Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2021

Summary of Significant Accounting Policies

Basis of Presentation

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 consolidated financial statements reflect the accounts of Senseonics Holdings and its wholly owned subsidiary Senseonics. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, recoverability of long-lived assets, deferred taxes and valuation allowances, derivative assets and liabilities, obsolete inventory, warranty obligations, variable consideration related to revenue, depreciable lives of property and equipment, and accruals for clinical study costs, which are accrued based on estimates of work performed under contract. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that it believes are reasonable, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenues and expenses. Actual results could differ from those estimates; however, management does not believe that such differences would be material.

Segment Information

Segment Information

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

Comprehensive Loss

Comprehensive Loss

Comprehensive income (loss) comprises net income (loss) and other changes in equity that are excluded from net income (loss). For the twelve months ended December 31, 2021, the Company’s comprehensive income (loss) included $0.2 million of other comprehensive loss related to the unrealized loss on marketable securities. For the years ended December 31, 2020 and 2019, 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

Cash and Cash Equivalents and Concentration of Credit Risk

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

	December 31,		December 31,
	2021		2020
Cash ⁽¹⁾	$	4,264	$	18,002

Money market funds		29,197		3
Cash and cash equivalents	$	33,461	$	18,005

(1)Includes overnight repurchase agreements.

	December 31,		December 31,
	2021		2020
Cash and cash equivalents	$	33,461	$	18,005
Restricted cash		—		200
Cash, cash equivalents and restricted cash	$	33,461	$	18,205

Concentration of Revenue and Customers

Concentration of Revenues and Customers

Net revenue from the Company’s distribution arrangement with Ascensia, a related party, accounted for 90% of total net revenues for the year ended December 31, 2021. Net revenue from distribution arrangement with Roche Diabetes Care GmbH, a related party, accounted for 72% of total net revenues for the year ended December 31, 2020. Revenue from 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 total net revenues for the year ended December 31, 2020. During the year ended December 2019, the Company derived 77% of its total net revenue from Roche, and 12% from Advanced Diabetes Supply.

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, 2021, 2020 and 2019:

	December 31, 2021				December 31, 2020				December 31, 2019
			%				%				%
(Dollars in thousands)	Amount		of Total		Amount		of Total		Amount		of Total
Revenue, net:
Outside of the United States	$	11,117	81.3	%	$	3,821	77.2	%	$	18,054	84.8	%
United States		2,558	18.7			1,128	22.8			3,247	15.2
Total	$	13,675	100.0	%	$	4,949	100.0	%	$	21,301	100.0	%

Marketable Securities

Marketable Securities

Marketable securities consist of commercial paper, corporate debt securities, asset backed securities and government and agency securities. The Company’s investments are classified as available for sale. Such securities are carried at fair value, with any unrealized holding gains or losses reported, net of any tax effects reported, as accumulated other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, are included in consolidated results of operations. A decline in the market value of any available for sale security below cost that is deemed to be other-than-temporary results in a reduction in fair value, which is charged to earnings in that period, and a new cost basis for the security is established. Dividend and interest income is recognized when earned. The cost of securities sold is calculated using the specific identification method. We classify all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets. We do not generally intend to sell these investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.

Inventory and Obsolescence

Inventory and Obsolescence

Inventory is valued at the lower of cost or net realizable value. Cost is determined using the standard cost method that approximates first in, first out. The Company records an adjustment to reduce the value of inventory for items that are potentially obsolete, where standard costs require adjustment to the net realizable value, and are in excess of future demand taking into consideration the product shelf life. The sensor manufacturing process can span several months, involves various contract manufacturers and includes raw components with long lead times, often resulting in significant work-in-progress inventory. 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.

Accounts Receivable

Accounts Receivable

The Company grants credit to various customers in the normal course of business. Accounts receivable consist of amounts due from distributors and are reduced by an allowance for doubtful accounts at the time potential collection risk is identified. 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. The Company does not have a history of collectability concerns, and no allowance for uncollectible accounts was recorded as of December 31, 2021. The Company had an immaterial allowance for doubtful accounts as of December 31, 2020.

Property and Equipment

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which is generally between three to seven years, and is recorded within operating expenses and cost of goods sold in the consolidated statements of operations and comprehensive loss. Upon disposition of the assets, the costs and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. Repairs and maintenance costs are included as expense in the accompanying statement of operations.

Long-lived Assets

Long-lived Assets

Management reviews long-lived assets, including property and equipment and right-of-use assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Management identified indicators of impairment on right-of-use assets in 2021. Management did not identify any indicators of impairment in 2020 and 2019.

Derivative Financial Instruments

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.

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 its 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. 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 its 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 its 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, the Company 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 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. The Company recorded the fair value of these embedded features in the amount of $1.9 million as a derivative asset in its 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 in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in its 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 its 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. On the date of issuance, 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

Warranty Obligation

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

At December 31, 2021 and December 31, 2020, the warranty reserve was $0.7 million and $0.6 million, respectively. The following table provides a reconciliation of the change in estimated warranty liabilities for the years ended December 31, 2021 and 2020 (in thousands):

	December 31,		December 31,
	2021		2020
Balance at beginning of the period	$	646	$	2,197
Provision for warranties during the period		781		(266)
Settlements made during the period		(704)		(1,285)
Balance at end of the period	$	723	$	646

Revenue Recognition

Revenue Recognition

The Company generates 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. 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.

Revenue from product sales is recognized at a point in time when the Customers obtain control of the Company’s product based upon the delivery terms as defined in the contract at an amount that reflects the consideration which the Company expect to receive in exchange for the product. Contracts with the Company’s distributors contain performance obligations, mostly for the supply of goods, and is typically satisfied upon transfer of control of the product. Customer contracts do not include the right to return unless there is a product issue, in which case we may provide replacement product. Product conformity guarantees do not create additional performance obligations and are accounted for as warranty obligations in accordance with guarantee and loss contingency accounting guidance.

The Company’s 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, the Company develops estimates for the expected value based on the terms of the agreements, historical data, geographic mix, reimbursement rates, Ascensia’s ability to sell through the inventory 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.

Cost of Sales

Cost of Sales

The Company uses third-party contract manufacturers to manufacture Eversense and related components and supplies. Cost of sales includes raw materials, contract manufacturing service fees, expected warranty costs, recall costs, product obsolescence, scrap, third-party warehousing, shipping and handling expenses associated with product delivery, and employee-related costs of the internal supply chain and manufacturing team.

Sales and Marketing Expenses

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of salaries, commissions, and other related costs, including stock-based compensation, for personnel who perform sales, marketing, and customer support functions. Other significant costs include website design and advertising, educational and promotional materials, consultants, tradeshow expenses, marketing programs and support for Ascensia’s marketing programs including direct to consumer campaigns.

Research and Development Expenses

Research and Development Expenses

Research and development expenses consist of expenses incurred in performing research and development activities in developing Eversense, including clinical trials and feasibility studies, and partnerships for strategic initiatives including insulin delivery and new indications. Research and development expenses include compensation and benefits for research and development employees including stock-based compensation, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to contract research organizations and other consultants, and other outside expenses. Research and development expenses are expensed as incurred.

General and Administrative Expenses

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.

Stock-Based Compensation

Stock-Based Compensation

The Company accounts for stock-based compensation related to stock option grants and restricted stock units under stock incentive plans, purchases under the employee stock purchase plan, as well as inducement stock grants, based on the fair value of those awards at the date of grant. The estimated fair value of stock options on the date of grant is amortized on a straight-line basis over the requisite service period of the individual award, which typically equals the vesting period. 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.

The Company has assumed no dividend yield because it does not expect to pay dividends in the future, which is consistent with its history of not paying dividends. The risk-free interest rate assumption is based on observed interest rates for constant maturity U.S. 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. 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. The Company uses the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. Expected volatility is based on the daily closing prices of a peer group of comparable publicly traded companies in similar stages of development.

Income Taxes

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Management uses a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return, as well as guidance on derecognition, classification, interest and penalties and financial statement reporting disclosures. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. 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.

The Company is subject to taxation in various jurisdictions in the United States and remains subject to examination by taxing jurisdictions for the year 1998 and all subsequent periods due to the availability of NOL carryforwards. In addition, all of the net operating losses and research and development credit carryforwards that may be used in future years are still subject to adjustment.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

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, and Warrants 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 along with Options are remeasured at fair value each reporting period.

Net Loss per Share

Net Loss per Share

Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period.

For periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potential common shares is anti-dilutive. The total number of anti-dilutive shares at December 31, 2021, 2020 and 2019, consisting of common stock options and stock purchase warrants, which have been excluded from the computation of diluted loss per share, was as follows:

	2021	2020	2019
Stock-based awards	26,140,291	30,013,407	24,218,612
Masters preferred shares	—	6,302,521	—
2023 Notes	4,617,646	6,672,500	6,672,500
PHC Notes	65,757,177	68,222,412	—
2025 Notes	39,689,142	44,728,676	63,565,883
Warrants	13,177,822	17,282,792	5,196,581
Total anti-dilutive shares outstanding	149,382,078	173,222,308	99,653,576

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

Recent Accounting Pronouncements

Recent Accounting Pronouncements

Recently Adopted

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. The Company has adopted this guidance as of January 1, 2021 and did not have a material impact on the consolidated financial statements and related disclosures.

Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities in unrealized loss positions, the new standard requires allowances to be recorded instead of reducing the amortized cost of the investment. The Company currently holds investments in available-for-sale securities. The Company has not historically experienced collection issues or bad debts with trade receivables. Accordingly, the Company does not expect this to have a significant impact on its consolidated financial statements and related disclosures at this time. Since the Company qualified as a smaller reporting company as of June 28, 2019, it maintains its status as a smaller reporting company for the adoption of this standard. As such, the Company will adopt this guidance on the effective date for smaller reporting companies, January 1, 2023.

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

December 15, 2020, including interim periods within that fiscal year. The Company adopted this guidance on its effective date of January 1, 2022 and does not expect this to have a significant impact on its consolidated financial statements and related disclosures at this time.

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.