Senseonics Holdings, Inc. (Form: 10-Q, Received: 11/08/2022 16:15:31)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2022

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

For the transition period from ______ to ______

Commission file number: 001-37717

Senseonics Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)	3841 (Primary Standard Industrial Classification Code Number)	47-1210911 (I.R.S. Employer Identification Number)

20451 Seneca Meadows Parkway

Germantown, MD 20876-7005

(301) 515-7260

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	SENS	NYSE American

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

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

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


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

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

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

There were 478,256,348 shares of common stock, par value $0.001, outstanding as of November 4, 2022.

Table of Contents

TABLE OF CONTENTS

PART I: Financial Information

ITEM 1: Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021	3
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for three and nine months ended September 30, 2022 and 2021	4
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2022 and 2021	5
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021	6
Notes to Unaudited Condensed Consolidated Financial Statements	7

ITEM 2: Management Discussion and Analysis of Financial Condition and Results of Operations	24

ITEM 3: Quantitative and Qualitative Disclosures about Market Risk	37

ITEM 4: Controls and Procedures	37

PART II: Other Information	37

ITEM 1: Legal Proceedings	37

ITEM 1A: Risk Factors	38

ITEM 2: Unregistered Sales of Equity and Securities and Use of Proceeds	39

ITEM 3: Defaults Upon Senior Securities	39

ITEM 4: Mine Safety Disclosures	39

ITEM 5: Other Information	39

ITEM 6: Exhibits	40

SIGNATURES	41

Table of Contents

Senseonics Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	September 30,		December 31,
	2022		2021
		(unaudited)

Assets
Current assets:
Cash and cash equivalents	$	35,484	$	33,461
Short term investments, net		118,715		96,445
Accounts receivable, net		103		205
Accounts receivable, net - related parties		2,021		1,768
Inventory, net		7,257		6,316
Prepaid expenses and other current assets		5,714		6,218
Total current assets		169,294		144,413

Option		101		239
Deposits and other assets		3,241		1,086
Long term investments, net		8,851		51,882
Property and equipment, net		1,183		1,308
Total assets	$	182,670	$	198,928
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	684	$	1,204
Accrued expenses and other current liabilities		12,674		10,667
Accrued expenses and other current liabilities, related parties		671		3,597
Note payable, current portion, net		15,223		—
Derivative liability, current portion		328		—
Option, current		28,068		—
Term Loans, net		—		2,926
Total current liabilities		57,648		18,394

Long-term debt and notes payables, net		53,434		59,798
Derivative liabilities		83,794		236,291
Option		—		69,401
Other liabilities		2,859		579
Total liabilities		197,735		384,463

Commitments and contingencies

Stockholders’ equity (deficit):
Common stock, $0.001 par value per share; 900,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 478,211,956 shares and 447,282,263 shares issued and outstanding as of September 30, 2022 and December 31, 2021		478		447
Additional paid-in capital		806,069		765,215
Accumulated other comprehensive loss		(1,185)		(212)
Accumulated deficit		(820,427)		(950,985)
Total stockholders' equity (deficit)		(15,065)		(185,535)
Total liabilities and stockholders’ equity (deficit)	$	182,670	$	198,928

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

Table of Contents

Senseonics Holdings, Inc.

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

(in thousands, except share and per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenue, net	$	126		276	$	555	$	1,196
Revenue, net - related parties		4,496		3,256		10,263		8,471
Total revenue		4,622		3,532		10,818		9,667
Cost of sales		3,866		4,778		8,711		9,995
Gross profit (loss)		756		(1,246)		2,107		(328)

Expenses:
Research and development expenses		10,985		7,200		28,088		19,562
Selling, general and administrative expenses		7,340		7,585		23,785		23,347
Operating loss		(17,569)		(16,031)		(49,766)		(43,237)
Other income (expense), net:
Interest income		544		486		878		743
Gain (Loss) on fair value adjustment of option		(8,592)		13,556		41,333		(74,848)
Gain on extinguishment of debt and option		—		—		—		330
Interest expense		(4,801)		(4,245)		(13,806)		(12,337)
Gain (Loss) on change in fair value of derivatives		(28,948)		50,075		152,169		(255,185)
Impairment cost		(984)		(488)		(138)		(1,650)
Other expense		(41)		(439)		(112)		(723)
Total other income (expense), net		(42,822)		58,945		180,324		(343,670)

Net Income (Loss)		(60,391)		42,914		130,558		(386,907)
Other comprehensive income (loss)
Unrealized gain (loss) on marketable securities		(57)		18		(973)		2
Total other comprehensive gain (loss)		(57)		18		(973)		2
Total comprehensive income (loss)	$	(60,448)	$	42,932	$	129,585	$	(386,905)

Basic net income (loss) per common share	$	(0.13)		0.10	$	0.28	$	(0.93)
Basic weighted-average shares outstanding		472,475,747		445,378,308		464,244,736		414,128,283

Diluted net income (loss) per common share	$	(0.13)		0.08	$	(0.10)	$	(0.93)
Diluted weighted-average shares outstanding		472,475,747		581,760,516		608,345,713		414,128,283

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

Table of Contents

Senseonics Holdings, Inc.

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


				Additional		Accumulated				Total		Series A
	Common Stock			Paid-In		Other		Accumulated		Stockholders'		Convertible
	Shares	Amount		Capital		Comprehensive Loss		Deficit		Equity (Deficit)		Preferred Stock Temporary Equity
Three months ended September 30, 2021:
Balance, June 30, 2021	445,125		445		765,262		(16)		(1,078,332)		(312,641)	$	—
Exercise of stock options and warrants	474		1		737		—		—		738		—
Issued common stock for vested RSUs and ESPP purchase	16		—		24		—		—		24		—
Stock-based compensation expense	—		—		2,301		—		—		2,301		—
Net income	—		—		—		—		42,914		42,914		—
Other comprehensive income, net of tax	—		—		—		18		—		18		—
Balance, September 30, 2021	445,615	$	446	$	768,324	$	2	$	(1,035,418)	$	(266,646)	$	—

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

Three months ended September 30, 2022:
Balance, June 30, 2022	465,326		465		776,640		(1,128)		(760,036)		15,941		—
Issuance of common stock, net	12,084		12		26,427		—		—		26,439		—
Exercise of stock options and warrants	681		1		711		—		—		712		—
Issued common stock for vested RSUs and ESPP purchase	121		—		69		—		—		69		—
Stock-based compensation expense	—		—		2,222		—		—		2,222		—
Net loss	—		—		—		—		(60,391)		(60,391)		—
Other comprehensive loss, net of tax	—		—		—		(57)		—		(57)		—
Balance, September 30, 2022	478,212	$	478	$	806,069	$	(1,185)	$	(820,427)	$	(15,065)	$	—

Nine months ended September 30, 2022:
Balance, December 31, 2021	447,282		447		765,215		(212)		(950,985)		(185,535)		—
Issuance of common stock, net	15,161		15		34,428		—		—		34,443		—
Exercise of stock options and warrants	9,892		10		941		—		—		951		—
Issuance of common stock for vested RSUs and ESPP purchase	6,970		7		125		—		—		132		—
Stock-based compensation expense	—		—		6,543		—		—		6,543		—
Shares withheld related to net share settlement of equity awards	(1,093)		(1)		(1,183)		—		—		(1,184)		—
Net income	—		—		—		—		130,558		130,558		—
Other comprehensive loss, net of tax	—		—		—		(973)		—		(973)		—
Balance, September 30, 2022	478,212	$	478	$	806,069	$	(1,185)	$	(820,427)	$	(15,065)	$	—

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

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Senseonics Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)


	Nine Months Ended
	September 30,
	2022		2021
Cash flows from operating activities
Net income (loss)	$	130,558		(386,907)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		751		918
Non-cash interest expense (debt discount and deferred costs)		8,858		5,825
Change in fair value of derivatives		(152,169)		255,185
(Gain) Loss on fair value adjustment of option		(41,333)		74,848
Gain on extinguishment of debt and option		—		(330)
Impairment of option, net		138		1,650
Stock-based compensation expense		6,543		7,134
Changes in assets and liabilities:
Accounts receivable		(151)		(686)
Prepaid expenses and other current assets		504		41
Inventory		(941)		(2,597)
Deposits and other assets		163		(30)
Accounts payable		(519)		(971)
Accrued expenses and other liabilities		(1,070)		1,319
Accrued interest		(257)		326
Net cash used in operating activities		(48,925)		(44,275)
Cash flows from investing activities
Capital expenditures		(255)		(75)
Purchase of marketable securities		(82,807)		(154,918)
Proceeds from sale and maturity of marketable securities		102,594		—
Net cash provided by (used in) investing activities		19,532		(154,993)
Cash flows from financing activities
Issuance of common stock, net		34,443		200,440
Proceeds from exercise of stock options, stock warrants and ESPP purchases		1,083		4,701
Taxes paid related to net share settlement of equity awards		(1,184)		—
Proceeds from issuance of Masters preferred stock, net		—		22,783
Repayment of term loans		(2,926)		(650)
Net cash provided by financing activities		31,416		227,274
Net increase in cash and cash equivalents		2,023		28,006
Cash and cash equivalents, at beginning of period		33,461		18,205
Cash and cash equivalents, at ending of period	$	35,484	$	46,211

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	5,137	$	6,149
Lease liabilities arising from obtaining right-of-use assets		2,944		—
Supplemental disclosure of non-cash investing and financing activities
Issuance of common stock converted from preferred shares		—		54,166
Issuance of common stock converted from notes payables		—		4,925

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

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Senseonics Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1.	Organization and Nature of Operations

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

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

2.	Liquidity and Capital Resources

From its founding in 1996 until 2010, the Company has devoted substantially all of its resources to researching various sensor technologies and platforms. Beginning in 2010, the Company narrowed its focus to developing and refining a commercially viable glucose monitoring system. However, to date, the Company has not generated any significant revenue from product sales. The Company has incurred substantial losses and cumulative negative cash flows from operations since its inception in October 1996. The Company has never been profitable from operations, and its net losses were $302.5 million, $175.2 million, and $115.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. As of September 30, 2022, the Company had an accumulated deficit of $820.4 million. To date, the Company has funded its operations principally through the issuance of preferred stock, common stock, convertible notes and debt. As of September 30, 2022, the Company had cash, cash equivalents and marketable securities of $163.0 million.

In November 2021, the Company entered into an Open Market Sale Agreement, (the “2021 Sales Agreement”) with Jefferies LLC (“Jefferies”), under which the Company could offer and sell, from time to time, at its sole discretion, shares of its common stock having an aggregate offering price of up to $150.0 million through Jefferies as its 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. During the nine months ended September 30, 2022, the Company received $34.4 million in net proceeds from the sale of 15,160,899 shares of its common stock under the 2021 Sales Agreement.

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

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

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Public 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 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 $50.0 million, before deducting fees to the placement agent and other estimated offering expenses payable by the Company. The Shares were offered and sold by the Company pursuant to an effective shelf registration statement on Form S-3, which was originally filed with the SEC 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, were approximately $46.1 million.

On November 9, 2020, the Company entered into an Equity Line Agreement (the “Equity Line Agreement”) with Energy Capital, LLC, a Florida limited liability company (“Energy Capital”), which provided that, upon the terms and subject to the conditions and limitations set forth therein, Energy Capital was committed to purchase up to an aggregate of $12.0 million of shares of the Company’s newly designated series B convertible preferred stock (the “Series B Preferred Stock”) at the Company’s request from time to time during the 24-month term of the Equity Line Agreement. Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including that the Company have less than $8.0 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), the Company had the right, at its sole discretion, to present Energy Capital with a purchase notice (each, a “Regular Purchase Notice”) directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of the Company’s Series B Preferred Stock at a per share price (the “Purchase Price”) equal to $1,000 per share of Series B Preferred Stock, with each share of Series B Preferred Stock initially convertible into common stock, 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 provided that the Company was not permitted to affect any Regular Purchase Notice under the Equity Line Agreement on any date where the closing price of the Company’s common stock on the NYSE American is less than $0.25 without the approval of Energy Capital. In addition, beginning on January 1, 2022, since there had been no sales of the Series B Preferred Stock pursuant to the Equity Line Agreement, Energy Capital had the right, at its sole discretion, by its delivery to the Company of a Regular Purchase Notice, to purchase up to the $12.0 million of Series B Preferred Stock under the Equity Line Agreement at the Purchase Price. On November 7, 2022, Energy Capital exercised in full its right to purchase $12.0 million of Series B Preferred Stock.

On August 9, 2020, the Company entered into a financing agreement with the parent company of Ascensia Diabetes Care Holdings AG (“Ascensia”), PHC Holdings Corporation (“PHC”), pursuant to which the Company issued $35.0 million in aggregate principal amount of Senior Secured Convertible Notes due on October 31, 2024 (the “PHC Notes”), to PHC. The Company also issued 2,941,176 shares of common stock to PHC as a financing fee. The Company also has the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022, contingent upon obtaining U.S. Food and Drug Administration (“FDA”) approval for the 180-day Eversense product for marketing in the United States before such date. The Company successfully obtained FDA approval in February 2022. The Company has not exercised this option as of September 30, 2022.

Additionally, on August 9, 2020, the Company entered into a Stock Purchase Agreement with Masters Special Solutions, LLC and certain affiliates thereof (collectively, “Masters”), pursuant to which the Company issued and sold to Masters 3,000 shares of convertible preferred stock, designated as Series A Preferred Stock (the “Series A Preferred Stock”), at a price of $1,000 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 per share in subsequent closings, subject to the terms and conditions of the Stock Purchase Agreement, as amended, through January 11, 2021. In January 2021, Masters and its assignees purchased in aggregate an additional 22,783 shares of Series A Preferred Stock, resulting in additional gross proceeds to the Company of $22.8 million. Each share of Series A Preferred Stock was initially convertible into a number of shares of common stock equal to $1,000 divided by the conversion price of $0.476 per share, subject to customary anti-dilution adjustments, including in the event of any stock split. All shares of Series A Preferred Stock

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have been converted to common stock.

3.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Although the Company considers the disclosures in these unaudited consolidated financial statements to be adequate to make the information presented not misleading, certain information or footnote information normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted under the rules and regulations of the SEC. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of financial position at September 30, 2022, and December 31, 2021, results of operations, comprehensive income (loss), and changes in stockholder’s deficit for the three and nine month periods ended September 30, 2022, and 2021 and cash flows for the nine months ended September 30, 2022, and 2021 have been included. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 1, 2022. The interim results for September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022, or for any future interim periods.

The consolidated financial statements reflect the accounts of Senseonics Holdings, Inc. and its wholly owned operating subsidiary Senseonics, Incorporated. The Company views its operations and manages its business in one segment, glucose monitoring products. Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

Certain prior year amounts have been reclassified to conform to the current-year presentation. An adjustment has been made to the Consolidated Statements of Operations and Comprehensive Income (Loss) to consolidate the line items Sales and marketing expenses and General and administrative expenses to Selling, general and administrative expenses in order to conform to current year presentation. These reclassifications had no effect on the reported results of operations.

Recent Accounting Pronouncements

Recently Adopted

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) (“ASU 2020-06”). 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. ASU 2020-06 is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted this guidance as of January 1, 2022 and its adoption 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 (“ASU 2016-13”), 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

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debts with trade receivables. Accordingly, the Company does not expect this to have a significant impact on its consolidated financial statements and related disclosures at this time. The Company will adopt this guidance on the effective date for smaller reporting companies, January 1, 2023.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. In the accompanying unaudited consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, recoverability of long-lived assets, deferred taxes and valuation allowances, derivative assets and liabilities, obsolete inventory, warranty obligations, variable consideration related to revenue, depreciable lives of property and equipment, and accruals for clinical study costs, which are accrued based on estimates of work performed under contract. The Company considered COVID-19 related impacts to its estimates, as appropriate, within its unaudited condensed consolidated financial statements and there may be changes to those estimates in future periods due to the uncertainties surrounding the severity and duration of the COVID-19 pandemic. Actual results could differ from those estimates.

Significant Accounting Policies

The accounting policies used by the Company in its presentation of interim financial results are consistent with those presented in Note 3 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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4. Revenue Recognition

The Company generates product revenue from sales of the Eversense system and related components and supplies to Ascensia, through a collaboration and commercialization agreement (the “Ascensia Commercialization Agreement”), third-party distributors in the European Union and to strategic fulfillment partners in the United States (collectively, the “Customers”), who then resell the products to health care providers and patients. Customers pay the Company for sales, regardless of whether or not the Customers resell the products to health care providers and patients. The Company’s policies for recognizing sales have not changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2021.

Revenue by Geographic Region

The following table sets forth net revenue derived from the Company’s two primary geographical markets, the United States and outside of the United States, based on the geographic location to which the Company delivers the product, for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended				Nine Months Ended
	September 30, 2022				September 30, 2022
			%				%
(Dollars in thousands)	Amount		of Total		Amount		of Total
Revenue, net:
Outside of the United States	$	2,688	58.2	%	$	6,910	63.9	%
United States		1,934	41.8			3,908	36.1
Total	$	4,622	100.0	%	$	10,818	100.0	%


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

Contract Assets

Contract assets consist of unbilled receivables from customers and are recorded at net realizable value and relate to the revenue share variable consideration from the Ascensia Commercialization Agreement. Accounts receivable – related parties, net as of September 30, 2022, and December 31, 2021 included unbilled accounts receivable of $1.1 million and $1.8 million, respectively. The Company expects to invoice and collect all unbilled accounts receivable within 12 months.

Concentration of Revenue and Customers

For the three months ended September 30, 2022 and 2021, the Company derived 97% and 92%, respectively, of its total revenue from one customer, Ascensia. For the nine months ended September 30, 2022 and 2021, the Company derived 95% and 88%, respectively, of its total revenue from one customer, Ascensia. Revenues for these corresponding periods represent sales of sensors, transmitters and miscellaneous Eversense system components.

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5. Net Income (Loss) per Share

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

Potentially dilutive common shares consist of shares issuable from restricted stock units, stock options, warrants and the Company’s convertible notes. Potentially dilutive common shares issuable upon vesting of restricted stock units and exercise of stock options and warrants are determined using the average share price for each period under the treasury stock method. Potentially dilutive common shares issuable upon conversion of the Company’s convertible notes are determined using the if converted method. The if-converted method assumes conversion of convertible securities at the beginning of the reporting period. Interest expense, dividends, and the changes in fair value measurement recognized during the period are added back to the numerator. The denominator includes the common shares issuable upon conversion of convertible securities.

In periods of net loss, all potentially dilutive common shares are excluded from the computation of the diluted net loss per share for those periods, as the effect would be anti-dilutive.

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


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021

Net income (loss)	(60,391)	42,914	130,558	(386,907)
Impact of conversion of dilutive securities	—	1,385	(188,563)	—

Dilutive Net income (loss)	(60,391)	44,299	(58,005)	(386,907)

Net income (loss) per share
Basic	(0.13)	0.10	0.28	(0.93)
Diluted	(0.13)	0.08	(0.10)	(0.93)

Basic weighted average shares outstanding	472,475,747	445,378,308	464,244,736	414,128,283
Dilutive potential common stock outstanding
Stock-based awards	—	15,520,414	6,499,671	—
2023 Notes	—	4,617,646	4,617,646	—
2025 Notes	—	39,689,142	39,211,358	—
PHC Notes	—	65,348,857	67,625,174	—
Energy Capital Option	—	—	23,335,635	—
Warrants	—	11,206,148	2,811,493	—
Diluted weighted average shares outstanding	472,475,747	581,760,516	608,345,713	414,128,283

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


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
Stock-based awards	24,940,972	1,949,958	10,426,560	28,502,846
2023 Notes	4,617,646	—	—	4,617,646
2025 Notes	39,211,358	—	—	39,689,142
PHC Notes	68,322,952	—	—	65,757,177
PHC Option	31,512,605	—	22,717,076	—
Energy Capital Option	30,372,058	—		—
Warrants	3,177,821	116,581	427,821	13,177,822
Total anti-dilutive shares outstanding	202,155,412	2,066,539	33,571,457	151,744,633

6.	Marketable Securities

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


	September 30, 2022
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
Commercial Paper	$	32,614		—		—	$	32,614
Corporate debt securities	$	37,209		—		(425)	$	36,784
Asset backed securities	$	13,979		—		(130)	$	13,849
Government and agency securities	$	44,949		—		(630)	$	44,319
Total	$	128,751	$	—	$	(1,185)	$	127,566


	December 31, 2021
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
Commercial Paper	$	57,369		—		—	$	57,369
Corporate debt securities	$	39,825		—		(77)	$	39,748
Asset backed securities	$	26,736		—		(29)	$	26,707
Government and agency securities	$	24,609		—		(106)	$	24,503
Total	$	148,539	$	—	$	(212)	$	148,327

The following are the scheduled maturities as of September 30, 2022 (in thousands):


2022 (remaining three months)	$	29,625
2023		90,175
2024		2,221
2025		6,730
Total	$	128,751

The Company periodically reviews its portfolio of debt securities to determine if any investment is impaired due to credit loss or other potential valuation concerns. For debt securities where the fair value of the investment is less than the amortized cost basis, the Company assesses at the individual security level, for various quantitative factors including, but not limited to, the nature of the investments, changes in credit ratings, interest rate fluctuations, industry analyst

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reports, and the severity of impairment. Unrealized losses on available-for-sale securities at September 30, 2022 were not significant and were primarily due to changes in interest rates and not due to increased credit risk associated with specific securities. The Company does not intend to sell these impaired investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.

7. Inventory, net

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


	September 30,		December 31,
	2022		2021
Finished goods	$	1,428	$	1,012
Work-in-process		4,306		3,770
Raw materials		1,523		1,534
Total	$	7,257	$	6,316

The Company charged $0.5 million and $1.1 million, respectively, to cost of sales for the three and nine months ended September 30, 2022 and $1.8 million to cost of sales for the three and nine months ended September 30, 2021 to reduce the value of inventory for items that are potentially obsolete due to expiry, in excess of product demand, or to adjust costs to their net realizable value.

8. Prepaid Expenses and Other Current Assets, and Deposits and other assets

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


	September 30,		December 31,
	2022		2021
Contract manufacturing⁽¹⁾	$	4,028	$	5,036
Insurance		506		74
Clinical and Preclinical		472		142
Interest receivable		369		443
Research and development		9		39
Accounting and Audit		148		—
Rent and utilities		108		105
IT and software		21		225
Sales and Marketing		17		98
Other		36		56
Total prepaid expenses and other current assets	$	5,714	$	6,218

(1)

Includes deposits to contract manufacturers for manufacturing process.

Deposits and other assets as of September 30, 2022 and December 31, 2021, were $3.2 million and $1.1 million, respectively. As of September 30, 2022, deposits and other assets is mainly comprised of $3.1 million for our right-of-use asset related to our operating lease of 33,000 square feet of research and office space for our corporate headquarters. In June 2022, the Company extended our lease for an additional five-year term. We recorded a modification to our right-of-use asset for the right-to-use the underlying asset for the additional lease term.

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9.	Accrued Expenses, Other Current Liabilities, and Other Liabilities

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


	September 30,		December 31,
	2022		2021
Compensation and benefits	$	3,462	$	3,484
Research and development		3,417		2,145
Interest on notes payable		1,887		2,144
Sales and marketing services		155		1,962
Product warranty and replacement obligations		661		1,697
Professional and administration services		1,334		1,011
Contract manufacturing		1,675		914
Operating lease		730		904
Other		24		3
Total accrued expenses and other current liabilities	$	13,345	$	14,264

Other liabilities as of September 30, 2022 and December 31, 2021, were $2.9 million and $0.6 million, respectively. Other liabilities is comprised of the non-current portion of our operating lease liability for our corporate headquarters. In June 2022, the Company extended our lease for an additional five-year term. We recorded a modification to the lease liability upon renewal to reflect our obligation to make the additional lease payments.

The current portion of our operating lease liability is included in the line-item accrued expenses and other current liabilities on our balance sheet. As of September 30, 2022 and December 31, 2021, the current portion of the operating lease liability was $0.7 million and $0.9 million, respectively.

10.

Product Warranty Obligations

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

At each of September 30, 2022, and December 31, 2021, the warranty reserve was $0.7 million, respectively. The following table provides a reconciliation of the change in estimated warranty liabilities for the nine months ended September 30, 2022 and for the twelve months ended December 31, 2021 (in thousands):


	September 30,		December 31,
	2022		2021
Balance at beginning of the period	$	723	$	646
Provision for warranties during the period		(53)		781
Settlements made during the period		(8)		(704)
Balance at end of the period	$	662	$	723

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11.

Notes Payable, Preferred Stock and Stock Purchase Warrants

Term Loans

PPP Loan

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

Under the terms of the PPP Note and the PPP Loan, interest accrued on the outstanding principal at a rate of 1.0% per annum. The term of the PPP Note was two years. In April 2022, the Company repaid the outstanding principal and accrued interest in full.

Convertible Preferred Stock and Warrants

On November 9, 2020, the Company entered into the Equity Line Agreement with 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 Series B Preferred Stock at the Company’s request from time to time during the 24-month term of the Equity Line Agreement. Under the Equity Line Agreement, beginning January 21, 2021, subject to the satisfaction of certain conditions, including the Company having less than $8 million of cash, cash equivalents and other available credit (aside from availability under the Equity Line Agreement), the Company has the right, at sole discretion, to present Energy Capital with a Regular Purchase Notice directing Energy Capital (as principal) to purchase shares of Series B Preferred Stock at a price of $1,000 per share (not to exceed $4.0 million worth of shares) once per month, up to an aggregate of $12.0 million of the Company’s Series B Preferred Stock at the Purchase Price equal to $1,000 per share of Series B Preferred Stock, with each share of Series B Preferred Stock initially convertible into common stock, beginning six months after the date of its issuance, at a conversion price of $0.3951 per share, subject to customary anti-dilution adjustments, including in the event of any stock split. The Equity Line Agreement provides that the Company shall not affect any Regular Purchase Notice under the Equity Line Agreement on any date where the closing price of the Company’s common stock on the NYSE American is less than $0.25 without the approval of Energy Capital. In addition, beginning on January 1, 2022, since there have been no sales of the Series B Preferred Stock pursuant to the Equity Line Agreement, Energy Capital has the right, at its sole discretion, by its delivery to the Company of a Regular Purchase Notice, to purchase up to the $12.0 million of Series B Preferred Stock under the Equity Line Agreement at the Purchase Price.

The Company accounted for the Equity Line Agreement as a put/call option (the “Energy Capital Option”). This put/call option is classified as a liability in accordance with ASC 480, Distinguishing liabilities from equity, on the Company’s balance sheet and was recorded at the estimated fair value of $4.2 million upon issuance. The put/call option is required to be remeasured to fair value at each reporting period with the change recorded in change in fair value of derivatives that is a component of other income (expense). In connection with the execution of the Equity Line Agreement, the Company incurred $7.6 million in debt issuance costs in fiscal year 2020. The fair value of the Energy Capital Option as of September 30, 2022 and December 31, 2021 was $28.1 million and $69.4 million, respectively.

Concurrently with entry into the Equity Line Agreement, the Company issued a warrant to Energy Capital, exercisable beginning on May 9, 2021, to purchase up to 10,000,000 shares of common stock at an exercise price of $0.3951 per share (the “Warrant”). The Warrant was exercised on a net basis in February 2022 and Energy Capital received 8,917,535 shares of common stock upon the net exercise of the Warrants.

On August 9, 2020, the Company entered into a Stock Purchase Agreement with Masters, pursuant to which the Company issued and sold Masters 3,000 shares of Series A Preferred Stock, at a price of $1,000 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 per share in subsequent closings, subject to the terms and conditions of the Stock Purchase Agreement, as amended, through January 11, 2021. In January 2021, Masters and its assignees purchased in aggregate an additional

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22,783 shares of Series A Preferred Stock, resulting in additional gross proceeds of $22.8 million. Each share of Series A Preferred Stock was initially convertible into a number of shares of common stock equal to $1,000 divided by the conversion price of $0.476 per share, subject to customary anti-dilution adjustments, including in the event of any stock split. All 25,783 shares of Series A Preferred Stock have been converted to shares of common stock. Masters’ option to purchase the remaining unissued shares of Series A Preferred Stock expired on January 11, 2021, resulting in a gain on extinguishment of $3.5 million.

Convertible Notes

PHC Notes

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

The PHC Notes are senior secured obligations of the Company and will be guaranteed on a senior secured basis by the Company’s wholly owned subsidiary, Senseonics, Incorporated. Interest at the initial annual rate of 9.5% is payable semi-annually in cash or, at the Company’s option, payment in kind. The interest rate decreased to 8.0% in April 2022 as a result of the Company having obtained FDA approval for the 180-day Eversense E3 system for marketing in the United States. The maturity date for the PHC Notes is October 31, 2024 (the “Maturity Date”). The obligations under the PHC Notes are secured by substantially all of the Company’s and its subsidiary’s assets.

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

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

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

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The Company also has the option to sell and issue PHC up to $15.0 million of convertible preferred stock on or before December 31, 2022 (the “PHC Option”), which was initially contingent upon obtaining FDA approval for the 180-day Eversense product for marketing in the United States before such date, and which approval the Company successfully obtained in February 2022. The PHC Option represents a freestanding financial instrument and is recognized as an asset in the Company’s consolidated balance sheets at fair value on the date of issuance and subject to impairment testing in each reporting period prior to the options exercise or expiration. The Company acknowledges that while the PHC Option is subject to impairment testing, there is no explicit guidance regarding how impairment should be assessed and measured for the PHC Option. As such, the measurement alternative in ASC Topic 321, Investments—Equity Securities, for equity securities without readily determinable fair values can be applied by analogy to assess and measure impairment of the PHC Option. The Company developed an estimated fair value at September 30, 2022 and December 31, 2021 to be $0.1 million and $0.2 million, respectively, and a loss of less than $0.1 million was recognized in net income as the difference between the fair value of the investment and its carrying amount for the nine months ended September 30, 2022.

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 derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded in change in fair value of derivatives that is a component of other income (expense) in the Company’s consolidated statement of operations and comprehensive loss. The fair value of the derivative at September 30, 2022 and December 31, 2021 was $63.8 million and $149.1 million, respectively.

In connection with the issuance of the Note Purchase Agreement, the Company incurred $2.9 million in debt issuance costs and debt discounts. The associated debt issuance costs were recorded as a contra liability in the amount of $1.4 million and are deferred and amortized as additional interest expense over the term of the notes. There have been no conversions of PHC Notes since inception of the Note Purchase Agreement.

2025 Notes

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

The 2025 Notes also contained an embedded conversion option requiring bifurcation as a separate derivative liability, along with the fundamental change make-whole provision and the cash settled fundamental make-whole shares provision. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded to other income (expense) in the Company’s consolidated statement of operations and comprehensive loss. The fair value of the derivative at September 30, 2022 and December 31, 2021 was $19.9 million and $81.4 million, respectively.

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

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As of December 31, 2021, there were conversions of $6.5 million of outstanding principal amount of the 2025 notes for 4,924,998 shares of common stock. Accordingly, $3.2 million of allocated deferred issuance costs and debt discounts were recognized as a loss on extinguishment of debt as of December 31, 2021. There were no conversions of 2025 Notes during the nine months ended September 30, 2022.

2023 Notes

In the first quarter of 2018, the Company issued $53.0 million in aggregate principal amount of senior convertible notes due February 1, 2023 (the “2023 Notes”). In July 2019, the Company used the net proceeds from the issuance of the 2025 Notes to repurchase $37.0 million aggregate principal amount of the outstanding 2023 Notes. Each $1,000 of principal of the 2023 Notes is initially convertible into 294.1176 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $3.40 per share, subject to adjustment upon the occurrence of specified events. Holders may convert at any time prior to February 1, 2023. Holders who convert on or after the date that is six months after the last date of original issuance of the 2023 Notes but prior to February 1, 2021, may also be entitled to receive, under certain circumstances, an interest make-whole payment payable in shares of common stock. If specific corporate events occur prior to the maturity date, the Company will increase the conversion rate pursuant to the make-whole fundamental change provision for a holder who elects to convert their 2023 Notes in connection with such an event in certain circumstances. Additionally, if a fundamental change occurs prior to the maturity date, holders of the 2023 Notes may require the Company to repurchase all or a portion of their 2023 Notes for cash at a repurchase price equal to 100% of the principal amount plus any accrued and unpaid interest.

The Company bifurcated the embedded conversion option, along with the interest make-whole provision and make-whole fundamental change provision, and in January 2018 recorded the embedded features as a debt discount and derivative liability in the Company’s consolidated balance sheets at its initial fair value of $17.3 million. Additionally, the Company incurred transaction costs of $2.2 million. The debt discount and transaction costs are being amortized to interest expense over the term of the 2023 Notes at an effective interest rate of 9.30%. The derivative is adjusted to fair value at each reporting period, with the change in the fair value recorded to other income (expense) in the Company’s consolidated statement of operations and comprehensive loss. The fair value of the derivative at September 30, 2022 and December 31, 2021 was $0.3 million and $5.8 million, respectively.

There were no conversions of 2023 Notes during the nine months ended September 30, 2022. As the 2023 Notes have a maturity date of February 1, 2023, they are classified as other current liability on the Company’s consolidated balance sheet at September 30, 2022.

The following carrying amounts were outstanding under the Company’s notes payable as of September 30, 2022 and December 31, 2021 (in thousands):


	September 30, 2022
	Principal ($)	Debt Discount ($)	Issuance Costs ($)	Carrying Amount ($)
2023 Notes	15,700	(477)	-	15,223
2025 Notes