What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-05 compared with 2020-03-16 · 473 added, 321 removed, 514 unchanged (61% of the section changed)

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Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Changes in Stockholders’

Equity (Deficit) for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of

Senseonics Holdings, Inc.

To the Shareholders and the Board of Directors of Senseonics Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Senseonics Holdings, Inc.

(the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, changes in stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2019, and the related notes, (collectively referred to as the “consolidated financial statements”).

(the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, changes in stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes, (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 16, 2020 expressed an unqualified opinion thereon.

The Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, has a projected working capital deficiency, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern.

Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2015.

March 16, 2020

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Senseonics Holdings, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Senseonics Holdings Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).

In our opinion, Senseonics Holdings, Inc.

(the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, changes in stockholder’s equity (deficit) and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated March 16, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.

Valuation of Derivatives Instruments, Warrants and Options

Description of the Matter

As discussed in Note 15 of the consolidated financial statements, the Company measures financial assets and liabilities at fair value using level three inputs.

As of December 31, 2020, the financial liabilities measured at fair value are $101.8 million and the financial assets measured at fair value are $1.9 million.

To determine fair value of each financial asset and liability the Company determines the appropriate valuation methodology and assumptions, including unobservable inputs.

For example, the derivative liabilities are measured at fair value using a binomial option pricing model that uses observable and unobservable market data for inputs, including the Company’s stock price, implied volatility of the Company’s shares, and probability of conversion occurrence through maturity.

Auditing management’s estimate for the fair value of the financial assets and liabilities involved subjective auditor judgement because the fair value calculations were sensitive to changes in assumptions described above, and certain inputs used in the determination of fair values were based on unobservable data, including, but not limited to, the implied volatility and probability of conversion.

How We Addressed the Matter in Our Audit

To test the fair value of the Company’s financial assets and liabilities, we performed audit procedures that included, among others, evaluating the methodologies used in the valuation model and the significant assumptions.

We involved our valuation specialist to assist in the evaluation including to develop an independent valuation of the instruments.

We also performed a sensitivity analysis of the significant assumptions, including the implied volatility and probability of conversion, to evaluate the change in the fair value that would result from changes in the assumptions.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2015.

March 5, 2021

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Cash and cash equivalents

Accounts receivable

Restricted cash

Accounts receivable, net

Accounts receivable - related parties

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Property and equipment, net

Liabilities and Stockholders’

Equity (Deficit)

Liabilities and Stockholders’ Deficit

Current liabilities:

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Accrued expenses and other current liabilities

Deferred revenue

Term Loans, net of discount

2025 Notes, net of discount

Term Loans, net

2025 Notes, net

Total current liabilities

Term Loans, net of discount and current portion

2023 Notes, net of discount

Long-term debt and notes payables, net

Derivative liabilities

Other liabilities

Total liabilities

Preferred stock and additional paid-in-capital, subject to possible redemption:

$ 0.001 par value per share;

3,000 shares and 0 shares issued and outstanding as of December 31, 2020 and December 31, 2019

Total temporary equity

Commitments and contingencies

Stockholders’

equity (deficit):

Stockholders’ deficit:

Common stock, $ 0.001 par value per share;

450,000,000 shares authorized;

203,452,812 and 176,918,381 shares issued and outstanding as of December 31, 2019 and 2018

900,000,000 shares and 450,000,000 shares authorized as of December 31, 2020 and 2019;

265,582,688 shares and 203,452,812 shares issued and outstanding as of December 31, 2020 and 2019

Additional paid-in capital

Accumulated deficit

Total stockholders' (deficit) equity

Total liabilities and stockholders’

equity (deficit)

Total stockholders' deficit

Total liabilities and stockholders’ deficit

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

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Cost of sales

Gross profit (loss)

Sales and marketing expenses

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Operating loss

Other income (expense), net:

Other (expense) income, net:

Interest income

Loss on fair value adjustment

Loss on extinguishment of debt

Loss on issuance of debt & other issuance costs

Interest expense

Debt issuance costs

Change in fair value of derivative liabilities

Other (expense) income

Total other income (expense), net

Gain (Loss) on fair value and change in fair value of derivatives

Impairment costs

Other expense

Total other (expense) income, net

Total comprehensive loss

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Senseonics Holdings, Inc.

Consolidated Statements of Changes in Stockholders’

Equit y (Deficit)

Consolidated Statements of Changes in Stockholders’ Equit y (Deficit)

(in thousands)

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Equity (Deficit)

Preferred Stock Temporary Equity

Balance, December 31, 2017

Issues shares of common stock

Issuance of common stock, net

Exercise of stock options and warrants

Stock-based compensation expense and vesting of RSUs

Issuance of warrants related to debt

Balance, December 31, 2017

Issued shares of common stock

Exercise of stock options for cash and warrants

Conversion of 2023 Notes

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Balance, December 31, 2018

Issued shares of common stock

Issuance of common stock, net

Exercise of stock options and warrants

Stock-based compensation expense and vesting of RSUs

Issuance of warrants related to debt, net of issuance costs

Issuance of warrants related to debt, net

Balance, December 31, 2019

Issuance of convertible preferred stock, net

Issuance of common stock, net

Exercise of stock options and ESPP purchases

Exchange and conversion of convertible notes, net

Stock-based compensation expense and vesting of RSUs

Issuance of warrants related to debt, net

Balance, December 31, 2020

Senseonics Holdings, Inc.

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(in thousands)

Cash flows from operating activities

Cash flows used in operating activities

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

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

Change in fair value of derivatives

Loss on fair value adjustment

Loss on extinguishment of debt

Change in fair value of derivative liabilities

Loss on issuance of debt

Impairment of asset

Stock-based compensation expense

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Accrued interest

Operating lease liabilities

Net cash used in operating activities

Cash flows from investing activities

Cash flows used in investing activities

Capital expenditures

Purchases of marketable securities

Payments on right of use liability, building

Sales and maturities of marketable securities

Net cash (used in) provided by investing activities

Cash flows from financing activities

Proceeds from issuance of common stock

Common stock issuance costs

Proceeds from exercise of stock options and stock warrants

Cash flows used in financing activities

Issuance of common stock, net

Proceeds from exercise of stock options and ESPP purchases

Proceeds from issuance of warrants

Proceeds from issuance of notes

Proceeds from debt issuance, net

Notes issuance costs

Proceeds from issuance of term loans

Term loans issuance costs

Repayment of Oxford and SVB Term Loan

Proceeds from Solar term loan, net of cost

Payments of notes payable

Repurchase of 2023 Notes

Principal payments under capital lease obligations

Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents, at beginning of year

Cash and cash equivalents, at ending of year

Net cash (used in) provided by financing activities

Net decrease in cash, cash equivalents and restricted cash

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

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

Supplemental disclosure of cash flow information

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Property and equipment purchases included in accounts payable and accrued expenses

Issuance of common stock converted from notes payables

Issuance of common stock and warrants - Highbridge transactions

Issuance of warrants - Energy Capital

Exchange of 2025 Notes for Second Lien Notes

Issuance of Second Lien Notes

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

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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.

Going Concern

The Company’s operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, lack of operating history and uncertainty of future profitability.

Since inception, the Company has suffered substantial operating losses, principally from expenses associated with the Company’s research and development programs and commercial launch of Eversense in the United States and Eversense and Eversense XL in Europe, the Middle East, and Africa.

The Company has not generated significant revenue from the sale of products and its ability to generate revenue and achieve profitability largely depends on the Company’s ability to successfully expand the commercialization of Eversense, continue the development of its products and product upgrades, and to obtain necessary regulatory approvals for the sale of those products, including approval by the FDA for the extended Eversense XL CGM system in the United States.

Senseonics Holdings and Senseonics, Incorporated are hereinafter collectively referred to as the “Company” unless otherwise indicated or the context otherwise requires.

Since inception, the Company has suffered substantial operating losses, principally from expenses associated with the Company’s research and development programs and commercial launch of the Eversense® CGM System (for use up to 90 days ) in the United States and the Eversense CGM and Eversense XL CGM Systems (for use up to 180 days ) in Europe, the Middle East, and Africa.

The Company has not generated significant revenue from the sale of products and its ability to generate revenue and achieve profitability largely depends on the Company’s ability to successfully expand the commercialization of Eversense, continue the development of its products and product upgrades, and to obtain necessary regulatory approvals for the sale of those products, including approval by the FDA for the new 180-day Eversense product in the United States.

These activities will require significant uses of working capital through 2021 and beyond.

In 2019, the Company generated a net loss of $(115.5) million and had an accumulated deficit of $(473.3) million at December 31, 2019.

At December 31, 2019, the Company had $95.9 million in cash and cash equivalents.

The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next twelve months from the date of this Annual Report filed on Form 10-K will depend on its ability to achieve forecasted results, its ability to raise additional funds, and to obtain a waiver or amend its Loan and Security Agreement with Solar Capital, Ltd.

(“Solar”), which the Company expects to be in noncompliance with as of March 31, 2020 and for the foreseeable periods thereafter.

As a result of these factors and the projected working capital deficiency, the Company has substantial doubt about its ability to continue as a going concern through one year from the date that the consolidated financial statements included in this Annual Report were issued.

The Company is in discussions with Solar to procure a waiver for the expected covenant noncompliance.

Because those discussions have not been finalized, under cross-default provisions in the Loan and Security Agreement with Solar, the Solar Loan and the Company’s convertible senior subordinated notes due in 2025, may be callable at the time of noncompliance.

The Company intends to raise additional capital in the near term through future sales of its common stock, debt financings, collaborations, strategic alliances and partnerships, distribution or licensing arrangements and in the longer term, from revenue related to product sales to the extent the Company is able to expand commercialization of Eversense.

New financings may not be available to the Company on commercially acceptable terms, or at all, and may be impacted by the current debt covenants.

The Company’s plans to alleviate its substantial doubt about its ability to continue as a going concern assume that there will be no material adverse development in its business, liquidity, or capital requirements.

If the Company is unable to obtain additional capital when required, or is unable to obtain a waiver from Solar, the Company may be required to reduce or delay management’s strategic plans for commercializing Eversense and Eversense XL, developing future products or product upgrades, reduce, delay or eliminate one or more of its research and development programs or studies, and/or downsize the organization.

The Company generated a net loss of $ 175.2 million for the twelve months ended December 31, 2020 and had an accumulated deficit of $ 648.5 million at December 31, 2020.

During the twelve months ended December 31, 2020, the Company repaid in full its term loan with Solar Capital Ltd.

(“Solar”) in the amount of $ 48.4 million, and as a result, and in consideration of the evolving impact of the coronavirus (“COVID-19”) pandemic, the Company made significant reductions in its cost structure to improve operating cash flow and generate future capital expenditure savings to ensure the long-term success of Eversense.

Specifically, the Company temporarily suspended commercial sales of the Eversense CGM system in the United States to new patients and streamlined its operational strategy to focus on the development and regulatory submission efforts for its new 180-day Eversense product in the United States.

On April 24, 2020, the Company received $ 15.0 million through the issuance and sale of First Lien Secured Notes due October 2021 (the “First Lien Notes”) pursuant to a Loan and Security Agreement (the “Highbridge Loan Agreement”) with certain funds managed by Highbridge Capital Management, LLC (“Highbridge”), as the lenders, together with the other lenders from time to time party thereto (the “Lenders”).

Upon the closing of the PHC Notes, the Company prepaid the First Lien Notes in full in the amount of approximately $ 17.6 million, which includes the discounted prepayment premium pursuant to the Highbridge Loan Agreement.

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

On April 22, 2020, the Company received $ 5.8 million in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”), as amended by the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), and administered by the U.S.

Small Business Administration (the “SBA”), to support payroll, rent, and utilities incurred during a defined period.

On August 9, 2020, the Company entered into a Collaboration and Commercialization Agreement with Ascensia Diabetes Care Holdings AG (“Ascensia”) and entered into a financing agreement pursuant to which the Company issued $ 35.0 million in aggregate principal amount of Senior Secured Convertible Notes due in October 2024 (the “PHC Notes”) to Ascensia’s parent company, PHC Holdings Corporation (“PHC”) on August 14, 2020 (the “Closing Date”).

The Company also issued PHC 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.

Upon the closing of the PHC Notes, we prepaid the Highbridge First Lien Notes in full, in the amount of approximately $ 17.6 million, which includes the discounted prepayment premium.

Additionally, on August 9, 2020, the Company entered into a Stock Purchase Agreement with Masters Special Situations, LLC and certain affiliates thereof (“Masters”) pursuant to which the Company issued and sold to Masters 3,000 shares of convertible preferred stock, designated as “Series A Convertible Preferred Stock” (the “Series A Preferred Stock”), at a price of $ 1,000.00 per share on the Closing Date.

Masters also has the option to purchase up to an additional 27,000 shares of Series A Preferred Stock at a price of $ 1,000.00 per share in a subsequent closing, subject to the terms and conditions of the Stock Purchase Agreement, as amended as set forth in Note 18 – Subsequent Events.

On November 9, 2020, we 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 that 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, in 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 the Company’s 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 (the “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.

The Company believes that these agreements and the financing described in Note 18 – Subsequent Events, provide the financial resources and mutual commitment to support the growth of Eversense and specifically for the Company, the manufacturing of Eversense and continued product development, including the U.S.

launch of the new 180-day Eversense product, if approved.

The timing and success of these collaborations and financings are dependent on certain events occurring in accordance with the Company’s plans, and may be influenced by uncontrollable external factors, including restrictions or impacts of COVID-19.

Management has concluded that based on the Company’s current operating plans, its existing cash and cash equivalents will be sufficient to meet the Company’s anticipated operating needs through 2022.

Accordingly, management has concluded that the substantial doubt about the Company’s ability to continue as a going concern through March 31, 2022 that existed at March 5, 2020 has been alleviated.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”).

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

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

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Comprehensive loss comprises net loss and other changes in equity that are excluded from net loss.

For the years ended December 31, 2019, 2018 and 2017, the Company’s net loss equaled its comprehensive loss and, accordingly, no additional disclosure is presented.

For the years ended December 31, 2020, 2019 and 2018, the Company’s net loss equaled its comprehensive loss and, accordingly, no additional disclosure is presented.

Cash and Cash Equivalents and Concentration of Credit Risk

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These investments are carried at cost, which approximates fair value.

Cash and cash equivalents consisted of the following as of December 31 (in thousands).

Cash, cash equivalents and restricted cash consisted of the following (in thousands):

Money market funds

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(1) Includes overnight repurchase agreements.

Cash and cash equivalents

Restricted cash

Cash, cash equivalents and restricted cash

Concentration of Revenues and Customers

During the year ended December 31, 2019 the Company derived 77% of its total net revenue from Roche Diabetes Care GmbH, a related party, and 12% from Advanced Diabetes Supply, one of the Company’s strategic fulfillment partners and a supplier of CGM products to diabetic patients in the United States.

During the years ended December 2018 and December 2017, the Company derived 86% and 93%, respectively, from one customer, Roche Diabetes Care GmbH .

Net revenue from our distribution arrangement with Roche Diabetes Care GmbH, a related party, accounted for 72 % of our total net revenues for the year ended December 31, 2020.

Net revenue from our distribution arrangement

with Edwards Healthcare Centers, Advanced Diabetes Supply, and Solara Medical Supply, strategic fulfillment partners and supplier of CGM systems to diabetic patients in the United States, accounted for 19 %, 15 %, and 10 %, respectively, of our total net revenues for the year ended December 31, 2020.

During the years ended December 2019, the Company derived 77 % of its total net revenue from Roche, and 12 % from Advanced Diabetes Supply.

During the year ended December 2018, the Company derived 86 %, from one customer, Roche .

Revenues by geographic region

The following table sets forth net revenues 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 years ended December 31, 2019, 2018, and 2017:

December 31, 2020

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However, expiry does not commence until the chemistry is applied to the sensor.

The Company is able to isolate pre-chemistry sensor inventory in progress from post-chemistry sensor inventory in progress and finished goods to assess against demand forecasts and customer dating requirements for potential excess or obsolete inventory The Company’s estimates are based on information known as of the balance sheet date and include factors such as anticipated future usage and sales, potential for external unfavorable conditions such as import holds or quality issues, and planned product upgrades.

However, if actual product quality or conditions differ from the Company’s assumptions, additional inventory adjustments that would increase cost of sales could be required.

The Company’s estimates are based on information known as of the balance sheet date and include factors such as anticipated future usage and sales, potential for external unfavorable conditions such as import holds or quality issues, and planned product upgrades.

However, if actual product quality or conditions differ from the Company’s assumptions, additional inventory adjustments that would increase cost of sales could be required.

Accounts Receivable

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Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible.

As of December 31, 2019 and 2018, the Company did not have any allowances for doubtful accounts, as there are no collectability concerns.

The Company does not have a history of collectability concerns, however, an immaterial allowance for uncollectible accounts was recorded as of December 31, 2020.

The Company did not have any allowances for doubtful accounts as of December 31, 2019.

Property and Equipment

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Derivative Financial Instruments

In connection with the Company’s issuance of the convertible senior subordinated notes due 2023 (the “2023 Notes”), in January 2018, the Company bifurcated the embedded conversion option, along with the interest make-whole provision and make-whole fundamental change provision, and recorded the embedded conversion option as a derivative liability in the Company’s consolidated balance sheets in accordance with Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging .

In July 2019, the Company issued $82.0 million in aggregate principal amount of convertible senior subordinated notes due 2025 (the “2025 Notes).

In connection with the 2025 Notes, the Company bifurcated the embedded conversion option along with the fundamental change make-whole provision and the cash settled fundamental make-whole shares provision, and recorded the fair value of these embedded features as a derivative liability in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging .

The two financial instruments above are remeasured at the end of each reporting period with changes in fair value recorded in the consolidated statements of operations and comprehensive loss in other income (expense) as a change in fair value of the derivative liability.

In July 2019, the Company issued $ 82.0 million in aggregate principal amount of convertible senior subordinated notes due 2025 (the “2025 Notes).

On April 21, 2020, the Company entered into the Highbridge Loan Agreement, in which an aggregate principal amount of $ 15.0 million was borrowed through the issuance and sale of the First Lien Notes and issued 1,500,000 shares of our common stock to the Lenders as a commitment fee.

The First Lien Notes also contained redemption features that were evaluated for bifurcation as separate derivative instruments including the permitted prepayment put option, the mandatory accelerated redemption and the mandatory redemption and reinvestment upon an asset sale.

We recorded the fair value of the embedded features in the amount of $ 1.0 million as a debt premium and derivative asset in our consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging.

The derivative was adjusted to fair value at each reporting period, with the change recorded in change in fair value of derivatives that is a component of other income (expense) in our consolidated statements of operations and comprehensive loss.

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.

On April 21, 2020, the Company entered into a Note Purchase and Exchange Agreement with certain funds managed by Highbridge providing for the exchange (the “Exchange”) of $ 24.0 million aggregate principal amount of the outstanding 2025 Notes for (i) $ 15.7 million aggregate principal amount of newly issued Second Lien Notes, (ii) 11,026,086 shares of common stock, (iii) warrants to purchase up to 4,500,000 shares of common stock at an exercise price of $ 0.66 per share, and (iv) $ 0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged.

On August 9, 2020, we entered into a First Amendment to Note Purchase and Exchange Agreement with Highbridge (as amended by the Amendment, the “Exchange Agreement”).

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

Unlike the First Lien Notes, the Second Lien Notes also permit voluntary conversion at the option of the holder as described above.

We recorded the fair value of these embedded features in the amount of $ 1.9 million as a derivative asset in our 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 our consolidated statement of operations and comprehensive loss.

During the fiscal year ended December 31, 2020, Highbridge elected to convert the full $ 15.7 million of outstanding principal on the Second Lien Notes for issuance of 42,776,936 shares of common stock, which included prepayment premiums and were based off of our election of PIK interest.

In August 2020, the Company issued $ 35.0 million in aggregate principal amount of convertible senior secured notes due PHC, or the PHC Notes.

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 financial instruments above are remeasured at the end of each reporting period with changes in fair value recorded in the consolidated statements of operations and comprehensive loss in other income (expense) as a change in fair value of the derivative liability.

Warranty Obligation

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At December 31, 2020 and December 31, 2019, the warranty reserve was $ 0.6 million and $ 2.2 million, respectively.

The following table provides a reconciliation of the change in estimated warranty liabilities for the years ended December 31, 2019 and 2018:

(Dollars in thousands)

The following table provides a reconciliation of the change in estimated warranty liabilities for the years ended December 31, 2020 and 2019 (in thousands):

Balance at beginning of the year

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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 the Eversense CGM system and related components at a fixed price to third-party distributors in the European Union and to a network of strategic fulfillment partners in the United States (collectively, “Customers”) who then resell the products to health care providers and patients.

The Company is paid for its sales directly to the Customers, regardless of whether or not the Customers resell the products to health care providers and patients.

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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.

Revenue is recognized only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in a future period.

The Company’s contracts may contain variable consideration such as prompt-pay discounts or tier-volume price discounts.

Variable consideration, including the reimbursements paid by the Company to its Customers in accordance with the Eversense Bridge Program initiated in March 2019 and to a lesser extent, other discounts and prompt-pay incentives, is treated as a reduction in revenue when the product sale is recognized.

Depending on the variable consideration, the Company estimates the expected value based on the terms of the agreements, historical data, third-party payor mix, reimbursement rates, and market conditions.

In connection with the Eversense Bridge Program, the Company reimburses participating Customers an amount up to a fixed maximum for the difference in the cost of the Eversense System and what they collect from insurance payors and the patient’s fee of $99.

The Customers are responsible for confirming patient insurance coverage, obtaining pre-authorizations, determining eligibility, and continuously provide the Company with data regarding which patient orders are under the program and which are not.

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Estimated reimbursement payments for product shipped to Customers but not provided to a patient within the same reporting period are recorded within accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

Because of the limited experience with the Eversense Bridge Program, the estimates used in determining the variable consideration on a sale transaction could change in future periods, and such changes could be material.

Contract assets consist of trade receivables from Customers and contract liabilities consist of amounts due to the Customers in connection with the Eversense Bridge Program, incentive programs, or prompt-pay discounts, classified as patient access and incentive programs within accrued liabilities on the accompanying consolidated balance sheets.

The Company’s contracts provide for a one-year warranty on transmitters to Customers.

The Eversense Bridge Program concluded on December 31, 2020 and the remaining estimated liability is likely not material.

Contract assets consist of trade receivables from Customers and contract liabilities consist of amounts due to the Customers in connection with the Eversense Bridge Program, incentive programs, or prompt-pay discounts, classified as patient access and incentive programs within accrued expenses and other current liabilities on the accompanying consolidated balance sheets.

The Company’s contracts provide for a one-year warranty on transmitters to Customers.

Customer contracts do not include the right to return.

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General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in the Company’s executive, finance, accounting, business development, information technology, and human resources functions.

Other significant costs include information technology, facility costs, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

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Forfeitures are accounted for in the period in which they occur.

The Company uses the Black-Scholes-Merton option pricing model (“Black-Scholes Model”) to determine the fair value of stock-option awards.

Valuation of stock awards requires management to make assumptions and to apply judgment to determine the fair value of the awards.

These assumptions and judgments include estimating the fair value of the Company’s common stock, future volatility of the Company’s stock price, dividend yields, future employee turnover rates, and future employee stock option exercise behaviors.

Changes in these assumptions can affect the fair value estimate.

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Treasury securities consistent with the expected life of employee stock options.

The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified method.

The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified

Under the simplified method, the expected life of an option is presumed to be the mid-point between the vesting date and the end of the contractual term.

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In the ordinary course of business, transactions occur for which the ultimate outcome may be uncertain.

Management does not expect the outcome related to accrued uncertain tax provisions to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

The Company recognizes interest and penalties accrued on any unrecognized tax exposures as a component of income tax expense.

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Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of their short maturities.

The Company’s term loan under the Solar Loan Agreement, 2025 Notes and 2023 Notes are recorded at historical cost, net of discounts, and approximate fair value based on their borrowing rates.

The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of their short maturities.

The Company’s term loan under the 2025 Notes, PHC Notes, 2023 Notes, Warrants and Options are recorded at historical cost, net of discounts, and approximate fair value based on their borrowing rates.

The associated embedded conversion features in the Notes are derivative instruments and remeasured at fair value each reporting period.

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Stock-based awards

Masters preferred shares

Total anti-dilutive shares outstanding

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Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-02, Leases (Topic 842) (“ASC 842”).

The guidance requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing arrangements.

In July 2018, the FASB issued ASU 2018-11 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption.

The guidance is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption.

The Company adopted the new standard effective January 1, 2019 using the modified retrospective approach.

The Company did not elect the transition option, but elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, its assessment of whether a contract is or contains a lease and its initial direct costs for any leases that existed prior to adoption of the standard.

The Company also elected to combine lease and non-lease components for its facility leases and to exclude leases with an initial term of 12 months or less from its consolidated balance sheet and recognize the associated lease payments in its consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term.

The Company’s equipment leases had a remaining term of 12 months or less at the adoption date..

The impact of adopting ASC 842 on the Company’s consolidated balance sheet as of January 1, 2019 is shown in the table below.

The standard did not materially affect the Company’s consolidated net loss or cash flow.

Impact of Adopting ASC 842 on the Financial Statements

January 1, 2019

ASC 842 Adoption

Consolidated Balance Sheet Data (in thousands)

Operating lease assets (1)

Deferred rent non-current (2)

Operating lease liabilities (3)

Non-current operating lease liabilities (3)

(1) Represents capitalization of operating lease assets, including reclassification of deferred rent to operating lease assets.

(2) As of December 31, 2018, the deferred rent balance was $84.

(3) Represents recognition of operating lease liabilities

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting , which simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments is substantially the same as those made to employees.

Under the guidance, share based awards to nonemployees will be measured at fair value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any are present, and awards will continue to be classified according to ASC 718 upon vesting which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees.

The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted.

The Company adopted the guidance on January 1, 2019.

The standard did not materially affect the Company’s consolidated net loss or cash flows.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement , which eliminates, adds and modifies certain disclosure requirements on fair value measurements.

The new standard includes additional disclosure requirements regarding the range and weighted average to develop significant unobservable inputs within Level 3 fair value measurements and became effective for the Company on January 1, 2020.

The Company has evaluated the standard and does not expect this to have a significant impact on the consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No.

2018-15, Intangibles - Goodwill and Other - Internal-Use Software:

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15) .

This new guidance requires a customer in a cloud computing arrangement to determine which implementation costs to capitalize as assets or expense as incurred.

Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use.

ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted.

Application of this guidance can be applied either prospectively or retrospectively.

We adopted the new standard on January 1, 2020 on a prospective basis.

The Company’s adoption of ASU 2018-15 at the beginning of the first quarter of 2020 did not have a significant impact on its consolidated financial statements.

Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments –

Credit Losses:

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.

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The Company does not currently hold or plan to invest in available-for-sale securities, and has not historically experienced collection issues or bad debts with trade receivables.

Accordingly, the Company does not expect this to have a significant impact on its consolidated financial statements and

related disclosures at this time.

Accordingly, the Company does not expect this to have a significant impact on its consolidated financial statements and related disclosures at this time.

The Company will adopt this guidance on its effective date for smaller reporting companies, January 1, 2023.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework –

Changes to the Disclosure Requirements for Fair Value Measurement , which eliminates, adds and modifies certain disclosure requirements on fair value measurements.

The Company has evaluated the standard and does not expect this to have a significant impact on the consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU No.

2019-12, Simplifying the Accounting for Income Taxes , which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law.

ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted.

The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.

In August 2020, the FASB issued ASU No.

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 is currently evaluating the impact that this guidance will have on its consolidated financial statements, but are likely to early adopt for fiscal year 2021.

The Company evaluated all other issued unadopted ASUs and believes the adoption of these standards will not have a material impact on its consolidated statements of operations and comprehensive loss, balance sheets, or cash flows.

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Contract manufacturing⁽¹⁾

Clinical and preclinical

Marketing and sales

IT and software

Marketing and sales

Clinical and preclinical

Interest receivable

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Depreciation expense for the years ended December 31, 2020, 2019, and 2018 was $ 0.4 million, $ 0.5 million, and $ 0.3 million, respectively.

The Company disposed of $1.4 million of property and equipment in 2019, resulting in a loss of $0.3 million recorded within other income (expense) in the consolidated statements of operations and comprehensive loss, and primarily related to machinery and laboratory equipment, including machinery at contract manufacturers determined to be impaired or obsoleted.

The Company did not dispose of any property or equipment in 2018 or 2017.

The Company disposed of $ 0.3 million of property and equipment in 2020 related to machinery and laboratory equipment, including machinery at contract manufacturers determined to be impaired or obsoleted.

The Company disposed of $ 1.4 million of property and equipment in 2019.

The Company did not dispose of any property or equipment in 2018.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of December 31, 2020 and 2019 (in thousands):

Contract manufacturing

Compensation and benefits

Sales and marketing services

Professional & administration services

Interest on notes payable

Contract manufacturing

Professional and administration services

Research and development

Product warranty and replacement obligations

Patient access and incentive programs

Operating lease

Product warranty and replacement obligations

Sales and marketing services

Patient access programs

Total accrued expenses and other current liabilities

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Specific considerations include whether the Company can control the underlying asset and has the right to obtain substantially all of the economic benefits or outputs from the asset.

Substantially all of the Company’s leases are long-term operating leases with fixed payment terms.

The Company currently does not have financing leases.

Right-of-use (“ROU”) operating lease assets represent the Company’s right-to-use an underlying asset for the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments.

Operating lease expense is recognized on a straight-line basis over the lease term and is included in general and administrative expenses on the Company’s consolidated statement of operations and comprehensive loss.

Options to extend the leases or terminate the leases early are only included in the lease term when it is reasonably certain that the option will be exercised.

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The Company did not have any lease related payments made to the lessor before the commitment date, lease incentives received from the lessor or initial direct cost adjustments to be added to the initial measurement of the liability.

The Company recorded $2.8 million of associated ROU assets and lease liabilities in its consolidated balance sheet at December 31, 2019.

As a result of COVID-19, this facility was vacated in the fourth quarter of 2020 and the ROU asset was tested for impairment.

No impairment charges were recorded as of December 31, 2020.

The Company recorded $ 2.1 million of associated ROU assets and $ 2.3 million in lease liabilities in its consolidated balance sheet at December 31, 2020.

Operating lease expense for the year ended December 31, 2020, 2019 and 2018 was $ 0.9 million, $ 0.7 million and $ 0.7 million, respectively.

Short-term lease expense is included in operating lease expense and was $0.2 million for the year ended December 31, 2019.

The following table summarizes the lease assets and liabilities as of December 31, 2020 (in thousands):

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Total operating lease liability

The following table summarizes the weighted-average lease term and weighted-average discount rate as of December 31, 2019:

The following table summarizes the weighted-average lease term and weighted-average discount rate as of December 31, 2020 and 2019:

Remaining lease term (years)

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Participants are fully vested in their contributions.

The Company has provided a discretionary match of 1% up to 4% of the participant’s contributions.

Employer match expenses during the years ended December 31, 2019 and 2018 were $0.2 million and $0.2 million, respectively.

There was no employer match expense during the year ended December 31, 2017.

The Company has provided a discretionary match of 1 % up to 4 % of the participant’s contributions.

Employer match expenses during the years ended December 31, 2020, 2019, 2018 were $ 0.1 million, $ 0.2 million and $ 0.2 million, respectively.

Administrative expenses for the plan, which are paid by the Company, were not material in 2020, 2019 or 2018.

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Solar Loan Agreement

On July 16, 2019, the Company entered into a Loan and Security Agreement (the “Solar Loan Agreement”), with Solar.

Pursuant to the Solar Loan Agreement, on July 25, 2019 (“the effective date”), the Company borrowed term loans in an aggregate principal amount of $45.0 million (the “Solar Term Loan”), of which the Company used $11.6 million to repay in full the Oxford/SVB Term Loans and terminate the Amended and Restated Loan and Security Agreement with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) described below.

Interest on the Solar Term Loan is payable monthly at a floating annual rate of 6.50% plus the greater of (i) the rate per annum rate published by the Intercontinental Exchange Benchmark Administration Ltd.

and (ii) 2.48%, provided that the minimum floor interest rate is 8.98%.

The maturity date for the Solar Term Loan is July 1, 2024 (the “Solar Maturity Date”).

Commencing on August 1, 2021, the Company will be required to make monthly principal amortization payments of $1.3 million;

provided that the interest only period may be extended to (i) August 1, 2022 if the Company’s product revenue is greater than or equal to $40.0 million on a trailing six-month basis prior to the second anniversary of the effective date and (ii) August 1, 2023 if the Company’s product revenue is greater than or equal to $75.0 million on a trailing six-month basis after the achievement of the first extension.

The Company may elect to prepay the Solar Term Loan prior to the Solar Maturity Date subject to a prepayment fee equal to 3.00% if the prepayment occurs within one year of the effective date, 2.00% if the prepayment occurs during the second year following the effective date, and 1.00% if the prepayment occurs more than two years after the effective date and prior to the Solar Maturity Date.

The Solar Loan Agreement contains customary events of default, including bankruptcy, the failure to make payments when due, the occurrence of a material impairment on the Solar Lenders’

security interest over the collateral, a material adverse change, the occurrence of a default under certain other agreements entered into by the Company and its subsidiaries, the rendering of certain types of judgments against the Company and its subsidiaries, the revocation of certain government approvals, violation of covenants, and incorrectness of representations and warranties in any material respect.

Upon the occurrence of an event of default, subject to specified cure periods, all amounts owed by the Company would begin to bear interest at a rate that is 5.00% above the rate effective immediately before the event of default, and may be declared immediately due and payable by the Solar Lenders.

Although the Company was in compliance with the financial covenants as of December 31, 2019, it is expected that the Company will not be in compliance with the trailing six-month revenue covenant as of March 31, 2020 and that, absent a waiver or amendment to the terms of the Solar Loan Agreement, the Company would likely remain in noncompliance with the trailing six-month revenue covenant for the foreseeable future thereafter.

Therefore, if the Company is not able to obtain a waiver of such default by Solar, it is possible that the outstanding indebtedness under the Solar Loan Agreement and the 2025 Notes could be accelerated and become immediately due and payable in 2020.

As a result, the Company has classified the outstanding indebtedness on the Solar Loan and 2025 Notes, net of discounts, as of December 31, 2019 in short-term liabilities in its consolidated statement of operations.

The Solar Term Loan is secured by substantially all of the Company and its subsidiaries’

The Solar Loan Agreement also contains specified financial covenants related to the Company’s liquidity and trailing six-month revenue.

The Solar Loan Agreement also contains certain restrictive covenants that limit the Company’s ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions, as well as financial reporting requirements.

A final fee (“Final Fee”), which is equal to $2.9 million (6.45% of the Solar Term Loan), is due and payable on the earliest to occur of (i) Solar Maturity Date, (ii) the acceleration of the Solar Term Loan including, upon the occurrence of a bankruptcy or insolvency event, or (iii) prepayment, refinancing, substitution or replacement of the Solar Term Loan.

The fee is accreted to interest expense over the term of the loan to the Final Fee amount.

On July 16, 2019, the Company entered into a Loan and Security Agreement (the “Solar Loan Agreement”), with Solar.

Pursuant to the Solar Loan Agreement, on July 25, 2019 (“the effective date”), the Company borrowed term loans in an aggregate principal amount of $ 45.0 million (the “Solar Term Loan”), of which the Company used $ 11.6 million to repay in full the Oxford/SVB Term Loans and terminate the Amended and Restated Loan and Security Agreement with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”).

In connection with the Solar Term Loan, the Company incurred issuance costs in the amount of $ 0.4 million, and paid fees to Lenders (as defined below) in the amount of $ 0.9 million in connection with the repayment of the Oxford/SVB Term Loans, which are netted against the principal balance of the Solar Term Loan and amortized as additional interest expense over the term of the Solar Term Loan using the effective interest method.

Unamortized debt issuance costs and additional prepayment fees in the amount of $0.4 million associated with the repayment of the Oxford/SVB Term Loans were recorded as a loss on the extinguishment of debt in other income (expense) in the Company’s consolidated statements of operations and comprehensive loss as of December 31, 2019.

Additionally, the Company issued Solar warrants to purchase an aggregate of 1,125,000 shares of the Company’s common stock with an exercise price of $1.20 per share (the “Solar Warrants”).

Unamortized debt issuance costs and additional prepayment fees in the amount of $ 0.4 million associated with the repayment of the Oxford/SVB Term Loans were recorded as a loss on the extinguishment of debt in other income (expense) in the Company’s consolidated statements of operations and comprehensive loss as of December 31, 2019.

Additionally, on July 16, 2019, the Company issued Solar warrants to purchase an aggregate of 1,125,000 shares of the Company’s common stock with an exercise price of $ 1.20 per share (the “Solar Warrants”).

The Solar Warrants are exercisable until July 25, 2029.

The proceeds from the Solar Term Loan were allocated between the debt and the Solar Warrants based on their respective fair value of $ 0.7 million, and were recorded within equity resulting in a debt discount that is being amortized as additional interest expense over the term of the Solar Term Loan using the effective interest method.

On March 22, 2020, the Company and Solar terminated the Solar Loan Agreement.

In connection with the termination, the Company paid $ 48.5 million representing all amounts outstanding under the Solar Loan Agreement, including the principal amount and interest of the loans, a payoff fee of 6.45 % of the loans outstanding, a prepayment premium of 3.0 % of the loans outstanding and other obligations owed to Solar thereunder.

A loss on the extinguishment of debt in the amount of $ 4.5 million reflecting the difference between the repayment amount and the carrying value of the principal balance, accrued interest, unamortized debt issuance costs and unaccreted prepayment fee at March 22, 2020 was recorded to other income (expense) in the Company’s condensed consolidated statement of operations and comprehensive loss during the twelve months ended December 31, 2020.

Oxford and Silicon Valley Bank Term Loans

On June 30, 2016, the Company entered into an Amended and Restated Loan and Security Agreement with Oxford and SVB (together, the “Lenders”).

Pursuant to the Amended and Restated Loan and Security Agreement, the Company borrowed an aggregate principal amount of $25.0 million in the following three tranches:

$15.0 million (the “Tranche 1 Term Loan”);

$5.0 million (the “Tranche 2 Term Loan”);

and $5.0 million (the “Tranche 3 Term Loan”

and together with the Tranche 1 Term Loan and the Tranche 2 Term Loan, the “Oxford/SVB Term Loans”).

The funding conditions for the Tranche 1 Term Loan were satisfied as of June 30, 2016.

Therefore, the Company issued secured notes to the Lenders for aggregate gross proceeds of $15.0 million (the “Oxford/SVB Notes”), on June 30, 2016.

The Company used approximately $11.0 million from the proceeds from the Oxford/SVB Notes to repay the outstanding balance under the Company’s previously existing Loan and Security Agreement with Oxford.

The Company borrowed the Tranche 2 Term Loan and Tranche 3 Term Loan in November 2016 and March 2017, respectively.

The maturity date for all the Oxford/SVB Term Loans was June 1, 2020.

The Company was also required to make a final payment equal to 9.00% of the aggregate principal balances of the funded Oxford/SVB Term Loans and was being accrued as additional interest expense over the term of the Oxford/SVB Notes using the effective interest method.

On June 30, 2016, the Company entered into an Amended and Restated Loan and Security Agreement with Oxford and SVB (together, the “Lenders”).

Pursuant to the Amended and Restated Loan and Security Agreement, the Company borrowed an aggregate principal amount of $ 25.0 million.

Proceeds from the Solar Term Loan were used to repay the remaining balance of the Oxford/SVB Term Loans, which were subject to a prepayment fee equal to $ 0.1 million.

Unamortized debt issuance costs and additional prepayment fees in the amount of $ 0.4 million associated with the repayment of the Oxford/SVB Term Loans were recorded as a loss on the extinguishment of debt in other income (expense) in the Company’s consolidated statements of operations and comprehensive loss as of December 31, 2019.

On April 22, 2020, the Company received $ 5.8 million in loan funding from the PPP pursuant to the CARES Act, as amended by the Flexibility Act, and administered by the SBA.

The unsecured loan (the “PPP Loan”) is evidenced

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

Under the terms of the PPP Note and the PPP Loan, interest accrues on the outstanding principal at a rate of 1.0 % per annum.

The term of the PPP Note is two years , though it may be payable sooner in connection with an event of default under the PPP Note.

To the extent the loan amount is not forgiven under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning after determination of forgiveness by the Bank.

The Company may apply for forgiveness any time on or before the maturity date of the loan.

If the Company does not apply for loan forgiveness within ten months after the last day of the covered period, the PPP loan is no longer deferred, and the Company must begin paying principal and interest.

The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed.

Under the PPP, the Company may apply for forgiveness for all or a part of the Company’s PPP Loan.

The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the specified period after the loan origination for certain purposes including payroll costs, interest on debt obligations incurred prior to February 15, 2020, rent payments on certain leases, and certain qualified utility payments, provided that at least 60 % of the loan amount is used for eligible payroll costs;

the employer maintaining or rehiring employees and maintaining salaries at certain levels;

and other factors.

Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered specified period will qualify for forgiveness.

As a result of the Company’s workforce reduction, the amount of forgiveness will correspondingly decrease.

The PPP Note may be prepaid in part or in full, at any time, without penalty.

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

Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require immediate payment of all amounts owed under the PPP Note, collect all amounts owing from the Company, and file suit and obtain judgment against the Company.

Highbridge Credit Facility

Highbridge Loan Agreement

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

Pursuant to the Highbridge Loan Agreement, the Company borrowed an aggregate principal amount of $ 15.0 million 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.

The First Lien Notes were secured, senior obligations that bear interest at the annual rate of 12 % or, at the Company’s election, payment in kind (“PIK”) at an annual rate of 13 %, payable monthly in arrears.

The First Lien Notes would have matured on October 24, 2021 (the “First Lien Maturity Date”).

The obligations under the First Lien Notes were secured by substantially all the Company’s assets.

The Company recorded the fair value of the embedded features in the amount of $ 1.0 million as a debt premium and derivative asset in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging.

The derivative is adjusted to fair value at each reporting period, with the change recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statements of operations and comprehensive loss.

The debt issuance costs incurred in connection with the Highbridge financings were allocated between the First Lien Notes, Second Lien Notes, common stock, and warrants.

The Company incurred and deferred $ 1.5 million in debt issuance costs and debt discounts associated with the First Lien Notes, which will be amortized as interest expense over the term of the First Lien Notes, along with $ 1.0 million of debt premium from the derivative bifurcation.

Exchange Agreement with Highbridge

On April 21, 2020, the Company entered into a Note Purchase and Exchange Agreement with certain funds managed by Highbridge providing for the exchange (the “Exchange”) of $ 24.0 million aggregate principal amount of the Company’s outstanding 2025 Notes for (i) $ 15.7 million aggregate principal amount of newly issued Second Lien Notes, (ii) 11,026,086 shares of common stock, (iii) warrants to purchase up to 4,500,000 shares of common stock at an exercise price of $ 0.66 per share, and (iv) $ 0.3 million in accrued and unpaid interest on the 2025 Notes being exchanged.

The Exchange closed on April 24, 2020.

The warrants may be exercised in cash or on a cashless basis at any time through the three-year anniversary of the issuance date.

On August 9, 2020, the Company entered into a First Amendment to Note Purchase and Exchange Agreement with Highbridge (as amended by the Amendment, the “Exchange Agreement”).

The debt issuance costs incurred in connection with the Amendment were allocated to the Second Lien Notes.

Loan modifications require third-party debt related costs to be expensed immediately.

In connection with the Amendment, the Company recorded a total of $ 0.5 million in debt issuance costs which were expensed immediately.

The Second Lien Notes are secured, senior obligations of the Company, junior only to the First Lien Notes.

Interest in cash at the annual rate of 7.5 % or, at the Company’s option, payment in kind at an annual rate of 8.25 %, on the Second Lien Notes will be payable monthly in arrears.

The maturity date for the Second Lien Notes is August 9, 2023 (the “Second Lien Maturity Date”), unless earlier repurchased, redeemed or converted in accordance with their terms.

The obligations under the Second Lien Notes are secured by substantially all of the Company’s assets.

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

The holders of the Second Lien Notes have the right to convert the aggregate principal of the Second Lien Notes (together with any applicable prepayment premium) to common stock at a price per share equal to 90 % of the greater of (i) the daily volume weighted average of the price per share of the common stock, on the conversion date, or if the conversion date is not a trading date, the trading day immediately prior to the conversion date and (ii) $ 0.33 per share.

This conversion option has a daily limit of $ 1.0 million in aggregate converted principal (inclusive of principal amount of First Lien Notes that are voluntarily converted by the Lenders).

Subject to certain conditions, if the Company retains or reinvests proceeds of an asset sale pursuant to the Asset Sale Prepayment Provisions in the Exchange Agreement, the Holders shall be entitled to convert additional Second Lien Notes and the Lenders shall be entitled to

convert First Lien Notes in aggregate combined principal amount equal to 45 % of such net proceeds retained or reinvested (together with any applicable prepayment premium).

The Exchange Agreement contains customary terms and covenants, including without limitation:

financial covenants, such as maintaining a minimum cash balance;

and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily restricted in such agreements.

Most of these restrictions are subject to certain minimum thresholds and exceptions.

The Exchange Agreement also contains customary events of default, after which the Second Lien Notes may be due and payable immediately, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, material adverse changes, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against us, and change of control, termination of any guaranty, governmental approvals, and lien priority.

Unlike the First Lien Notes, the Second Lien Notes also permit voluntary conversion at the option of the holder as described above.

The Company recorded the fair value of these embedded features in the amount of $ 1.9 million as a derivative asset in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging.

The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statement of operations and comprehensive loss.

Since Highbridge was a noteholder of the 2025 Notes and exchanged $ 24.0 million of outstanding principal of the 2025 Notes for Second Lien Notes, the Exchange qualifies as a loan modification.

The debt issuance costs incurred in connection with the Highbridge financings were allocated between the First Lien Notes, Second Lien Notes, common stock, and warrants.

Loan modifications require third-party debt related costs to be expensed immediately, whereas fees paid to lenders of the modified loans are deferred.

In connection with the issuance of the Second Lien Notes, the Company recorded a total of $ 14.1 million in debt issuance costs and debt discounts, including $ 13.2 million allocated from the 2025 Notes for the $ 24.0 million outstanding principal exchanged and the discount from the bifurcated derivative.

These costs were recorded as debt discounts to the Second Lien Notes and are amortized as interest expense over the term of the Second Lien Notes.

Allocated third-party debt related costs of $ 0.8 million were expensed during the twelve months ended December 31, 2020.

For the twelve months ended December 31, 2020, Highbridge voluntarily converted all $ 15.7 million of outstanding principal amount of the Second Lien Notes for 42,776,936 shares of common stock, which included prepayment premiums and were based off the Company’s election of PIK interest.

Accordingly, $ 15.7 million of allocated deferred issuance costs, debt discounts and prepayment premiums were recognized as a loss on extinguishment of debt in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss during the twelve months ended December 31, 2020.

Convertible Preferred Stock and Warrants

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 (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 we 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 us 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.

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).

The fair value as of December 31, 2020 was $ 16.3 million.

In connection with the issuance of the Equity Line Agreement, the Company incurred $ 7.6 million in debt issuance costs.

On August 9, 2020, the Company entered into a Stock Purchase Agreement with Masters, pursuant to which the Company issued and sold to Masters 3,000 shares of Series A Preferred Stock, at a price of $ 1,000.00 per share, on the Closing Date.

Each share of Series A Preferred Stock is initially convertible into a number of shares of common stock equal to $ 1,000 divided by the conversion price of $ 0.476 per share, subject to customary anti-dilution adjustments, including in the event of any stock split.

The Series A Preferred Stock ranks senior to the common stock.

Upon a liquidation, dissolution or winding up of the Company, each share of Series A Preferred Stock is entitled to receive an amount per share equal to the greater of the purchase price paid and the amount that the holder would have been entitled to receive at such time if the Series A Preferred Stock were converted into common stock.

The holders are also entitled to participate in dividends declared or paid on the common stock on an as-converted basis.

If we undergo a change of control, each holder has the right to cause us to redeem any or all of the Series A Preferred Stock for cash consideration equal to the liquidation amount.

The holders of Series A Preferred Stock generally are entitled to vote with the holders of the shares of common stock on all matters submitted for a vote of holders of shares of common stock (voting together with the holders of shares of common stock as one class) on an as-converted basis.

Additionally, certain matters will require the approval of the majority of the outstanding Series A Preferred Stock, voting as a separate class, including (i) altering or changing adversely the powers, privileges, preferences or rights of the Series A Preferred Stock, or (ii) amendments, modifications, repeal or waiver of any provision of the Company’s certificate of incorporation, bylaws or of the certificate of designations that would adversely affect the rights, preferences, privileges or powers of the Series A Preferred Stock.

The Series A Preferred Stock is contingently redeemable upon occurrence of a change of control event which is considered outside the control of the Company, and therefore the Series A Preferred Stock has been classified in temporary equity on the consolidated balance sheet.

At each reporting period, the Company evaluates the probability of the Series A Preferred Stock being redeemed.

The Company’s policy is to recognize the difference in carrying value to redemption value once the redemption becomes probable.

As of December 31, 2020, the features that would require redemption (e.g., occurrence of a change of control) was not deemed probable.

The Company accounted for the option to purchase up to an additional 27,000 shares of preferred stock as a freestanding warrant instrument, as it is legally detachable and separately exercisable.

This warrant is classified as a liability in accordance with ASC 480 on the Company’s balance sheet and was recorded at the estimated fair value of $ 4.8 million upon issuance.

The warrant is required to be remeasured to fair value at each reporting period with the change recorded in change in fair value of derivatives that is a component of other income (expense).

The fair value as of December 31, 2020 was $ 23.5 million.

Convertible 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 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.

In the fourth quarter of 2020, the Company elected payment in kind of interest.

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”), provided that the Maturity Date will accelerate if the Company has not repaid the Company’s outstanding Second Lien Notes (other than an aggregate principal amount of up to $ 1.0 million) by 91 days prior to the maturity of the Second Lien Notes.

The obligations under the PHC Notes are secured by substantially all of the Company’s and its subsidiary’s assets.

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 (including any payment in kind interest which has been added to such amount), plus any accrued but unpaid interest.

On or after October 31, 2023, the 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 (including any payment in kind interest which has been added to such amount), plus any accrued but unpaid interest, plus a call premium of 130 % if redeemed at least six months prior to the Maturity Date or a call premium of 125 % if redeemed within six months of the Maturity Date.

The Note Purchase Agreement contains customary terms and covenants, including financial covenants, such as operating within an approved budget and achieving minimum revenue and liquidity targets, and negative covenants, such as limitations on indebtedness, liens, mergers, asset transfers, certain investing activities and other matters customarily restricted in such agreements.

Most of these restrictions are subject to certain minimum thresholds and exceptions.

The Note Purchase Agreement also contains customary events of default, after which the 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 the Company, change of control or delisting events, termination of any guaranty, governmental approvals, and lien priority.

This purchased put option represents a freestanding financial instrument and is recognized as an asset in the Company’s consolidated balance sheets at the fair value 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 December 31, 2020 to be $ 1.9 million, and an impairment loss of $ 2.3 million was recognized in net income as the difference between the fair value of the investment and its carrying amount.

The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statement of operations and comprehensive loss.

The fair value of the derivative as of December 31, 2020 was $ 45.6 million.

In connection with the issuance of the Note Purchase Agreement, the Company incurred $ 2.9 million in debt issuance costs and debt discounts.

The associated debt issuance costs are recorded as a contra liability in the amount of $ 1.4 million and are deferred and amortized as additional interest expense over the term of the notes.

In July 2019, the Company issued $ 82.0 million in aggregate principal amount of 2025 Notes.

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The 2025 Notes will mature on January 15, 2025, unless earlier repurchased or converted.

The Company used $37.9 million of the net proceeds from the issuance of the 2025 Notes to repurchase $37.0 million aggregate principal amount of the Company’s outstanding 2023 Notes, at a purchase price equal to the principal amount thereof, plus accrued and unpaid interest thereon.

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 Company may redeem for cash all or part of the 2025 Notes, at its option, if (1) the last reported sale price of the Company’s common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption and (2) a registration statement covering the resale of the shares of the Company’s common stock issuable upon conversion of the 2025 Notes is effective and available for use and is expected to remain effective and available for use during the redemption period as of the date of the redemption notice date.

The Company used $ 37.9 million of the net proceeds from the issuance of the 2025 Notes to repurchase $ 37.0 million aggregate principal amount of the Company’s outstanding 2023 Notes, at a purchase price equal to the principal amount thereof, plus accrued and unpaid interest thereon.

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 Company may redeem for cash all or part of the 2025 Notes, at its option, if (1) the last reported sale price of the Company’s common stock has been at least 150 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption and (2) a registration statement covering the resale of the shares of the Company’s common stock issuable upon conversion of the 2025 Notes is effective and available for use and is expected to remain effective and available for use during the redemption period as of the date of the redemption notice date.

The redemption price will be equal to 100 % of the principal amount of the 2025 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.

If the Company undergoes a fundamental change, such as a merger, sale, greater than 50% ownership change, liquidation, dissolution or delisting, holders may require the Company to repurchase for cash all or any portion of their 2025 Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

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 2025 Notes in connection with such notice of redemption or corporate event.

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 shares.

The 2025 Notes are guaranteed on a senior unsecured basis by the Company’s wholly owned subsidiary, Senseonics, Incorporated, and may be guaranteed by certain future subsidiaries.

The subsidiary guarantor is 100 % owned, the guarantee is full and unconditional and joint and several and the parent company has no independent assets or operations and any subsidiaries of the parent company other than the subsidiary guarantor are minor.

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The third-party costs associated with the new note holders are also deferred as discounts that are amortized as additional interest expense over the term of the notes.

Of the $4.3 million, $3.3 million were expensed for loan modifications are recorded within other income (expense) on the consolidated statement of operations and comprehensive loss and $1.0 million were deferred as discounts to the debt.

Of the $ 4.3 million, $ 3.3 million were expensed for loan modifications were recorded within other income (expense) on the consolidated statement of operations and comprehensive loss and $ 1.0 million were deferred as discounts to the debt in 2019.

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 Company recorded the fair value of the embedded features in the amount of $38.3 million as a debt discount and 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 to other income (expense) in the Company’s consolidated statement of operations and comprehensive loss.

Based upon recent trading prices (Level 2 —

market approach) and other observable inputs, including the Company’s common stock, implied volatility, and risky (bond) rate, the fair value of the Company’s 2025 Notes, excluding the embedded features, were $53.6 million as of December 31, 2019.

The Company recorded the fair value of the embedded features in the amount of $ 38.3 million as a debt discount and derivative liability in the Company’s consolidated balance sheets in accordance with ASC Topic 815, Derivatives and Hedging .

Based upon recent trading prices (Level 2-market approach) and other observable inputs, including the Company’s common stock, implied volatility and risky (bond) rate, the fair value of the Company’s 2025 Notes, excluding the embedded features, was $ 29.0 million as of December 31, 2020.

For the twelve months ended December 31, 2020, there were conversions of $ 0.3 million of outstanding principal amount of the 2025 Notes for 227,271 shares of common stock.

In January 2018, the Company issued $ 50.0 million in aggregate principal amount of the 2023 Notes.

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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.

As the 2023 Notes have a maturity date of February 1, 2023, they are classified as a long-term liability on the Company’s consolidated balance sheet at September 30, 2019.

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.

As the 2023 Notes have a maturity date of February 1, 2023, they are classified as a long-term liability on the Company’s consolidated balance sheet at December 31, 2020.

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.

Holders may convert at any time prior to February 1, 2023.

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Additionally, if a fundamental change occurs prior to the maturity date, holders of the 2023 Notes may require the Company to repurchase all or a portion of their 2023 Notes for cash at a repurchase price equal to 100 % of the principal amount plus any accrued and unpaid interest.

The Company bifurcated the embedded conversion option, along with the interest make-whole provision and make-whole fundamental change provision, and in January 2018 recorded the embedded features as a debt discount and derivative liability in the Company’s consolidated balance sheets at its initial fair value of $17.3 million.

Additionally, the

Company incurred transaction costs of $2.2 million.

Additionally, the Company incurred transaction costs of $ 2.2 million.

The debt discount and transaction costs are being amortized to interest expense over the term of the 2023 Notes at an effective interest rate of 9.30 %.

The 2023 Notes do not have current observable inputs such as recent trading prices (Level 3) and are measured at fair value using the binomial option pricing model and incorporate management’s assumptions for probabilities of conversion occurrence through maturity, stock price, volatility and risky (bond) rate.

The fair value of the Company’s 2023 Notes, excluding the embedded features, was $11.9 million as of December 31, 2019 and $41 million at December 31, 2018.

In the year ended December 31, 2018, the Company issued 85,007 shares of common stock upon the conversion of $250,000 in aggregate principal amount of the 2023 Notes.

There were no conversions of 2023 Notes in the year ended December 31, 2019.

The following carrying amounts are outstanding under the Company’s notes payable as of December 31, 2019 and December 31, 2018 (in thousands):

The fair value of the Company’s 2023 Notes, excluding the embedded features, was $ 12.9 million as of December 31, 2020 and $ 11.8 million at December 31, 2019.

There were no conversions of 2023 Notes in the years ended December 31, 2020 or 2019.

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

December 31, 2020

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Carrying Amount ($)

Solar Term Loan

December 31, 2019

3 unchanged sentences

Carrying Amount ($)

Oxford / SVB Term

Solar Term Loan

Interest expense related to the notes payable for the periods presented below is as follows (in thousands):

Year ended December 31, 2019

December 31, 2020

Effective Interest Rate

Debt Discount & Fees ($)

Debt Discount and Fees ($)

Issuance Costs ($)

Loss on Extinguishment of Debt ($)

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Solar Term Loan

Oxford / SVB Term

Interest expense related to notes payable was $8.3 million, including $2.9 million for amortization of issuance fees and discounts on the 2023 Notes, and $3.1 million for the years ended December 31, 2018 and 2017, respectively.

The following are the scheduled maturities of the Solar Term Loan, 2025 Notes and 2023 Notes as of December 31, 2019:

Stockholders’

Equity (Deficit)

In connection with our acquisition of Senseonics, Incorporated in December 2015 (the “Acquisition”), (i) all outstanding shares of common stock of Senseonics, $0.01 par value per share, were exchanged for 1,955,929 shares of the Company's common stock, $0.001 par value per share (reflecting an exchange ratio of 2.0975), (ii) all outstanding shares of preferred stock were converted into shares of common stock of Senseonics, and exchanged into 55,301,674 shares of the Company’s common stock, $0.001 par value per share, and (iii) all outstanding options and warrants to purchase shares of common stock of Senseonics were exchanged for or replaced with options and warrants to acquire shares of the Company’s common stock using the same exchange ratio.

As of December 31, 2019 and December 31, 2018, the Company’s authorized capital stock included 450,000,000 shares of common stock, par value $0.001 per share.

First Lien Notes

Second Lien Notes

December 31, 2019

Effective Interest Rate

Debt Discount and Fees ($)

Issuance Costs ($)

Loss on Extinguishment of Debt ($)

Total Interest Expense ($)

Solar Term Loan

The following are the scheduled maturities of our outstanding debt, including the 2025 Notes, PHC Notes, 2023 Notes and PPP Loan as of December 31, 2020:

Stockholders’ Equity (Deficit)

In connection with our acquisition of Senseonics, Incorporated in December 2015 (the “Acquisition”), (i) all outstanding shares of common stock of Senseonics, $ 0.01 par value per share, were exchanged for 1,955,929 shares of the Company's common stock, $ 0.001 par value per share (reflecting an exchange ratio of 2.0975 ), (ii) all outstanding shares of preferred stock were converted into shares of common stock of Senseonics, and exchanged into 55,301,674 shares of the Company’s common stock, $ 0.001 par value per share, and (iii) all outstanding options and warrants to purchase shares of common stock of Senseonics were exchanged for or replaced with options and warrants to acquire shares of the Company’s common stock using the same exchange ratio.

As of December 31, 2020 and December 31, 2019, the Company’s authorized capital stock included 900,000,000 and 450,000,000 shares of common stock, par value $ 0.001 per share, respectively.

The Company had 265,582,688 and 203,452,812 shares of common stock issued and outstanding at December 31, 2020 and December 31, 2019, respectively.

Preferred Stock

As of December 31, 2019 and 2018, the Company’s authorized capital stock included 5,000,000 shares and 0 shares of undesignated preferred stock, par value $0.001 per share, respectively.

No shares of preferred stock were outstanding as of December 31, 2019 or 2018.

As of December 31, 2020 and 2019, the Company’s authorized capital stock included 5,000,000 shares of undesignated preferred stock, par value $ 0.001 per share, respectively.

The Company had 3,000 shares of preferred stock outstanding as of December 31, 2020.

No shares of preferred stock were outstanding as of December 31, 2019.

Stock Purchase Warrants

The Company issued the Solar Warrants to purchase an aggregate of 1,125,000 shares of the Company’s common stock with an exercise price of $1.20 per share.

The Solar Warrants are exercisable until July 25, 2029.

The proceeds from the Solar Term Loan were allocated between the debt and the Solar Warrants based on their fair value of $0.7 million, and were recorded within equity resulting in a discount to the Solar Term Loan.

The Company also issued the Energy Capital Warrants to purchase an aggregate of 10,000,000 shares of the Company’s common stock with an exercise price of $ 0.40 per share.

The Energy Capital Warrants are exercisable until November 9, 2030.

The warrants were recorded within equity based on their fair value of $ 3.4 million.

The Company issued the Highbridge Warrants to purchase an aggregate of 4,500,000 shares of the Company’s common stock with an exercise price of $ 0.66 per share.

The Highbridge Warrants are exercisable until April 24, 2023.

The proceeds from the Highbridge Notes were allocated between the debt and the Highbridge Warrants based on their fair value, and $ 1.3 million was recorded for the warrants within equity.

In connection with the issuance of the Oxford/SVB Notes, the Company issued to the Lenders 10 -year stock purchase warrants to purchase an aggregate of 116,581 , 63,025 and 80,645 shares of common stock at an exercise price of $ 3.86 , $ 2.38 and $ 1.86 per share, respectively.

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These warrants expire on June 30 , 2026, November 22, 2026, and March 29, 2027, respectively, and are classified in equity.

The unamortized deferred financing fees and debt discount related to the notes rollover amount was being amortized along with the deferred financing costs and the discount created by the new issuance of the Solar Warrants over the term of the loan using the effective interest method.

In connection with the repayment of the Term Loans, the unamortized discount and additional prepayment fee of $0.4 million was recorded as a loss on extinguishment of debt in other income (expense) in the Company’s consolidated statements of operations and comprehensive loss.

Stock-Based Compensation

In December 2015, the Company adopted the 2015 Equity Incentive Plan (the “2015 Plan”), under which incentive stock options and non-qualified stock options may be granted to the Company’s employees and certain other persons in accordance with the 2015 Plan provisions.

In 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 February 20, 2016.

The Company’s board of directors may terminate the amended and

restated 2015 Plan at any time.

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 will automatically increase on January 1 of each year, beginning on January 1, 2017 and ending on January 1, 2026, by 3.5% of the total number of shares of its common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by its board of directors.

Pursuant to the amended and restated 2015 Plan, the number of shares of the Company’s common stock reserved for issuance will automatically increase on January 1 of each year, beginning on January 1, 2017 and ending on January 1, 2026, by 3.5 % of the total number of shares of its common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by its board of directors.

As of December 31, 2020, 3,074,030 shares remained available for grant under the amended and restated 2015 Plan.

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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 nonstatutory options, restricted stock unit awards and other equity incentive awards.

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 December 31, 2020, 1,414,458 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.

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At December 31, 2020 there were 6,171,581 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.

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.

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The 2016 ESPP is considered compensatory for financial reporting purposes.

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 6,253,301 shares of the Company’s common stock underlying options have vested or are expected to vest under the 1997 Plan.

certain other persons in accordance with the 1997 Plan provisions.

Approximately 3,072,411 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.

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The estimated fair value of stock options on the date of grant is amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award for those awards with service conditions only.

For awards that also contain performance

conditions, expense is recognized beginning at the time the performance condition is considered probable of being met over the remaining vesting period.

For awards that also contain performance conditions, expense is recognized beginning at the time the performance condition is considered probable of being met over the remaining vesting period.

Stock option activity under the Plans during the years ended December 31, 2020, 2019 and 2018 is as follows:

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Options outstanding as of December 31, 2020

Cancelled/forfeited

Options outstanding as of December 31, 2019

Options vested and expected to vest as of December 31, 2020

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The weighted average grant date fair value of the unvested stock option awards outstanding at December 31, 2020 and 2019 was $ 1.59 and $ 1.64 per share, respectively.

The weighted average grant date fair value of the stock option

awards vested, exercised and forfeited/cancelled for the year ended December 31, 2019 were $1.72, $1.50 and $1.71 per share, respectively

The weighted average grant date fair value of the stock option awards vested, exercised and forfeited/cancelled for the year ended December 31, 2020 were $ 1.58 , $ 0.33 and $ 1.61 per share, respectively

Fair value is estimated at each grant date under the plans using the Black-Scholes Model with assumptions summarized in the following table:

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The risk-free interest rate assumption is based upon observed U.S.

treasury yields for a period consistent with the expected term of the Company’s employee stock options.

The expected term is the period of time for which the stock-based options are expected to be outstanding.

The expected life is determined using the “simplified method”

which is defined as the mid-point between the vesting date and the end of the contractual term.

The expected life is determined using the “simplified method” which is defined as the mid-point between the vesting date and the end of the contractual term.

The Company does not pay a dividend, and is not expected to pay a dividend in the foreseeable future.

The Company utilizes comparable public companies’

volatility rates as a proxy of its expected volatility for purposes of the Black-Scholes Model.

The Company utilizes comparable public companies’ volatility rates as a proxy of its expected volatility for purposes of the Black-Scholes Model.

Stock-based compensation expense is recorded monthly and is adjusted periodically for actual forfeitures as they occur.

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As of December 31, 2020, there was $ 11.3 million of total unrecognized compensation cost related to non-vested employee stock option awards, which is expected to be recognized over a weighted average period of 2.02 years.

There was no unrecognized compensation cost related to non-vested restricted stock awards as of December 31, 2019.

Restricted Stock Units

The Company issued 142,600 and 91,786 shares of restricted stock units in lieu of cash payment to members of the Board of Directors during 2019 and 2018, respectively.

The restricted stock units immediately vest upon issuance.

The weighted average share price on date of exercise for restricted stock awards was $1.72 and $3.40 for the years ended December 31, 2019 and 2018, respectively.

Stock-based compensation expense for restricted stock awards was $0.3 million, $0.3 million, and $0.3 million for the years ended December 31, 2019, 2018 and 2017 respectively, all of which was classified as general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss.

The Company issued 462,308 and 142,600 restricted stock units in lieu of cash payment for board and director fees to members of the Board of Directors during 2020 and 2019, respectively.

These restricted stock units were immediately vested upon issuance.

The Company also issued 17,455,264 restricted stock units to members of the Board of Directors as equity compensation under the Company’s non-employee director compensation policy and to employees of the Company during 2020 as incentive compensation.

Of the restricted stock units granted in 2020, 3,893,278 were granted in December and are subject to performance-based vesting, and are expected to vest in two equal installments upon approval of the U.S.

180-day product and, assuming the prior approval of the 180-day product, November 2021.

Additionally, in October 2020, the Company granted 273,077 restricted stock units to a new board member, which award will fully vest in October 2021.

The remaining 13,288,909 restricted stock units were granted between May and July and vest in eight equal installments beginning with an initial accelerated vesting tranche in the month following the grant, followed by seven vesting dates every six months .

There were no restricted stock units granted in 2018 or 2019 other than the issuance in lieu of cash to members of the Board of Directors in respect of director fees.

The weighted average share price on the date of grant of restricted stock unit awards was $ 0.43 and $ 1.72 for the years ended December 31, 2020 and 2019, respectively.

Stock-based compensation expense for restricted stock unit awards was $ 2.2 million, $ 0.3 million, and $ 0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

No provision for U.S.

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The net change in valuation allowance for the years ended December 31, 2020 and 2019 was a net increase of $ 22.8 million and a net increase of $ 24.0 million, respectively.

The increase in valuation allowance is primarily due to net losses and credits incurred in 2019.

The increase in valuation allowance is primarily due to net losses incurred and changes in the fair value of derivatives in 2020.

This increase in valuation allowance is based on management's assessment that it is more likely than not that the Company will not realize these deferred tax assets.

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federal and state tax purposes, start-up and organizational costs incurred before October 22, 2004 will be amortized over sixty months and those incurred on and after October 22, 2004 will be amortized over one hundred and eighty months beginning in the current year.

At December 31, 2019, the Company had federal and state net operating loss (“NOL”) carryforwards of $419.2 million and had research and experimental credit carryforwards of $9.4 million.

At December 31, 2020, the Company had NOL carryforwards of $ 515.24 million and had research and experimental credit carryforwards of $ 12.76 million.

Research and experimental credit carryforwards will expire in varying amounts between 2021 and 2040.

NOL carryforwards in the amount of $ 198.7 million will expire in varying amounts between 2021 and 2037.

NOL carryforwards incurred in tax years 2018 and forward have an indefinite carryforward period.

Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in a limitation on the amount of NOL carryforwards and research and development credit carryforwards which can be available in future

No income tax benefit was recognized in the Company’s consolidated statement of operations and comprehensive loss for stock-based compensation arrangements due to the Company’s net loss position.

A reconciliation of the Company’s estimated U.S.

federal statutory rate to the Company’s effective income tax rate for the years ended December 31, 2019, 2018 and 2017 is as follows:

No income tax benefit was recognized in the Company’s Statement of Operations for stock-based compensation arrangements due to the Company’s net loss position.

A reconciliation of the Company’s estimated U.S.

federal statutory rate to the Company’s effective income tax rate for the years ended December 31, 2020, 2019 and 2018 is as follows:

Federal Statutory rate

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State tax rates changes

Debt Transactions

Other non-deductible items

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Deferred tax liabilities and assets are adjusted for changes in tax laws or tax rates of the various tax jurisdictions as of the enacted date.

The federal tax rate used to calculate deferred tax liabilities and assets as of December 31, 2017 was 34%.

The Tax Cuts and Jobs (the “Act”) was enacted into law as of December 22, 2017.

Among other provisions, the Act reduced the federal tax rate to 21% effective for the Company as of January 1, 2018.

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid.

Accordingly, the Company's deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S.

corporate income tax rate.

As a result of the tax rate, the Company’s deferred tax assets were decreased by $30.8 million and the valuation allowance was decreased by the same amount, resulting in no net tax expense.

The federal tax rate remained unchanged at 21 % for the 2020 tax year.

The change in the state tax rate from 2018 to 2019, and 2017 to 2018, respectively, is primarily due to changes in applicable state apportionment factors and additional jurisdictions.

The Company recognized the income tax effects of the Act in its financial statements for the year ended December 31, 2017 in accordance with Staff Accounting Bulletin No.

118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the Act was signed into law.

In accordance with Staff Accounting Bulletin No.

118, as of December 31, 2018, the Company completed its accounting for the tax effects of enactment of the Act and no adjustments to the provisional income tax effects were required.

A breakdown of the Company’s uncertain tax position during 2019, 2018 and 2017 is as follows (in thousands):

The change in state tax rate from 2018 to 2019, and 2019 to 2020, respectively, is primarily due to changes in applicable state apportionment factors and additional jurisdictions.

A breakdown of the Company’s uncertain tax position during 2020, 2019 and 2018 is as follows (in thousands):

Gross unrecognized tax benefit at beginning of year

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The Company did not incur any penalties or interest payable to taxing authorities in 2020, 2019 and 2018.

The Company’s U.S.

Federal and state income tax returns from 2000 to 2019 remain subject to examination by the tax authorities.

The Company’s prior tax years remain open for examination, even though the statute of limitations has expired, due to the net operating losses and credits carried forward for use in prospective years.

Related Party Transactions

Roche Holding A.G, through their ownership interests in Roche Finance Ltd, has a noncontrolling ownership interest in the Company.

For the years ended December 31, 2019 and 2018, revenues from Roche were $16.4 million and $16.2 million, respectively, and amounts due from them were $7.1 million and $6.3 million, respectively.

At December 31, 2019, the Company had committed replacement obligations under warranties in the amount of $0.6 million.

At December 31, 2018.

the Company had deferred revenue of $0.6 million related to Roche, which was earned and recognized during 2019.

Roche Holding A.G, through its ownership interests in Roche Finance Ltd, has a noncontrolling ownership interest in the Company.

For the years ended December 31, 2020, 2019 and 2018, revenues from Roche were $ 3.6 million, $ 16.4 million and $ 16.2 million, respectively, and amounts due from them were $ 2.4 million, $ 7.1 million and $ 6.3 million, respectively.

At December 31, 2020, the Company had estimated replacement obligations under warranties in the amounts of $ 0.4 million.

Ascensia Diabetes Care Holdings AG, 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.

For the years ended December 31, 2020 revenues from Ascensia and amounts due from them were immaterial.

Fair Value Measurements

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date.

When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use to price the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk.

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● Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

● Level 3 - Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

The fair value of money market funds and other investments classified as cash and cash equivalents are based on period-end statements supplied by the various banks and brokers that hold the majority of the funds.

The valuation technique used to measure the fair value of the Company’s debt instruments is based on the binomial option pricing model and incorporate management’s assumptions for probabilities of conversion occurrence through maturity, stock price, volatility, risky bond rate, and trade data when available.

The following table represents the fair value hierarchy of the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2019 and 2018 (in thousands):

The following table represents the fair value hierarchy of the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and 2019 (in thousands):

December 31, 2020

Money market funds⁽¹⁾

Corporate bonds

Energy Capital Option

Masters Option

Embedded features of the 2023 Notes

Embedded features of the PHC Notes

Embedded features of the 2025 Notes

December 31, 2019

Money market funds⁽¹⁾

Commercial paper⁽¹⁾

Corporate bonds

Embedded features of the 2023 Notes

Embedded features of the 2025 Notes

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

Features of the

December 31, 2019

Change in derivative liabilities (including the partial settlement of the 2023 Notes)

Initial fair value of Instruments

Loss on fair value adjustment

Loss on fair value and change in derivative

Loss on extinguishment of debt

Financial asset impairment cost

December 31, 2020

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Stock price volatility

Probabilities of make-whole provision

Probabilities of conversion provisions

Time period until maturity (yrs)

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Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain financial instruments within the fair value hierarchy.

The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs.

There were no transfers between Level 1, Level 2, or Level 3 during the years ended December 31, 2019 and 2018.

There were no transfers between Level 1, Level 2, or Level 3 during the year ended December 31, 2020 and 2019.

When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement .

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The Company has evaluated claims in accordance with the accounting guidance for contingencies that it deems both probable and reasonably estimable, and for the period ended December 31, 2020 and 2019 has no such contingencies.

Subsequent Events

Series A Preferred Stock

In January 2021, the Company completed a series of closings of its previously announced private placement of Series A Preferred Stock, pursuant to the Purchase Agreement (the “Stock Purchase Agreement”) dated August 9, 2020 by and among the Company and Masters Special Situations, LLC, Marlin Fund, Limited Partnership and Marlin Fund II, Limited Partnership (collectively, the “Masters Purchasers”).

In total, including the initial closing, the Company sold an aggregate of $ 25.8 million of Series A Preferred Stock to the Masters Purchasers and certain of their assignees.

By virtue of the subsequent closings, pursuant to the previously announced Investor Rights Agreement dated July 9, 2020, Masters Special Situations, LLC has retained its right to designate one director for election to the Company’s board of directors at the Company’s 2021 Annual Meeting of Stockholders.

Registered Direct Offering

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 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 the Company, are approximately $ 46 million.

Public Offering

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.

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

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data