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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number: 001-37717

Senseonics Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

3841
(Primary Standard Industrial
Classification Code Number)

47-1210911
(I.R.S. Employer
Identification Number)

20451 Seneca Meadows Parkway

Germantown, MD 20876-7005

(301515-7260

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

SENS

NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

There were 245,666,611 shares of common stock, par value $0.001, outstanding as of November 4, 2020.

TABLE OF CONTENTS

PART I: Financial Information

ITEM 1: Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019

3

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for three and nine months ended September 30, 2020 and 2019

4

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2020 and 2019

5

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

ITEM 2: Management Discussion and Analysis of Financial Condition and Results of Operations

26

ITEM 3: Quantitative and Qualitative Disclosures about Market Risk

44

ITEM 4: Controls and Procedures

44

PART II: Other Information

45

ITEM 1: Legal Proceedings

45

ITEM 1A: Risk Factors

45

ITEM 2: Unregistered Sales of Equity and Securities and Use of Proceeds

50

ITEM 3: Defaults Upon Senior Securities

50

ITEM 4: Mine Safety Disclosures

51

ITEM 5: Other Information

51

ITEM 6: Exhibits

51

SIGNATURES

52

2

Senseonics Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

September 30, 

December 31, 

 

2020

2019

(unaudited)

Assets

    

    

Current assets:

Cash and cash equivalents

$

26,192

$

95,938

Restricted cash

200

Accounts receivable, net

250

3,239

Accounts receivable - related parties

251

7,140

Inventory, net

4,284

16,929

Prepaid expenses and other current assets

 

4,588

 

4,512

Total current assets

 

35,765

 

127,758

Purchase put option

4,224

Deposits and other assets

 

2,409

 

3,042

Property and equipment, net

 

1,665

 

2,001

Total assets

$

44,063

$

132,801

Liabilities and Stockholders’ Deficit

Current liabilities:

Accounts payable

$

949

$

4,285

Accrued expenses and other current liabilities

 

9,153

 

18,636

Term Loans, net

43,434

2025 Notes, net

 

 

60,353

Total current liabilities

 

10,102

 

126,708

Long-term debt and notes payables, net

59,649

11,800

Derivative liabilities

 

24,590

 

664

Other liabilities

1,693

2,278

Total liabilities

 

96,034

 

141,450

Preferred stock and additional paid-in-capital, subject to possible redemption: $0.001 par value per share; 3,000 shares and 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019

2,811

Total temporary equity

2,811

Commitments and contingencies

Stockholders’ deficit:

Common stock, $0.001 par value per share; 450,000,000 shares authorized; 244,238,638 and 203,452,812 shares issued and outstanding as of September 30, 2020 and December 31, 2019

 

244

 

203

Additional paid-in capital

 

491,853

 

464,491

Accumulated deficit

 

(546,879)

 

(473,343)

Total stockholders' deficit

 

(54,782)

 

(8,649)

Total liabilities and stockholders’ deficit

$

44,063

$

132,801

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

Senseonics Holdings, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

 

Revenue, net

$

514

    

$

959

$

761

    

$

3,678

 

Revenue, net - related parties

253

3,360

303

8,671

Total revenue

767

4,319

1,064

12,349

Cost of sales

(68)

7,659

21,006

23,552

Gross profit (loss)

835

(3,340)

(19,942)

(11,203)

Expenses:

Sales and marketing expenses

3,234

 

11,560

 

17,521

 

38,573

Research and development expenses

4,568

 

11,076

 

15,726

 

28,688

General and administrative expenses

5,501

 

5,388

 

15,635

 

17,321

Operating loss

(12,468)

(31,364)

 

(68,824)

 

(95,785)

Other (expense) income, net:

Interest income

1

519

173

1,556

Loss on extinguishment and issuance of debt

(9,527)

 

(398)

 

(20,458)

 

(398)

Interest expense

(3,632)

(3,460)

(11,560)

(7,459)

Debt issuance costs

(931)

(3,344)

(1,216)

(3,344)

Gain on fair value and change in fair value of derivatives

3,520

19,186

29,069

26,147

Other expense

(391)

 

(638)

 

(720)

 

(655)

Total other (expense) income, net

(10,960)

11,865

(4,712)

15,847

Net loss

(23,428)

(19,499)

(73,536)

(79,938)

Total comprehensive loss

$

(23,428)

$

(19,499)

$

(73,536)

$

(79,938)

Basic and diluted net loss per common share

$

(0.10)

$

(0.10)

$

(0.33)

$

(0.43)

Basic and diluted weighted-average shares outstanding

236,519,812

 

197,223,419

 

220,250,060

 

183,804,257

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

Senseonics Holdings, Inc.

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

(in thousands)

Additional

Total

 

Common Stock

Paid-In

Accumulated

Stockholders'

 

  

Shares

  

Amount

  

Capital

  

Deficit

  

Equity (Deficit)

 

Three months ended September 30, 2019:

Balance, June 30, 2019

177,031

$

177

$

433,228

$

(418,233)

$

15,172

Issuance of common stock

26,136

 

26

 

26,731

26,757

Exercise of stock options

179

Stock-based compensation expense and vesting of RSUs

20

 

 

2,194

2,194

Issuance of warrants related to debt

723

723

Net loss

 

 

(19,499)

(19,499)

Balance, September 30, 2019

203,366

$

203

$

462,876

$

(437,732)

$

25,347

Nine months ended September 30, 2019:

Balance, December 31, 2018

 

176,918

$

177

$

428,878

 

$

(357,794)

$

71,261

Issuance of common stock

26,136

 

26

 

26,731

 

 

26,757

Exercise of stock options

 

230

 

 

93

 

 

 

93

Stock-based compensation expense and vesting of RSUs

82

 

 

6,451

 

 

 

6,451

Issuance of warrants related to debt

723

723

Net loss

 

 

 

 

 

(79,938)

 

(79,938)

Balance, September 30, 2019

 

203,366

$

203

$

462,876

 

$

(437,732)

$

25,347

Three months ended September 30, 2020:

Balance, June 30, 2020

230,553

$

231

$

483,615

$

(523,451)

$

(39,605)

Exercise of stock options and ESPP purchases

1,188

 

1

 

76

77

Exchange and conversion of convertible notes, net

12,498

12

5,859

5,871

Stock-based compensation expense and vesting of RSUs

2,303

2,303

Net loss

 

 

(23,428)

(23,428)

Balance, September 30, 2020

244,239

$

244

$

491,853

$

(546,879)

$

(54,782)

Nine months ended September 30, 2020:

Balance, December 31, 2019

203,453

$

203

$

464,491

$

(473,343)

$

(8,649)

Issuance of common stock, net

 

175

 

 

(86)

 

 

 

(86)

Exercise of stock options and ESPP purchases

 

2,220

 

2

 

573

 

 

 

575

Exchange and conversion of convertible notes, net

38,391

39

20,082

20,121

Stock-based compensation expense and vesting of RSUs

 

 

 

5,581

 

 

 

5,581

Issuance of warrants related to debt, net

1,212

1,212

Net loss

 

 

 

 

 

(73,536)

 

(73,536)

Balance, September 30, 2020

 

244,239

$

244

$

491,853

 

$

(546,879)

$

(54,782)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

Senseonics Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

Nine Months Ended

September 30, 

    

2020

    

2019

Cash flows used in operating activities

 

Net loss

$

(73,536)

$

(79,938)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization expense

 

853

 

335

Non-cash interest expense (debt discount and deferred costs)

 

7,200

 

6,798

Loss on extinguishment and issuance of debt

20,458

Change in fair value of derivatives

(29,069)

(26,147)

Stock-based compensation expense

 

5,581

 

6,452

Provision for inventory obsolescence and net realizable value

9,441

2,077

Non-cash lease expense

336

Loss on disposal of assets

181

Changes in assets and liabilities:

Accounts receivable

9,880

829

Prepaid expenses and other current assets

 

(77)

 

(877)

Inventory

3,204

(11,708)

Deposits and other assets

117

(4)

Accounts payable

 

(3,336)

 

(1,154)

Accrued expenses and other liabilities

(8,608)

3,998

Deferred revenue

(628)

Accrued interest

(877)

(908)

Operating lease liabilities

(586)

Other

 

 

(947)

Net cash used in operating activities

 

(59,174)

 

(101,486)

Cash flows used in investing activities

Capital expenditures

 

(181)

 

(951)

Net cash used in investing activities

 

(181)

 

(951)

Cash flows used in financing activities

Issuance of common stock, net

(87)

26,757

Proceeds from exercise of stock options and ESPP purchases

576

94

Proceeds from debt issuance, net of costs

 

55,971

 

Proceeds from 2025 Notes, net of cost

77,699

Proceeds from Solar term loan, net of cost

42,951

Proceeds from issuance of warrants, net of costs

723

Payments of notes payable

(66,050)

(15,000)

Cost of modification of Second Lien Notes

(601)

Repurchase of 2023 Notes

(37,000)

Net cash (used in) provided by financing activities

 

(10,191)

 

96,224

Net decrease in cash, cash equivalents and restricted cash

 

(69,546)

 

(6,213)

Cash, cash equivalents and restricted cash, at beginning of period

 

95,938

 

136,793

Cash, cash equivalents and restricted cash, at ending of period

$

26,392

$

130,580

Supplemental disclosure of cash flow information

Cash paid during the period for interest

$

5,600

$

4,200

Supplemental disclosure of non-cash investing and financing activities

Property and equipment purchases included in accounts payable and accrued expenses

$

$

182

Issuance of common stock converted from notes payables

$

300

$

Exchange of 2025 Notes for Second Lien Notes

$

(24,000)

$

Issuance of Second Lien Notes

$

15,675

$

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

Senseonics Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1.

Organization and Nature of Operations

Senseonics Holdings, Inc., a Delaware corporation, is a medical technology company focused on the development and commercialization of long-term, implantable continuous glucose monitoring (“CGM”) systems to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy.

Senseonics, Incorporated is a wholly owned subsidiary of Senseonics Holdings and was originally incorporated on October 30, 1996 and commenced operations on January 15, 1997. Senseonics Holdings and Senseonics, Incorporated are hereinafter collectively referred to as the “Company” unless otherwise indicated or the context otherwise requires.

2.

Going Concern and Liquidity Update

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

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

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

7

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

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

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

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

3.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Although the Company considers the disclosures in these unaudited consolidated financial statements to be adequate to make the information presented not misleading, certain information or footnote information normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of financial position at September 30, 2020 and December 31, 2019, results of operations, comprehensive loss, and changes in stockholder’s equity (deficit) for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019 have been included. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 16, 2020, and amended on April 28, 2020. The interim results for September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future interim periods.

The consolidated financial statements reflect the accounts of Senseonics Holdings, Inc. and its wholly owned operating subsidiary Senseonics Incorporated.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. In the accompanying unaudited consolidated financial statements,

8

estimates are used for, but not limited to, stock-based compensation, recoverability of long-lived assets, deferred taxes and valuation allowances, derivative assets and liabilities, obsolete inventory, warranty obligations, variable consideration related to revenue, depreciable lives of property and equipment, and accruals for clinical study costs, which are accrued based on estimates of work performed under contract. The Company considered COVID-19 related impacts to its estimates, as appropriate, within its unaudited condensed consolidated financial statements and there may be changes to those estimates in future periods due to the uncertainties surrounding the severity and duration of the COVID-19 pandemic. Actual results could differ from those estimates; however, management does not believe that such differences would be material.

Segment Information

The Company views its operations and manages its business in one segment, glucose monitoring products.

Comprehensive Loss

Comprehensive loss comprises net loss and other changes in equity that are excluded from net loss. For the three and nine months ended September 30, 2020 and 2019, the Company’s net loss equaled its comprehensive loss and, accordingly, no additional disclosure is presented.

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value. Cash and cash equivalents consisted of the following as of the periods listed below (in thousands):

September 30, 

December 31,

    

    

2020

    

2019

 

Cash ¹

$

26,189

$

38,043

Money market funds

3

37,769

Commercial paper

13,870

Corporate bonds

6,256

Cash and cash equivalents

$

26,192

$

95,938

(1) Includes overnight repurchase agreements

Restricted Cash

The Company’s restricted cash includes pledged cash as collateral related to its credit card program with Silicon Valley Bank. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows (in thousands):

September 30, 

December 31,

    

    

2020

    

2019

Cash and cash equivalents

$

26,192

$

95,938

Restricted cash

200

Cash, cash equivalents and restricted cash

$

26,392

$

95,938

Long-lived Assets

Management reviews long-lived assets, including property and equipment and right-of-use assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As a result of COVID-19 and the events described above in Note 2, the Company identified an indicator of impairment and completed an impairment assessment. As part of the assessment, the Company concluded the fair value of some of its property and equipment exceeded its carrying values and recognized an impairment of property and

9

equipment in the amount of $0.2 million for the nine months ended September 30, 2020 that was recorded in the Company’s unaudited condensed consolidated statement of operations and comprehensive loss.

Warranty Obligation

The Company provides a warranty of one year on its smart transmitters. Additionally, the Company may also replace Eversense system components that do not function in accordance with the product specifications. Estimated replacement costs are recorded at the time of shipment as a charge to cost of sales in the consolidated statement of operations and are developed by analyzing product performance data and historical replacement experience, including comparing actual return management authorizations to revenue.

At September 30, 2020 and December 31, 2019, the warranty reserve was $1.1 million and $2.2 million, respectively. The decrease in warranty reserve balance was attributable to the decrease in warranty provisions during the period as a result of the temporary suspension of commercial sales of Eversense. The following table provides a reconciliation of the change in estimated warranty liabilities as of September 30, 2020 and December 31, 2019 (in thousands):

September 30, 

December 31,

    

2020

    

2019

Balance at beginning of the year

$

2,197

$

816

Provision for warranties during the period

104

3,296

Settlements made during the period

(1,211)

(1,915)

Balance at end of the year

$

1,090

$

2,197

Revenue

The Company recognizes revenue in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company generates revenue from sales of its Eversense CGM system and related components at a fixed price to third-party distributors in the European Union and to a network of strategic fulfillment partners in the United States (collectively, “Customers”) who then resell the products to health care providers and patients. The Company is paid for its sales directly to the Customers, regardless of whether or not the Customers resell the products to health care providers and patients. Customer contracts do not include the right to return unless there is a product issue, in which case the Company may provide replacement product. Product conformity guarantees do not create additional performance obligations and are accounted for as warranty obligations in accordance with guarantee and loss contingency accounting guidance.

Revenue is recognized, at a point in time, when the Customers obtain control of the product based upon the delivery terms as defined in the contract at an amount that reflects the consideration which is expected to be received in exchange for the product. Contracts with the Customers include performance obligations for supply of goods and the performance obligation is typically satisfied upon transfer of control of the product. Distribution contracts may also contain requirements for training and customer service support, however these are not assessed as performance obligations given the activities are considered immaterial in the context of the contract. The payment terms and

10

conditions of the Customers vary, but the Company is typically paid within 60 days of invoicing subsequent to the Customers obtaining control of the Company’s product.

Revenue is recognized only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in a future period. The Company’s contracts may contain variable consideration such as prompt-pay discounts or tier-volume price discounts. Variable consideration, including the reimbursements paid by the Company to its Customers in accordance with the Eversense Bridge Program initiated in March 2019 and to a lesser extent, other discounts and prompt-pay incentives, is treated as a reduction in revenue when the product sale is recognized. Depending on the variable consideration, the Company estimates the expected value based on the terms of the agreements, historical data, insurance payor mix, reimbursement rates, and market conditions. In connection with the Eversense Bridge Program, the Company reimburses participating Customers an amount up to a fixed maximum for the difference in the cost of the Eversense CGM System and what they collect from insurance payors and the patient’s fee of $99. The Customers are responsible for confirming patient insurance coverage, obtaining pre-authorizations, determining eligibility, and continuously provide the Company with data regarding which patient orders are under the program and which are not. Customer supplied data, along with actual reimbursements that have been validated to patient claims, are used to support expected reimbursement estimates. Estimated reimbursement payments for product shipped to Customers but not provided to a patient within the same reporting period are recorded within accrued expenses and other current liabilities in the accompanying consolidated balance sheets. The Company’s estimates used in determining the variable consideration on a sale transaction may be adjusted each reporting period depending on actual results, provided a change does not reflect a modification to the original contract.

Contract assets consist of trade receivables from Customers and contract liabilities consist of amounts due to Customers in connection with the Eversense Bridge Program, classified as patient access and incentive programs within accrued liabilities on the accompanying unaudited condensed consolidated balance sheets. Trade receivables for customers in the United States are recorded at net realizable value, which is generally the contractual price but may be net of anticipated prompt-pay or promotional discounts.

Concentration of Revenue and Customers

For the three months ended September 30, 2020 and 2019, the Company derived 33% and 78% of its total revenue, respectively, from one customer, Roche Diabetes Care GmbH (“Roche”). For the nine months ended September 30, 2020 and 2019, the Company derived 29% and 70% of its total revenue, respectively, from one customer, Roche. During the three and nine months ended September 30, 2020, Roche did not place commercial sales orders in accordance with their quarterly requirements or towards their annual binding minimum requirements for sensors. Revenues for these corresponding periods in 2020 represent purchases for transmitters and miscellaneous Eversense system components.

11

Revenue by Geographic Region

The following table sets forth net revenue derived from the Company’s two primary geographical markets, the United States and outside of the United States, based on the geographic location to which the Company delivers the product, for the three and nine months ended September 30, 2020 and 2019.

Three Months Ended

Nine Months Ended

September 30, 2020

September 30, 2020

%

%

(Dollars in thousands)

Amount

of Total

Amount

of Total

Revenue, net:

Outside of the United States

$

258

33.6

%

$

325

30.5

%

United States

509

66.4

739

69.5

Total

$

767

100.0

%

$

1,064

100.0

%

Three Months Ended

Nine Months Ended

September 30, 2019

September 30, 2019

%

%

(Dollars in thousands)

Amount

of Total

Amount

of Total

Revenue, net:

Outside of the United States

$

3,792

87.8

%

$

9,908

80.2

%

United States

527

12.2

2,441

19.8

Total

$

4,319

100.0

%

$

12,349

100.0

%

Accounts Receivable

Accounts receivable consist of amounts due from the Company’s Customers and are recorded at net realizable value, which may include reductions for allowances for doubtful accounts at the time potential collection risk is identified or for promotional or prompt-pay discounts offered. The Company extended payment terms and provided one-time COVID-19 pandemic relief concessions to some of its customers in the United States for allowances up to a specified amount if they are unable to sell through Eversense and related components on hand prior to product expiry, which began to occur in the third quarter of 2020 and the Company expects to continue to occur in the fourth quarter of 2020. The Company does not have a history of collectability concerns, however an immaterial allowance for uncollectible accounts was recorded as of September 30, 2020. There were no provisions for uncollectible accounts recorded against accounts receivable at December 31, 2019.

Net Loss per Share

Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company evaluated the Series A Preferred Stock to determine if those shares represented a participating security. Because the holders of the Series A Preferred Stock participate in Common Stock dividends, it is considered a participating security and the application of the two-class method will be applied once the Company has net income. The holders of the Series A Preferred Stock do not participate in losses; therefore, there is no impact to the current period net loss. The Masters option to purchase additional Series A Preferred Stock are not considered participating securities because the option holder is not entitled to participate in dividends until the option is exercised and the resulting Series A Preferred Stock shares are issued.

12

For periods of net loss, diluted net loss per share is calculated similarly to basic loss per share because the impact of all potential common shares is anti-dilutive. The total number of anti-dilutive shares at September 30, 2020 and 2019, consisting of common stock options and stock purchase warrants, which have been excluded from the computation of diluted net loss per share, was as follows:

September 30, 

    

2020

    

2019

Stock-based awards

27,972,959

25,684,676

Second Lien Notes

18,085,140

2023 Notes

6,672,500

6,672,500

2025 Notes

44,429,624

63,565,883

2024 Notes

65,359,000

Warrants

9,696,581

5,196,581

Total anti-dilutive shares outstanding

172,215,804

101,119,640

For periods of net income, and when the effects are not anti-dilutive, diluted earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the impact of all potential dilutive common shares, consisting primarily of common stock options stock purchase warrants and employee stock purchases using the treasury stock method.

Exit or Disposal Costs

Costs associated with exit or disposal activities, such as restructuring, sale or termination of a line of business, the closure of business activities in a particular location, the relocation of business activities, changes in management structure and a fundamental reorganization that affects the nature and focus of operations, are recognized and measured initially at their fair values during the period in which an obligation meets the definition of a liability. The Company’s workforce reduction on March 26, 2020 did not permit continuation of service past March 31, 2020 and associated one-time employee termination benefit costs in the amount of $1.4 million were paid and recorded in the Company’s accompanying unaudited consolidated financial statements for the nine months ended September 30, 2020.

Recent Accounting Pronouncements

Recently Adopted

In August 2018, the Financial Accounting Standards Board (“FASB “) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements on fair value measurements. The new standard includes additional disclosure requirements regarding the range and weighted average to develop significant unobservable inputs within Level 3 fair value measurements. The Company adopted this on its effective date, January 1, 2020 and did not have a material impact on the consolidated financial statements and related disclosures.

Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities in unrealized loss positions, the new standard requires allowances to be recorded instead of reducing the amortized cost of the investment. The Company does not currently hold or plan to invest in available-for-sale securities and has not historically experienced collection issues or bad debts with trade receivables. Accordingly, the Company does not expect this to have a significant impact on its consolidated financial statements and related disclosures at this time. The Company will adopt this guidance on its effective date for smaller reporting companies, January 1, 2023.

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In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.

4. Inventory, net

Inventory, net of reserves, consisted of the following (in thousands):

    

September 30, 

    

December 31, 

2020

    

2019

Finished goods

    

$

259

    

$

3,944

Work-in-process

 

1,419

 

10,938

Raw materials

 

2,606

 

2,047

Total

$

4,284

$

16,929

The Company charged $15.1 million and $3.3 million to cost of sales for the nine months ended September 30, 2020 and 2019, respectively, to reduce the value of inventory for items that are potentially obsolete, in excess of product demand, or to adjust costs to their net realizable value.

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

September 30, 

December 31, 

2020

    

2019

Contract manufacturing⁽¹⁾

$

3,649

$

3,043

Insurance

442

44

Clinical and preclinical

178

240

Marketing and sales

    

127

 

605

Rent

102

IT and software

65

294

Other

 

25

 

179

Interest receivable

 

 

107

Total prepaid expenses and other current assets

$

4,588

$

4,512

(1) Includes deposits for manufacturing and amounts for materials procured by contract manufacturers on behalf of the Company following its March 2020 announcement of its streamlined operational focus and may be applied when manufacturing resumes.

14

6.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

September 30, 

December 31, 

2020

    

2019

Compensation and benefits

$

3,505

$

5,630

Interest on notes payable

 

1,275

 

2,153

Product warranty and replacement obligations

1,089

2,197

Professional and administration services

947

1,384

Research and development

815

1,956

Operating lease

 

769

 

696

Contract manufacturing

    

352

    

2,452

Patient access programs

232

1,578

Sales and marketing services

116

553

Other

53

37

Total accrued expenses and other current liabilities

$

9,153

$

18,636

7.Notes Payable, Preferred Stock and Stock Purchase Warrants

Repayment of Solar Term Loan

On March 22, 2020, the Company and Solar terminated its Loan and Security Agreement, dated as of July 16, 2019 (the “Solar Loan Agreement”).

In connection with the termination, the Company paid $48.5 million representing all amounts outstanding under the Solar Loan Agreement, including the principal amount and interest of the loans, a payoff fee of 6.45% of the loans outstanding, a prepayment premium of 3.0% of the loans outstanding and other obligations owed to Solar thereunder. The Company issued warrants in connection to the Solar Loan Agreement to purchase an aggregate of 1,125,000 shares of the Company’s common stock with an exercise price of $1.20 per share, which are exercisable until July 25, 2029.

A loss on the extinguishment of debt in the amount of $4.5 million reflecting the difference between the repayment amount and the carrying value of the principal balance, accrued interest, unamortized debt issuance costs and unaccreted prepayment fee at March 22, 2020 was recorded to other income (expense) in the Company’s unaudited condensed consolidated statement of operations and comprehensive loss during the nine months ended September 30, 2020.

PPP Loan

On April 22, 2020, the Company received $5.8 million in loan funding from the PPP pursuant to the CARES Act, as amended by the Flexibility Act, and administered by the SBA. The unsecured loan (the “PPP Loan”) is evidenced by the PPP Note dated April 21, 2020 (the “PPP Note”) in the principal amount of $5.8 million with Silicon Valley Bank (the “Bank”).

Under the terms of the PPP Note and the PPP Loan, interest accrues on the outstanding principal at a rate of 1.0% per annum. The term of the PPP Note is two years, though it may be payable sooner in connection with an event of default under the PPP Note. To the extent the loan amount is not forgiven under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning after determination of forgiveness by the Bank. The Company may apply for forgiveness any time on or before the maturity date of the loan. If the Company does not apply for loan forgiveness within ten months after the last day of the covered period, the PPP loan is no longer deferred, and the Company must begin paying principal and interest.

15

The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply for forgiveness for all or a part of the Company’s PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the specified period after the loan origination for certain purposes including payroll costs, interest on debt obligations incurred prior to February 15, 2020, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered specified period will qualify for forgiveness. As a result of the Company’s workforce reduction, the amount of forgiveness will correspondingly decrease.

The PPP Note may be prepaid in part or in full, at any time, without penalty. The PPP Note provides for certain customary events of default, including (i) failing to make a payment when due under the PPP Note, (ii) failure to do anything required by the PPP Note or any other loan document, (iii) defaults of any other loan with the Bank, (iv) failure to disclose any material fact or make a materially false or misleading representation to the Bank or SBA, (v) default on any loan or agreement with another creditor, if the Bank believes the default may materially affect the Company’s ability to pay the PPP Note, (vi) failure to pay any taxes when due, (vii) becoming the subject of a proceeding under any bankruptcy or insolvency law, having a receiver or liquidator appointed for any part of the Company’s business or property, or making an assignment for the benefit of creditors, (viii) having any adverse change in financial condition or business operation that the Bank believes may materially affect the Company’s ability to pay the PPP Note, (ix) if the Company reorganizes, merges, consolidates, or otherwise changes ownership or business structure without the Bank’s prior written consent, or (x) becoming the subject of a civil or criminal action that the Bank believes may materially affect the Company’s ability to pay the PPP Note. Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require immediate payment of all amounts owed under the PPP Note, collect all amounts owing from the Company, and file suit and obtain judgment against the Company.

Highbridge Credit Facility

Highbridge Loan Agreement

On April 21, 2020, the Company entered into the Highbridge Loan Agreement with certain funds managed by Highbridge, the Lenders and Wilmington Savings Fund Society, SCB, as collateral agent.

Pursuant to the Highbridge Loan Agreement, the Company borrowed an aggregate principal amount of $15.0 million on April 24, 2020. In connection with the Highbridge Loan Agreement and receipt of the first tranche of borrowing, the Company issued 1,500,000 shares of its common stock to the Lenders as a commitment fee.

On August 14, 2020, the Company prepaid the First Lien Notes in full, including the discounted prepayment premium, in the amount of approximately $17.6 million and recognized a loss on extinguishment in the amount of $0.7 million.

The First Lien Notes were secured, senior obligations that bear interest at the annual rate of 12% or, at the Company’s election, payment in kind (“PIK”) at an annual rate of 13%, payable monthly in arrears. The First Lien Notes would have matured on October 24, 2021 (the “First Lien Maturity Date”). The obligations under the First Lien Notes were secured by substantially all the Company’s assets.

The First Lien Notes also contained redemption features that were evaluated for bifurcation as separate derivative instruments including the permitted prepayment put option, the mandatory accelerated redemption and the mandatory redemption and reinvestment upon an asset sale. The Company recorded the fair value of the embedded features in the amount of $1.0 million as a debt premium and derivative asset in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging. The derivative is adjusted to fair value at each reporting period, with the change recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statements of operations and comprehensive loss.

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The debt issuance costs incurred in connection with the Highbridge financings were allocated between the First Lien Notes, Second Lien Notes, common stock, and warrants. The Company incurred and deferred $1.5 million in debt issuance costs and debt discounts associated with the First Lien Notes, which will be amortized as interest expense over the term of the First Lien Notes, along with $1.0 million of debt premium from the derivative bifurcation.

Exchange Agreement with Highbridge

On April 21, 2020, the Company entered into a Note Purchase and Exchange Agreement with certain funds managed by Highbridge providing for the exchange (the “Exchange”) of $24.0 million aggregate principal amount of the Company’s outstanding 2025 Notes for (i) $15.7 million aggregate principal amount of newly issued Second Lien Notes, (ii) 11,026,086 shares of common stock, (iii) warrants to purchase up to 4,500,000 shares of common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged. The Exchange closed on April 24, 2020. The warrants may be exercised in cash or on a cashless basis at any time through the three-year anniversary of the issuance date. On August 9, 2020, the Company entered into a First Amendment to Note Purchase and Exchange Agreement with Highbridge (as amended by the Amendment, the “Exchange Agreement”).

On August 9, 2020, the Company entered into a First Amendment to Note Purchase and Exchange Agreement with Highbridge (as amended by the Amendment, the “Exchange Agreement”). The debt issuance costs incurred in connection with the Amendment were allocated to the Second Lien Notes. Loan modifications require third-party debt related costs to be expensed immediately. In connection with the Amendment, the Company recorded a total of $0.5 million in debt issuance costs which were expensed immediately.

The Second Lien Notes are secured, senior obligations of the Company, junior only to the First Lien Notes. Interest in cash at the annual rate of 7.5% or, at the Company’s option, payment in kind at an annual rate of 8.25%, on the Second Lien Notes will be payable monthly in arrears. The maturity date for the Second Lien Notes is August 9, 2023 (the “Second Lien Maturity Date”), unless earlier repurchased, redeemed or converted in accordance with their terms. The obligations under the Second Lien Notes are secured by substantially all of the Company’s assets.

The Company will have the right to prepay the Second Lien Notes at any time, subject to a prepayment premium, which in certain circumstances the Company may elect to pay in common stock, equal to the aggregate amount of interest payments through maturity.

The holders of the Second Lien Notes have the right to convert the aggregate principal of the Second Lien Notes (together with any applicable prepayment premium) to common stock at a price per share equal to 90% of the greater of (i) the daily volume weighted average of the price per share of the common stock, on the conversion date, or if the conversion date is not a trading date, the trading day immediately prior to the conversion date and (ii) $0.33 per share. This conversion option has a daily limit of $1.0 million in aggregate converted principal (inclusive of principal amount of First Lien Notes that are voluntarily converted by the Lenders). Subject to certain conditions, if the Company retains or reinvests proceeds of an asset sale pursuant to the Asset Sale Prepayment Provisions in the Exchange Agreement, the Holders shall be entitled to convert additional Second Lien Notes and the Lenders shall be entitled to convert First Lien Notes in aggregate combined principal amount equal to 45% of such net proceeds retained or reinvested (together with any applicable prepayment premium).

The Exchange Agreement contains customary terms and covenants, including without limitation: financial covenants, such as maintaining a minimum cash balance; and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The Exchange Agreement also contains customary events of default, after which the Second Lien Notes may be due and payable immediately, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, material adverse changes, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against us, and change of control, termination of any guaranty, governmental approvals, and lien priority.

The Second Lien Notes also contain redemption features that were evaluated for bifurcation as separate derivative instruments including the permitted prepayment put option, the mandatory accelerated redemption and the

17

mandatory redemption and reinvestment upon an asset sale. Unlike the First Lien Notes, the Second Lien Notes also permit voluntary conversion at the option of the holder as described above. The Company recorded the fair value of these embedded features in the amount of $1.9 million as a derivative asset in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statement of operations and comprehensive loss.

Since Highbridge was a noteholder of the 2025 Notes and exchanged $24.0 million of outstanding principal of the 2025 Notes for Second Lien Notes, the Exchange qualifies as a loan modification. The debt issuance costs incurred in connection with the Highbridge financings were allocated between the First Lien Notes, Second Lien Notes, common stock, and warrants. Loan modifications require third-party debt related costs to be expensed immediately, whereas fees paid to lenders of the modified loans are deferred. In connection with the issuance of the Second Lien Notes, the Company recorded a total of $14.1 million in debt issuance costs and debt discounts, including $13.2 million allocated from the 2025 Notes for the $24.0 million outstanding principal exchanged and the discount from the bifurcated derivative. These costs were recorded as debt discounts to the Second Lien Notes and are amortized as interest expense over the term of the Second Lien Notes. Allocated third-party debt related costs of $0.8 million were expensed during the three and nine months ended September 30, 2020.

During the quarter ended September 30, 2020, Highbridge voluntarily converted a total of $3.6 million of outstanding principal amount of the Second Lien Notes for 9,328,955 shares of common stock, which included prepayment premiums and were based off the Company’s election of PIK interest. Accordingly, $3.6 million of allocated deferred issuance costs, debt discounts and prepayment premiums were recognized as a loss on extinguishment of debt in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss during the three and nine months ended September 30, 2020. For the nine months ended September 30, 2020, Highbridge voluntarily converted a total of $9.6 million of outstanding principal amount of the Second Lien Notes for 22,695,294 shares of common stock, which included prepayment premiums and were based off the Company’s election of PIK interest. Accordingly, $10.0 million of allocated deferred issuance costs, debt discounts and prepayment premiums were recognized as a loss on extinguishment of debt in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss during the three and nine months ended September 30, 2020.

Convertible Notes

2024 Notes

On August 9, 2020, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with PHC, as the purchaser (together with the other purchasers from time to time party thereto, the “Note Purchasers”) and Alter Domus (US) LLC, as collateral agent. Pursuant to the Note Purchase Agreement, the Company borrowed $35.0 million in aggregate principal through the issuance and sale of 2024 Notes on August 14, 2020 (the “Closing Date”). The Company also issued 2,941,176 shares of its common stock, $0.001 par value per share to PHC as a financing fee (the “Financing Fee Shares”) on the Closing Date. The Financing Fee Shares are accounted for as debt discount in the amount of $1.5 million.

The 2024 Notes are senior secured obligations of the Company and will be guaranteed on a senior secured basis by the Company’s wholly owned subsidiary, Senseonics, Incorporated. Interest at the annual rate of 9.5% will be payable semi-annually in cash or, at the Company’s option, payment in kind. The interest rate will decrease to 8.0% if the Company obtains approval for 180-day Eversense XL for marketing in the United States, subject to certain conditions. The maturity date for the 2024 Notes is October 31, 2024 (the “Maturity Date”), provided that the Maturity Date will accelerate if the Company has not repaid the Company’s outstanding Second Lien Notes (other than an aggregate principal amount of up to $1.0 million) by 91 days prior to the maturity of the Second Lien Notes. The obligations under the 2024 Notes are secured by substantially all of the Company’s and its subsidiary’s assets.

18

The Note Purchasers are entitled to convert the 2024 Notes to common stock at a conversion rate of 1,867.4136 shares per $1,000 principal amount of the 2024 Notes (including any interest added thereto as payment in kind), equivalent to a conversion price of approximately $0.54 per share, subject to specified anti-dilution adjustments, including adjustments for the Company’s issuance of equity securities on or prior to April 30, 2022 below the conversion price. In addition, following a notice of redemption or certain corporate events that occur prior to the maturity date, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2024 Notes in connection with such notice of redemption or corporate event. In certain circumstances, the Company will be required to pay cash in lieu of delivering make whole shares unless the Company obtains stockholder approval to issue such shares.

Subject to specified conditions, on or after October 31, 2022, the 2024 Notes are redeemable by the Company if the closing sale price of the common stock exceeds 275% of the conversion price for a specified period of time and subject to certain conditions upon 10 days prior written notice at a cash redemption price equal to the then outstanding principal amount (including any payment in kind interest which has been added to such amount), plus any accrued but unpaid interest. On or after October 31, 2023, the 2024 Notes are redeemable by the Company upon 10 days prior written notice at a cash redemption price equal to the then outstanding principal amount (including any payment in kind interest which has been added to such amount), plus any accrued but unpaid interest, plus a call premium of 130% if redeemed at least six months prior to the Maturity Date or a call premium of 125% if redeemed within six months of the Maturity Date.

The Note Purchase Agreement contains customary terms and covenants, including financial covenants, such as operating within an approved budget and achieving minimum revenue and liquidity targets, and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The Note Purchase Agreement also contains customary events of default, after which the 2024 Notes be due and payable immediately, including defaults related to payment compliance, material inaccuracy of representations and warranties, covenant compliance, material adverse changes, bankruptcy and insolvency proceedings, cross defaults to certain other agreements, judgments against the Company, change of control or delisting events, termination of any guaranty, governmental approvals, and lien priority.

The Company also has the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon obtaining approval for the 180-day Eversense product for marketing in the United States before such date. This purchased put option represents a freestanding financial instrument and is recognized as an asset in the Company’s consolidated balance sheets at the fair value of $4.2 million.

The Note Purchase Agreement also contained several provisions requiring bifurcation as a separate derivative liability including an embedded conversion feature, mandatory prepayment upon event of default that constitutes a breach of the minimum revenue financial covenant, optional redemption upon an event of default, change in interest rate after PMA approval and default interest upon an event of default. The Company recorded the fair value of the embedded features in the amount of $25.8 million as a derivative liability in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statement of operations and comprehensive loss. The fair value of the derivative as of September 30, 2020 was $19.9 million.

In connection with the issuance of the Note Purchase Agreement, the Company incurred $2.9 million in debt issuance costs and debt discounts. The associated debt issuance costs are recorded as a contra liability in the amount of $1.4 million and are deferred and amortized as additional interest expense over the term of the notes.

2025 Notes

In July 2019, the Company issued $82.0 million in aggregate principal amount of 2025 Notes that will mature on January 15, 2025, unless earlier repurchased or converted. The 2025 Notes are convertible, at the option of the holders, into shares of the Company’s common stock, at an initial conversion rate of 757.5758 shares per $1,000 principal amount of the 2025 Notes (equivalent to an initial conversion price of approximately $1.32 per share).

19

The 2025 Notes also contained an embedded conversion option requiring bifurcation as a separate derivative liability, along with the fundamental change make-whole provision and the cash settled fundamental make-whole shares provision. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded to other income (expense) in the Company’s consolidated statement of operations and comprehensive loss.

In connection with the Exchange on April 24, 2020, $24.0 million aggregate principal of the Company’s outstanding 2025 Notes held by Highbridge were exchanged for $15.7 million of Second Lien Notes, (ii) 11,026,086 shares of common stock, (iii) warrants to purchase up to 4,500,000 shares of common stock at an exercise price of $0.66 per share, and (iv) $0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged. This transaction modified the original 2025 Notes outstanding with Highbridge and resulted in $13.2 million of deferred issuance fees and debt discounts associated with the exchanged 2025 Notes being transferred as a discount to the Second Lien Notes.

2023 Notes

In the first quarter of 2018, the Company issued $53.0 million in aggregate principal amount of senior convertible notes due February 1, 2023 (the “2023 Notes”). In July 2019, the Company used the net proceeds from the issuance of the 2025 Notes to repurchase $37.0 million aggregate principal amount of the outstanding 2023 Notes. Each $1,000 of principal of the 2023 Notes is initially convertible into 294.1176 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $3.40 per share, subject to adjustment upon the occurrence of specified events.

The Company bifurcated the embedded conversion option, along with the interest make-whole provision and make-whole fundamental change provision as a derivative liability. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statement of operations and comprehensive loss.

Convertible Preferred Stock and Warrants

On August 9, 2020, the Company entered into a Stock Purchase Agreement with Masters, pursuant to which the Company issued and sold to Masters 3,000 shares of Series A Preferred Stock, at a price of $1,000.00 per share, on the Closing Date. Masters also has the option to purchase up to an additional 27,000 shares of Series A Preferred Stock at a price of $1,000.00 per share in a subsequent closing, subject to the terms and conditions of the Stock Purchase Agreement, as amended as set forth in Note 13 – Subsequent Events. Each share of Series A Preferred Stock is initially convertible into a number of shares of common stock equal to $1,000 divided by the conversion price of $0.476 per share, subject to customary anti-dilution adjustments, including in the event of any stock split. The Series A Preferred Stock ranks senior to the common stock. Upon a liquidation, dissolution or winding up of the Company, each share of Series A Preferred Stock is entitled to receive an amount per share equal to the greater of the purchase price paid and the amount that the holder would have been entitled to receive at such time if the Series A Preferred Stock were converted into common stock. The holders are also entitled to participate in dividends declared or paid on the common stock on an as-converted basis. If we undergo a change of control, each holder has the right to cause us to redeem any or all of the Series A Preferred Stock for cash consideration equal to the liquidation amount. The holders of Series A Preferred Stock generally are entitled to vote with the holders of the shares of common stock on all matters submitted for a vote of holders of shares of common stock (voting together with the holders of shares of common stock as one class) on an as-converted basis. Additionally, certain matters will require the approval of the majority of the outstanding Series A Preferred Stock, voting as a separate class, including (i) altering or changing adversely the powers, privileges, preferences or rights of the Series A Preferred Stock, or (ii) amendments, modifications, repeal or waiver of any provision of the Company’s certificate of incorporation, bylaws or of the certificate of designations that would adversely affect the rights, preferences, privileges or powers of the Series A Preferred Stock.

The Series A Preferred Stock is contingently redeemable upon occurrence of a change of control event which is considered outside the control of the Company, and therefore the Series A Preferred Stock has been classified in temporary equity on the consolidated balance sheet. At each reporting period, the Company evaluates the probability of the Series A Preferred Stock being redeemed. The Company’s policy is to recognize the difference in carrying value to

20

redemption value once the redemption becomes probable. As of September 30, 2020, the features that would require redemption (e.g., occurrence of a change of control) was not deemed probable.

The Company accounted for the option to purchase up to an additional 27,000 shares of preferred stock as a freestanding warrant instrument, as it is legally detachable and separately exercisable. This warrant is classified as a liability in accordance with ASC 480 on the Company’s balance sheet and was recorded at the estimated fair value of $4.8 million upon issuance. The warrant is required to be remeasured to fair value at each reporting period with the change recorded in change in fair value of derivatives that is a component of other income (expense). The fair value as of September 30, 2020 was $1.6 million.

The following carrying amounts were outstanding under the Company’s notes payable as of September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020

Principal ($)

Debt Discount ($)

Issuance Costs ($)

Carrying Amount ($)

2023 Notes

15,700

(3,052)

-

12,648

2025 Notes

57,700

(29,454)

(449)

27,797

2024 Notes

35,000

(22,999)

(1,405)

10,596

Second Lien Notes

6,394

(5,083)

(73)

1,238

PPP Loan

5,763

-

-

5,763

December 31, 2019

Principal ($)

Debt Discount ($)

Issuance Costs ($)

Carrying Amount ($)

Solar Term Loan

45,000

(1,466)

(100)

43,434

2023 Notes

15,700

(3,900)

-

11,800

2025 Notes

82,000

(46,482)

(708)

34,810

Interest expense related to the notes payable for the three and nine months ended September 30, 2020 was as follows (dollars in thousands):

Three months ended September 30, 2020

Effective Interest Rate

Interest ($)

Debt Discount and Fees ($)

Issuance Costs ($)

Final Payment Fee ($)

Total Interest Expense ($)

2023 Notes

5.25%

206

290

-

-

496

2025 Notes

5.25%

795

1,136

17

-

1,948

First Lien Notes

13.00%

256

9

15

-

280

Second Lien Notes

8.25%

48

372

5

-

425

2024 Notes

9.50%

445

-

23

-

468

PPP Loan

1.00%

15

-

-

-

15

Total

1,765

1,807

60

-

3,632

Nine months ended September 30, 2020

Effective Interest Rate

Interest ($)

Debt Discount and Fees ($)

Issuance Costs ($)

Final Payment Fee ($)

Total Interest Expense ($)

Solar Term Loan

8.98%

1,001

301

-

-

1,302

2023 Notes

5.25%