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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-05 · 111 added, 223 removed, 183 unchanged (65% of the section changed)

Management’s Discussion and Analysi s of Financial Condition and Results of Operations

You should read the following discussion and analysis together with “Selected Financial Data” in Part II, Item 6 and our consolidated financial statements and related notes in Part II, Item 8 of this Annual Report.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes in Part II, Item 8 of this Annual Report.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties.

You should review the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

We are a medical technology company focused on the development and commercialization of a long-term, implantable continuous glucose monitoring, or CGM, system to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy.

Our Eversense and Eversense XL CGM systems are designed to continually and accurately measure glucose levels in people with diabetes via an under-the-skin sensor, a removable and rechargeable smart transmitter, and a convenient app for real-time diabetes monitoring and management for a period of up to 90 and 180 days, respectively, as compared to seven to 14 days for non-implantable CGM systems.

The original Eversense CGM system received a CE mark in June 2016, which marked the first approval for the product to be sold within the European Economic Area.

Subsequently, the extended life Eversense XL CGM system received its CE mark in September 2017 and is currently available in select markets in Europe, the Middle East, and Africa, or EMEA.

We are a medical technology company focused on the development and manufacturing of glucose monitoring products designed to transform lives in the global diabetes community with differentiated, long-term implantable glucose management technology.

Our Eversense, Eversense XL and Eversense E3 CGM system are designed to continually and accurately measure glucose levels in people with diabetes via an under-the-skin sensor, a removable and rechargeable smart transmitter, and a convenient app for real-time diabetes monitoring and management for a period of up to six months, respectively, as compared to seven to 14 days for non-implantable CGM systems.

We affixed the CE mark to

the original Eversense CGM system in June 2016, which marked the first certification for the product to be sold within the European Economic Area (EEA).

Subsequently, we affixed the CE mark to the extended life Eversense XL CGM system in September 2017 which is currently available in select markets in Europe and the Middle East.

In June 2018, the U.S.

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With this approval and the availability of a new app in December 2019, the Eversense system can now be used as a therapeutic CGM in the United States to replace fingerstick blood glucose measurement to make treatment decisions, including insulin dosing.

In February 2022, the extended life Eversense E3 CGM system was approved by the FDA and we expect Ascensia Diabetes Care Holdings AG, or Ascensia, to begin commercializing Eversense E3 in the second quarter of 2022.

Our net revenues are derived from sales of the Eversense system which is sold in two separate kits:

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We continue to see momentum of broad national payor acceptance, including on August 3, 2020, the Center for Medicare and Medicaid Services, or CMS, released its Calendar Year 2021 Medicare Physician Fee Schedule Proposed Rule that announces proposed policy changes for Medicare payments, including the proposed establishment of national payment amounts for the three CPT© Category III codes describing the insertion (CPT 0446T), removal (0447T), and removal and insertion (0048T) of an implantable interstitial glucose sensor, which describes our Eversense CGM systems, as a medical benefit, rather than as part of the Durable Medical Equipment channel that includes other CGMs.

In December 2021, CMS released its Calendar Year 2022 Medicare Physician Fee Scheduled that update global payments for the device cost and procedure fees.

We are in the early commercialization stages of the Eversense brand and are focused on driving awareness of our CGM system amongst intensively managed patients and their healthcare providers.

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On June 21, 2018, we received PMA approval from the FDA for the Eversense system.

In July 2018, we began distributing the Eversense system

directly in the United States through our own direct sales and marketing organization.

In July 2018, we began distributing the Eversense system directly in the United States through our own direct sales and marketing organization.

We have received Category III CPT codes for the insertion and removal of the Eversense sensor.

In December 2018, we initiated the PROMISE pivotal clinical trial to evaluate the safety and accuracy of Eversense for a period of up to 180 days in the United States.

In December 2018, we initiated the PROMISE pivotal clinical trial to evaluate the safety and accuracy of Eversense for a period of up to 6 months in the United States.

In September 30, 2019, we completed enrollment of the PROMISE trial.

In the trial, we observed performance matching that of the current Eversense 90-day product available in the United States, with a mean absolute relative difference, or MARD, of 8.5%.

This result was achieved with reduced calibration, down to one per day, while also doubling the sensor life to 180 days.

Following the results of the PROMISE trial, on September 30, 2020, a Premarket Approval, or PMA, supplement application to extend the wearable life of the Eversense CGM System to 180 days was submitted to the FDA.

This result was achieved with reduced calibration, down to one per day, while also doubling the sensor life to six months.

In March 2019, we launched a patient access program, the Eversense Bridge Program, to assist those patients who do not have insurance coverage for Eversense, or whose insurance is denied or insufficient.

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In December 2020, we terminated the Eversense Bridge Program.

We expect our partner Ascensia to implement a patient assistance program and related programs as part of its commercialization efforts.

In 2021, Ascensia initiated a patient assistance program to provide financial assistance to patients on Eversense.

The lack of a patient assistance program, or a program’s design being ineffective, could adversely impact the sales of Eversense and, consequently our net revenues.

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This sub-set of 30 participants were left undisturbed for 365 days with the goal of measuring accuracy and longevity over the full 365 days.

Following information gathered from this sub-set and continued development efforts, and pending developments at the FDA relating to the ongoing the ongoing COVID-19 pandemic, in the second half of 2021 we plan to seek Investigational Device Exemption, or IDE, from the FDA to explore the 365-day sensor in a clinical trial.

If the IDE is approved in a timely manner, we would target to begin enrollment of a clinical trial, in which we intend to include a pediatric population, in the first half of 2022.

In April 2020, we announced that we received regulatory approval in Europe such that the Eversense XL is no longer contraindicated for MRI, which means the sensor does not need to be removed from under the skin during MRI scanning.

We had previously obtained this indication for Eversense in the United States in 2019.

This MRI approval is a first for the CGM category, as all other sensors are required to be removed during an MRI scan.

On August 9, 2020, we entered into a collaboration and commercialization agreement with Ascensia pursuant to which we granted Ascensia the exclusive right to distribute our 90-day Eversense continuous glucose monitoring system and our 180-day Eversense continuous glucose monitoring system worldwide for people with diabetes, with the following initial exceptions:

Following information gathered from this sub-set and continued development efforts, and pending developments at the FDA relating to the ongoing the ongoing COVID-19 pandemic, in the first half of 2022 we plan to seek Investigational Device Exemption, or IDE, from the FDA to explore the 365-day sensor in a clinical trial.

If the IDE is approved in a timely manner, we would target to begin enrollment of a clinical trial, in which we intend to include a pediatric population, in the second half of 2022.

On August 9, 2020, we entered into a collaboration and commercialization agreement with Ascensia pursuant to which we granted Ascensia the exclusive right to distribute our 90-day Eversense CGM system and our 180-day Eversense CGM system worldwide for people with diabetes, with the following initial exceptions:

(i) until January 31, 2021, the territory did not include countries covered by our then existing distribution agreement with Roche Diagnostics International AG and Roche Diabetes Care GmbH, which are the Europe, Middle East and Asia, excluding Scandinavia and Israel, and 17 additional countries, including Brazil, Russia, India and China, as well as select markets in the Asia Pacific and Latin American regions;

(ii) until September 13, 2021, the territory does not include countries covered by our current distribution agreement with Rubin Medical, which are Sweden, Norway and Denmark;

(ii) until September 13, 2021, the territory did not include countries covered by our current distribution agreement with Rubin Medical, which are Sweden, Norway and Denmark;

and (iii) until May 31, 2022, the territory does not include Israel.

Pursuant to the Commercialization Agreement, in the United States, Ascensia began providing sales support for the 90-day Eversense

product on October 1, 2020 and the parties have been planning and making arrangements for Ascensia to ramp up sales activities and more fully assume commercial responsibilities in the second quarter of 2021.

The Eversense 180-day product is planned to be marketed upon receipt of marketing approval from the FDA.

In Germany, Italy and Switzerland, Spain, Poland and the Netherlands, Ascensia assumed commercial responsibilities for Eversense XL beginning on February 1, 2021.

For Sweden and Norway, Ascensia will assume commercial responsibilities later this year.

Ascensia is entitled to receive a portion of net revenue at specified tiered percentages ranging from the mid-teens to the mid-forty’s based on levels of global net revenues.

Ascensia is obligated to achieve specified minimum annual revenue targets and meet specified levels of sales and marketing spend in order to maintain its exclusive distribution rights.

Ascensia purchases Eversense and Eversense XL from us at negotiated prices.

We remain responsible for product development and manufacturing, including regulatory submissions, approvals and registrations and second level customer support, and Ascensia is responsible for sales, marketing, market access, patient and provider onboarding and first level customer support.

We have agreed to establish a joint alliance committee and joint marketing committee, each with equal representation from each party, in order to collaborate.

Pursuant to the Commercialization Agreement, in the United States, Ascensia began providing sales support for the 90-day Eversense product on October 1, 2020 and Ascensia ramped up sales activities and assumed commercial responsibilities for the 90-day Eversense product during the second quarter of 2021.

In February 2022, the extended life Eversense E3 CGM system was approved by the FDA and we expect Ascensia to begin commercializing Eversense E3 in the United States in the second quarter of 2022.

European Commercialization of Eversense

In September 2017, we received the CE mark for Eversense XL, which is indicated for a sensor life of up to 180 days.

Eversense XL began commercialization in Europe in the fourth quarter of 2017.

In September 2017, we affixed the CE mark to the Eversense XL, which is indicated for a sensor life of up to six months.

Eversense XL began commercialization in the EEA in the fourth quarter of 2017.

All such commercialization and marketing activities remain subject to applicable government approvals.

In May 2016, we entered into a distribution agreement with Roche Diagnostics International AG and Roche Diabetes Care GmbH, together referred to as Roche.

Pursuant to the agreement, as amended, we have granted Roche the exclusive right to market, sell and distribute Eversense in the EMEA, excluding Scandinavia and Israel.

In addition, Roche has exclusive distribution rights in 17 additional countries, including Brazil, Russia, India and China, as well as select markets in the Asia Pacific and Latin American regions.

Roche is obligated to purchase from us specified minimum volumes of Eversense XL CGM components at pre-determined prices.

Pursuant to the agreement, as amended, we had granted Roche the exclusive right to market, sell and distribute Eversense in the EMEA, excluding Scandinavia and Israel.

In addition, Roche had exclusive distribution rights in 17 additional countries, including Brazil, Russia, India and China, as well as select markets in the Asia Pacific and Latin American regions.

Roche was obligated to purchase from us specified minimum volumes of Eversense XL CGM components at pre-determined prices.

On December 12, 2019, we further amended the distribution agreement to lower minimum volumes for 2020 and increase pricing for the remaining period of the contract.

On November 30, 2020 we entered into a final amendment and settlement agreement with Roche to facilitate the transition of distribution to Ascensia as sales conclude on January 31, 2021, including final purchases, and transition support activities.

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

On November 30, 2020 we entered into a final amendment and settlement agreement with Roche to facilitate the transition of distribution to Ascensia as sales concluded on January 31, 2021, including final purchases, and transition support activities.

The distribution rights under the agreement expired January 31, 2021.

On January 30, 2020, the World Health Organization, or the WHO, announced a global health emergency because of a new strain of coronavirus, or COVID-19, and the risks to the international community as the virus spreads globally.

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The Governor of Maryland issued an order closing all non-essential businesses, which took effect on March 23, 2020.

Although the state of Maryland is gradually undergoing a phased reopening plan, substantially all of our workforce is still working from home either all or substantially all of the time.

Additionally, because our sensor requires an in-clinic procedure, we saw a reduction in access to clinics and sensor insertions during the initial outbreak.

During the latter half of 2020, several new order requests from our distributors led to adjustments to concession allowances previously provided to some of our customers in the United States to reflect actual product usage.

While these trends are promising, insertion volumes are still below pre-COVID-19 levels.

Additionally, the COVID-19 pandemic infection rates in the United States are still high, vaccine distribution has only just begun, and it is difficult to predict the longevity and severity COVID-19 will have on our business.

reductions in our cost structure and operations to improve cash flow and generate future expenditure savings to ensure the long-term success of Eversense.

Specifically, in the first quarter of 2020, we temporarily suspended commercial sales and marketing of the Eversense CGM System in the United States to new patients to solely focus our resources on supporting existing users, including ensuring broader insurance coverage for Eversense, and the development and regulatory submission of our new 180-day Eversense product in the United States.

In connection with these actions, on March 26, 2020, we reduced our workforce by approximately 60%, over half of which were sales personnel.

Critical Accounting Policies and Use of Estimates

Beginning with the initial outbreak and through 2021 substantially all of our workforce is still working from home either all or substantially all of the time.

Additionally, because our sensor requires an in-clinic procedure, we saw a reduction in access to clinics and sensor insertions during multiple periods during the pandemic.

The COVID-19 pandemic infection rates in the United States are still high, vaccine distribution is on-going, and it is difficult to predict the longevity and severity COVID-19 will have on our business.

As a result of the COVID-19 pandemic’s disruption to our operations, suppliers, employees, and the healthcare community in which we sell to and support, and our limited cash resources, in March 2020, we made significant reductions in our cost structure and operations to improve cash flow and generate future expenditure savings to ensure the long-term success of Eversense.

Specifically, in the first quarter of 2020, we temporarily suspended commercial sales and marketing of the Eversense CGM System and we reduced our workforce by approximately 60%.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.

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These estimates, particularly estimates relating to accounting for variable consideration related to revenue, warranty obligations, inventory obsolescence and embedded derivatives, have a material impact on our financial statements and are discussed in detail throughout our analysis of the results of operations discussed below.

We did not make any material changes to these assumptions for the year ended December 31, 2021.

We do not expect any material changes in the near term to the underlying assumptions during the year ended December 31, 2022.

We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not readily apparent from other sources.

Actual results and outcomes could differ from these estimates and assumptions.

We generate product revenue from sales of the Eversense system and related components and supplies at a fixed price to third-party distributors in the European Union and to a network of strategic fulfillment partners in the United States, or collectively, Customers, who then resell the products to health care providers and patients.

We generate product revenue from sales of the Eversense system and related components and supplies to Ascensia, through the Commercialization Agreement, third-party distributors in the European Union and to strategic fulfillment partners in the United States, or collectively, Customers, who then resell the products to health care providers and patients.

We are paid for our sales directly to the Customers, regardless of whether or not the Customers resell the products to health care providers and patients.

Under the terms of our distribution agreement with Roche, Roche was contractually obligated to make certain minimum purchases of Eversense systems from us and, accordingly, the revenue we recognize for any given period is not necessarily indicative of the level of sales to end users for that, or any other, period.

Revenue from product sales is recognized at a point in time when the Customers obtain control of our product based upon the delivery terms as defined in the contract at an amount that reflects the consideration which we expect to receive in exchange for the product.

Contracts with our distributors contain performance obligations, mostly for the supply of goods, and is typically satisfied upon transfer of control of the product.

We recognize revenue 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.

Our contracts may contain some form of variable consideration such as prompt-pay discounts or tier-volume price discounts.

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

Depending on the variable consideration, we develop estimates for 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, we reimburse 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.

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

We use this data, along with actual reimbursements that have been validated to patient claims, to support our expected reimbursement estimates.

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

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

Customer contracts do not include the right to return unless there is a product issue, in which case we may provide replacement product.

Product conformity guarantees do not create additional performance obligations and are accounted for as warranty obligations in accordance with guarantee and loss contingency accounting guidance.

Our contracts may contain some form of variable consideration such as prompt-pay discounts, tier-volume price discounts and for the Ascensia commercial agreement, revenue share.

Variable consideration, such as discounts and prompt-pay incentives, are treated as a reduction in revenue and variable considerations, such as revenue share, is treated as an addition in revenue when the product sale is recognized.

The amount of variable consideration that is included in the transaction price may be constrained and is included in revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period, when the uncertainty associated with the variable consideration is subsequently resolved.

Estimating variable consideration and the related constraint requires the use of significant management judgment.

Depending on the variable consideration, we develop estimates for the expected value based on the terms of the agreements, historical data, geographic mix, reimbursement rates, and market conditions.

Contract assets consist of trade receivables and unbilled receivables from customers and are recorded at net realizable value.

Unbilled receivables relate to the revenue share variable consideration from the Ascensia commercial agreement.

Warranty Obligations

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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.

The Second 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.

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.

The derivative was 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.

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The derivative instruments 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.

The fair value assessment incorporates management’s assumptions for probabilities of conversion occurrence through maturity, stock price, volatility, risky bond rate, and trade data when available.

The fair value assessment incorporates management’s assumptions for probabilities

of conversion occurrence through maturity, stock price, volatility, risky bond rate, and trade data when available.

We engage a third-party valuation specialist to perform the valuation using the binomial option pricing model.

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(in thousands)

Revenue, net - related parties

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Cost of sales

Gross profit (loss)

Sales and marketing expenses

Sales and marketing expenses- related parties

Total Sales and marketing expenses

Research and development 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 fair value adjustment of option

Gain (Loss) on extinguishment of debt and option

Loss on issuance of debt & other issuance costs

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Debt issuance costs

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

Impairment costs

Loss on change in fair value of derivatives

Impairment cost

Other expense

Total other (expense) income, net

Our total net revenue decreased to $4.9 million for the year ended December 31, 2020, compared to $21.3 million for the year ended December 31, 2019, a decrease of $16.4 million.

This decrease was primarily due to decreased sales of the Eversense CGM System outside of the United States.

Components of Results of Operations

Our total net revenue increased to $13.7 million for the year ended December 31, 2021, compared to $4.9 million for the year ended December 31, 2020, an increase of $8.7 million.

This increase was due to the transition of commercial responsibility for Eversense to Ascensia and its orders for Eversense for distribution in the European Union and in the United States.

Ascensia assumed commercial responsibilities for Eversense XL beginning on February 1, 2021 and for the 90-day Eversense product during the second quarter of 2021.

Cost of sales

Our cost of sales decreased to $14.5 million for the year ended December 31, 2021, compared to $22.3 million for the year ended December 31, 2020, a decrease of $7.8 million.

This decrease was primarily attributable to decreased product costs of $17.2 million due to the temporary suspension of manufacturing activities resulting from changes made to our operational focus.

The decrease was primarily attributed to the reduction of inventory impairment, write-offs and scrap expense of $13.9 million and a reduction of $0.2 million in salaries &

related costs, partially offset by an increase of $6.3 million in production costs, freight and logistic cost and warranty and replacement costs related to the commercialization of Eversense under the Ascensia commercialization and collaboration agreement.

Gross profit (loss) was $(0.8) million and $(17.4) million for the years ended December 31, 2021 and 2020, respectively.

Gross profit as a percentage of revenue, or gross margin, was (5.9)% and (350.9)% for the years ended December 31, 2021 and 2020, respectively.

The decrease in gross profit was due to lower sales and inventory impairment as a result of temporary suspension of commercial activities.

The improved gross margin was primarily due to the fulfillment of orders utilizing existing written off inventory as a result of the COVID-19 pandemic.

Sales and marketing expenses

Sales and marketing expenses were $7.6 million for the year ended December 31, 2021, compared to $20.6 million for the year ended December 31, 2020, a decrease of $12.9 million.

The decrease was primarily the result of our headcount reduction on March 26, 2020, which impacted the majority of the sales organization, resulting in a decline in salary and personnel costs of $15.4 million and a decline of $13.6 million related to travel, trade shows, consultants and other regional marketing programs to market Eversense, due to the temporary suspension of commercial activities.

Research and development expenses

Research and development expenses were $20.4 million for the year ended December 31, 2020, compared to $38.4 million for the year ended December 31, 2019, a decrease of $18.0 million.

The decrease was due to decrease of $7.9 million for clinical trial costs primarily related to the PROMISE trial, $6.5 million decrease of consulting, outside services and other expenses resulting from our change in operational plans to focus on our regulatory submission for the new 180-day Eversense product in the United States, $1.9 million decrease related to lab supplies, software and travel reductions and $1.7 million decrease for salary and other personnel related costs following our reduction in workforce in March 2020.

General and administrative expenses

General and administrative expenses were $20.8 million for the year ended December 31, 2020, compared to $23.2 million for the year ended December 31, 2019, a decrease of $2.4 million.

The decrease was primarily due to a $1.9 million decrease in other general and administrative costs to support our operations, which includes recruiting, IT supplies and services, and travel, $0.6 million decrease in legal expenses related to patents and trademarks, and $0.2 million decrease in salaries, bonuses and payroll related costs for reduction in headcount, offset by $0.3 million increase in occupancy cost.

Total other income (expense), net

Total other income (expense), net, was ($96.0) million for the year ended December 31, 2020, compared to $15.1 million for the year ended December 31, 2019, a decrease of $111.1 million.

The decrease was primarily due to a $40.9 million change in fair value on our derivative liabilities, a $30.7 million loss on fair value adjustment for the Masters and Energy Capital transactions, a $20.7 million loss on extinguishment of debt, an aggregate of $12.7 million of loss on debt issuance, related to the Series A preferred stock financing and other issuance costs related to the equity line with Energy Capital, $4.4 million in interest expense and $2.3 million impairment expense related to the PHC option

and $1.7 million in lower interest income, offset by an aggregate reduction of $2.3 million in debt issuance costs and other expense.

Comparison of the Years Ended December 31, 2019 and 2018

The following table sets forth our results of operations for the years ended December 31, 2019 and 2018.

Period Change

(in thousands)

Revenue, net - related parties

Total revenue

Cost of sales

Gross profit (loss)

Sales and marketing expense

Research and development expenses

General and administrative expenses

Operating loss

Other income (expense):

Interest income

Loss on extinguishment of debt

Interest expense

Debt issuance costs

Change in fair value of derivative liabilities

Other (expense) income

Total other expense, net

Our total net revenue increased to $21.3 million for the year ended December 31, 2019, compared to $18.9 million for the year ended December 31, 2018, an increase of $2.4 million.

This increase was primarily due to increased U.S.

sales of Eversense, net of reimbursements in connection with the Eversense Bridge Program.

Cost of Sales

Our cost of sales increased to $40.7 million for the year ended December 31, 2019, compared to $27.1 million for the year ended December 31, 2018, an increase of $13.7 million.

This increase was primarily attributable to increased impairment charges of $5.3 million due to obsolete inventory and product enhancements, $3.3 million for scrap and costs to streamline our sensor supply chain, $3.0 million for warranty expenses, $1.0 million for product back-ups and replacements associated with the recall of 844 uninserted sensors in the third quarter of 2019 and a net increase of $1.1 million for packaging, warehousing and logistics related costs.

Gross profit was $(19.4) million and $(8.1) million for the years ended December 31, 2019 and 2018, respectively.

Gross profit as a percentage of revenue, or gross margin, was (91.3)% and (43.1)% for the years ended December 31, 2019 and 2018, respectively.

Sales and marketing expenses

Sales and marketing expenses were $49.6 million for the year ended December 31, 2019, compared to $27.7 million for the year ended December 31, 2018, an increase of $21.8 million.

The increase was primarily due to increased commercialization efforts in the United States during 2019, including a $13.0 million increase in salaries, commissions and payroll related costs for additional headcount, an increase in marketing costs of $6.4 million mainly related to consultants and travel, and an increase of $2.4 million for marketing programs, customer support services and software.

The decrease was primarily the result of the reduction in sales support due to the transition to Ascensia for the commercialization of Eversense.

Research and development expenses

Research and development expenses were $27.2 million for the year ended December 31, 2021, compared to $20.4 million for the year ended December 31, 2020, an increase of $6.8 million.

The increase was primarily due to a $7.9 million increase related to the PROMISE clinical trial and other post-approval and feasibility studies, a $0.8 million increase in salaries, bonuses and payroll related costs for additional headcount, partially offset by a decrease in contractual services of $2.1 million due to the FDA approval of Eversense in the United States in July 2018.

The increase was due to the expansion of our R&D workforce which was $2.2 million increase in personnel-related costs.

Also, the increase was due to various R&D efforts to improve our sensor & transmitter technology in 2021 that led to $4.1 million increase in consulting, contract fabrication and other R&D support services and an increase of $0.5 million in clinical studies.

General and administrative expenses

General and administrative expenses were $21.5 million for the year ended December 31, 2021, compared to $20.8 million for the year ended December 31, 2020, an increase of $0.7 million.

The increase was primarily due to a $1.3 million increase in salaries, bonuses and payroll related costs for additional headcount, a $1.3 million increase in other general and administrative costs to support our operations, and a $1.1 million increase for legal, audit and consulting fees.

Total other expense, net

Total other income (expense), net, was $15.1 million for the year ended December 31, 2019, compared to $(6.4) million for the year ended December 31, 2018, an increase of $21.5 million.

The increase was primarily due to a $29.2 million change in fair value on our derivative liabilities in connection with the 2023 and 2025 Notes in 2019, offset by a $7.3 million increase in interest expense, debt issuance costs, and loss on the extinguishment of debt associated with the modification of the 2023 Notes and issuance of the 2025 Notes in July 2019.

The increase was due to higher salaries and related expenses of $1.3 million, primarily related to stock-based compensation and related expenses, offset by a reduction of $0.6 million in other administrative expenses including accounting and consulting costs.

Total other income (expense), net

Total other income (expense), net, was ($245.3) million for the year ended December 31, 2021, compared to ($96.0) million for the year ended December 31, 2020, an increase of $149.3 million expense.

The increase in expense was primarily due to a $162.5 million change in fair value of the embedded derivatives in our convertible notes, $22.4 million change in non-cash loss on fair value adjustment of the Energy Capital Option and an increase of $0.6 million in interest expense, offset by a $21.4 million reduction in loss on extinguishment of debt, a $12.7 million reduction in loss on issuance of debt & issuance costs, a reduction of $1.2 million in debt issuance cost a decrease of $0.7 million in impairment cost, a decrease of $0.1 million in other expenses and a $0.1 million increase in interest income.

Comparison of the Years Ended December 31, 2020 and 2019

For the discussion of our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations"

in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 5, 2021.

Liquidity and Capital Resources

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To date, we have funded our operations principally through the issuance of preferred stock, common stock, convertible note issuance and debt.

As of December 31, 2020, we had cash, cash equivalents and restricted cash of $18.2 million.

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.

As of December 31, 2021, we had cash, cash equivalents and marketable securities of $181.8 million.

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

Jefferies will receive a commission up to 3.0% of the gross proceeds of any common stock sold through Jefferies under the 2021 Sales Agreement.

As of the date of this Annual Report on Form 10-K, we have received $8.1 million in net proceeds from the sale of 3,077,493 shares of our common stock under the 2021 Sales Agreement.

In November 2019, we entered into an Open Market Sale Agreement, or 2019 Sales Agreement, with Jefferies, under which we could offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $50.0 million through Jefferies as our sales agent in an “at the market” offering.

In June 2021, we received $48.4 million in net proceeds from the sale of 12,830,333 shares of our common stock utilizing the full capacity under the 2019 Sales Agreement.

For the twelve months ended December 31, 2020, we had received $0.1 million in net proceeds from the sale of 175,289 shares of our common stock under the 2019 Sales Agreement.

On January 21, 2021, we entered into an underwriting agreement, which was subsequently amended and restated on the same day, or 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 and a related prospectus and prospectus supplement, in each case filed with the Securities and Exchange Commission, the Offering.

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

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

The Shares were sold at a purchase price of $1.25 per share for aggregate 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 $46.1 million.

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 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.

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

The Shares were sold at a purchase price of $1.25 per share for aggregate gross proceeds to the us of $50 million, before deducting fees to the placement agent and other estimated offering expenses payables.

The Shares were offered and sold by us 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 us from the Registered Direct Offering, after deducting fees and expenses and the estimated offering expenses payable by us, are approximately $46.1 million.

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

Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that we have less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), we have the right, in our sole discretion, to present Energy Capital with a purchase notice, or a Regular Purchase Notice, directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of our Series B Preferred Stock at a per share price, or the Purchase Price, equal to $1,000 per share of Series B Preferred Stock, with each share of Series B Preferred Stock initially convertible into common stock, beginning nine months after the date of its issuance, at a conversion price of

$0.3951 per share.

The Equity Line Agreement provides that we shall not affect any Regular Purchase under the Equity Line Agreement on any date where the closing price of the common stock on the NYSE American is less than $0.25 without the approval of Energy Capital.

On August 9, 2020, we entered into a financing agreement with Ascensia’s parent company, PHC, pursuant to which we issued $35.0 million in aggregate principal amount 2024 Notes, to PHC.

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Upon the closing of the 2024 Notes, we prepaid the First Lien Notes in full in the amount of approximately $17.6 million, which includes the discounted prepayment premium.

Additionally, on August 9, 2020, we entered into a Stock Purchase Agreement with Masters, pursuant to which we issued and sold to Masters 3,000 shares of Series A Preferred Stock, at a price of $1,000.00 per share in an initial closing.

Additionally, on August 9, 2020, we entered into a Stock Purchase Agreement with Masters Special Solutions, LLC and certain affiliates thereof, or Masters, pursuant to which we issued and sold to Masters 3,000 shares of convertible preferred stock, designated as Series A Preferred Stock, the Series A Preferred Stock, at a price of $1,000.00 per share in an initial closing.

Masters also had the option to purchase up to an additional 27,000 shares of Series A Preferred Stock at a price of $1,000.00 per share in subsequent closings, subject to the terms and conditions of the Stock Purchase Agreement, as amended, through January 11, 2021.

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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 will be 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 be 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 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 our 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.

As of March 3, 2021, 23,783 shares of Series A Preferred Stock have been converted to common stock and 2,000 shares of Series A Preferred remain outstanding.

At the Market Offering

In November 2019, we entered into an Open Market Sale Agreement with Jefferies LLC which allows us to issue and sell up to $50 million in gross proceeds of our common stock.

As of December 31, 2020, we have received $0.1 million in net proceeds from the sale of 175,289 shares under this agreement.

All shares of Series A Preferred Stock have been converted to common stock as of December 31, 2021.

On July 16, 2019, we 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, or the Solar Warrants.

The Solar Warrants are exercisable until July 25, 2029.

Subsequent to December 31, 2020, the Solar Warrants have been exercised in full on a net basis.

As of December 31, 2021, the Solar Warrants have been exercised in full, on a net basis.

On November 9, 2020, we issued Energy Capital warrants to purchase up to 10,000,000 shares of Company’s common stock with an exercise price of $0.3951 per share, or the Energy Capital Warrants.

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We used $11.6 million of the Solar Term Loan to repay in full the term loans, or the Oxford/SVB Term Loans and together with the Solar Term Loan, the Term Loans, borrowed pursuant to our Amended and Restated Loan and Security Agreement with Oxford Finance LLC, or Oxford, and Silicon Valley Bank, or SVB.

As described in our Overview and Business Updates, on March 22, 2020 we terminated our Loan and Security Agreement with Solar and repaid the $45.0 million principal balance in full.

On March 22, 2020 we terminated our Loan and Security Agreement with Solar and repaid the $45.0 million principal balance in full.

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

The unsecured loan, or the PPP Loan, is evidenced by the PPP Note dated April 21, 2020, or the PPP Note, in the principal amount of $5.8 million with Silicon Valley Bank, or the Bank.

The unsecured loan, or the PPP Loan, is evidenced by the

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

We have elected not to apply for forgiveness and are making monthly payments of principal and interest until the loan is paid in full in the second quarter of 2022.

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, we are obligated to make equal monthly payments of principal and interest, beginning after determination of forgiveness by the Bank.

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

If we do not apply for loan forgiveness within ten months

after the last day of the covered period, the PPP loan is no longer deferred, and we 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, we may apply for forgiveness for all or a part of our 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 us 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 our 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.

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Funding Requirements and Outlook

Our ability to generate revenue and achieve profitability depends on the successful commercialization and adoption of our Eversense CGM systems by diabetes patients and healthcare providers, along with future product development, regulatory approvals, and post-approval requirements.

These activities, including our ongoing focus to grow covered lives through positive insurance payor policy decisions and obtain approval for Eversense 180-day product in the United States, will require significant uses of working capital through 2021 and beyond.

We expect that existing cash, cash equivalents and cash flows from our future operations will be sufficient to meet the Company’s current published operating plans for the foreseeable future.

These activities, including our ongoing focus to grow covered lives through positive insurance payor policy decisions and continued development of Eversense 365-day product in the United States, will require significant uses of working capital through 2022 and beyond.

Management has concluded that based on our current operating plans, existing cash and cash equivalents and cash flows from our future operations will be sufficient to meet our anticipated operating needs through 2023.

As part of our liquidity strategy, we will continue to monitor our capital structure and operating plans and we may access the capital markets or debt markets for additional funding if the opportunity arises to enhance our capital structure for changes to our operating plans, for financing strategic initiatives and to provide financial flexibility.

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Net cash used in operating activities

Net cash (used in) provided by investing activities

Net cash (used in) provided by financing activities

Net decrease in cash, cash equivalents and restricted cash

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Net cash used in operating activities

adjustment of $30.7 million, related to the Master and Energy Capital transactions, loss on extinguishment of debt in the amount of $21.1 million, non-cash interest expense of $11.0 million, a net change in operating assets and liabilities of $13.8 million, change in fair value of derivative liabilities of $11.6 million, loss on issuance of debt, other issuance cost and impairment of asset of $15.0 million, stock-based compensation expense of $7.3 million and other non-cash charges of $1.5 million.

Net cash used in operating activities was $136.0 million for the year ended December 31, 2019, and consisted of a net loss of $115.5 million and a net change in operating assets and liabilities of $(13.5) million, a change in the fair value of derivative liabilities of $(29.2) million, stock-based compensation expense of $8.1 million, non-cash interest expense of $8.5 million, loss on extinguishment of debt in the amount of $0.4 million and other non-cash charges of $5.2 million.

Net cash used in operating activities was $90.8 million for the year ended December 31, 2018, and consisted of a net loss of $94.0 million and a net change in operating assets and liabilities of $(6.7) million, partially offset by stock-based compensation expense of $6.4 million, non-cash interest expense of $3.3 million, and other non-cash charges of $0.2 million.

Net cash (used in) provided by investing activities

Net used in investing activities was $0.2 million for the year ended December 31, 2020, and consisted of $0.2 million of capital expenditures, primarily for production equipment.

Net cash used in operating activities was $56.1 million for the year ended December 31, 2021, and consisted of a net loss of $302.5 million, a net change in operating assets and liabilities of $1.5 million, and $0.3 million of loss on extinguishment of debt, offset by a change in fair value of derivative liabilities of $174.2 million, a change of $53.2 million in the fair value adjustment related to the Energy Capital transactions, other non-cash charges, net of $9.6 million, stock-based compensation expense of $9.0 million, and $2.2 million of impairment costs.

Net cash used in operating activities was $67.4 million for the year ended December 31, 2020, and consisted of a net loss of $175.2 million and provision for inventory obsolescence of $4.2 million, offset by a change in the fair value adjustment of $30.7 million, related to the Master and Energy Capital transactions, loss on extinguishment of debt in the amount of $21.1 million, non-cash interest expense of $11.0 million, a net change in operating assets and liabilities of $13.8 million, change in fair value of derivative liabilities of $11.6 million, loss on issuance of debt, other issuance cost and impairment of asset of $15.0 million, stock-based compensation expense of $7.3 million and other non-cash charges of $1.5 million.

Net cash used in investing activities

Net cash used in investing activities was $148.7 million for the year ended December 31, 2021, and consisted of $154.5 million from the purchase of marketable securities and $0.2 million of capital expenditures for laboratory equipment, offset by $6.0 million form sale and maturity of marketable securities.

Net used in investing activities was $0.2 million for the year ended December 31, 2020, and consisted of $0.2 million of capital expenditures, primarily for production equipment.

Net cash provided by investing activities was $19.4 million for the year ended December 31, 2018, and consisted of $28.4 million from the sale of marketable securities, partially offset by $1.0 million of capital expenditures for laboratory equipment, and $8.0 million for the purchase of marketable securities.

Net cash (used in) provided by financing activities

Net cash provided by (used in) financing activities

Net cash provided by financing activities was $220.1 million for the year ended December 31,2021, primarily consisted of $200.4 million from issuance of common stock, proceeds of $22.8 million for the issuance of Series A preferred stock and $5.0 million for proceeds related to exercise off stock options and warrants, offset by repayment of $2.8 million of PPP loan and $5.3 million taxes paid related to net share settlement of equity awards.

Net cash used in financing activities was $10.1 million for the year ended December 31, 2020, and primarily consisted of $66.1 million for the repayment of outstanding principal on our Solar Loan Agreement and Highbridge First Lien Notes, offset by proceeds from issuance of debt for $56.0 million, consisting $33.6 million from issuance of PHC notes, net proceeds of $14.4 million from the issuance of First Lien Notes, the PPP loan of $5.8 million and net proceeds from issuance of preferred stock of $2.5 million.

Net cash provided by financing activities was $96.2 million for the year ended December 31, 2019, and consisted primarily of $26.8 million from the issuance of common stock in our July 2019 offering, net of costs, $77.7 million from the issuance of the 2025 Notes, net of costs, and $43.0 million from the Solar Term Loan, net of cost, partially offset by $15.0 million for the repayment of the Oxford/SVB Term Loans and the repurchase of $37.0 million of 2023 Notes.

Net cash provided by financing activities was $192.0 million for the year ended December 31, 2018, and consisted primarily of $149.0 million from the issuance of common stock in our June 2018 Offering, $50.7 million from the issuance of the 2023 Notes, and $2.3 million from the exercise of stock options, partially offset by aggregate principal payments on our Solar Term Loan and Oxford/SVB Term Loans of $10.0 million.

Contractual Obligations

The following summarizes our contractual obligations as of December 31, 2020.

Payment due by period

Contractual Obligations

Operating lease obligations

Principal payments under PPP Loan

Interest payments under PPP Loan

Principal payments under 2023 Notes

Interest payments under 2023 Notes

Principal payments under PHC Notes

Interest payments under PHC Notes (1)

Principal payments under 2025 Notes

Interest payments under 2025 Notes

Other Commitments (2)

Total contractual obligations

(1) Reflects assumption of PIK interest on these notes.

(2) Other commitments include, among other things, minimum payment obligations and other obligations in the ordinary course of business that we cannot cancel or where we would be required to pay a fee for termination before the contractual period ended.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

Recent Accounting Pronouncements

Recently Adopted

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.

We have 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.

Our adoption of ASU 2018-15 at the beginning of the first quarter of 2020 did not have a significant impact on our consolidated financial statements.

Not yet Adopted

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

Measurement of Credit Losses on Financial Instruments , which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be

For available-for-sale debt securities in unrealized loss positions, the new standard requires allowances to be recorded instead of reducing the amortized cost of the investment.

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

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

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

In December 2019, the FASB issued ASU No.

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

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

We are currently evaluating the impact that this guidance will have on our 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.

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

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

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 7. Management’s Discussion and Analysis