack of operating history and uncertainty of future profitability. Since inception, the Company has suffered substantial operating losses, principally from expenses associated with the Company’s research and development programs and commercial launch of the Eversense® CGM System (for use up to 90 days) in the United States and the Eversense CGM and Eversense XL CGM Systems (for use up to 180 days) in Europe, the Middle East, and Africa. The Company has not generated significant revenue from the sale of products and its ability to generate revenue and achieve profitability largely depends on the Company’s ability to successfully expand the commercialization of Eversense, continue the development of its products and product upgrades, and to obtain necessary regulatory approvals for the sale of those products, including approval by the FDA for the new 180-day Eversense product in the United States. These activities will require significant uses of working capital through 2020 and beyond.

The Company generated a net loss of $73.5 million for the nine months ended September 30, 2020 and had an accumulated deficit of $546.9 million at September 30, 2020. During the nine months ended September 30, 2020, the Company repaid in full its term loan with Solar Capital Ltd. (“Solar”) in the amount of $48.4 million, and as a result, and in consideration of the evolving impact of the coronavirus (“COVID-19”) pandemic, the Company made significant reductions in its cost structure to improve operating cash flow and generate future capital expenditure savings to ensure the long-term success of Eversense. Specifically, the Company temporarily suspended commercial sales of the Eversense CGM system in the United States to new patients and streamlined its operational strategy to focus on the development and regulatory submission efforts for its new 180-day Eversense product in the United States.

On August 9, 2020, the Company entered into a Collaboration and Commercialization Agreement with Ascensia Diabetes Care Holdings AG (“Ascensia”) and entered into a financing agreement pursuant to which the Company issued $35.0 million in aggregate principal amount of Senior Secured Convertible Notes due in October 2024 (the “2024 Notes”) to Ascensia’s parent company, PHC Holdings Corporation (“PHC”) on August 14, 2020 (the “Closing Date”). The Company also has the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon obtaining approval for the 180-day Eversense product for marketing in the United States before such date. Additionally, on August 9, 2020, the Company entered into a Stock Purchase Agreement with Masters Special Situations, LLC and certain affiliates thereof (“Masters”) pursuant to which the Company issued and sold to Masters 3,000 shares of convertible preferred stock, designated as “Series A Convertible Preferred Stock” (the “Series A Preferred Stock”), at a price of $1,000.00 per share on the Closing Date. Masters also has the option to purchase up to an additional 27,000 shares of Series A Preferred Stock at a price of $1,000.00 per share in a subsequent closing, subject to the terms and conditions of the Stock Purchase Agreement, as amended as set forth in Note 13 – Subsequent Events.

On April 24, 2020, the Company received $15.0 million through the issuance and sale of First Lien Secured Notes due October 2021 (the “First Lien Notes”) pursuant to a Loan and Security Agreement (the “Highbridge Loan Agreement”) with certain funds managed by Highbridge Capital Management, LLC (“Highbridge”), as the lenders, together with the other lenders from time to time party thereto (the “Lenders”). Upon the closing of the 2024 Notes, the Company prepaid the First Lien Notes in full in the amount of approximately $17.6 million, which includes the discounted prepayment premium pursuant to the Highbridge Loan Agreement.

In connection with the entry into the Highbridge Loan Agreement on April 24, 2020, the Company entered into a Note and Purchase Exchange Agreement with the Lenders, pursuant to which the Company’s senior convertible notes maturing on January 15, 2025 (the “2025 Notes”) were exchanged for (i) $15.7 million aggregate principal amount of newly issued Second Lien Secured Notes (the “Second Lien Notes”), (ii) 11,026,086 shares of common stock, (iii) warrants to purchase up to 4,500,000 shares of common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged.

On April 22, 2020, the Company received $5.8 million in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”), as amended by the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), and administered by the U.S. Small Business Administration (the “SBA”), to support payroll, rent, and utilities incurred during a defined period.

The Company believes that these agreements provide the financial resources and mutual commitment to support the growth of Eversense and specifically for the Company, the manufacturing of Eversense and continued product development, including the U.S. launch of the new 180-day Eversense product, if approved. The timing and success of these collaborations and financings are dependent on certain events occurring in accordance with the Company’s plans, and may be influenced by uncontrollable external factors, including restrictions or impacts of COVID-19. Even with these transactions and that the potential subsequent closings contemplated by the transactions have not yet occurred, management’s doubt regarding its ability to continue as a going concern for the next twelve months from the date this Quarterly Report on Form 10-Q is filed is not yet alleviated.