Quarterly Report (10-q)

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Table of Contents

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, 2021

☐ 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

(301) 515-7260

(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 445,982,671 shares of common stock, par value $0.001, outstanding as of November 5, 2021.

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TABLE OF CONTENTS

PART I: Financial Information

ITEM 1: Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020	3
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for three and nine months ended September 30, 2021 and 2020	4
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2021 and 2020	5
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	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	41

ITEM 4: Controls and Procedures	41

PART II: Other Information	42

ITEM 1: Legal Proceedings	42

ITEM 1A: Risk Factors	42

ITEM 2: Unregistered Sales of Equity and Securities and Use of Proceeds	42

ITEM 3: Defaults Upon Senior Securities	42

ITEM 4: Mine Safety Disclosures	42

ITEM 5: Other Information	43

ITEM 6: Exhibits	43

SIGNATURES	44

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Senseonics Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	September 30,		December 31,
	2021		2020
		(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	46,211	$	18,005
Restricted cash		—		200
Short term investments, net		96,566		—
Accounts receivable, net		124		565
Accounts receivable - related parties		3,549		2,421
Inventory, net		7,878		5,281
Prepaid expenses and other current assets		3,732		3,774
Total current assets		158,060		30,246

Option		236		1,886
Deposits and other assets		1,668		2,229
Long term investments, net		58,355		—
Property and equipment, net		1,305		1,557
Total assets	$	219,624	$	35,918

Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	793	$	1,762
Accrued expenses and other current liabilities		13,985		11,674
Term Loans, net		5,113		3,202
Total current liabilities		19,891		16,638

Long-term debt and notes payables, net		57,161		57,216
Derivative liabilities		317,304		62,119
Option		91,097		39,734
Other liabilities		817		1,483
Total liabilities		486,270		177,190

Preferred stock and additional paid-in-capital, subject to possible redemption: $0.001 par value per share; 0 shares issued and outstanding as of September 30, 2021 and 3,000 shares issued and outstanding as of December 31, 2020		—		2,811
Total temporary equity		—		2,811

Commitments and contingencies

Stockholders’ deficit:
Common stock, $0.001 par value per share; 900,000,000 shares authorized; 445,615,196 and 265,582,688 shares issued and outstanding as of September 30, 2021 and December 31, 2020		446		266
Additional paid-in capital		768,324		504,162
Accumulated other comprehensive income, net of tax		2		—
Accumulated deficit		(1,035,418)		(648,511)
Total stockholders' deficit		(266,646)		(144,083)
Total liabilities and stockholders’ deficit	$	219,624	$	35,918

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

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Senseonics Holdings, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except share and per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Revenue, net	$	276		514		1,196		761
Revenue, net - related parties		3,256		253		8,471		303
Total revenue		3,532		767		9,667		1,064
Cost of sales		4,778		(68)		9,995		21,006
Gross profit (loss)		(1,246)		835		(328)		(19,942)

Expenses:
Sales and marketing expenses		2,468		3,234		5,725		17,521
Research and development expenses		7,200		4,568		19,562		15,726
General and administrative expenses		5,117		5,501		17,622		15,635
Operating loss		(16,031)		(12,468)		(43,237)		(68,824)
Other income (expense), net:
Interest income		486		1		743		173
Gain (Loss) on fair value adjustment of option		13,556		—		(74,848)		—
Gain (Loss) on extinguishment of debt and option		—		(9,527)		330		(20,458)
Loss on issuance of debt & other issuance costs		—		(931)		—		(1,216)
Interest expense		(4,245)		(3,632)		(12,337)		(11,560)
Gain (Loss) on change in fair value of derivatives		50,075		3,520		(255,185)		29,069
Impairment cost		(488)		—		(1,650)		—
Other expense		(439)		(391)		(723)		(720)
Total other income (expense), net		58,945		(10,960)		(343,670)		(4,712)

Net Income (Loss)		42,914		(23,428)		(386,907)		(73,536)
Other comprehensive income, net of tax
Unrealized gain on marketable securities		18		—		2		—
Total other comprehensive income, net of tax		18		—		2		—
Total comprehensive income (loss), net of tax	$	42,932	$	(23,428)	$	(386,905)	$	(73,536)

Basic net income (loss) per common share	$	0.10	$	(0.10)	$	(0.93)	$	(0.33)
Basic weighted-average shares outstanding		445,378,308		236,519,812		414,128,283		220,250,060

Diluted net income (loss) per common share	$	0.08	$	(0.10)	$	(0.93)	$	(0.33)
Diluted weighted-average shares outstanding		581,760,516		236,519,812		414,128,283		220,250,060

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

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Senseonics Holdings, Inc.

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

(in thousands)


				Additional			Accumulated			Total		Series A
	Common Stock			Paid-In		Other		Accumulated		Stockholders'		Convertible
	Shares	Amount		Capital		Comprehensive Loss		Deficit		Equity (Deficit)		Preferred Stock Temporary Equity
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 RSU's	—		—		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 RSU's	—		—		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)	$	—

Three months ended September 30, 2021:
Balance, June 30, 2021	445,125		445		765,262		(16)		(1,078,332)		(312,641)		—
Exercise of stock options and warrants	474		1		737		—		—		738		—
Issued common stock for vested RSUs and ESPP purchase	16		—		24		—		—		24		—
Stock-based compensation expense	—		—		2,301		—		—		2,301		—
Net income	—		—		—		—		42,914		42,914		—
Other comprehensive income, net of tax	—		—		—		18		—		18		—
Balance, September 30, 2021	445,615	$	446	$	768,324	$	2	$	(1,035,418)	$	(266,646)	$	—

Nine months ended September 30, 2021:

Balance, December 31, 2020	265,582		266		504,162		—		(648,511)		(144,083)		2,811
Issuance of convertible preferred stock, net	—		—		—		—		—		—		42,756
Conversion of preferred stock	54,166		54		45,512		—		—		45,566		(45,567)
Issuance of common stock, net	112,571		113		200,327		—		—		200,440		—
Exercise of stock options and warrants	5,501		5		4,622		—		—		4,627		—
Exchange and conversion of convertible notes, net	4,925		5		6,496		—		—		6,501		—
Issued common stock for vested RSUs and ESPP purchase	2,870		3		71		—		—		74		—
Stock-based compensation expense	—		—		7,134		—		—		7,134		—
Net loss	—		—		—		—		(386,907)		(386,907)
Other comprehensive income, net of tax	—		—		—		2		—		2		—
Balance, September 30, 2021	445,615	$	446	$	768,324	$	2	$	(1,035,418)	$	(266,646)	$	—

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

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Senseonics Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)


	Nine Months Ended
	September 30,
	2021		2020
Cash flows from operating activities
Net loss	$	(386,907)		(73,536)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		918		853
Non-cash interest expense (debt discount and deferred costs)		5,825		7,200
Change in fair value of derivatives		255,185		(29,069)
Loss on fair value adjustment of option		74,848		—
(Gain) Loss on extinguishment of debt and option		(330)		20,458
Impairment cost		1,650		—
Stock-based compensation expense		7,134		5,581
Loss on disposal of assets		—		181
Changes in assets and liabilities:
Accounts receivable		(686)		9,880
Prepaid expenses and other current assets		41		(77)
Inventory		(2,597)		12,645
Deposits and other assets		(30)		117
Accounts payable		(971)		(3,336)
Accrued expenses and other liabilities		1,319		(8,608)
Accrued interest		326		(877)
Operating lease liabilities		—		(586)
Net cash used in operating activities		(44,275)		(59,174)
Cash flows from investing activities
Capital expenditures		(75)		(181)
Purchase of marketable securities		(154,918)		—
Net cash used in investing activities		(154,993)		(181)
Cash flows from financing activities
Issuance of common stock, net		200,440		(87)
Proceeds from exercise of stock options, stock warrants and ESPP purchases		4,701		576
Proceeds from debt issuance, net		—		55,971
Proceeds from issuance of Masters preferred stock, net		22,783		—
Repayment of term loans		(650)		(66,050)
Cost of issuance of Second Lien Notes		—		(601)
Net cash provided by (used in) financing activities		227,274		(10,191)
Net increase (decrease) in cash, cash equivalents and restricted cash		28,006		(69,546)
Cash, cash equivalents and restricted cash, at beginning of period		18,205		95,938
Cash, cash equivalents and restricted cash, at ending of period	$	46,211	$	26,392

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	6,149		5,600
Supplemental disclosure of non-cash investing and financing activities
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.

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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.	Liquidity and Capital Resources

From its founding in 1996 until 2010, the Company has devoted substantially all of its resources to researching various sensor technologies and platforms. Beginning in 2010, the Company narrowed its focus to developing and refining a commercially viable glucose monitoring system. However, to date, the Company has not generated any significant revenue from product sales. The Company has incurred substantial losses and cumulative negative cash flows from operations since its inception in October 1996. The Company has never been profitable from operations, and its net losses were $175.2 million, $115.5 million, and $94.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of September 30, 2021, the Company had an accumulated deficit of $1.0 billion. To date, the Company has funded its operations principally through the issuance of preferred stock, common stock, convertible note issuance and debt. As of September 30, 2021, the Company had cash, cash equivalents and marketable securities of $201.1 million.

In November 2019, the Company entered into an Open Market Sale Agreement with Jefferies LLC, under which the Company could offer and sell, from time to time at its sole discretion, shares of its common stock having an aggregate offering price of up to $50.0 million through Jeffries as its sales agent in an “at the market” offering. In June 2021, the Company received $48.4 million in net proceeds from the sale of 12,830,333 shares of its common stock utilizing the full capacity under the 2019 Sales Agreement. For the nine months ended September 30, 2020, the Company had received $0.1 million in net proceeds from the sale of 175,289 shares of its common stock under the 2019 Sales Agreement.

On January 21, 2021, the Company entered into an underwriting agreement, which was subsequently amended and restated on the same day (the “Underwriting Agreement”) with H.C. Wainwright & Co., LLC, as representative of the underwriters (the “Underwriters”), to issue and sell 51,948,052 shares of common stock, in an underwritten public offering pursuant to effective registration statements on Form S-3, including a related prospectus and prospectus supplement, in each case filed with the Securities and Exchange Commission (the “Offering”). The price to the public in the Offering was $1.925 per share of common stock. The Underwriters agreed to purchase the shares from the Company pursuant to the Underwriting Agreement at a price of $1.799875 per share and the Company also agreed to reimburse them for customary fees and expenses. The initial closing of the Offering occurred on January 26, 2021. Subsequent to the initial closing, the Underwriters exercised their option to purchase an additional 7,792,207 shares of common stock.

Total net proceeds from the Offering were $106.1 million after deducting underwriting discounts and commissions and estimated offering expenses.

On January 17, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional purchasers (the “Purchasers”), pursuant to which the Company sold to the Purchasers, in a registered direct offering (the “Registered Direct Offering”), an aggregate of 40,000,000 shares (the “Shares”) of common stock, $0.001 par value per share. The Shares were sold at a purchase price of $1.25 per share for aggregate

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gross proceeds to the Company of $50.0 million, before deducting fees to the placement agent and other estimated offering expenses payable by the Company. The Shares were offered and sold by the Company pursuant to an effective shelf registration statement on Form S-3, which was originally filed with the Securities and Exchange Commission on November 27, 2019. The net proceeds to the Company from the Registered Direct Offering, after deducting fees and expenses and the estimated offering expenses payable by the Company, are approximately $46.1 million.

On November 9, 2020, the Company entered into an equity line agreement (the “Equity Line Agreement”) with Energy Capital, LLC, a Florida limited liability company (“Energy Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Energy Capital is committed to purchase up to an aggregate of $12.0 million of shares of the Company’s newly designated series B convertible preferred stock (the “Series B Preferred Stock”) at the Company’s request from time to time during the 24-month term of the Equity Line Agreement. Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including the Company has less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), the Company has the right, at its sole discretion, to present Energy Capital with a purchase notice (each, a “Regular Purchase Notice”) directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of our Series B Preferred Stock at a per share price (the “Purchase Price”) equal to $1,000 per share of Series B Preferred Stock, with each share of Series B Preferred Stock initially convertible into common stock, beginning six months after the date of its issuance, at a conversion price of $0.3951 per share, subject to customary anti-dilution adjustments, including in the event of any stock split. The Equity Line Agreement provides that the Company shall not affect any Regular Purchase under the Equity Line Agreement on any date where the closing price of the Company’s common stock on the NYSE American is less than $0.25 without the approval of Energy Capital. In addition, beginning on January 1, 2022, subject to the satisfaction of certain conditions, if the full $12.0 million of Series B Preferred Stock has not been sold pursuant to Regular Purchases, Energy Capital may, at its sole discretion, by its delivery to the Company of a Purchase Notice, from time to time, purchase up to the amount then remaining available under the Equity Line Agreement at the Purchase Price.

On August 9, 2020, the Company entered into a financing agreement with the parent company of Ascensia Diabetes Care Holdings AG (“Ascensia”), PHC Holdings Corporation (“PHC”), pursuant to which the Company issued $35.0 million in aggregate principal amount of Senior Secured Convertible Notes due on October 31, 2024 (the “PHC Notes”), to PHC. The Company also issued 2,941,176 shares of common stock to PHC as a financing fee. 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 Solutions, 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 Preferred Stock” (the “Series A Preferred Stock”), at a price of $1,000.00 per share in an initial closing. Masters also had 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 subsequent closings, subject to the terms and conditions of the Stock Purchase Agreement, as amended, through January 11, 2021. In January 2021, Masters and its assignees purchased in aggregate an additional 22,783 shares of Series A Preferred Stock, resulting in additional gross proceeds to the Company of $22.8 million. Each share of Series A Preferred Stock was initially convertible into a number of shares of common stock equal to $1,000.00 divided by the conversion price of $0.476 per share, subject to customary anti-dilution adjustments, including in the event of any stock split. All shares of Series A Preferred Stock have been converted to common stock as of September 30, 2021.

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

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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, 2021, and December 31, 2020, results of operations, comprehensive income (loss), and changes in stockholder’s equity (deficit) for the three and nine months ended September 30, 2021, and 2020 and cash flows for the nine months ended September 30, 2021, and 2020 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, 2020, as filed with the SEC on March 5, 2021. The interim results for September 30, 2021, are not necessarily indicative of the results to be expected for the year ending December 31, 2021, 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, 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 income (loss) comprises net income (loss) and other changes in equity that are excluded from net income (loss). For the three and nine months ended September 30, 2021, the Company’s comprehensive income (loss) included less than $0.1 million of other comprehensive income related to the unrealized gain on marketable securities. For the three and nine months ended September 30, 2020, 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,
	2021		2020
Cash ⁽¹⁾	$	2,393	$	18,002
Money market funds		43,818		3
Cash and cash equivalents	$	46,211	$	18,005

(1)	Includes overnight repurchase agreements

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Restricted Cash

The Company’s restricted cash previously included pledged cash as collateral related to its credit card program with Silicon Valley Bank (“SVB”). 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,
	2021		2020
Cash and cash equivalents	$	46,211	$	18,005
Restricted cash		—		200
Cash, cash equivalents and restricted cash	$	46,211	$	18,205

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. 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 identified an indicator of impairment for a right of use asset and recorded an immaterial expense for the nine months ended September 30, 2021. There was no impairment recorded for the three months ended September 30, 2021.

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 replacements to revenue.

At September 30, 2021, and December 31, 2020, the warranty reserve for both periods was $0.6 million. The following table provides a reconciliation of the change in estimated warranty liabilities for the nine months ended September 30, 2021 and for the twelve months ended December 31, 2020 (in thousands):


	September 30,		December 31,
	2021		2020
Balance at beginning of the period	$	646	$	2,197
Provision for warranties during the period		760		(266)
Settlements made during the period		(844)		(1,285)
Balance at end of the period	$	562	$	646

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

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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 strategic fulfillment partners in the United States, and a combination of fixed and variable prices to its strategic partner, Ascensia (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 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.

The Company’s contracts contain variable consideration such as prompt-pay discounts, tier-volume price discounts and for the Ascensia commercial agreement, revenue share. Variable consideration, such as discounts and prompt-pay incentives, are treated as a reduction in revenue and variable consideration, such as revenue share is treated as an addition in revenue when the product sale is recognized. The amount of variable consideration that is included in the transaction price may be constrained and is included in revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period, when the uncertainty associated with the variable consideration is subsequently resolved. Estimating variable consideration and the related constraint requires the use of significant management judgement. Depending on the variable consideration, the Company estimates the expected value based on the terms of the agreements, historical data, geographic mix, reimbursement rates, and market conditions. 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 and unbilled receivables from customers and are recorded at net realizable value. Unbilled receivables relate to the revenue share variable consideration from the Ascensia commercial agreement.

Concentration of Revenue and Customers

For the three months ended September 30, 2021, the Company derived 92% of its total revenue from one customer, Ascensia. For the three months ended September 30, 2020, the Company derived 33% of its total revenue from one customer, Roche Diabetes Care GmbH. For the nine months ended September 30, 2021, the Company derived 88% of its total revenue from one customer, Ascensia. For the nine months ended September 30, 2020, the Company derived 29% of its total revenue from one customer, Roche Diabetes Care GmbH. Revenues for these corresponding periods represent purchases for sensors, transmitters and miscellaneous Eversense system components.

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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, 2021 and 2020:


	Three Months Ended				Nine Months Ended
	September 30, 2021				September 30, 2021
			%				%
(Dollars in thousands)	Amount		of Total		Amount		of Total
Revenue, net:
Outside of the United States	$	2,928	82.9	%	$	7,771	80.4	%
United States		604	17.1			1,896	19.6
Total	$	3,532	100.0	%	$	9,667	100.0	%


	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	%

Marketable Securities

Marketable securities consist of commercial paper, corporate debt securities, asset backed securities and government and agency securities. The Company’s investments are classified as available for sale. Such securities are carried at 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.

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 does not have a history of collectability concerns and no allowance for uncollectible accounts was recorded as of September 30, 2021, however, an immaterial allowance for uncollectible accounts was recorded as of December 31, 2020. Accounts receivable as of September 30, 2021 included unbilled accounts receivable of $2.0 million. The Company expects to invoice and collect all unbilled accounts receivable within 12 months.

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Net Income (Loss) per Share

Basic net income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, potential common share equivalents. 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.

Potentially dilutive common shares consist of shares issuable from restricted stock units, warrants, and our convertible notes. Potentially dilutive common shares issuable upon vesting of restricted stock units and exercise of stock options and warrants are determined using the average share price for each period under the treasury stock method. Potentially dilutive common shares issuable upon conversion of our convertible notes are determined using the if converted method. In periods of net loss, all potentially dilutive common shares are excluded from the computation of the diluted net loss per share for those periods, as the effect would be anti-dilutive.

The following table sets forth the computation of basic and diluted net income per share for the periods shown:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020

Net income (loss)	42,914	(23,428)	(386,907)	(73,536)
Impact of conversion of dilutive securities	1,385	-	-	-

Dilutive Net income (loss)	44,299	(23,428)	(386,907)	(73,536)

Net income (loss) per share
Basic	0.10	(0.10)	(0.93)	(0.33)
Diluted	0.08	(0.10)	(0.93)	(0.33)

Basic weighted average shares outstanding	445,378,308	236,519,812	414,128,283	220,250,060
Dilutive potential common stock outstanding
Stock-based awards	15,520,414	-	-	-
2023 Notes	4,617,646	-	-	-
2025 Notes	39,689,142	-	-	-
PHC Notes	65,348,857	-	-	-
Warrants	11,206,148	-	-	-
Diluted weighted average shares outstanding	581,760,516	236,519,812	414,128,283	220,250,060

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For the nine months ended September 30, 2021, as well as for the three and nine months ended September 30, 2020, the Company operated at a loss. Accordingly, all potentially dilutive shares were considered antidilutive, and basic and diluted EPS are the same.

Outstanding anti-dilutive securities not included in the diluted net income per share attributable to common stockholders calculations were as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Stock-based awards	1,949,958	27,972,959	28,502,846	27,972,959
2023 Notes	—	6,672,500	4,617,646	6,672,500
2025 Notes	—	44,429,624	39,689,142	44,429,624
PHC Notes	—	65,359,000	65,757,177	65,359,000
Second Lien Notes	—	18,085,140	—	18,085,140
Warrants	116,581	9,696,581	13,177,822	9,696,581
Total anti-dilutive shares outstanding	2,066,539	172,215,804	151,744,633	172,215,804

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. There were no exit or disposal activities for the three and nine months ended September 30, 2021. 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 December 2019, the FASB issued ASU 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 has adopted this guidance as of January 1, 2021 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 currently holds investments in available-for-sale securities. The Company 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 is evaluating the appropriate effective date and impact on the consolidated financial statements and related disclosures.

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In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contract in Entity’s Own Equity (Subtopic 815-40). This new guidance is intended to reduce the complexity of accounting for convertible instruments. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments. Entities may adopt ASU 2020-06 using either partial retrospective or fully retrospective method of transition. This ASU is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning December 15, 2020, including interim periods within that fiscal year. The Company will adopt this guidance on its effective date of January 1, 2022.

4. Marketable Securities

Marketable securities available for sale, were as follows (in thousands):


	September 30, 2021
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
Commercial Paper	$	62,336		—		—	$	62,336
Corporate debt securities	$	40,084		5		(4)	$	40,085
Asset backed securities	$	27,869		5		(4)	$	27,870
Government and agency securities	$	24,630		5		(5)	$	24,630
Total	$	154,919	$	15	$	(13)	$	154,921

The following are the scheduled maturities as of September 30, 2021 (in thousands):


2021 (remaining three months)	$	4,999
2022		149,922
2023		—
2024		—
Thereafter		—
Total	$	154,921

5. Inventory, net

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


	September 30,		December 31,
	2021		2020
Finished goods	$	1,927	$	203
Work-in-process		4,513		2,626
Raw materials		1,438		2,452
Total	$	7,878	$	5,281

The Company charged $1.8 million to cost of sales for the nine months ended September 30, 2021 and $15.1 million to cost of sales for the nine months ended September 30, 2020, to reduce the value of inventory for items that are potentially obsolete due to expiry, in excess of product demand, or to adjust costs to their net realizable value.

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6. Prepaid Expenses and Other Current Assets

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


	September 30,		December 31,
	2021		2020
Contract manufacturing⁽¹⁾	$	2,431	$	3,324
Interest receivable		378		—
Insurance		266		50
IT and software		266		150
Research and development		115		—
Rent		105		102
Other		171		148
Total prepaid expenses and other current assets	$	3,732	$	3,774

(1)

Includes deposits to contract manufacturers for manufacturing process.

7.	Accrued Expenses and Other Current Liabilities

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


	September 30,		December 31,
	2021		2020
Compensation and benefits	$	3,010	$	4,344
Interest on notes payable		2,098		1,773
Professional and administration services		1,945		880
Product warranty and replacement obligations		1,783		646
Contract manufacturing		1,629		1,421
Research and development		1,454		842
Sales and marketing services		1,149		615
Operating lease		875		794
Other		42		151
Patient access programs		—		208
Total accrued expenses and other current liabilities	$	13,985	$	11,674

8.Notes Payable, Preferred Stock and Stock Purchase Warrants

Term Loans

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 Small Business Administration (“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 SVB.

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. The Company began to make equal monthly payments of principal and interest, beginning in the third quarter of 2021.

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disclose any material fact or make a materially false or misleading representation to SVB or SBA, (v) default on any loan or agreement with another creditor, if SVB 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 SVB 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 SVB’s prior written consent, or (x) becoming the subject of a civil or criminal action that SVB believes may materially affect the Company’s ability to pay the PPP Note. Upon the occurrence of an event of default, SVB 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.

Convertible Preferred Stock and Warrants

On November 9, 2020, the Company entered into the (the “Equity Line Agreement”) with Energy Capital, LLC, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Energy Capital is committed to purchase up to an aggregate of $12.0 million of shares of the Company’s newly designated series B convertible preferred stock (the “Series B Preferred Stock”) at the Company’s request from time to time during the 24-month term of the Equity Line Agreement. Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including the Company having less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), the Company has the right, at sole discretion, to present Energy Capital with a purchase notice (each, a “Regular Purchase Notice”) directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000.00 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of our Series B Preferred Stock at a per share price (the “Purchase Price”) equal to $1,000.00 per share of Series B Preferred Stock, with each share of Series B Preferred Stock initially convertible into common stock, beginning six months after the date of its issuance, at a conversion price of $0.3951 per share, subject to customary anti-dilution adjustments, including in the event of any stock split. The Equity Line Agreement provides that the Company shall not affect any Regular Purchase under the Equity Line Agreement on any date where the closing price of our common stock on the NYSE American is less than $0.25 without the approval of Energy Capital. In addition, beginning on January 1, 2022, subject to the satisfaction of certain conditions, if the full $12.0 million of Series B Preferred Stock has not been sold pursuant to Regular Purchases, Energy Capital may, at its sole discretion, by its delivery to the Company of a Purchase Notice, from time to time, purchase up to the amount then remaining available under the Equity Line Agreement at the Purchase Price.

The Company accounted for the Equity Line Agreement as a put/call option (the “Energy Capital Option”). This put/call option 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 $4.2 million upon issuance. The put/call option 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). In connection with the issuance of the Equity Line Agreement, the Company incurred $7.6 million in debt issuance costs. The fair value as of September 30, 2021 was $91.1 million.

Concurrently with entry into the Equity Line Agreement, the Company issued a warrant to Energy Capital, exercisable beginning May 9, 2021, to purchase up to 10,000,000 shares of common stock at an exercise price of $0.3951 per share (the “Warrant”). The Warrant expires, if unexercised, on November 9, 2030.

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 in an initial closing. Masters also had 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 subsequent closings, subject to the terms and conditions of the Stock Purchase Agreement, as amended, through January 11, 2021. In January 2021, Masters and its assignees purchased in aggregate an additional 22,783 shares of Series A Preferred Stock, resulting in additional gross proceeds of $22.8 million. Each share of Series A Preferred Stock was initially convertible into a number of shares of common stock equal to $1,000.00 divided by the conversion price of $0.476 per share, subject to customary anti-dilution adjustments, including in the

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event of any stock split. As of September 30, 2021, all 25,783 shares of Series A Preferred Stock have been converted to common stock. Masters’ option to purchase the remaining unissued shares of Series A Preferred Stock expired on January 11, 2021, resulting in a gain on extinguishment of $3.5 million.

Convertible Notes

Highbridge Loan Agreement

On April 21, 2020, the Company entered into 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”) 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 in aggregate principal through the issuance and sale of First Lien Notes (the “First Lien Notes”) 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.

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 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 (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 (the “Exchange”). The Exchange closed on April 24, 2020. During 2020, Highbridge voluntarily converted all $15.7 million of outstanding principal amount of the Second Lien Notes for 42,776,936 shares of the Company’s common stock.

PHC 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 the PHC 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 PHC 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 for marketing in the United States, subject to certain conditions. The maturity date for the PHC Notes is October 31, 2024 (the “Maturity Date”). The obligations under the PHC Notes are secured by substantially all of the Company’s and its subsidiary’s assets.

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The Note Purchasers are entitled to convert the PHC Notes to common stock at a conversion rate of 1,867.4136 shares per $1,000 principal amount of the PHC 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 PHC 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 PHC 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, plus any accrued but unpaid interest. On or after October 31, 2023, the PHC Notes are redeemable by the Company upon 10 days prior written notice at a cash redemption price equal to the then outstanding principal 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 PHC Notes become 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 (the “PHC Option”), 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 fair value on the date of issuance and subject to impairment testing in each reporting period prior to the options exercise or expiration. The Company acknowledges that while the purchased put option is subject to impairment testing, there is no explicit guidance regarding how impairment should be assessed and measured for the PHC purchased put option. As such, the measurement alternative in ASC 321 for equity securities without readily determinable fair values can be applied by analogy to assess and measure impairment of the purchased put option. The Company developed an estimated fair value at September 30, 2021 to be $0.2 million, and an impairment loss of $0.5 million for the three months ended September 30, 2021, was recognized in net income as the difference between the fair value of the investment and its carrying amount.

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.

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 were 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.

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2025 Notes

In July 2019, the Company issued $82.0 million in aggregate principal amount of senior convertible notes that will mature on January 15, 2025 (the “2025 Notes”), 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).

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, (i) 11,026,086 shares of common stock, (ii) warrants to purchase up to 4,500,000 shares of common stock at an exercise price of $0.66 per share, and (iii) $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.

For the nine months ended September 30, 2021, there were conversions of $6.5 million of outstanding principal amount of the 2025 notes for 4,924,998 shares of common stock. Accordingly, $3.2 million of allocated deferred issuance costs and debt discounts were recognized as a loss on extinguishment of debt in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss during the nine months ended September 30, 2021. There was no activity for the three months ended September 30, 2021.

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.

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The following carrying amounts were outstanding under the Company’s notes payable as of September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021
	Principal ($)	Debt Discount ($)	Issuance Costs ($)	Carrying Amount ($)
2023 Notes	15,700	(1,824)	-	13,876
2025 Notes	51,199	(21,742)	(364)	29,093
PHC Notes	35,000	(19,610)	(1,198)	14,192
PPP Loan	5,113	-	-	5,113

	December 31, 2020
	Principal ($)	Debt Discount ($)	Issuance Costs ($)	Carrying Amount ($)
2023 Notes	15,700	(2,755)	-	12,945
2025 Notes	57,700	(28,276)	(431)	28,993
PHC Notes	36,312	(22,237)	(1,359)	12,716
PPP Loan	5,763	-	-	5,763

Interest expense related to the notes payable for the three and nine months ended September 30, 2021 was as follows (dollars in thousands):


	Three months ended September 30, 2021
	Effective Interest Rate	Interest ($)	Debt Discount and Fees ($)	Issuance Costs ($)	Loss on Extinguishment ($)	Total Interest Expense ($)
2023 Notes	5.25%	206	318	-	-	524
2025 Notes	5.25%	672	1,152	19	-	1,843
PHC Notes	9.50%	831	950	58	-	1,839
PPP Loan	1.00%	15	-	-	-	15
Total		1,724	2,420	77	-	4,221


	Nine months ended September 30, 2021
	Effective Interest Rate	Interest ($)	Debt Discount and Fees ($)	Issuance Costs ($)	Loss on Extinguishment ($)	Total Interest Expense ($)
2023 Notes	5.25%	618	931	-	-	1,549
2025 Notes	5.25%	2,044	3,362	56	3,183	8,645
PHC Notes	9.50%	2,456	2,627	161	-	5,244
PPP Loan	1.00%	44	-	-	-	44
Total		5,162	6,920	217	3,183	15,482

The following are the scheduled maturities of the Company’s notes payable as of September 30, 2021 (in thousands):


2021 (remaining three months)	$	2,191
2022		2,922
2023		15,700
2024		35,000
Thereafter		51,199
Total	$	107,012

9.	Stockholders’ Deficit

In November 2019, the Company entered into an Open Market Sale Agreement with Jefferies LLC which allows the Company to issue and sell up to $50.0 million in gross proceeds of its common stock. During the nine months ended September 30, 2021 the Company sold 12,830,333 shares of common stock under the Open Market Sale Agreement, resulting in gross proceeds of $48.4 million. During the nine months ended September 30, 2020, the Company sold 175,289 shares of common stock under the Open Market Sale Agreement, resulting in gross proceeds of $0.1 million.

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During the nine months ended September 30, 2021, in addition to the shares sold under the Open Market Sale Agreement above, the Company sold 99,740,259 shares of common stock, of which 59,740,259 shares of common stock were sold in the Offering and 40,000,000 shares of common stock were sold in the Registered Direct Offering. During the nine months ended September 30, 2020, the Company did not sell any shares of common stock, other than the shares sold under the Open Market Sale Agreement. For additional information on the Offering and the Registered Direct Offering, see Note 2—Liquidity and Capital Resources.

10. Stock-Based Compensation

2015 Plan

In December 2015, the Company adopted the 2015 Equity Incentive Plan (the “2015 Plan”), under which incentive stock options, non-qualified stock options and restricted stock units may be granted to the Company’s employees and certain other persons, such as officers and directors, in accordance with the 2015 Plan provisions. In February 2016, 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”), which became effective on March 17, 2016. 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 of the Company’s common stock reserved for issuance automatically increases on January 1 of each year, 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 September 30, 2021, 9,276,073 shares remained available for grant under the amended and restated 2015 Plan.

Inducement Plan

On May 30, 2019, the Company adopted the Senseonics Holdings, Inc. Inducement Plan (the “Inducement Plan”), pursuant to which the Company reserved 1,800,000 shares of the Company’s common stock for issuance. The only persons eligible to receive grants of awards under the Inducement Plan are individuals who satisfy the standards for inducement grants in accordance with NYSE American Company Guide Section 711(a), including individuals who were not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to such persons entering into employment with the Company. An “Award” is any right to receive the Company’s common stock pursuant to the Inducement Plan, consisting of non-statutory options, restricted stock unit awards and other equity incentive awards. As of September 30, 2021, 735,375 shares remained available for grant under the Inducement Plan.

2016 Employee Stock Purchase Plan

In February 2016, the Company adopted the 2016 Employee Stock Purchase Plan, (the “2016 ESPP”). The 2016 ESPP became effective on March 17, 2016. The maximum number of shares of common stock that may be issued under the 2016 ESPP was initially 800,000 shares and automatically increases on January 1 of each year, ending on and including January 1, 2026, by 1.0% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; provided, however, the 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. At September 30, 2021 there were 8,670,753 shares of common stock available for issuance under the 2016 ESPP.

The 2016 ESPP permits participants to purchase shares of the Company’s 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 common stock on the first day of an offering or on the date of purchase. Participants may end their participation at any time and deductions not yet used in a purchase are refundable upon employment termination. The Company initiated its first 2016 ESPP offering period on August 1, 2019 and new

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offering periods occur every six months thereafter, each consisting of two purchase periods of six months in duration ending on or about January 31st and July 31st of each year. A participant may only be in one offering at a time. On February 1, 2020, there were 566,573 shares purchased in connection with the initial offering period. The 2016 ESPP contains an offering reset provision whereby if the fair market value of a share on offering date of an ongoing offering is less than or equal to the fair market value of a share on a new offering date, the ongoing offering will terminate immediately after the purchase date and rolls over to the new offering.

The 2016 ESPP is considered compensatory for financial reporting purposes.

1997 Plan

On May 8, 1997, the Company adopted the 1997 Stock Option Plan (the “1997 Plan”), under which incentive stock options, non-qualified stock options, and restricted stock awards may be granted to the Company’s employees and certain other persons in accordance with the 1997 Plan provisions. Approximately 2,115,534 shares of the Company’s common stock underlying options have vested under the 1997 Plan. Upon the effectiveness of the 2015 Plan, the Company no longer grants any awards under the 1997 Plan.

11.

Fair Value Measurements

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 September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021
	Total		Level 1		Level 2		Level 3
Assets
Money market funds⁽¹⁾	$	43,818	$	43,818	$	—	$	—
Corporate debt securities		40,085		—		40,085		—
Commercial paper		62,336		—		62,336		—
Government and agency securities		20,050		20,050		—		—
PHC Option		236		—		—		236
Liabilities
Energy Capital Option	$	91,097	$	—	$	—	$	91,097
Embedded features of the 2023 Notes		9,492		—		—		9,492
Embedded features of the PHC Notes		195,727		—		—		195,727
Embedded features of the 2025 Notes		112,085		—		112,085		—


	December 31, 2020
	Total		Level 1		Level 2		Level 3
Assets
Money market funds⁽¹⁾	$	3	$	3	$	—	$	—
PHC Option		1,886		—		—		1,886
Liabilities
Energy Capital Option	$	16,255	$	—	$	—	$	16,255
Masters Option		23,479		—		—		23,479
Embedded features of the 2023 Notes		622		—		—		622
Embedded features of the PHC Notes		45,647		—		—		45,647
Embedded features of the 2025 Notes		15,850		—		15,850		—

(1)

Classified as cash and cash equivalents due to their short-term maturity

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The following table provides a reconciliation of the beginning and ending net balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3) (in thousands):



	Level 3
	Instruments
December 31, 2020	$	84,117
Conversion of financial instruments		(19,973)
Loss on fair value adjustment of option		74,848
Loss on change in fair value of derivatives		158,951
Gain on extinguishment of option		(3,513)
Financial asset impairment cost		1,650
September 30, 2021	$	296,080

The recurring Level 3 fair value measurements of the embedded features of the notes payable include the following significant unobservable inputs at September 30, 2021:


	2023 Notes		PHC Notes
Unobservable Inputs	Assumptions		Assumptions
Risky (bond) rate	30.0	%	15.0	%
Stock price volatility	95.0	%	95.0	%
Probabilities of conversion provisions	5.0 - 90.0	%	5.0 - 75.0	%
Time period until maturity (yrs)	0.50 - 1.34		0.50 - 3.08
Dividend yield	—	%	—	%

12.

Income Taxes

The Company has not recorded any tax provision or benefit for the nine months ended September 30, 2021 or September 30, 2020. The Company has provided a valuation allowance for the full amount of its net deferred tax assets since realization of any future benefit from deductible temporary differences, NOL carryforwards and research and development credits is not more-likely-than-not to be realized at September 30, 2021 and December 31, 2020.

On March 27, 2020, Congress enacted the CARES Act, as amended by the Flexibility Act, to provide certain relief as a result of the COVID-19 pandemic. The enactment of the CARES Act did not result in any material adjustments to the Company’s income tax provision or net deferred tax assets for the nine months ended September 30, 2021.

13. Related Party Transactions

Ascensia, through the ownership interests of its parent company, PHC, has a noncontrolling ownership interest in the Company. Ascensia also has representation on the Company’s board of directors. Revenue from Ascensia during the nine months ended September 30, 2021 was $8.5 million and the amount due from Ascensia as of September 30, 2021 was $3.5 million. At September 30, 2021, the Company had estimated replacement obligations under warranties in the amount of $1.7 million.

14. Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Consolidated Statements of Cash Flows for the nine months ended September 30, 2020, to reclass the provision for inventory obsolescence and net realizable value of $9,441,000 to change in Inventory. This change in classification does not affect previously reported cash flows from operating activities in the Consolidated Statements of Cash Flows.

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15. Subsequent Events

In November 2021, the Company entered into an Open Market Sale Agreement (the “2021 Sales Agreement”) with Jefferies LLC (“Jeffries”), under which the Company could offer and sell, from time to time at its sole discretion, shares of its common stock having an aggregate offering price of up to $150.0 million through Jeffries as its sales agent in an “at the market” offering. Jeffries will receive a commission up to 3.0% of the gross proceeds of any common stock sold through Jeffries under the 2021 Sales Agreement. As of the date of this Quarterly Report on Form 10-Q, there have been no offer and sales of the Company’s common stock under the 2021 Sales Agreement.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks, uncertainties, and assumptions, including the duration and severity of the COVID-19 pandemic and its impact on our business and financial performance, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those described below and elsewhere in this Quarterly Report on Form 10-Q, and in our Annual Report on Form 10-K, particularly in Part I – Item 1A, “Risk Factors,” and our other filings with the Securities and Exchange Commission. Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes for the year ended December 31, 2020, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2021. 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 Senseonics Holdings, Inc. and its subsidiary.

Overview

We are a medical technology company focused on the development and commercialization of a long-term, implantable continuous glucose monitoring, or CGM, system to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy. Our Eversense and Eversense XL CGM systems are designed to continually and accurately measure glucose levels in people with diabetes via an under-the-skin sensor, a removable and rechargeable smart transmitter, and a convenient app for real-time diabetes monitoring and management for a period of up to 90 and 180 days, respectively, as compared to seven to 14 days for non-implantable CGM systems. The original Eversense CGM system received a CE mark in June 2016, which marked the first approval for the product to be sold within the European Economic Area. Subsequently, the extended life Eversense XL CGM system received its CE mark in September 2017 and is currently available in select markets in Europe and the Middle East. In June 2018, the U.S. Food and Drug Administration, or FDA, approved the Eversense CGM system and it is currently available throughout the United States. In June 2019, we received FDA approval for the non-adjunctive indication (dosing claim) for the Eversense system. With this approval and the availability of a new app in December 2019, the Eversense system can now be used as a therapeutic CGM in the United States to replace fingerstick blood glucose measurement to make treatment decisions, including insulin dosing.

Our net revenues are derived from sales of the Eversense system which is sold in two separate kits: the disposable Eversense Sensor Pack which includes the sensor, insertion tool, and adhesive patches, and the durable Eversense Smart Transmitter Pack which includes the transmitter and charger.

We sell directly to our network of distributors and strategic fulfillment partners, who provide the Eversense system to healthcare providers and patients through a prescribed request and invoice insurance payors for reimbursement. Sales of the Eversense system are widely dependent on the ability of patients to obtain coverage and

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adequate reimbursement from third-party payors or government agencies. We leverage and target regions where we have coverage decisions for patient device use and provider insertion and removal procedure payment.

We are in the early commercialization stages of the Eversense brand and are focused on driving awareness of our CGM system amongst intensively managed patients and their healthcare providers. In both the United States and our overseas markets, we have entered into strategic partnerships and distribution agreements that allow third party collaborators with direct sales forces and established distribution systems to market and promote Senseonics CGM systems, including Eversense, Eversense XL and future generation products.

COVID-19 and Restructuring and Transition of Commercial Strategy

On January 30, 2020, the World Health Organization, or the WHO, announced a global health emergency because of COVID-19, and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. In response to the pandemic, many states and jurisdictions have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus. The state of Maryland, where we are headquartered, has been affected by COVID-19. Although the state of Maryland is gradually undergoing a phased reopening plan, substantially all of our workforce is still working from home either all or substantially all of the time. As a result of the COVID-19 pandemic’s disruption to our operations, suppliers, employees, and the healthcare community in which we sell to and support, and our limited cash resources, in March 2020, we made significant reductions in our cost structure and operations to improve cash flow and generate future expenditure savings to ensure the long-term success of Eversense. Specifically, in the first quarter of 2020, we temporarily suspended commercial sales and marketing of the Eversense CGM System in the United States to new patients to solely focus our resources on supporting existing users, including ensuring broader insurance coverage for Eversense, and the development and regulatory submission of our new 180-day Eversense product in the United States. In connection with these actions, on March 26, 2020, we reduced our workforce by approximately 60%, over half of which were sales personnel.

On August 9, 2020, we entered into a collaboration and commercialization agreement with Ascensia (the “Commercialization Agreement”) pursuant to which we granted Ascensia the exclusive right to distribute our 90-day Eversense continuous glucose monitoring system and our 180-day Eversense continuous glucose monitoring system worldwide for people with diabetes, with the following initial exceptions: (i) until January 31, 2021, the territory did not include countries covered by our then existing distribution agreement with Roche Diagnostics International AG and Roche Diabetes Care GmbH, which are Europe, the Middle East and Asia, excluding Scandinavia and Israel, and 17 additional countries, including Brazil, Russia, India and China, as well as select markets in the Asia Pacific and Latin American regions; (ii) until September 13, 2021, the territory does not include countries covered by our current distribution agreement with Rubin Medical, which are Sweden, Norway and Denmark; and (iii) until May 31, 2022, the territory does not include Israel. Pursuant to the Commercialization Agreement, in the United States, Ascensia began providing sales support for the 180-day Eversense product on October 1, 2020 and Ascensia ramped up sales activities and assumed commercial responsibilities for the 90-day Eversense product during the second quarter 2021. The Eversense 180-day production the United States is planned to be marketed upon receipt of marketing approval from the FDA. In Germany, Italy and Switzerland, Spain, Poland and the Netherlands, Ascensia assumed commercial responsibilities for Eversense XL beginning on February 1, 2021. For Sweden and Norway, Ascensia assumed commercial responsibilities during the second quarter of 2021. Ascensia is entitled to receive a portion of net revenue at specified tiered percentages ranging from the mid-teens to the mid-forty’s based on levels of global net revenues. Ascensia is obligated to achieve specified minimum annual revenue targets and meet specified levels of sales and marketing spend in order to maintain its exclusive distribution rights. Ascensia purchases Eversense and Eversense XL from us at negotiated prices. We remain responsible for product development and manufacturing, including regulatory submissions, approvals and registrations and second level customer support, and Ascensia is responsible for sales, marketing, market access, patient and provider onboarding and first level customer support. We have agreed to establish a joint alliance committee and joint marketing committee, each with equal representation from each party, in order to collaborate.

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United States Development and Commercialization of Eversense

In 2016, we 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 8.5% 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 for 90-day use. On June 21, 2018, we received PMA approval from the FDA for the Eversense system. In July 2018, we began distributing the Eversense system directly in the United States through our own direct sales and marketing organization. We have received Category III CPT codes for the insertion and removal of the Eversense sensor.

In December 2018, we initiated the PROMISE pivotal clinical trial to evaluate the safety and accuracy of Eversense for a period of up to 180 days in the United States. In September 30, 2019, we completed enrollment of the PROMISE trial. In the trial, we observed performance matching that of the current Eversense 90-day product available in the United States, with a mean absolute relative difference, or MARD, of 8.5%-9.6%. This result was achieved with reduced calibration, down to one per day, while also doubling the sensor life to 180 days. Following the results of the PROMISE trial, on September 30, 2020, a Premarket Approval, or PMA, supplement application to extend the wearable life of the Eversense CGM System to 180 days was submitted to the FDA.

In June 2019, we received FDA approval for the non-adjunctive indication (dosing claim) for the Eversense system and launched with an updated app in December 2019. With this approval, the Eversense system can be used as a therapeutic CGM to replace fingerstick blood glucose measurement for treatment decisions, including insulin dosing.

In April 2020, we announced that we received regulatory approval in Europe such that the Eversense XL is no longer contraindicated for MRI, which means the sensor does not need to be removed from under the skin during MRI scanning. We had previously obtained this indication for Eversense in the United States in 2019. This MRI approval is a first for the CGM category, as all other sensors are required to be removed during an MRI scan.

On February 26, 2020, we announced that the FDA approved a subgroup of PROMISE trial participants to continue for a total of 365 days to gather feasibility data on the safety and accuracy of a 365-day sensor. This sub-set of 30 participants were left undisturbed for 365 days with the goal of measuring accuracy and longevity over the full 365 days. Following information gathered from this sub-set and continued development efforts, and pending developments at the FDA relating to the ongoing the ongoing COVID-19 pandemic, we plan to seek Investigational Device Exemption, or IDE, from the FDA to explore the 365-day sensor in a clinical trial. If the IDE is approved in a timely manner, we would target to begin enrollment of a clinical trial, in which we intend to include a pediatric population, in the first half of 2022.

European Commercialization of Eversense

In September 2017, we received the CE mark for Eversense XL, which is indicated for a sensor life of up to 180 days. Eversense XL began commercialization in Europe in the fourth quarter of 2017. All such commercialization and marketing activities remain subject to applicable government approvals.

In May 2016, we entered into a distribution agreement with Roche Diagnostics International AG and Roche Diabetes Care GmbH, together referred to as Roche. Pursuant to the agreement, as amended, we granted Roche the exclusive right to market, sell and distribute Eversense in the EMEA, excluding Scandinavia and Israel. In addition, under the distribution agreement, Roche had exclusive distribution rights in 17 additional countries, including Brazil, Russia, India and China, as well as select markets in the Asia Pacific and Latin American regions and was obligated to purchase from us specified minimum volumes of Eversense XL CGM components at pre-determined prices. On December 12, 2019, we amended the distribution agreement to lower minimum volumes for 2020 and increase pricing for the remaining period of the contract. On November 30, 2020 we entered into a final amendment and settlement agreement with Roche to facilitate the transition of distribution to Ascensia as sales were set to conclude on January 31,

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2021, including final purchases, and transition support activities. The distribution rights under the agreement expired January 31, 2021, subject to Roche providing certain transition and wind-down services for approximately six months in markets where Ascensia is not initiating distribution.

Financial Overview

Revenue

We generate product revenue from sales of the Eversense system and related components and supplies to Ascensia, through the Commercialization Agreement, third-party distributors in the European Union and to strategic fulfillment partners in the United States, or collectively, Customers, who then resell the products to health care providers and patients. We are paid for our sales directly to the Customers, regardless of whether or not the Customers resell the products to health care providers and patients.

Revenue from product sales is recognized at a point in time when the Customers obtain control of our product based upon the delivery terms as defined in the contract at an amount that reflects the consideration which we expect to receive in exchange for the product. Contracts with our distributors contain performance obligations, mostly for the supply of goods, and is typically satisfied upon transfer of control of the product. Customer contracts do not include the right to return unless there is a product issue, in which case we 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.

Our contracts may contain some form of variable consideration such as prompt-pay discounts, tier-volume price discounts and for the Ascensia commercial agreement, revenue share. Variable consideration, such as discounts and prompt-pay incentives, are treated as a reduction in revenue and variable considerations, such as revenue share, is treated as an addition in revenue when the product sale is recognized. The amount of variable consideration that is included in the transaction price may be constrained and is included in revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period, when the uncertainty associated with the variable consideration is subsequently resolved. Estimating variable consideration and the related constraint requires the use of significant management judgement. Depending on the variable consideration, we develop estimates for the expected value based on the terms of the agreements, historical data, geographic mix, reimbursement rates, and market conditions.

Concentration of Revenue and Customers

For the three months ended September 30, 2021, we derived 92% of our total revenue from one customer, Ascensia. For the three months ended September 30, 2020, we derived 33% of our total revenue from one customer, Roche Diabetes Care GmbH. For the nine months ended September 30, 2021, we derived 88% of our total revenue from one customer, Ascensia. For the nine months ended September 30, 2020, we derived 29% of our total revenue from one customer, Roche Diabetes Care GmbH. Revenues for these corresponding periods represent purchases for sensors, transmitters and miscellaneous Eversense system components.

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Revenue by Geographic Region

The following table sets forth net revenue derived from our two primary geographical markets, the United States and outside of the United States, based on the geographic location to which we deliver the product, for three and nine months ended September 30, 2021 and 2020:


	Three Months Ended				Nine Months Ended
	September 30, 2021				September 30, 2021
			%				%
(Dollars in thousands)	Amount		of Total		Amount		of Total
Revenue, net:
Outside of the United States	$	2,928	82.9	%	$	7,771	80.4	%
United States		604	17.1			1,896	19.6
Total	$	3,532	100.0	%	$	9,667	100.0	%


	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	%

Accounts Receivable

Accounts receivable consist of amounts due from our 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. We do not have a history of collectability concerns and no allowance for uncollectible accounts was recorded as of September 30, 2021, however, an immaterial allowance for uncollectible accounts was recorded as of December 31, 2020.

Use of Estimates

The preparation of our 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 our accompanying unaudited consolidated financial statements, 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. We considered COVID-19 related impacts to our estimates, as appropriate, within our 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, we do not believe that such differences would be material.

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Recent Accounting Pronouncements

Recently Adopted

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. We have adopted this guidance as of January 1, 2021 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. We currently hold investments in available-for-sale securities. We have not historically experienced collection issues or bad debts with trade receivables. Accordingly, we do not expect this to have a significant impact on our consolidated financial statements and related disclosures at this time. We are evaluating the appropriate effective date and impact on the consolidated financial statements and related disclosures.

In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contract in Entity’s Own Equity (Subtopic 815-40). This new guidance is intended to reduce the complexity of accounting for convertible instruments. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments. Entities may adopt ASU 2020-06 using either partial retrospective or fully retrospective method of transition. This ASU is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning December 15, 2020, including interim periods within that fiscal year. We will adopt this guidance on its effective date of January 1, 2022

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Results of Operations

Comparison of the three months ended September 30, 2021 and 2020

The following table sets forth our results of operations for the three months ended September 30, 2021 and 2020 (in thousands):


	Three Months Ended
	September 30,				Period-to-
	2021		2020		Period Change

	(unaudited)
Revenue, net	$	276	$	514	$	(238)
Revenue, net - related parties		3,256		253		3,003
Total revenue		3,532		767		2,765
Cost of sales		4,778		(68)		4,846
Gross profit (loss)		(1,246)		835		(2,081)

Expenses:
Sales and marketing expenses		2,468		3,234		(766)
Research and development expenses		7,200		4,568		2,632
General and administrative expenses		5,117		5,501		(384)
Operating loss		(16,031)		(12,468)		(3,563)
Other (expense) income, net:
Interest income		486		1		485
Gain on fair value adjustment of option		13,556		—		13,556
Loss on extinguishment of debt and option		—		(9,527)		9,527
Loss on issuance of debt & other issuance costs		—		(931)		931
Interest expense		(4,245)		(3,632)		(613)
Gain on change in fair value of derivatives		50,075		3,520		46,555
Impairment cost		(488)		—		(488)
Other expense		(439)		(391)		(48)
Total other (expense) income, net		58,945		(10,960)		69,905
Net income (loss)	$	42,914	$	(23,428)	$	66,342

Revenue, net

Our net revenue increased $2.7 million to $3.5 million for the three months ended September 30, 2021, compared to $0.8 million for the three months ended September 30, 2020. This increase was due to the transition of commercial responsibility for Eversense to Ascensia and its orders for Eversense for distribution in the European Union and in the United States.

Cost of sales

Our cost of sales increased $4.8 million to $4.8 million for the three months ended September 30, 2021, compared to $(0.1) million for the three months ended September 30, 2020. The increase was as a result of impairment charges and write-offs on inventory and related assets of current generation products with potential expiry concerns.

Gross profit was $(1.2) million and $0.8 million for the three months ended September 30, 2021 and 2020, respectively. The negative gross margin in the quarter was primarily due to impairment charges and write-offs.

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Sales and marketing expenses

Sales and marketing expenses were $2.5 million for the three months ended September 30, 2021, compared to $3.2 million for the three months ended September 30, 2020, a decrease of $0.7 million. The decrease was primarily the result of a decline in salary and personnel costs of $0.9 million from the reduction in sales support due to the transition to Ascensia for the commercialization of Eversense, offset by an increase of $0.2 million in general advertising related to the shared support of the commercialization of the 90-day product in the US.

Research and development expenses

Research and development expenses were $7.2 million for the three months ended September 30, 2021, compared to $4.6 million for the three months ended September 30, 2020, an increase of $2.6 million. The increase was due to higher salaries and related expenses of $0.9 million due to the expansion of our R&D workforce, an increase of $0.9 million in clinical studies and lab supplies and an increase of $0.8 million in for contractor expenses.

General and administrative expenses

General and administrative expenses were $5.1 million for the three months ended September 30, 2021, compared to $5.5 million for three months ended September 30, 2020, a decrease of $0.4 million. The decrease was due to lower legal expenses of $0.2 million and a decrease of $0.2 million in other administrative costs including investor relations costs for the annual meeting, accounting fees, and other general administrative expenses.

Total other (expense) income, net

Total other income, net, was $58.9 million for the three months ended September 30, 2021, compared to other expense, net, of $11.0 million for the three months ended September 30, 2020, an increase of $69.9 million. The increase was primarily due to a $46.6 million non-cash gain on the fair value of the embedded derivatives in our convertible notes, $13.5 million increase in non-cash gain on fair value adjustment of the Energy Capital Option, a $9.5 million of reduction in loss on extinguishment of debt, a decrease on $0.9 million for loss in issuance of debt & issuance costs, an increase of $0.5 million in interest income, offset by an impairment cost of $0.5 million on the PHC Option classified as an asset and an increase of $0.6 million in interest expense.

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Comparison of the nine months ended September 30, 2021 and 2020

The following table sets forth our results of operations for the nine months ended September 30, 2021 and 2020 (in thousands):


	Nine Months Ended
	September 30,				Period-to-
	2021		2020		Period Change

	(in thousands)
Revenue, net	$	1,196	$	761	$	435
Revenue, net - related parties		8,471		303		8,168
Total revenue		9,667		1,064		8,603
Cost of sales		9,995		21,006		(11,011)
Gross Loss		(328)		(19,942)		19,614

Expenses:
Sales and marketing expenses		5,725		17,521		(11,796)
Research and development expenses		19,562		15,726		3,836
General and administrative expenses		17,622		15,635		1,987
Operating loss		(43,237)		(68,824)		25,587
Other (expense) income, net:
Interest income		743		173		570
Loss on fair value adjustment of option		(74,848)		—		(74,848)
Gain (Loss) on extinguishment of debt and option		330		(20,458)		20,788
Loss on issuance of debt & other issuance costs		—		(1,216)		1,216
Interest expense		(12,337)		(11,560)		(777)
Gain (Loss) on change in fair value of derivatives		(255,185)		29,069		(284,254)
Impairment cost		(1,650)		—		(1,650)
Other expense		(723)		(720)		(3)
Total other (expense) income, net		(343,670)		(4,712)		(338,958)
Net loss	$	(386,907)	$	(73,536)	$	(313,371)

Revenue, net

Our net revenue increased $8.6 million to $9.7 million for the nine months ended September 30, 2021, compared to $1.1 million for the nine months ended September 30, 2020. This increase was due to the transition of commercial responsibility for Eversense to Ascensia and its orders for Eversense for distribution in the European Union and in the United States.

Cost of sales

Our cost of sales decreased $11.0 million to $10.0 million for the nine months ended September 30, 2021, compared to $21.0 million for the nine months ended September 30, 2020. The decrease was primarily attributed to the reduction of inventory impairment and write-offs of $13.3 million and scrap expense of $1.4 million and a reduction of $0.3 million in salaries & related costs, partially offset by an increase of $2.4 million to product costs and $0.9 million of freight and logistic costs, and a $0.7 million increase in warranty and replacement costs from the sale of Eversense to Ascensia under the Commercialization Agreement.

Gross profit was $(0.3) million and $(19.9) million for the nine months ended September 30, 2021 and 2020, respectively. The improved gross margin was primarily due to the fulfillment of orders utilizing existing written off inventory as a result of the COVID-19 pandemic.

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Sales and marketing expenses

Sales and marketing expenses were $5.7 million for the nine months ended September 30, 2021, compared to $17.5 million for the nine months ended September 30, 2020, a decrease of $11.8 million. The decrease was primarily the result of our headcount reduction in March 2020, which impacted the majority of the sales organization, resulting in a decline in salary and personnel costs of $7.7 million and a decline of $4.1 million related to travel, trade shows, consultants and other marketing programs to market Eversense. These activities are now the responsibility of Ascensia, as a result of the Commercialization Agreement.

Research and development expenses

Research and development expenses were $19.5 million for the nine months ended September 30, 2021, compared to $15.7 million for the nine months ended September 30, 2020, an increase of $3.8 million. The increase was due to higher salaries and related expenses of $2.1 million, primarily related to stock based compensation and related expenses, higher consultant costs of $2.0 million, offset by a reduction of $0.3 million for clinical trial costs primarily related to the PROMISE trial.

General and administrative expenses

General and administrative expenses were $17.6 million for the nine months ended September 30, 2021, compared to $15.6 million for nine months ended September 30, 2020, an increase of $2.0 million. The increase was due to higher salaries and related expenses of $2.8 million, primarily related to stock based compensation and related expenses, an increase of $0.3 million related to legal expenses and an increase of $0.2 million in investor relations costs for the annual meeting, offset by a reduction of $1.3 million in other administrative expenses including occupancy, and accounting and consultants costs.

Total other (expense) income, net

Total other expense, net, was $343.7 million for the nine months ended September 30, 2021, compared to other expense, net, of $4.7 million for the nine months ended September 30, 2020, an increase of $339.0 million. The increase was primarily due to a $284.3 million non-cash loss on the fair value of the embedded derivatives in our convertible notes, a $74.8 million increase in non-cash loss on fair value adjustment of the Energy Capital Option, impairment cost of $1.7 million on the PHC Option classified as an asset and a $0.8 million increase in interest expense, offset by a decrease of $20.8 million in loss on extinguishment of debt, a decrease on $1.2 million for loss in issuance of debt & issuance costs and an increase of $0.6 million in interest income.

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 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 $175.2 million, $115.5 million, and $94.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of September 30, 2021, we had an accumulated deficit of $1.0 billion. To date, we have funded our operations principally through the issuance of preferred stock, common stock, convertible note issuance and debt. As of September 30, 2021, we had cash, cash equivalents and marketable debt securities of $201.1 million.

In November 2021, we entered into an Open Market Sale Agreement (the “2021 Sales Agreement”) with Jefferies LLC (“Jeffries”), under which we could offer and sell, from time to time, at our sole discretion, shares of our common stock having an aggregate offering price of up to $150.0 million through Jeffries as our sales agent in an “at the

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market” offering. Jeffries will receive a commission up to 3.0% of the gross proceeds of any common stock sold through Jeffries under the 2021 Sales Agreement. As of the date of this Quarterly Report on Form 10-Q, there have been no offer and sales of our common stock under the 2021 Sales Agreement.

In November 2019, we entered into an Open Market Sale Agreement (the “2019 Sales Agreement”) with Jefferies, under which we could offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $50.0 million through Jeffries as our sales agent in an “at the market” offering. In June 2021, we received $48.4 million in net proceeds from the sale of 12,830,333 shares of our common stock utilizing the full capacity under the 2019 Sales Agreement. For the nine months ended September 30, 2020, we had received $0.1 million in net proceeds from the sale of 175,289 shares of our common stock under the 2019 Sales Agreement.

On January 21, 2021, we entered into an underwriting agreement, which was subsequently amended and restated on the same day (the “Underwriting Agreement”) with H.C. Wainwright & Co., LLC, as representative of the underwriters (the “Underwriters”), to issue and sell 51,948,052 shares of common stock, in an underwritten public offering pursuant to effective registration statements on Form S-3, including a related prospectus and prospectus supplement, in each case filed with the Securities and Exchange Commission (the “Offering”). The price to the public in the Offering was $1.925 per share of common stock. The Underwriters agreed to purchase the shares from us pursuant to the Underwriting Agreement at a price of $1.799875 per share and the Company also agreed to reimburse them for customary fees and expenses. The initial closing of the Offering occurred on January 26, 2021. Subsequent to the initial closing, the Underwriters exercised their option to purchase an additional 7,792,207 shares of Common Stock. Total net proceeds from the Offering were $106.1 million after deducting underwriting discounts and commissions and estimated offering expenses.

On January 17, 2021, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional purchasers (the “Purchasers”), pursuant to which we sold to the Purchasers, in a registered direct offering (the “Registered Direct Offering”), an aggregate of 40,000,000 shares (the “Shares”) of common stock, $0.001 par value per share. The Shares were sold at a purchase price of $1.25 per share for aggregate gross proceeds to the Company of $50 million, before deducting fees to the placement agent and other estimated offering expenses payable by the Company. The Shares were offered and sold by the Company pursuant to an effective shelf registration statement on Form S-3, which was originally filed with the Securities and Exchange Commission on November 27, 2019. The net proceeds to the Company from the Registered Direct Offering, after deducting fees and expenses and the estimated offering expenses payable by us are approximately $46.1 million.

On November 9, 2020, we entered into an equity line agreement, (“Equity Line Agreement”), with Energy Capital, LLC (“Energy Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Energy Capital is committed to purchase up to an aggregate of $12.0 million of shares of our newly designated series B convertible preferred stock, or the Series B Preferred Stock, at our request from time to time during the 24-month term of the Equity Line Agreement.

Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that we have less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), we have the right, in our sole discretion, to present Energy Capital with a purchase notice, or a Regular Purchase Notice, directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of our Series B Preferred Stock at a per share price, or the Purchase Price, equal to $1,000 per share of Series B Preferred Stock, with each share of Series B Preferred Stock initially convertible into common stock, beginning nine months after the date of its issuance, at a conversion price of $0.3951 per share. The Equity Line Agreement provides that we shall not affect any Regular Purchase under the Equity Line Agreement on any date where the closing price of the common stock on the NYSE American is less than $0.25 without the approval of Energy Capital.

Concurrently with entry into the Equity Line Agreement, we issued a warrant to Energy Capital, exercisable beginning May 9, 2021, to purchase up to 10,000,000 shares of common stock at an exercise price of $0.3951 per share, (the “Warrant”). The Warrant expires, if unexercised, on November 9, 2030.

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On August 9, 2020, we entered into a financing agreement with Ascensia pursuant to which we issued $35.0 million in aggregate principal amount PHC Notes, to Ascensia’s parent company, PHC, on the Closing Date. We also issued PHC 2,941,176 shares of common stock to PHC as a financing fee. We also have 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. Upon the closing of the PHC Notes, we prepaid in full the First Lien Notes, issued and sold pursuant to the Highbridge Loan Agreement, in the amount of approximately $17.6 million.

Additionally, on August 9, 2020, we entered into a Stock Purchase Agreement with Masters Special Solutions, LLC and certain affiliates thereof (“Masters”), pursuant to which we issued and sold to Masters 3,000 shares of convertible preferred stock, designated as Series A Preferred Stock (the “Series A Preferred Stock”), at a price of $1,000.00 per share in an initial closing. Masters also had 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 subsequent closings, subject to the terms and conditions of the Stock Purchase Agreement, as amended, through January 11, 2021. In January 2021, Masters and its assignees purchased in aggregate an additional 22,783 shares of Series A Preferred Stock, resulting in additional gross proceeds of $22.8 million. 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. All shares of Series A Preferred Stock have been converted to common stock as of September 30, 2021.

We believe that these agreements provide the financial resources and mutual commitment to support the growth of Eversense and specifically for us, 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 our plans, and may be influenced by uncontrollable external factors, including restrictions or impacts of COVID-19. Management has concluded that based on our current operating plans, existing cash and cash equivalents and cash flows from our future operations will be sufficient to meet our anticipated operating needs through 2022.

Common Stock

In November 2019, we entered into an Open Market Sale Agreement with Jefferies LLC which allows us to issue and sell up to $50.0 million in gross proceeds of its common stock. During the nine months ended September 30, 2021, we sold 12,830,333 shares of common stock under the Open Market Sale Agreement, resulting in gross proceeds of $48.4 million. During the nine months ended September 30, 2020, we sold 175,289 shares of common stock under the Open Market Sale Agreement, resulting in gross proceeds of $0.1 million.

During the nine months ended September 30, 2021, in addition to the shares sold under the Open Market Sale Agreement above, we sold 99,740,259 shares of common stock, of which 59,740,259 shares of common stock were sold in the Offering and 40,000,000 shares of common stock were sold in the Registered Direct Offering. During the nine months ended September 30, 2020, we did not sell any shares of common stock, other than the shares sold under the Open Market Sale Agreement. For additional information on the Offering and the Registered Direct Offering, see Note 2—Liquidity and Capital Resources.

Indebtedness

Term Loans

PPP Loan

On April 22, 2020, we 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, or the PPP Loan, is evidenced by the

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PPP Note dated April 21, 2020, or the PPP Note, in the principal amount of $5.8 million with Silicon Valley Bank (“SVB”).

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 SVB, (iv) failure to disclose any material fact or make a materially false or misleading representation to SVB or SBA, (v) default on any loan or agreement with another creditor, if SVB believes the default may materially affect our 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 our business or property, or making an assignment for the benefit of creditors, (viii) having any adverse change in financial condition or business operation that SVB believes may materially affect our ability to pay the PPP Note, (ix) if we reorganize, merge, consolidate, or otherwise change ownership or business structure without SVB’s prior written consent, or (x) becoming the subject of a civil or criminal action that SVB believes may materially affect our ability to pay the PPP Note. Upon the occurrence of an event of default, SVB has customary remedies and may, among other things, require immediate payment of all amounts owed under the PPP Note, collect all amounts owing from us, and file suit and obtain judgment against us.

Convertible Notes

The following table summarizes our outstanding notes payable at September 30, 2021:

Aggregate

Initial Conversion

Conversion Price

Convertible

Issuance

Principal

Maturity

Rate per $1,000

per Share of

Note

Date

Coupon

(in millions)

Date

Principal Amount

Common Stock

2023 Notes

January 2018

5.25%

15.7

February 1, 2023

294.1176

3.40

2025 Notes

July 2019

5.25%

51.2

January 15, 2025

757.5758

1.32

PHC Notes

August 2020

9.50%

35.0

October 31, 2024

1867.4136

0.54

2023 Notes

In the first quarter of 2018, we issued $53.0 million in aggregate principal amount of senior convertible notes that will mature on February 1, 2023, (the “2023 Notes”), of which $15.7 million in aggregate principal remains after some of the holders exchanged their 2023 Notes for 2025 Notes, as defined below, in July 2019.

2025 Notes

In July 2019, we issued $82.0 million in aggregate principal amount of senior convertible notes that will mature on January 15, 2025 (the “2025 Notes”), unless earlier repurchased or converted. In connection with the Exchange on April 24, 2020, $24.0 million in aggregate principal of Highbridge’s outstanding 2025 Notes were exchanged for (i) $15.7 million aggregate principal amount of Second Lien Notes, (ii) 11,026,086 shares of our common stock, (iii) warrants to purchase up to 4,500,000 shares of our 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.

For additional information on the 2025 Notes and the 2023 Notes, see Note 8—Notes Payable, Preferred Stock and Stock Purchase Warrants in the accompanying unaudited consolidated financial statements.

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PHC Notes

On August 9, 2020, we entered into a note purchase agreement with PHC, pursuant to which we agreed to borrow $35.0 million in aggregate principal through the issuance and sale of PHC Notes on or prior to August 14, 2020. The PHC Notes will be senior secured obligations and will be guaranteed on a senior secured basis by our wholly owned subsidiary, Senseonics, Incorporated. Interest at the annual rate of 9.5% will be payable semi-annually in cash or, at our option, payment in kind. The interest rate will decrease to 8.0% if we obtain approval for 180-day Eversense product for marketing in the United States, subject to certain conditions. The maturity date for the PHC Notes will be October 31, 2024, provided that the maturity date will accelerate if we have not repaid our 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.

PHC will be entitled to convert the PHC Notes to common stock at a conversion rate of 1,867.4136 shares per $1,000 principal amount of the PHC Notes, equivalent to a conversion price of approximately $0.54 per share, subject to specified anti-dilution adjustments, including adjustments for our 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, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such notice of redemption or corporate event. In certain circumstances, we will be required to pay cash in lieu of delivering make whole shares unless we obtain stockholder approval to issue such shares.

Subject to specified conditions, on or after October 31, 2022, the PHC Notes are redeemable by us 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, plus any accrued but unpaid interest. On or after October 31, 2023, the PHC Notes are redeemable by us upon 10 days prior written notice at a cash redemption price equal to the then outstanding principal 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 PHC 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 us, change of control or delisting events, termination of any guaranty, governmental approvals, and lien priority.

Funding Requirements and Outlook

Our ability to generate revenue and achieve profitability depends on the successful commercialization and adoption of our Eversense CGM systems by diabetes patients and healthcare providers, along with future product development, regulatory approvals, and post-approval requirements. These activities, including our ongoing focus to grow covered lives through positive insurance payor policy decisions and obtain approval for Eversense 180-day product in the United States, will require significant uses of working capital through 2021 and beyond.

We expect that existing cash, cash equivalents and cash flows from our future operations will be sufficient to meet the Company’s current operating plans through 2022. As part of our liquidity strategy, we will continue to monitor our capital structure and operating plans and we may access the capital markets or debt markets for additional funding if the opportunity arises to enhance our capital structure for changes to our operating plans, for financing strategic initiatives and to provide financial flexibility.

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Cash Flows

The following is a summary of cash flows for each of the periods set forth below (in thousands).


	Nine Months Ended
	September 30,
	2021		2020
Net cash used in operating activities	$	(44,275)	$	(59,174)
Net cash used in investing activities		(154,993)		(181)
Net cash provided by (used in) financing activities		227,274		(10,191)
Net increase (decrease) in cash, cash equivalents and restricted cash	$	28,006	$	(69,546)

Net cash used in operating activities

Net cash used in operating activities was $44.3 million for the nine months ended September 30, 2021 and consisted of a net loss of $386.9 million, a net decrease in operating assets and liabilities of $2.6 million (mostly due to an increase in inventory of $2.6 million, higher accounts receivable of $0.7 million, and a $1.0 million decrease in accounts payable, reflecting reduced operational activities, offset by an increase in accrued liabilities of $1.3 million and an increase of $0.3 million in accrued interest) and $0.3 million for gain on extinguishment for the convertible notes and options, offset by $255.2 million due to the change in fair value of derivatives on convertible notes, a $74.8 million loss on fair value adjustment of the option, $7.1 million for stock-based compensation and net for increased impairment reserves, depreciation/amortization and non-cash items of $8.4 million.

Net cash used in operating activities was $59.2 million for the nine months ended September 30, 2020 and consisted of a net loss of $73.5 million and a decrease in fair value of derivatives of $29.1 million, offset by $20.5 million for extinguishment and issuance losses on the notes, net non-cash items of $13.7 million for interest expense, depreciation, disposal of fixed assets and stock-based compensation expense, and a net change in operating assets and liabilities of $9.2 million (mostly due to $12.6 million reductions in inventory, net for increased impairment reserves, $9.9 million for collections of accounts receivable, offset by declines in accruals and accounts payables of $11.9 million reflecting reduced operational activities).

Net cash used in investing activities

Net cash used in investing activities was $155.0 million for the nine months ended September 30, 2021 and primarily consisted of the purchase of marketable securities.

Net cash used in investing activities was $0.2 million for the nine months ended September 30, 2020 and consisted of capital expenditures for laboratory equipment.

Net cash provided by (used in) financing activities

Net cash provided by financing activities was $227.3 million for the nine months ended September 30, 2021, primarily consisted of $200.4 million from issuance of common stock, proceeds of $22.8 million for the issuance of Series A preferred stock and $4.7 million for proceeds related to exercise off stock options and warrants, offset by repayment of $0.6 million of PPP loan.

Net cash used in financing activities was $10.2 million for the nine months ended September 30, 2020 and primarily consisted of $66.0 million for the repayment of outstanding principal, final payoff fees and prepayment premiums of $48.4 million for Solar Loan Agreement and $17.6 million for First Lien Notes, offset by proceeds of $56.0 million from the PPP loan of $5.8 million, from the First Lien Notes of $14.4 million, from the 2024 Notes of $33.3 million and $2.5 million from the issuance of Series A preferred stock.

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Off-Balance Sheet Arrangements

During the nine months ended September 30, 2021, we did not have any off-balance sheet arrangements as defined by SEC rules.

ITEM 3: 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 September 30, 2021, we had cash, cash equivalents and marketable securities of $201.1 million. We generally hold our cash in interest-bearing money market accounts or short-term investments that meet our policy for cash equivalents. 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. The interest rates on our notes payable are all fixed. We do not currently engage in hedging transactions to manage our exposure to interest rate risk.

Foreign Currency Risk

The majority of our international sales are denominated in Euros. Therefore, our U.S. dollar value of sales is impacted by exchange rates versus the Euro. Currency fluctuations or a strengthening U.S. dollar can decrease our revenue from these Euro-denominated international sales. To date, foreign currency transaction gains and losses and exchange rate fluctuations have not been material to our consolidated financial statements, and we do not believe that the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would have had a material impact on our operating results or financial condition. We do not currently engage in any hedging transactions to manage our exposure to foreign currency exchange rate risk.

In addition, the uncertainty that exists with respect to the economic impact of the global COVID-19 pandemic has introduced significant volatility in the financial markets subsequent to our quarter ended September 30, 2021, which could increase our foreign currency and interest rate risk.

ITEM 4: Controls and Procedures

Changes to Smaller Reporting Company Requirements

On March 12, 2020, the SEC voted to adopt amendments to the “accelerated filer” and “large accelerated filer” definitions in Rule 12b-2 under the Securities Exchange Act of 1934, or the Exchange Act. The amendments more appropriately tailor the types of issuers that are included in the categories of accelerated and large accelerated filers and promote capital formation, preserve capital, and reduce unnecessary burdens and compliance costs for certain smaller issuers while maintaining investor protections. As a result, certain low-revenue issuers will not be required to have their management’s assessment of the effectiveness of internal control over financial reporting, or ICFR, attested to, and reported on, by an independent auditor, as required by Section 404(b) of the Sarbanes-Oxley Act, or SOX. However, those issuers will remain obligated, among other things, to establish and maintain ICFR and, as required by SOX Section 404(a), have management assess the effectiveness of ICFR. Additionally, the amendments revise certain transition thresholds for accelerated and large accelerated filers and add an ICFR auditor attestation check box to the cover page of Form 10-K.

The 2019 fiscal year was the first year we were required to have an auditor’s attestation report on our system of ICFR pursuant to SOX. As a result of these amendments, we are no longer required to have our independent auditor attest to our ICFR, however, we will reassess our classification as a non-accelerated filer as of December 31, 2021, based on our public float as of June 30, 2021.

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Evaluation of Disclosure Controls and Procedures

Our management, with the assistance of our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, has reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2021. 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. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving such control objectives. Based on the evaluation of our disclosure controls and procedures as of September 30, 2021, 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 were no changes 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 September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1: Legal Proceedings

From time to time, we are subject to litigation and claims arising in the ordinary course of business.

In February 2021, we received notice and accepted service of a civil complaint that had been filed in the Western District of Texas and styled Carew ex rel. United States v. Senseonics, Inc., No. SA20CA0657DAE. The complaint was filed by a relator under seal in May 2020 pursuant to the qui tam provisions in the federal False Claims Act. Prior to the unsealing of the complaint, the government declined to intervene in the case. The case, therefore, is being pursued only by the relator. The complaint alleges the Company’s marketing practices with physicians for its product, Eversense Continuous Glucose Monitoring System, violated the False Claims Act, 31 U.S.C. § 3729 and the Texas Medicaid Fraud Prevention Law, Tex. Hum Res. Code § 36.002. Outside counsel, on behalf of the Company, has filed a motion to dismiss the action for failure to state a claim. The motion is currently pending before the court.

ITEM 1A: Risk Factors

Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. Our risk factors as of the date of this Quarterly Report on Form 10-Q have not changed materially from those described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K.

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

Not applicable.

ITEM 3: Defaults Upon Senior Securities

Not applicable.

ITEM 4: Mine Safety Disclosures

Not applicable.

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ITEM 5: Other Information

None.

ITEM 6: Exhibits

The exhibits listed on the Exhibit Index hereto are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.


Exhibit No.		Document

3.1		Amended and Restated Certificate of Incorporation of Senseonics Holdings, Inc. (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37717), filed with the Commission on March 23, 2016).

3.2		Amended and Restated Bylaws of Senseonics Holdings, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-37717), filed with the Commission on March 23, 2016).

3.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Senseonics Holdings, Inc. (incorporated herein by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2018 (File No. 001-37717), filed with the Commission on August 8, 2018).

3.4		Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37717), filed with the Commission on August 18, 2020).

3.5		Certificate of Designation of Series A Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37717), filed with the Commission on August 18, 2020).

3.6		Form of Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37717) filed with the Commission on November 9, 2020).

3.7		Amendment to Bylaws of Senseonics Holdings, Inc. (incorporated herein by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K (File No. 001-37717) filed with the Commission on March 5, 2021).

31.1*		Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act.

31.2*		Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act.

32.1**		Certifications of Principal Executive Officer and Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act.

101.INS*		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document)

101.SCH*		Inline XBRL Taxonomy Extension Schema Document

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

** These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Exchange Act 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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.