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 June 30, ~~2017~~2018

☐ 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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ☒☐ (Do not check if a smaller reporting company)

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 ~~123,201,541~~176,026,760 shares of common stock, par value $0.001, outstanding as of August ~~8, 2017.~~7, 2018.

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PART I: Financial Information

ITEM 1:Financial Statements

Condensed Consolidated Balance Sheets as of June 30, ~~2017~~2018 (Unaudited) and December 31, ~~2016~~2017	2
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017	3
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, ~~2017~~2018 and ~~2016~~2017	4
Notes to Unaudited Condensed Consolidated Financial Statements	5

ITEM 2:Management Discussion and Analysis of Financial Condition and Results of Operations	1719

ITEM 3:Quantitative and Qualitative Disclosures about Market Risk	2830

ITEM 4:Controls and Procedures	2830

~~PART II Other Information~~

ITEM 1:Legal Proceedings	2931

ITEM 1A:Risk Factors	2931

ITEM 2:Unregistered Sales of Equity and Securities and Use of Proceeds	32

ITEM 3:Defaults Upon Senior Securities	3332

ITEM 4:Mine Safety Disclosures	3332

ITEM 5:Other Information	3332

ITEM 6:Exhibits	33

SIGNATURES	34
~~Exhibit Index~~

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Senseonics Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


					June 30,		December 31,
	June 30,		December 31,		2018		2017
	2017		2016
	(unaudited)				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	33,458	$	13,047	$	183,928	$	16,150
Marketable securities		7,972		7,291		7,954		20,300
Accounts receivable		800		251
Accounts receivable, primarily from a related party						2,988		3,382
Inventory, net		3,383		477		8,400		2,991
Prepaid expenses and other current assets		562		365		4,195		2,092
Total current assets		46,175		21,431		207,465		44,915

Deposits and other assets		141		105		205		176
Property and equipment, net		839		735		998		853
Total assets	$	47,155	$	22,271	$	208,668	$	45,944

Liabilities and Stockholders’ Equity (Deficit)
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,982	$	3,070	$	5,172	$	7,712
Accrued expenses and other current liabilities		7,262		4,666		9,863		5,428
Notes payable, current portion		5,000		3,889		10,000		10,000
Total current liabilities		15,244		11,625		25,035		23,140

Notes payable, net of discount		19,188		15,177		9,619		14,414
Accrued interest		631		273
Convertible senior notes, net of discount						34,469		—
Derivative liability						32,312		—
Notes payable, accrued interest						1,444		1,054
Other liabilities		64		73		73		69
Total liabilities		35,127		27,148		102,952		38,677

Commitments and contingencies (Note 7)
Commitments and contingencies (Note 8)

Stockholders’ equity (deficit):
Common stock, $0.001 par value per share; 250,000,000 shares authorized, 123,186,466 and 93,569,642 shares issued and outstanding as of June 30, 2017 and December 31, 2016		123		94
Stockholders’ equity:
Common stock, $0.001 par value per share; 450,000,000 and 250,000,000 shares authorized, 175,897,790 and 136,882,735 shares issued and outstanding as of June 30, 2018 and December 31, 2017						177		137
Additional paid-in capital		242,074		199,751		424,131		270,953
Accumulated deficit		(230,169)		(204,722)		(318,592)		(263,823)
Total stockholders' equity (deficit)		12,028		(4,877)
Total liabilities and stockholders’ equity (deficit)	$	47,155	$	22,271
Total stockholders' equity						105,716		7,267
Total liabilities and stockholders’ equity					$	208,668	$	45,944

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

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Senseonics Holdings, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Revenue	$	814	$	19	$	1,367	$	19
Revenue, primarily from a related party									$	3,623	$	814	$	6,569	$	1,367
Cost of sales		1,714		34		2,759		34		3,839		1,714		7,147		2,759
Gross profit		(900)		(15)		(1,392)		(15)		(216)		(900)		(578)		(1,392)

Expenses:
Sales and marketing expenses		1,249		635		2,389		1,268		6,177		1,249		9,618		2,389
Research and development expenses		5,604		7,539		12,602		13,955		8,289		5,604		16,402		12,602
General and administrative expenses		3,888		3,361		7,655		7,241		5,382		3,888		9,393		7,655

Operating loss		(11,641)		(11,550)		(24,038)		(22,479)		(20,064)		(11,641)		(35,991)		(24,038)
Other income (expense), net:
Interest income		37		31		58		34		241		37		425		58
Interest expense		(767)		(268)		(1,451)		(544)		(2,236)		(767)		(4,007)		(1,451)
Change in fair value of 2023 derivative										(10,166)		—		(15,013)		—
Other expense		(3)		(74)		(16)		(89)		(271)		(3)		(183)		(16)
Total other expense, net										(12,432)		(733)		(18,778)		(1,409)

Net loss		(12,374)		(11,861)		(25,447)		(23,078)		(32,496)		(12,374)		(54,769)		(25,447)
Total comprehensive loss	$	(12,374)	$	(11,861)	$	(25,447)	$	(23,078)	$	(32,496)	$	(12,374)	$	(54,769)	$	(25,447)

Basic and diluted net loss per common share	$	(0.12)	$	(0.13)	$	(0.26)	$	(0.27)	$	(0.23)	$	(0.12)	$	(0.40)	$	(0.26)
Basic and diluted weighted-average shares outstanding		103,689,994		92,742,097		98,825,088		85,033,493		138,767,873		103,689,994		137,923,135		98,825,088

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)


	Six Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2018		2017
Cash flows from operating activities
Net loss	$	(25,447)	$	(23,078)	$	(54,769)	$	(25,447)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		92		63		104		92
Non-cash interest expense (debt discount and deferred costs)		226		17		1,519		226
Change in fair value of warrants		—		304
Change in fair value of derivative liability						15,012		—
Stock-based compensation expense		1,719		1,154		3,058		1,719
Provision for lower of cost or net realizable value		263		—		202		263
Net realized gain on marketable securities						(69)		—
Changes in assets and liabilities:
Accounts receivable		(549)		—		394		(549)
Prepaid expenses and other current assets		(197)		114		(2,103)		(197)
Inventory		(3,169)		(324)		(5,611)		(3,169)
Deposits and other assets		(36)		68		(76)		(36)
Accounts payable		(88)		3,839		(2,540)		(88)
Accrued expenses and other current liabilities		2,616		781		4,118		2,616
Accrued interest		358		(327)		390		358
Deferred rent		11		12		4		11
Net cash used in operating activities		(24,201)		(17,377)		(40,367)		(24,201)
Cash flows from investing activities
Capital expenditures		(196)		(362)		(176)		(196)
Purchases of marketable securities		(7,981)		—		(7,935)		(7,981)
Sales and maturities of marketable securities		7,300		—		20,350		7,300
Net cash used in investing activities		(877)		(362)
Net cash provided by (used in) investing activities						12,239		(877)
Cash flows from financing activities
Proceeds from issuance of common stock, net of issuance costs		40,343		45,738		149,379		40,343
Proceeds from exercise of stock options		186		36		813		186
Proceeds from notes payable, net of costs		4,896		17,500		—		4,896
Proceeds from issuance of warrants		104		—		—		104
Repayments of notes payable		—		(13,284)
Proceeds from convertible senior notes, net of costs						50,734		—
Principal payments of notes payable						(5,000)		—
Principal payments under capital lease obligations		(40)		—		(20)		(40)
Net cash provided by financing activities		45,489		49,990		195,906		45,489
Net increase in cash and cash equivalents		20,411		32,251		167,778		20,411
Cash and cash equivalents, at beginning of period		13,047		3,939		16,150		13,047
Cash and cash equivalents, at end of period	$	33,458	$	36,190	$	183,928	$	33,458

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	811	$	347	$	954	$	811

Supplemental disclosure of non-cash investing and financing activities
Common stock offering costs incurred					$	282	$	—
Convertible debt offering costs incurred					$	29	$	—
Capital expenditures					$	73	$	—

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

Senseonics Holdings, Inc. ~~(the “Company”)~~, a Delaware corporation, is a medical technology company focused on the ~~design,~~ development and commercialization of glucose monitoring products to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy.

ASN Technologies, Inc. (“ASN”) was incorporated in Nevada on June 26, 2014. On December 4, 2015, ASN reincorporated in Delaware and changed its name to Senseonics Holdings, Inc. On December 7, 2015, Senseonics Holdings, Inc. acquired 100% of the outstanding capital stock of Senseonics, Incorporated (the "Acquisition"). Senseonics, Incorporated was originally incorporated on October 30, 1996 and commenced operations on January 15, 1997. Senseonics Holdings, Inc. and its wholly-owned subsidiary Senseonics, Incorporated are hereinafter referred to as the “Company” unless the context requires otherwise.

2.Liquidity

The Company’s operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, lack of operating history and uncertainty of future profitability. Since inception, the Company has incurred substantial operating losses, principally from expenses associated with the Company’s research and development programs. The Company has not generated significant revenues from the sale of products and its ability to generate revenue and achieve profitability largely depends on the Company’s ability, alone or with others, to complete the development of its products or product candidates, and to obtain necessary regulatory approvals for the manufacture, marketing and sales of those products. These activities ~~including planned significant research and development efforts,~~ will require significant uses of working capital through the remainder of ~~2017~~2018 and beyond.

On March 23, 2016, the Company effected the initial closing of its public offering of 15,800,000 shares of its common stock at a price to the public of $2.85 per share (the “March 2016 Offering”). ~~Additionally, the Company closed on the partial exercise of the underwriters’ option to purchase additional shares on April 5, 2016.~~ The Company received aggregate net proceeds from the March 2016 Offering, including proceeds from the underwriters’ subsequent partial exercise of their option to purchase additional shares, of $44.8 million. On June 30, 2016, the Company entered into Amended and Restated Loan and Security Agreement with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) ~~to potentially borrow up to~~resulting in borrowings of an aggregate principal amount of ~~$30.0~~$25.0 million. On June 1, 2017, the Company effected the closing of its offering of 29,078,014 shares of its common stock at a price of $1.41 per share (the “May 2017 Offering”). The Company received aggregate net proceeds from the May 2017 Offering of $40.4 million. On August 23, 2017, the Company effected the closing of its offering of 13,383,125 shares of its common stock at a price of $2.15 per share (the “August 2017 Offering”). The Company received aggregate net proceeds from the August 2017 Offering of $26.5 million. In January 2018, the Company issued $50.0 million in aggregate principal amount of convertible senior subordinated notes, and in February 2018, the Company issued an additional $3.0 million in aggregate principal amount of convertible senior subordinated notes (collectively, the “2023 Notes”) upon the partial exercise of the underwriters’ over-allotment option. On June 28, 2018, the Company effected the closing of its offering of 38,076,561 shares of its common stock at a price of $3.93 per share (the “June 2018 Offering”). The Company received aggregate net proceeds from the June 2018 Offering of $149.1 million. Management has concluded that, based on the Company’s current operating plans, its existing cash, cash equivalents, and marketable securities available for sale will be sufficient to meet the Company’s anticipated operating needs ~~into the second quarter of 2018.~~through 2020. Accordingly, ~~since~~ management has concluded that the ~~Company does not have sufficient funds to support operations through August 2018, the Company believes that~~ doubt about the Company’s ability to continue as a going concern ~~exists.~~through March 31, 2019 that existed at May 10, 2018 has been alleviated.

Historically, the Company has financed its operating activities through the sale of equity and equity linked securities and the issuance of debt. Although the Company began generating revenue from product sales of Eversense, its continuous glucose monitoring system, in June 2016, the Company does not expect product revenues to be sufficient to satisfy its operating needs for several years, if ever. Accordingly, theThe Company plans to continue financing its operations with external capital for the foreseeable future. However, the Company may not be able to raise additional funds on acceptable terms, or at all. If the

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Company is unable to secure sufficient capital to fund its research and development and other operating activities, the Company may be required to delay or suspend operations, enter into collaboration agreements with partners that could require the Company to share commercial rights to its products to a greater extent or at earlier stages in the product development process than is currently intended, merge or consolidate with other entities, or liquidate.

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3.Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the Company’s opinion, the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly its financial position, results of operations, and cash flows. The consolidated balance sheet at December 31, ~~2016,~~2017, has been derived from audited financial statements as of that date. The interim condensed consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the U.S. Securities and Exchange Commission (“SEC”). The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim condensed consolidated financial statements are read in conjunction with the audited financial statements and notes previously included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

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 revenues and expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but not limited to, inventory valuation, inputs used to value stock-based compensation, recoverability of long-lived assets, ~~deferred~~fair value of financial instruments, income taxes, ~~and valuation allowances,~~ depreciable lives of property and equipment, reserves for expected warranty costs, and estimated accruals for clinical and preclinical study costs, which are accrued based on estimates of work performed under contracts. Actual results could differ from those estimates; however management does not believe that such differences would be material.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete financial 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. The Company views its operations and manages its business in one segment, glucose monitoring products.

Comprehensive Loss

Comprehensive loss comprises net loss and other changes in equity that are excluded from net loss. For the three and six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, 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

The Company considers highly liquid investments with 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.

The Company’s cash and cash equivalents potentially subject the Company to credit and liquidity risk. The Company maintains cash deposits at major financial institutions with high credit quality and, at times, the balances of those deposits may exceed the Federal Deposit Insurance Corporation limits of $250,000. The Company has not

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experienced and does not anticipate any losses on deposits with commercial banks and financial institutions that exceed the federally insured amounts.

Concentration of Revenues and Customers

At any given time, the Company’s trade receivables are concentrated among a small number of principal customers. If any of the Company’s customers fail to pay their obligations under the terms of these financial instruments, the Company’s maximum exposure to potential losses would be equal to amounts reported on its consolidated balance sheets.

During the three and six months ended June 2018 and 2017, the Company derived substantially all of its revenue from two customers. Total revenues from those customers was as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Roche Diabetes Care (related party)	$	3,070	$	698	$	5,638	$	1,163
Rubin Medical	$	529	$	116	$	897	$	204

Marketable Securities

Marketable securities consist of government and agency securities and corporate debt 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

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using the specific identification method. The Company classifies all available-for-sale marketable securities with maturities greater than one year from the balance sheet date as non-current assets.

Inventory

Inventory is valued at the lower of cost or ~~market (net~~net realizable ~~value).~~value. Cost is determined using the standard cost method that approximates first in, first out. The Company periodically reviews inventory to determine if a ~~write down~~write-down is necessary for inventory that has become obsolete, inventory that has a cost basis less than net realizable value, and inventory in excess of future demand taking into consideration the product shelf life.

Accounts Receivable

The Company grants credit to various customers in the normal course of business. Accounts receivable consist of amounts due from distributors. The Company records 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.

Property and Equipment

Property and equipment are stated at ~~historical cost and depreciated on a~~cost. Depreciation is computed by use of the straight-line ~~basis~~method over the estimated useful lives ~~generally~~of the assets, which is between three to five ~~years. Equipment under capital leases is depreciated on a straight-line basis over the lesser of its estimated useful life or the lease term. Leasehold improvements are depreciated over~~years for laboratory equipment, between five to seven years for office furniture and equipment, and the shorter of ~~the remaining~~ lease term or useful ~~lives of the assets.~~life for leasehold improvements. 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 ~~statements~~statement of ~~operations and comprehensive loss.~~operations.

Management reviews property and equipment for impairment whenever events or changes in circumstances

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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 did not identify any indicators of impairment through June 30, ~~2017.~~2018.

Derivative Financial Instruments

In connection with the Company’s issuance of 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. The financial instrument is remeasured at the end of each reporting period with changes in fair value recorded in the consolidated statements of operations in other income (expense) as change in fair value of 2023 derivative.

Warranty Reserve

The Company ~~generally provides a warranty on Eversense to end user customers and~~ may replace Eversense system components that do not function in accordance with the product specifications. Estimated ~~warranty~~replacement costs associated with a product are recorded at the time of shipment. The Company estimates future ~~warranty~~replacement costs by analyzing historical ~~warranty~~replacement experience for the timing and amount of returned product, and the Company evaluates the reserve quarterly and makes adjustments when appropriate.

Revenue Recognition

Effective January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, using the full retrospective transition method. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is ~~generated~~probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company generates product revenue from sales of ~~sensor kits, transmitter kits,~~the Eversense system and related components and supplies ~~under agreements for~~at a fixed price to third-party distributors ~~that~~(the “Customers”) who resell the ~~product~~products to ~~customers.~~health care providers and patients in the European Union. The Company is paid for its sales directly ~~by third-party distributors,~~to the Customers, regardless of whether or not the ~~distributors~~Customers resell the products to ~~their customers.~~health care providers and patients.

Revenues from product sales are recognized when the Customers obtain control of the Company’s product, which occurs at a point in time, based upon the delivery terms as defined in the distributor agreement. The Company is typically paid within 60 days of invoicing subsequent to the Customers obtaining control of the Company’s product.

The Company ~~recognizes~~offers no discounts, rebates, rights of return, or other allowances to the Customers which would result in the establishment of reserves against product ~~sales revenue when all of~~revenue. Additionally, to date, the ~~following criteria are met:~~Company has not incurred incremental costs in obtaining a Customer contract.

~~persuasive evidence of an arrangement exists;~~

~~delivery has occurred;~~

~~the price is fixed or determinable; and~~

~~collectability is reasonably assured.~~

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Cost of Sales

The Company ~~offers no rights~~uses third-party contract manufacturers to manufacture Eversense and related components and supplies. Cost of ~~return~~sales includes raw materials, contract manufacturing service fees, reserves for expected warranty costs, reserves for inventory valuation, scrap, and ~~has no significant post-delivery obligations~~shipping and ~~therefore,~~handling expenses associated with product delivery.

Shipping and Handling Expenses

Shipping and handling expenses associated with product delivery are included within cost of sales in the ~~above criteria are generally met as products are shipped to, or received by, third-party distributors.~~Company’s consolidated statements of operations.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development expenses include costs related to employee compensation, preclinical studies and clinical trials, supplies, outsource testing, consulting and depreciation and other facilities‑related expenses.

Stock‑Based Compensation

The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options, 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 for each separately vesting portion of the award for those awards with service conditions only. For awards that also contain performance conditions, expense is recognized beginning at the time the performance condition is considered probable of being met over the remaining vesting period. The Company accounts for forfeitures in the period in which they occur.

The Company uses the Black‑Scholes option pricing 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.

Under ~~Accounting Standards Codification (“ASC”)~~ASC Topic 718, the cumulative amount of compensation cost recognized for instruments classified as equity that ordinarily would result in a future tax deduction under existing tax law shall be considered to be a deductible difference in applying ASC Topic 740, Income Taxes. The deductible temporary difference is based on the compensation cost recognized for financial reporting purposes; however, these provisions currently do not impact the Company, as all the deferred tax assets have a full valuation allowance.

Since the Company had net operating loss (“NOL”) carryforwards as of June 30, ~~2017,~~2018, no excess tax benefits for the tax deductions related to stock-based awards were recognized in the statements of operations and comprehensive loss.

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

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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 did not have any amounts accrued relating to interest and penalties as of June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

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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 NOLs and research and development credit carryforwards that may be used in future years are still subject to adjustment.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of their short maturities. ~~Based on the borrowing rates currently available for loans with similar terms, the Company believes that the~~The Company’s term notes and 2023 Notes are recorded at historical cost, net of discounts, and are not remeasured at fair ~~value of its long-term notes payable approximates its carrying~~ value.

Net Loss per Share

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

For periods of net loss, diluted net loss per share is calculated similarly to basic loss per share because the impact of all potential ~~dilutive~~ common shares is ~~anti‑dilutive. The~~anti-dilutive. At June 30, 2018 and 2017, the total number of ~~anti‑dilutive~~anti-dilutive shares, consisting of common stock options, stock purchase warrants, and the 2023 Notes using the if-converted method, which have been excluded from the computation of diluted loss per share, ~~was 15,348,333 and 11,354,147 common stock options and 4,570,902~~ ~~and 5,127,176~~ ~~stock purchase warrants exercisable for common stock~~were as ~~of June 30, 2017 and 2016, respectively.~~follows:


	June 30,
	2018	2017
Stock-based awards	21,305,247	15,348,333
2023 Notes	15,499,998	—
Warrants	4,082,544	4,570,902
Total anti-dilutive shares outstanding	40,887,789	19,919,235

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 and stock purchase warrants using the treasury stock method, and the 2023 Notes using the if-converted method.

Recent Accounting Pronouncements

Recently Adopted

In ~~July 2015,~~May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting ~~Standard~~Standards Update (“ASU”) ~~2015-11,~~2014-09, which ~~requires~~amends the guidance for accounting for revenue from contracts with customers. This ASU supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and creates a new ASC Topic 606, Revenue from Contracts with Customers. In 2015 and 2016, the FASB issued additional ASUs related to ASC Topic 606 that ~~inventory accounted for under~~delayed the ~~first-in, first-out or average cost methods be measured at~~effective date of the ~~lower~~guidance and clarified various aspects of ~~cost~~the new revenue guidance, including principal versus agent considerations, identifying performance obligations, and ~~net realizable value, where net realizable value represents the estimated selling price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal,~~licensing, and ~~transportation.~~they include other improvements and practical expedients. The Company adopted this new standard on January 1, 2018 using the ~~guidance in the first quarter of fiscal year 2017.~~full retrospective transition method. The adoption of ~~this guidance~~the new standard did not ~~have a material~~materially impact onthe amounts reported in the Company’s consolidated financial ~~statements.~~statements and there were no other significant changes impacting the timing or measurement of revenues or the Company’s business process and controls.

~~Not Yet Adopted~~

In May 2014, the FASB issued ASU 2014-09, guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue arising from contracts with customers. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. In March 2016, the FASB issued guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross rather than net, with the same deferred effective date. In April 2016, the FASB issued guidance to clarify the implementation guidance on identifying performance obligations and the accounting for licenses of intellectual property, with the same deferred effective date. In May 2016, the FASB issued guidance rescinding SEC paragraphs related to revenue recognition, pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting. In May 2016, the FASB also issued guidance to clarify the implementation guidance on assessing collectability, presentation of sales tax, noncash consideration, and contracts and

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contract modifications at transition, with the same effective date. The Company plans to adopt the guidance on January 1, 2018 using the full retrospective method. The Company expects the adoption of the guidance to have an immaterial impact to its consolidated financial statements based on its current revenue model.

In August 2016, the FASB issued ASU ~~2016-015,~~2016-15, guidance on the classification of certain cash receipts and cash payments in the statements of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The guidance must beCompany adopted this new standard on January 1, 2018 on a retrospective ~~basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable.~~basis. The ~~Company is currently evaluating~~adoption of the new standard did not impact ~~of adopting~~ the ~~guidance will have on its~~amounts reported in the Company’s consolidated statements of cash flows.

Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, guidance for accounting for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing arrangements. In July 2018, the FASB issued ASU 2018-11 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. The guidance is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. The Company plans to adopt the guidance on January 1, 2019. The Company is in the process of reviewing of its lease agreements and evaluating the impact of the lease guidance on the Company’s consolidated financial statements. The Company anticipates recording additional assets and corresponding liabilities on its consolidated balances sheets related to operating leases within its lease portfolio upon adoption of the guidance.

The Company has evaluated all other issued unadopted Accounting Standards Updates and believes the adoption of these standards will not have a material impact on its consolidated statements of earnings, balance sheets, or cash flows.

4. Marketable Securities

Marketable securities available for sale, consisting of government and agency securities and corporate debt securities, were as follows (in thousands):

June 30, 2017

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Market

Cost

Gains

Losses

Value

Corporate debt securities

$
7,972

$
—

$
—

$
7,972


	June 30, 2018
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
Corporate debt securities	$	7,954	$	—	$	—	$	7,954
Total	$	7,954	$	—	$	—	$	7,954


	December 31, 2016								December 31, 2017
			Gross		Gross		Estimated				Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market		Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
Government and agency securities	$	1,201	$	—	$	—	$	1,201	$	5,990	$	—	$	—	$	5,990
Corporate debt securities		6,090		—		—		6,090		14,310		—		—		14,310
Total	$	7,291	$	—	$	—	$	7,291	$	20,300	$	—	$	—	$	20,300

5. Inventory, net

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


	June 30,		December 31,		June 30,		December 31,
	2017		2016		2018		2017
Finished goods	$	746	$	477	$	401	$	375
Work in-process		2,699		—
Work-in-process						7,065		2,150
Raw materials		201		—		934		466
Reserve for lower of cost or net realizable value		(263)		—
Total	$	3,383	$	477	$	8,400	$	2,991

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6. Prepaid Expenses and Other Current Assets

~~6.Accrued~~Prepaid expenses and other current assets consisted of the following (in thousands):


	June 30,		December 31,
	2018		2017
Contract manufacturing	$	2,920	$	1,601
Clinical and preclinical		37		35
Marketing		594		93
Software		150		214
Insurance		199		77
Other		295		72
Total prepaid expenses and other current assets	$	4,195	$	2,092

7.Accrued Expenses and Other Current Liabilities

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


	June 30,		December 31,		June 30,		December 31,
	2017		2016		2018		2017
Clinical and preclinical	$	389	$	500
Contract manufacturing		2,480		1,328	$	3,439	$	1,209
Compensation and benefits		1,105		1,774		2,376		2,209
Product warranty						403		813
Legal		603		314		577		627
Interest on notes payable and 2023 Notes						1,302		180
Audit and tax related		218		320		373		315
Clinical and preclinical						159		55
Other		297		244		1,234		20
Total accrued expenses		5,092		4,480
Accrued purchases		1,671		—
Equipment lease, current portion		60		79
Compensation and benefits		33		29
Product warranty		406		78
Total accrued expenses and other current liabilities	$	7,262	$	4,666	$	9,863	$	5,428

~~7.Commitments~~8.Commitments and Contingencies

The Company leases approximately ~~32,000~~33,000 square feet of research and office space under a non‑cancelable operating lease expiring in 2023. The Company has an option to renew the lease for one additional five‑year term. Additionally, the Company leases approximately 12,000 square feet of office space under a cancelable operating lease expiring in December 2018. The Company can terminate the lease agreement upon 60 days’ prior written notice. The Company has an option to renew the lease for three additional two-month terms. Expense recognition is based upon a straight‑line basis and was ~~$155,884 and $130,699~~$0.2 million for each of the three months ended June 30, 2018 and 2017 and ~~2016, respectively, and $311,768 and $227,224~~$0.3 million for each of the six months ended June 30, ~~2017~~2018 and ~~2016, respectively.~~2017.

On March 31, 2016, the Company amended a corporate development agreement with a supplier to include a minimum purchase commitment per year. Total research and development expense related to the minimum payment was ~~$467,746~~$0.2 million and ~~$141,000~~$0.5 million for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$525,621~~$0.5 million and ~~$253,890~~$0.6 million for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. There were approximately ~~$1.8~~$0.6 million of future minimum payments under this commitment at June 30, ~~2017.~~2018.

89.401(k) Plan

The Company has a defined contribution 401(k) plan available to all full-time employees. Employee contributions are voluntary and are determined on an individual basis subject to the maximum allowable under federal income tax regulations. Participants are fully vested in their contributions. There have been no employer contributions to

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this plan. Administrative expenses for the plan, which are paid by the Company, were not material in the three ~~and~~or six months ended June 30, 2018 or 2017.

~~9.Notes~~10.Notes Payable

Convertible Senior Notes

In January 2018, the Company issued $50.0 million in aggregate principal amount of the 2023 Notes. In February 2018, the Company issued an additional $3.0 million in aggregate principal amount of the 2023 Notes, pursuant to the partial exercise of the overallotment option by the underwriter. The net proceeds from the issuance of the 2023 Notes, after deducting transaction costs, were $50.7 million. The 2023 Notes are general, unsecured, senior subordinated obligations of the Company. The Company pays interest semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2018. As the 2023 Notes have a maturity date of February 1, 2023, they are classified as a long-term liability on the Company’s consolidated balance sheet at June 30, 2018.

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 would 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.

In accordance with GAAP relating to embedded conversion features, 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 conversion option 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, embedded conversion option 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 liability will be remeasured at each reporting period with changes in fair value recorded in the consolidated statements of operations in other income (expense).

In the second quarter of 2018, the Company issued 73,529 shares of common stock upon the conversion of $250,000 in aggregate principal amount of the 2023 Notes.

Term Notes Payable

On June 30, 2016, the Company entered into an Amended and Restated Loan and Security Agreement with Oxford and SVB (the “Lenders”). Pursuant to the Amended and Restated Loan and Security Agreement, the Company ~~may potentially borrow up to~~has borrowed an aggregate principal amount of ~~$30.0~~$25.0 million in the following ~~four~~three tranches: $15.0 million (“Tranche 1 Term Loan”); $5.0 million (“Tranche 2 Term Loan”); ~~$5.0 million (“Tranche 3 Term Loan”);~~ and $5.0 million (“Tranche 43 Term Loan”) (each, a “Term Loan,” and collectively, the “Term Loans”). The funding conditions for the Tranche 1 Term Loan were satisfied as of June 30, 2016. Therefore, the Company issued secured notes to the Lenders for aggregate gross proceeds of $15.0 million (the “Notes”) on June 30, 2016. The Company used approximately $11.0 million from the proceeds from the Notes to repay the outstanding balance under the Company’s

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previously existing Loan and Security Agreement with ~~Oxford, dated as of July 31, 2014, including the applicable final payment fee due thereunder of $1 million.~~Oxford. The Company borrowed the Tranche 2 Term Loan in November 2016 upon the Lenders’ confirmation that the Company received positive data in its U.S. pivotal trial of Eversense, and the Company submitted a pre-market approval (“PMA”) application for Eversense in the United States with the FDA. The Company borrowed the Tranche 3 Term Loan in March 2017 upon completion of the first commercial sale of its second-generation transmitter in the European Union. ~~The Company may borrow the Tranche 4 Term Loan on or before December 31, 2017 if it receives PMA approval from the FDA for Eversense, and achieves trailing six-month revenue for the applicable period~~

Table of ~~measurement of at least $4.0 million.~~ Contents

The maturity date for all Term Loans is June 1, 2020 (the “Maturity Date”).

The Term Loans bear interest at a floating annual rate of 6.31% plus the greater of (i) 90-day U.S. Dollar LIBOR reported in the Wall Street Journal or (ii) 0.64%, provided that the minimum floor interest rate is 6.95%, and require monthly payments. The monthly payments initially ~~consist~~consisted of ~~interest-only. After 18 months,~~interest-only through December 31, 2017. In January 2018, the Company began to make monthly principal payments that will ~~convert to payments of principal and monthly accrued interest, with~~continue until the ~~principal amount being amortized over the ensuing 30 months.~~Maturity Date.

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

The Amended and Restated Loan and Security Agreement contains customary events of default, including bankruptcy, the failure to make payments when due, the occurrence of a material impairment on the Lenders’ security interest over the collateral, a material adverse change, the occurrence of a default under certain other agreements entered into by the Company, the rendering of certain types of judgments against the Company, the revocation of certain government approvals of the Company, violation of covenants, and incorrectness of representations and warranties in any material respect. Upon the occurrence of an event of default, subject to specified cure periods, all amounts owed by the Company would begin to bear interest at a rate that is 5.00% above the rate effective immediately before the event of default, and may be declared immediately due and payable by Lenders.

Pursuant to the Amended and Restated Loan and Security Agreement, the Company also issued 10-year stock purchase warrants to purchase an aggregate of 116,581, 63,025 and 80,645 shares of common stock at an exercise price of $3.86, $2.38 and $1.86 per share, respectively (see Note ~~10)~~11, “Stockholders’ Equity”).

The Notes are collateralized by all of the Company’s consolidated ~~assets other than its intellectual property.~~assets. The Notes also contain certain restrictive covenants that limit the Company’s ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions, as well as financial reporting requirements. The Company incurred issuance costs related to the Notes of approximately ~~$568,648~~$0.6 million that are being amortized as additional interest expense over the term of the Notes using the effective interest method. The fair value of the stock purchase warrants, which was estimated to be ~~$526,209,~~$0.5 million, was recorded as a discount to the Notes, which is also being amortized as additional interest expense over the term of the Notes using the effective interest method.

At maturity (or earlier prepayment), the Company is also required to make a final payment equal to 9.00% of the aggregate principal balances of the funded Term Loans. This fee is being accrued as additional interest expense over the term of the Notes using the effective interest method. InAt June 30, 2018 and December 31, 2017, the ~~event that~~final payment fee accrual was $1.4 million and $1.1 million, respectively.

The following are the ~~Company achieves the requirements to borrow the Tranche 4 Term Loan, and elects not to borrow the Tranche 4 Term Loan, the Company is obligated to pay the Lenders a non-utilization fee of 2.00%~~scheduled maturities of the ~~undrawn amounts.~~2023 Notes and Term Loans as of June 30, 2018 (in thousands):


2018 (remaining six months)	$	5,000
2019		10,000
2020		5,000
2021		—
2022		—
After 2022		52,700
Total	$	72,700

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The ~~following are~~Company estimates the ~~scheduled maturities~~fair value of the ~~Term Loans~~term notes based on borrowing rates currently available for loans with similar terms (Level 2). The Company believes that the fair value of its term notes approximate their carrying value. The Company estimates the fair value of the 2023 Notes using commonly accepted valuation methodologies and market-risk measurements that are indirectly observable, such as ofcredit risk (Level 2). At June 30, ~~2017 (in thousands):~~2018, the fair value of the 2023 Notes, excluding the derivative liability, was $42.5 million.

2017 (remaining six months)

$
—

2018

10,000

2019

10,000

2020

5,000

Total

$
25,000

~~10.Stockholders’~~11.Stockholders’ Equity ~~(Deficit)~~

Preferred Stock

As of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company’s authorized capital stock included 5,000,000 shares of undesignated preferred stock, par value $0.001 per share. No shares of preferred stock were outstanding as of June 30, ~~2017~~2018 or December 31, ~~2016.~~2017.

Common Stock

As of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company’s authorized capital stock included 450,000,000 and 250,000,000 shares of common stock, respectively, par value $0.001 per share. The Company had ~~123,186,466~~175,897,790 and ~~93,569,642~~136,882,735 shares of common stock issued and outstanding at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

Stock Purchase Warrants

In connection with the issuance of the Notes, the Company also issued to the Lenders 10-year stock purchase warrants to purchase an aggregate of 116,581, 63,025 and 80,645 shares of common stock at an exercise price of $3.86, $2.38 and $1.86 per share, respectively. The cumulative fair value of the warrants, which the Company estimated to be ~~$526,209,~~$0.5 million, was recorded as a discount to the Notes. These warrants expire on June 30, 2026, November 22, 2026, and March 29, 2027, respectively, and are classified in equity. In connection with the Company’s original Loan and Security Agreement with Oxford in 2014, the Company issued to Oxford 10-year stock purchase warrants to purchase an aggregate of 167,570 shares of common stock at an exercise price of $1.79 per share. The fair value of the warrants, which the Company estimated to be ~~$205,150,~~$0.2 million, was recorded as a discount to the promissory notes issued to Oxford in connection with the original Loan and Security Agreement. These warrants expire on November 2, 2020, July 14, 2021 and August 19, 2021, and are classified in equity. The unamortized deferred financing fees and debt discount related to the notes rollover amount will be amortized along with the deferred financing costs and the discount created by the new issuance of the warrants over the term of the loan using the effective interest method. For each of the three and six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, the Company recorded amortization of discount of debt of ~~$58,150 and $12,683, respectively, and for the six months ended June 30, 2017 and 2016, the Company recorded amortization of discount of debt of $111,798 and $27,010, respectively,~~$0.1 million within interest expense in the accompanying statements of operations and comprehensive loss.

~~Restricted Stock Awards~~

The Company issued 398,525 shares of restricted stock to the chairman of the Company’s board of directors (the “Chairman”) in December 2015, half of which were vested upon grant and half of which vested upon the completion of the March 2016 Offering, pursuant to an agreement between the Company and the Chairman, as described in greater detail in Note 11. In June 2016, the Company issued a fully vested restricted stock award for 300,000 shares of common stock to the Chairman to settle the outstanding obligations under the agreement. The Company recognized stock-based compensation expense of $378,470 and $1.2 million in the three and six months ended June 30, 2016, respectively, related to the grant and vesting of this restricted stock. For the three and six months ended June 30, 2017, no compensation expense was recognized related to the grant or vesting of restricted stock.

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Stock‑Based Compensation

In December 2015, the Company adopted the 2015 Equity Incentive Plan (the “2015 Plan”) under which incentive stock options, ~~and~~ non-qualified stock options, and restricted stock awards may be granted to the Company’s employees and certain other persons in accordance with the 2015 Plan provisions. In connection with the March 2016 Offering, the Company’s board of directors adopted and the Company’s stockholders approved an Amended and Restated 2015 Equity Incentive Plan (the “amended and restated 2015 Plan”). The amended and restated 2015 Plan became effective as of the date of the pricing of the March 2016 Offering. The Company’s board of directors may terminate the amended and restated 2015 Plan at any time. Options granted under the amended and restated 2015 Plan expire ten years after the date of grant.

Pursuant to the amended and restated 2015 Plan, the number of shares initially reserved for issuance pursuant to equity awards was 17,251,115 shares, representing 8,000,000 shares plus up to an additional 9,251,115 shares in the event that options that were outstanding under the Company’s equity incentive plans as of February 16, 2016 expire or otherwise terminate without having been exercised (in such case, the shares not acquired will revert to and become available for issuance under the amended and restated 2015 Plan). The number of shares of the Company’s common stock reserved for issuance under the amended and restated 2015 Plan will automatically increase on January 1 of each

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year, beginning on January 1, 2017 and ending on January 1, 2026, by 3.5% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Company’s board of directors. As of June 30, ~~2017, 3,884,452~~2018, 1,906,380 shares remained available for grant under the amended and restated 2015 Plan.

On May 8, 1997, the Company adopted the 1997 Stock Option Plan (the “1997 Plan”), under which incentive stock options, ~~and~~ non‑qualified stock options, and restricted stock awards may be granted to the Company’s employees and certain other persons in accordance with the 1997 Plan provisions. Approximately ~~8,492,171~~7,844,281 shares of the Company’s common stock underlying options have vested or are expected to vest under the 1997 Plan. Upon the effectiveness of the 2015 Plan, the Company no longer grants any awards under the 1997 Plan.

The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options, 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 for each separately vesting portion of the award for those awards with service conditions only. For awards that also contain performance conditions, expense is recognized beginning at the time the performance condition is considered probable of being met over the remaining vesting period.

~~11.Related Party Transactions~~

In December 2015, the Chairman received a restricted stock award of 398,525 shares of common stock pursuant to an agreement entered into with the Company (the “December Agreement”) that superseded a pre-existing agreement. One half of the shares covered by this restricted stock award were fully vested on grant. The remainder vested in full upon the completion of the Company’s March 2016 Offering, which was the specific performance condition of the award. Additionally, as a result of the completion of the March 2016 Offering, pursuant to the December Agreement, the Chairman was entitled to receive estimated compensation in the amount of $785,000. In June 2016, the Chairman received a restricted stock award of 300,000 shares of common stock pursuant to an agreement entered into with the Company that superseded the December Agreement and satisfied the outstanding compensation obligation under the December Agreement. All of the shares covered by this restricted stock award were fully vested on date of grant.

12.Fair Value Measurements

~~Fair~~The Company applies fair value ~~is defined~~accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received ~~to sell~~from selling an asset or paid to ~~settle~~transfer a liability in an orderly transaction between market participants at the measurement date. ~~Fair value has a three level hierarchy from highest priority (Level 1) to lowest priority (Level 3).~~ ~~The fair value hierarchy reflects whether the inputs are observable from~~

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~~independent sources or rely on unobservable inputs based on the Company’s market assumptions. The three levels of~~When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use to price the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, ~~are described below~~:which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1—Quoted prices for identical assets or liabilities ~~(unadjusted)~~ in active markets.

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

Level 3—~~Unobservable inputs~~Inputs that are ~~supported by little~~generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or ~~no market activity.~~liability.

The ~~levels are not necessarily an indication~~Company classifies money market funds within Level 1 in the fair value hierarchy because the Company uses quoted prices in active markets. The Company classifies government agency securities and corporate debt securities within Level 2 in the fair value hierarchy because the Company uses pricing sources utilizing market observable inputs to determine fair value. The Company values the embedded conversion option through a Monte Carlo analysis utilizing future stock prices modeled using geometric Brownian motion; option pricing models utilizing using inputs such as the Company’s stock price, volatility of the ~~risk~~Company’s common stock and guideline public companies, dividend yield, and risk-free rate; and management assumptions concerning the likelihood of ~~liquidity associated with~~ the ~~financial assets or liabilities disclosed.~~occurrence of certain corporate events.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company has segregated its financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement ~~date in the table below. The inputs used in measuring the fair value~~date.

Table of the Company’s money market funds included in cash equivalents are considered to be Level 1 in accordance with the three-tier fair value hierarchy. The fair market values are based on period-end statements supplied by the various banks and brokers that held the majority of the funds.Contents

The following table represents the fair value hierarchy of the Company’s financial assets and liabilities measured at fair value on a recurring basis as follows (in thousands):


	June 30, 2017								June 30, 2018
	Total		Level 1		Level 2		Level 3		Total		Level 1			Level 2			Level 3
Assets
Money market funds	$	24,841	$	24,841	$	—	$	—	$	14,218		$	14,218		$	—	$	—
Corporate debt securities		15,162		—		15,162		—		7,954			—			7,954		—
Liabilities
Embedded conversion option										32,312			—			—		32,312


	December 31, 2016								December 31, 2017
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Money market funds	$	10,601	$	10,601	$	—	$	—	$	4,706	$	4,706	$	—	$	—
Government and agency securities		1,201		—		1,201		—		7,987		—		7,987		—
Corporate debt securities		6,589		—		6,589		—		17,708		—		17,708		—

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


	Embedded
	Conversion
	Option
December 31, 2017	$	—
Issuance of the 2023 Notes		17,300
Change in fair value included in other income (expense)		15,012
June 30, 2018	$	32,312

The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain financial instruments within the fair value hierarchy. The Company’s policy is to recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended June 30, 2018 and 2017. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.

Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company has no financial assets and liabilities that are measured at fair value on a non-recurring basis.

Non-Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company has no non-financial assets and liabilities that are measured at fair value on a recurring basis.

Non‑Financial Assets and Liabilities Measured at Fair Value on a Non‑Recurring Basis

The Company measures its long‑lived assets, including property and equipment, at fair value on a non‑recurring basis. These assets are recognized at fair value when they are deemed to be impaired. No such fair value impairment was recognized in the three and six months ended June 30, ~~2017 or June 30, 2016.~~2018 and 2017.

13.Income Taxes

The Company has not recorded any tax provision or benefit for the three and six months ended June 30, ~~2017~~2018 or June 30, ~~2016.~~2017. The Company has provided a valuation allowance for the full amount of its net deferred tax assets since

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realization of any future benefit from deductible temporary differences, NOL carryforwards and research and development credits is not more-likely-than-not to be realized at June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

On December 22, 2017, the Tax Cuts and Jobs Acts was enacted into law. The new legislation contains several key tax provisions that will impact the Company, including the reduction of the corporate income tax rate to 21% effective January 1, 2018. The new legislation also includes a variety of other changes, such as a one-time repatriation tax on accumulated foreign earnings, a limitation on the tax deductibility of interest expense, acceleration of business asset expensing, and reduction in the amount of executive pay that could qualify as a tax deduction, among others. The lower corporate income tax rate required the Company to remeasure its U.S. deferred tax assets and liabilities as well as reassess the realizability of its deferred tax assets and liabilities. ASC Topic 740 requires the Company to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff has issued Staff Accounting Bulletin No. 118 which allows the Company to record provisional amounts during a measurement period which is similar to the measurement period used when accounting for business combinations. While no adjustments has been made in the current period, the Company will continue to assess the impact of the recently enacted tax law on its business and financial statements and will reflect the provisional impact of the tax law change in the period when such analysis is complete.

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~~14.Litigation~~

From time to time, the Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for litigation and claims when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company has evaluated claims in accordance with the accounting guidance for contingencies that it deems both probable and reasonably estimable and, accordingly, has recorded aggregate liabilities for all claims of approximately $40,000 as of December 31, 2016. These amounts are reported on the consolidated balance sheets within accrued and other liabilities and other noncurrent liabilities. This liability was settled for $43,237 on April 4, 2017. As of June 30, 2017, there were no recorded liabilities related to pending litigation, claims arising from the ordinary course of business, or other legal matters.

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

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes for the year ended December 31, ~~2016,~~2017, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on ~~February 23, 2017.~~

~~Overview~~

We were originally incorporated as ASN Technologies, Inc. in Nevada on June 26, 2014. On December 4, 2015, we were reincorporated in Delaware and changed our name to Senseonics Holdings, Inc. Also, on December 4, 2015, we entered into a merger agreement with Senseonics, Incorporated and SMSI Merger Sub, Inc., or the Merger Agreement, to acquire Senseonics, Incorporated. Senseonics, Incorporated was originally incorporated on October 30, 1996 and commenced operations on January 15, 1997. The transactions contemplated by the Merger Agreement were consummated on December 7, 2015, referred to herein as the Acquisition. Pursuant to the terms of the Merger Agreement, (i) all issued and outstanding shares of Senseonics, Incorporated's preferred stock were converted into shares of Senseonics, Incorporated common stock, $0.01 par value per share, or the Senseonics Shares, (ii) all outstanding Senseonics Shares were exchanged for 57,739,953 shares of our common stock, $0.001 par value per share, or the Company Shares, reflecting an exchange ratio of one Senseonics Share for 2.0975 Company Shares, or the Exchange Ratio, and (iii) all outstanding options and warrants to purchase Senseonics Shares, or the Senseonics Options and Senseonics Warrants, respectively, were each exchanged or replaced with options and warrants to acquire shares of our common stock, or the Company Options and Company Warrants, respectively. Accordingly, Senseonics, Incorporated became our wholly-owned subsidiary.

Following the closing of the Acquisition, the business of Senseonics, Incorporated became our sole focus and all of our operations following the closing of the Acquisition consist of the historical Senseonics, Incorporated business.March 13, 2018. Unless otherwise indicated or the context otherwise requires, all references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section to ~~"the Company,~~the "Company," "we," "our," "ours," "us" or similar terms refer to ~~(i) Senseonics, Incorporated prior to the closing of the Acquisition, and (ii)~~ Senseonics Holdings, Inc. and its subsidiaries subsequent to the closing of the Acquisition and all share and per share information in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section gives retroactive effect to the exchange of Senseonics Shares, Senseonics Options and Senseonics Warrants for Company Shares, Company Options and Company Warrants, respectively, in the Acquisition, as well as the corresponding exercise price adjustments for the such options and warrants.subsidiaries.

Overview

We are a medical technology company focused on the ~~design,~~ development and commercialization of glucose monitoring products to improve the lives of people with diabetes by enhancing their ability to manage their disease with relative ease and accuracy. Our ~~first generation~~ continuous glucose monitoring, or CGM, ~~system,~~systems, Eversense ~~is a~~and Eversense XL, are reliable,

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long‑term, implantable CGM ~~system~~systems that we have designed to continually and accurately measure glucose levels in people with diabetes for a period of up to 90 and 180 days, respectively, as compared to ~~seven~~six to fourteen days for currently available CGM systems. We believe Eversense and Eversense XL will provide people with diabetes ~~with~~ a more convenient method to monitor their glucose levels in comparison ~~with~~to the traditional method of self‑monitoring of blood glucose, or SMBG, as well as currently available CGM systems. In our ~~European~~U.S. pivotal clinical trial, we observed that Eversense measured glucose levels over 90 days with a degree of accuracy ~~comparable or~~ superior to that of ~~other~~ currently available CGM systems.

~~Corporate History~~

~~From~~ On June 21, 2018, our ~~founding~~Eversense System received approval from the U.S. Food and Drug Administration, or FDA, for marketing in ~~1996 until 2010,~~the United States and we devoted substantially all of our resources to researching various sensor technologies and platforms. Beginning in 2010, we narrowed our focus to designing, developing and refining a commercially viable glucose monitoring system. On May 10, 2016, we received regulatory approval to commercialize Eversense in Europe. In June 2016, we made our first product shipment ofhave begun distributing Eversense through our ~~distribution agreement with Rubin Medical, or Rubin. Since our inception, we have funded our activities primarily through equity~~direct sales force in the United States. Eversense and ~~debt financings.~~Eversense XL are approved for sale in Europe/Middle East and Africa (EMEA).

In March 2016, we completed a public offering of our common stock, or the March 2016 Offering, selling 15,800,000 shares of common stock at a price to the public of $2.85 per share, for aggregate gross proceeds of $45.0 million. Net cash proceeds from the March 2016 Offering were approximately $40.9 million, after deducting underwriting discounts and commissions and estimated offering-related transaction costs payable by us. In April 2016, the underwriters for the March 2016 Offering partially exercised their option to purchase additional shares of common stock, purchasing an additional 1,439,143 shares, from which we received additional net cash proceeds of approximately $3.9 million, after deducting underwriting discounts and commissions and estimated offering-related transaction costs payable by us.Recent Developments

On June ~~30, 2016~~28, 2018, we ~~entered into an Amended and Restated Loan and Security Agreement with Oxford Finance LLC, or Oxford, and Silicon Valley Bank, or SVB, to potentially borrow up to an aggregate principal amount~~effected the closing of $30.0 million. Under the terms of the agreement, we initially borrowed an aggregate of $15 million from Oxford and SVB on June 30, 2016. We used $11 million of the $15 million to retire existing loans with Oxford, including a final payment fee of $1 million. In each of November 2016 and March 2017, we borrowed an additional $5 million upon achieving certain milestones. The agreement also permits us to borrow up to an additional $5 million upon the achievement of specified milestones through the end of 2017. The agreement provides for monthly payments of interest only for a period of 18 months, followed by an amortization period of 30 months.

~~In June 2017, we completed an underwritten~~public offering of ~~our common stock, or the May 2017 Offering, selling 29,078,014~~38,076,561 shares of our common stock at a price of ~~$1.41~~$3.93 per share, ~~for~~or the June 2018 Offering. We received aggregate ~~gross proceeds of $41.0 million. Net cash~~net proceeds from the ~~May 2017~~June 2018 Offering ~~were approximately $40.4 million, after deducting underwriting discounts and commissions and estimated transaction costs payable by us.~~

We have never been profitable and our net losses were $12.4 million and $11.9 million for three months ended June 30, 2017 and 2016, respectively, and $25.4 million and $23.1 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, our accumulated deficit totaled $230.2 million, primarily as a result of expenses incurred in connection with our research and development programs and from general and administrative expenses associated with our operations. We expect to continue to incur significant expenses and increasing operations and net losses for the foreseeable future.$149.1 million.

European Development and Commercialization of Eversense

In ~~July 2015, we applied for, and in~~ May 2016, we received our CE ~~mark,~~Mark for Eversense, which allows us to market and sell Eversense in Europe. In connection with our CE Mark, we have agreed to conduct ~~post market~~post-market surveillance activities. In June 2016, we commenced commercialization of Eversense in Sweden through our exclusive distribution agreement with Rubin Medical, or Rubin, which also has the right to distribute Eversense in Norway and Denmark. Rubin markets and sells medical products for diabetes treatment in the Scandinavian ~~region, including as the exclusive Scandinavian distributor for the insulin pump manufacturer Animas Corporation.~~region.

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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 which we granted Roche the exclusive right to market, sell and distribute Eversense in Germany, Italy and the Netherlands. In November 2016, we entered into an amendment to the distribution agreement granting Roche the exclusive right to market, sell and distribute Eversense in Europe, the Middle East and Africa, excluding Sweden, Norway, Denmark, Finland and Israel. Roche is a pioneer in the development of blood glucose monitoring systems and a global leader for diabetes management systems and services. We began distributing Eversense through Roche in Germany in September 2016 and in Italy and the Netherlands in the fourth quarter of 2016. To date, we have begun distributing Eversense in an aggregate of 14 countries through Rubin and Roche.

~~We continue to expand our Eversense line of product offerings and expect to receive a~~In September 2017, we received the CE Mark for Eversense XL, which ~~will indicate~~is indicated for a sensor life toof up to 180 ~~days,~~days. Eversense XL began commercialization in Europe in the ~~third~~fourth quarter of 2017. ~~We plan~~In February 2018 we received approval to ~~begin to commercialize~~market Eversense ~~XL in Europe by the end of 2017. We are also developing Eversense Now,~~NOW, which is an application designed to remotely monitor the Eversense users’ CGM data in real time. ~~We expect to receive approval to market Eversense Now in Europe by the end of 2017.~~

United States Development and Commercialization of Eversense

In 2016, we completed our Precise II pivotal clinical trial in the United States. This trial, which was fully enrolled with 90 subjects, was conducted at eight sites in the United States. In the trial, we measured the accuracy of Eversense measurements through 90 days after insertion. We also assessed safety through 90 days after insertion or through sensor removal. In the trial, we observed a mean absolute relative difference, or MARD, of ~~8.8%~~8.5% utilizing two calibration points for Eversense across the 40-400 mg/dL range when compared to YSI blood reference values during the 90-day continuous wear period. We also observed a MARD of 9.5% utilizing one calibration point for Eversense across the 40-400 mg/dL range when compared to YSI blood reference values during the 90-day continuous wear period. Based on the data from this trial, in October 2016 we submitted a pre-market approval, or PMA, application to the FDA to market Eversense in the United ~~States. While~~States for 90-day use. On March 29, 2018, we ~~expect~~had a meeting with the FDA Clinical Chemistry and Clinical Toxicology Devices Panel, during which the panel voted that the ~~PMA process can take as long as 18 months,~~Eversense benefits outweighed the risks by a count of 8 to 0. The panel also voted 8 to 0 in favor of the safety and 8 to 0 in favor of the efficacy of Eversense. On June 21, 2018, we ~~are currently anticipating approval by the end of 2017. However, the ultimate timing of~~received PMA approval ~~is uncertain and will depend on many factors, including whether~~from the FDA ~~would require~~for the ~~review of~~ Eversense ~~by an advisory panel and~~System. We have begun distributing the related logistics of convening a panel, the degree and nature of questions raised by the FDA in its review process, and our ability to submit additional data or other information that adequately addresses questions raised by the FDA. Accordingly, we cannot guarantee the timing of receipt of PMA approval, if at all. For commercializationEversense System directly in the United States ~~we intend to distribute our product~~ through our own direct sales and marketing organization. We have received Category III CPT codes for the insertion and removal of the Eversense sensor. ~~Following PMA approval, we~~We intend to pursue a Category I CPT ~~code.~~code in the future.

Pediatric Development

On June 22, 2018, third party researchers presented data from a clinical trial evaluating the performance of Eversense XL for up to 180 days in pediatrics aged 12 and over and adults with diabetes at the American Diabetes Association's 78th Scientific Sessions. In this prospective, unblinded, single-arm, single-center trial conducted by LMC Diabetes & Endocrinology in Canada, 30 children and six adults with diabetes were evaluated on the accuracy and safety of the Eversense XL CGM System through the 180-day trial duration. When referenced against a lab analyzer, the findings demonstrated the accuracy of Eversense XL (MARD of 9.4%, 15/15% metric of 83%, and 99.6% of consensus error grid data in zones A and B). Trial participants also generally expressed an overall favorable rating of the system. No serious adverse events related to the insertion/removal of the sensor or device were reported. We believe the observations from this study could potentially help inform the design of our future pediatric clinical trials.

We have never been profitable and our net losses were $32.5 million and $12.4 million for three months ended June 30, 2018 and 2017, respectively, and $54.8 million and $25.4 million for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, our accumulated deficit totaled $318.6 million, primarily as a result of expenses incurred in connection with our research and development programs and from general and administrative expenses associated with our operations. We expect to continue to incur significant expenses and increasing operations and net losses for the foreseeable future.

We have incurred and expect to continue to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. In addition, we expect that our expenses will increase substantially as we continue the research and development of our other products and maintain, expand and protect our intellectual property portfolio and seek regulatory approvals in other jurisdictions. Furthermore, we expect to continue to incur

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additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. We will need to obtain substantial additional funding in connection with our continuing operations through public or private equity or debt financings or other sources, which may include collaborations with third parties. However, we may be unable to raise additional funds when needed on favorable terms or at all. Our failure to raise such capital as and when needed would have a material and adverse impact on our financial condition and our ability to develop and commercialize Eversense and future products and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so.

Financial Overview

Revenue

During the three and six months ended June 30, ~~2017,~~2018, we generated product revenue from sales of the Eversense and Eversense XL system in Europe pursuant to distribution agreements with Roche and Rubin, and we expect to ~~continue~~begin marketing Eversense and Eversense XL in additional ~~European~~ countries ~~during 2017.~~ throughout the remainder of 2018. We have begun distributing the Eversense System directly in the United States through our own direct sales and marketing organization. We expect our revenue from ~~European~~ product sales will increase as we ramp up our commercialization efforts through the remainder of ~~2017~~2018 and into ~~2018. In the future, subject to regulatory approval, we also intend to seek to commercialize Eversense in the United States, as well as other~~

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~~international markets.~~2019. If we fail to successfully commercialize Eversense or if we are ~~otherwise~~ unable to successfully complete the development of future generations of Eversense, our ability to generate future revenue, and our results of operations and financial position, will be adversely ~~affected~~.affected.

Cost of Sales

We utilize contract manufacturers to produce ~~Eversense.~~the Eversense system. Cost of sales consists primarily of the components of the Eversense system and assembly, as well as reserves for warranty costs. Other cost of sales includes distribution-related expenses such as logistics and shipping costs of Eversense to Roche and Rubin for distribution in various regions in Europe, the Middle East and Africa. We calculate gross margin as revenue less costs of sales divided by revenue. We expect our overall gross margin to improve over the long term, as our sales increase and we have more opportunities to spread our costs over larger production volumes. However, our gross margins may fluctuate from period to period.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and other related costs, including stock‑based compensation, for personnel who perform sales and marketing functions. Other significant costs include promotional materials and tradeshow expenses.

We anticipate that our sales and marketing expenses will increase in the future as we continue to expand our commercialization of Eversense.

Research and Development

Research and development expenses consist of expenses incurred in performing research and development activities in developing the Eversense system, including our clinical trials and feasibility studies. Research and development expenses include compensation and benefits for research and development employees including stock‑based compensation, overhead expenses, 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 costs are expensed as incurred.

We have incurred significant research and development expenses from inception, with the substantial majority of the expenses spent on the development of Eversense. We expect to continue to commit significant resources to continue to develop Eversense and future product enhancements and to conduct ongoing and future clinical trials. We expect that our overall research and development expenses will continue to increase in absolute dollars, but to decline as a percentage of total expenses as we expand the commercialization of Eversense.

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General and Administrative

General and administrative expenses consist primarily of salaries and other related costs, including stock‑based compensation, for personnel in our executive, finance, accounting, business development, and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

Our general and administrative expenses have increased, and we expect them to continue to increase in the future, as a result of operating as a public company. These increases include increased costs related to the hiring of additional personnel and increased fees to outside consultants, lawyers and accountants as well as expenses related to maintaining compliance with ~~NYSE-MKT~~NYSE American listing rules and SEC requirements, insurance, and investor relations costs. These expenses may further increase when we no longer qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, which will require us to comply with certain reporting requirements from which we are currently exempt.

Other Income (Expense), Net

Other income (expense) primarily consists of the change in the fair value of the 2023 derivative, which represents the value of the embedded conversion option within our convertible senior subordinated notes due 2023. This financial instrument is remeasured at the end of each reporting period with changes in fair value recorded in other income (expense). Interest income consists of interest earned on our cash equivalents and interest expense primarily consists of the interest expense on the secured notes, or the Notes, we issued to Oxford Finance LLC, or Oxford, in connection with our original Loan and Security Agreement in July and December 2014 and the Notes we issued to Oxford and Silicon Valley Bank, or SVB, in connection with our

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Amended and Restated Loan and Security Agreement in June 2016, November 2016 and March 2017. We refer to Oxford and SVB together as the Lenders. This interest expense primarily consists of (i) contractual interest on the Notes, (ii) amortization of debt discount related to warrants, or the warrants, that we issued to the Lenders in connection with the Notes, and (iii) the accrual into interest expense of a final payment obligation that we are required to pay to the Lenders at maturity of the Notes.

Results of Operations

Comparison of the ~~Three Months Ended~~three months ended June 30, ~~2017~~2018 and ~~2016~~2017

The following table sets forth our results of operations for the three months ended June 30, 2018 and 2017 ~~and 2016.~~(in thousands).


	Three Months Ended						Three Months Ended
	June 30,				Period-to-		June 30,				Period-to-
	2017		2016		Period Change		2018		2017		Period Change
	(in thousands)						(in thousands)
Revenue	$	814	$	19	$	795
Revenue, primarily from a related party							$	3,623	$	814	$	2,809
Cost of sales		1,714		34		1,680		3,839		1,714		2,125
Gross profit		(900)		(15)		(885)		(216)		(900)		684

Expenses:
Sales and marketing expenses		1,249		635		614		6,177		1,249		4,928
Research and development expenses		5,604		7,539		(1,935)		8,289		5,604		2,685
General and administrative expenses		3,888		3,361		527		5,382		3,888		1,494
Operating loss		(11,641)		(11,550)		(91)		(20,064)		(11,641)		(8,423)
Other income (expense), net:
Interest income		37		31		6		241		37		204
Interest expense		(767)		(268)		(499)		(2,236)		(767)		(1,469)
Change in fair value of 2023 derivative								(10,166)		—		(10,166)
Other expense		(3)		(74)		71		(271)		(3)		(268)
Total other expense, net		(733)		(311)		(422)		(12,432)		(733)		(11,699)
Net loss	$	(12,374)	$	(11,861)	$	(513)	$	(32,496)	$	(12,374)	$	(20,122)

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Revenue

Our revenue increased to $3.6 million for the three months ended June 30, 2018, compared to $0.8 million for the three months ended June 30, ~~2017, compared to $19,000 for the three months ended June 30, 2016.~~2017. This increase was due to ~~a higher number of shipments~~increased demand of Eversense tofrom Rubin and Roche for distribution in Europe during the three months ended June 30, ~~2017. We made our first shipment of Eversense to Rubin for distribution in Sweden during the three months ended June 30, 2016.~~2018.

Cost of sales

Our cost of sales increased to $3.8 million for the three months ended June 30, 2018, compared to $1.7 million for the three months ended June 30, ~~2017, compared to $34,000 for the three months ended June 30, 2016.~~2017. This increase was due to increased ~~manufacturing and distribution~~sales of Eversense to Roche and Rubin for distribution in Europe during the three months ended June 30, ~~2017. During the three months ended June 30, 2016, our cost of sales reflected the initial manufacturing and distribution of our first shipment of Eversense to Rubin for distribution in Sweden.~~2018.

Our gross profit was ~~$(0.9)~~$(0.2) million and ~~$(15,000)~~$(0.9) million for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Gross profit as a percentage of revenue, or gross margin, ~~changed to (110.6)~~was (6)% and (111)% in the three months ended June 30, 2018 and 2017, ~~from (78.9)% in the three months ended June 30, 2016 as a result of manufacturing and distribution efficiencies achieved while ramping up manufacturing to meet product demand in Europe.~~ respectively.

Sales and marketing expenses

Sales and marketing expenses were ~~$1.2~~$6.2 million for the three months ended June 30, 2018, compared to $1.3 million for the three months ended June 30, 2017, ~~compared to $0.6 million for the three months ended June 30, 2016,~~ an increase of ~~$0.6~~$4.9 million. The ~~$0.6~~$4.9 million increase was primarily

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due to a ~~$0.2~~$2.6 million increase in salaries, bonuses and payroll related costs for additional headcount, an increase in market research and ~~a $0.4~~marketing costs of $1.7 million in preparation of the U.S. launch of Eversense, and an increase of $0.6 million in other sales and general marketing expenses to support our European distribution of Eversense as well as in preparation for our U.S. launch of Eversense.

Research and development expenses

Research and development expenses were $8.3 million for the three months ended June 30, 2018, compared to $5.6 million for the three months ended June 30, 2017, ~~compared to $7.5 million for the three months ended June 30, 2016, a decrease~~an increase of ~~$1.9~~$2.7 million. The ~~decrease~~increase of ~~$1.9~~$2.7 million was primarily due to a $1.0 million ~~decrease due to the completion~~increase in salaries, bonuses and payroll related costs for additional headcount, and an increase of ~~our U.S. pivotal trial in 2016,~~$1.7 million for research and ~~a $0.9 million decrease in~~development expenses related to the development of future generations of Eversense.

General and administrative expenses

General and administrative expenses were $5.4 million for the three months ended June 30, 2018, compared to $3.9 million for the three months ended June 30, 2017, ~~compared to $3.4 million for the three months ended June 30, 2016,~~ an increase of ~~$0.5~~$1.5 million. The increase was primarily due to a ~~$0.3~~$0.9 million increase in ~~recruiting~~salaries, bonuses and ~~relocation~~payroll related costs ~~to support hiring efforts,~~for additional headcount, and ~~a $0.2~~an increase of $0.6 million ~~increase~~ in ~~information~~other general and ~~technology spending for services~~administrative costs to support our operations.

Total other expense, net

Total other expense, net, was $12.4 million for the three months ended June 30, 2018, compared to $0.7 million for the three months ended June 30, 2017, ~~and 2016~~an increase of $11.7 million. The increase was ~~$0.7~~primarily due to a $10.2 million change in fair value of the derivative liability and ~~$0.3 million, respectively, consisting primarily of~~ interest expense on our ~~debt facilities.~~Term Loans and 2023 Notes described below in “Liquidity and Capital Resources.”

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Comparison of the ~~Six Months Ended~~six months ended June 30, ~~2017~~2018 and ~~2016~~2017

The following table sets forth our results of operations for the six months ended June 30, 2018 and 2017 ~~and 2016.~~(in thousands).


	Six Months Ended						Six Months Ended
	June 30,				Period-to-		June 30,				Period-to-
	2017		2016		Period Change		2018		2017		Period Change
	(in thousands)						(unaudited)
Revenue	$	1,367	$	19	$	1,348
Revenue, primarily from a related party							$	6,569	$	1,367	$	5,202
Cost of sales		2,759		34		2,725		7,147		2,759		4,388
Gross profit		(1,392)		(15)		(1,377)		(578)		(1,392)		814

Expenses:
Sales and marketing expenses		2,389		1,268		1,121		9,618		2,389		7,229
Research and development expenses		12,602		13,955		(1,353)		16,402		12,602		3,800
General and administrative expenses		7,655		7,241		414		9,393		7,655		1,738
Operating loss		(24,038)		(22,479)		(1,559)		(35,991)		(24,038)		(11,953)
Other income (expense), net:
Interest income		58		34		24		425		58		367
Interest expense		(1,451)		(544)		(907)		(4,007)		(1,451)		(2,556)
Change in fair value of 2023 derivative								(15,013)		—		(15,013)
Other expense		(16)		(89)		73		(183)		(16)		(167)
Total other expense, net		(1,409)		(599)		(810)		(18,778)		(1,409)		(17,369)

Net loss	$	(25,447)	$	(23,078)	$	(2,369)	$	(54,769)	$	(25,447)	$	(29,322)

Revenue

Our revenue increased to $6.6 million for the six months ended June 30, 2018, compared to $1.4 million for the six months ended June 30, ~~2017, compared to $19,000 for the six months ended June 30, 2016.~~2017. This increase was due to ~~a higher number of shipments~~increased demand of Eversense tofrom Rubin and Roche for distribution in Europe during the six months ended June 30, ~~2017. We made our first shipment of Eversense to Rubin for distribution in Sweden during the six months ended June 30, 2016.~~2018.

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Cost of sales

Our cost of sales increased to $7.2 million for the six months ended June 30, 2018, compared to $2.8 million for the six months ended June 30, ~~2017, compared to $34,000 for the six months ended June 30, 2016.~~2017. This increase was due to increased ~~manufacturing and distribution~~sales of Eversense to Roche and Rubin for distribution in Europe during the ~~three~~six months ended June 30, ~~2017. During the three months ended June 30, 2016, our cost of sales reflected the initial manufacturing and distribution of our first shipment of Eversense to Rubin for distribution in Sweden.~~2018.

Our gross profit was ~~$(1.4)~~$(0.6) million and ~~$(15,000)~~$(1.4) million for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Gross profit as a percentage of revenue, or gross margin, ~~changed to (101.8)~~was (9)% and (102)% in the six months ended June 30, ~~2017 from (78.9)% in the six months ended June 30, 2016 as a result of manufacturing~~2018 and ~~distribution efficiencies achieved while ramping up manufacturing to meet product demand in Europe.~~2017.

Sales and marketing expenses

Sales and marketing expenses were $9.6 million for the six months ended June 30, 2018, compared to $2.4 million for the six months ended June 30, 2017, ~~compared~~an increase of $7.2 million. The $7.2 million increase was primarily due to ~~$1.3~~a $3.8 million increase in salaries, bonuses and payroll related costs for additional headcount, an increase in market research and marketing costs of $2.8 million in preparation of the U.S. launch of Eversense, and an increase of $0.6 million in other sales and general marketing expenses to support our European distribution of Eversense as well as in preparation for our U.S. launch of Eversense.

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Research and development expenses

Research and development expenses were $16.4 million for the six months ended June 30, ~~2016,~~2018, compared to $12.6 million for the six months ended June 30, 2017, an increase of ~~$1.1~~$3.8 million. The ~~$1.1~~increase of $3.8 million ~~increase~~ was primarily due to a ~~$0.5~~$1.7 million increase in salaries, bonuses and payroll related costs for additional headcount, and ~~a $0.6~~an increase of $2.1 million ~~increase in other sales and general marketing expenses to support European distribution of Eversense.~~

~~Research~~for research and development expenses

Research and development expenses were $12.6 million for the six months ended June 30, 2017, compared to $14.0 million for the six months ended June 30, 2016, a decrease of $1.3 million. The decrease of $1.3 million was primarily due to a decrease of $2.3 million in expenses due related to the ~~completion~~development of ~~our U.S. pivotal trial in 2016, partially offset by a $1.0 million increase in salaries, bonuses and payroll related costs for additional headcount.~~future generations of Eversense.

General and administrative expenses

General and administrative expenses were $9.4 million for the six months ended June 30, 2018, compared to $7.7 million for the six months ended June 30, 2017, ~~compared to $7.2 million for the six months ended June 30, 2016,~~ an increase of ~~$0.5~~$1.7 million. The increase was primarily due to a $1$1.2 million increase in ~~recruiting~~salaries, bonuses and ~~relocation~~payroll related costs for additional headcount, and an increase of $0.5 million in other general ~~spending~~and administrative costs to support our ~~operations, partially offset by a $0.5 million decrease in non-cash stock-based compensation expense.~~operations.

Total other expense, net

Total other expense, net, was $18.8 million for the six months ended June 30, 2018, compared to $1.4 million for the six months ended June 30, 2017, ~~and 2016~~an increase of $17.4 million. The increase was ~~$1.4~~primarily due to a $15.0 million change in fair value of the derivative liability and ~~$0.6 million, respectively, consisting primarily of~~ interest expense on our ~~debt facilities.~~Term Loans and 2023 Notes.

Liquidity and Capital Resources

Sources of Liquidity

From our founding in 1996 until 2010, we devoted substantially all of our resources to researching various sensor technologies and platforms. Beginning in 2010, we narrowed our focus to designing, developing and refining a commercially viable glucose monitoring system. However, to date, we have not generated any significant revenue from product sales. We have incurred substantial losses and cumulative negative cash flows from operations since our inception in October 1996. We have never been profitable and our net losses were ~~$12.4~~$32.5 million and ~~$11.9~~$12.4 million for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$25.4~~$54.8 million and ~~$23.1~~$25.4 million for the six months ended June 30, 2018 and 2017, ~~and 2016,~~ respectively. ~~As of June 30, 2017, our accumulated deficit totaled $230.2 million.~~

To date, we have funded our operations principally through the issuance of preferred stock, common stock and debt. As of June 30, ~~2017,~~2018, we had cash and cash equivalents and marketable securities of ~~$41.4~~$191.9 million. On March 23, 2016, we effected the initial closing of the March 2016 Offering of our common stock. Additionally, we closed on the partial exercise by the underwriters of the March 2016 Offering on their option to purchase additional shares on April 5, 2016. As a result of these events, we received aggregate net proceeds of $44.8 million. Under ~~the terms of~~ the Amended and Restated Loan and Security Agreement with ~~Oxford and SVB,~~the Lenders, we ~~may borrow up to~~have borrowed an aggregate principal amount of $25.0 million.

~~Table~~In January 2018, we issued $50.0 million in aggregate principal amount of ~~Contents~~

~~of $30.0 million. Under this debt facility,~~5.25% convertible senior subordinated notes due 2023, or the 2023 Notes, and in February 2018, we ~~initially borrowed~~issued an additional $3.0 million in aggregate ~~of $15 million from Oxford and SVB on June 30, 2016. We used $11 million~~principal amount of the ~~$15 million~~2023 Notes.

On March 30, 2018, we entered into an at-the-market sales agreement with Cowen and Company LLC, or Cowen, under which we may offer and sell, from time to retire existing loans with Oxford, including a final payment fee of $1 million. In each of November 2016 and March 2017, we borrowed an additional $5 million from Oxford and SVB upon achieving certain milestones. The agreement provides for monthly payments of interest only for a period of 18 months, followed by an amortization period of 30 months. On June 1, 2017, we closed the May 2017 Offeringtime at our sole discretion, shares of our common stock ~~and~~having an aggregate offering price of up to $50.0 million through Cowen acting as our sales agent. As of the date of this report, we have not sold any shares of our common stock under the at-the-market facility.

On June 28, 2018, we closed our June 2018 Offering of 38,076,561 shares of our common stock at a price of $3.93 per share. We received aggregate net proceeds from the June 2018 Offering of ~~$40.4~~$149.1 million.

Our ability to generate revenue and achieve profitability depends on our completion of the development of Eversense and future product candidates and obtaining ofand maintaining the necessary regulatory approvals for the manufacture, marketing and sales of those products. These activities, including our planned significant research and development efforts, will require significant uses of working capital through ~~2017~~2018 and beyond. Upon the completion of the audit of our consolidated financial statements for the year ended December 31, 2016, we did not have sufficient cash to fund our operations beyond the third quarter of 2017 without additional financing and, therefore, we concluded there was substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph regarding this uncertainty in its report on those consolidated financial statements. The financial information throughout this Quarterly Report and the unaudited consolidated financial statements included elsewhere in this Quarterly Report have been prepared on a basis that assumes that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. This financial information and these statements do not include any adjustments that may result from the outcome of this uncertainty.

We expect our existing cash, cash equivalents, and marketable securities ~~available for sale~~ as of June 30, ~~2017~~2018 will enable us to fund our operations ~~into the second quarter of 2018, without receiving additional funding.~~through 2020. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Additionally, the process of clinical and regulatory development of medical devices is costly, and the timing of progress of these efforts is uncertain.

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We anticipate that we will continue to incur losses for the foreseeable future. We expect that our research and development expenses and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations. Until such time, if ever, as we can generate substantial revenue, we expect to finance our cash needs through a combination of equity offerings, which may include additional follow-on offerings or through anour at-the-market facility, debt financings and revenue from potential research and development and other collaboration agreements. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant licenses to develop and market products that we would otherwise prefer to develop and market ourselves.

Indebtedness

On June 30, 2016, we entered into an Amended and Restated Loan and Security Agreement with the Lenders. Pursuant to the Amended and Restated Loan and Security Agreement, we ~~may potentially borrow up to~~have borrowed an aggregate principal amount of ~~$30.0~~$25.0 million in the following ~~four~~three tranches: $15.0 million, or the Tranche 1 Term Loan; $5.0 million, or the Tranche 2 Term Loan; ~~$5.0 million, or the Tranche 3 Term Loan;~~ and $5.0 million, or the Tranche 43 Term Loan. We refer to each of the tranches as a Term Loan, and collectively, the Term Loans. The funding conditions for the Tranche 1 Term Loan were satisfied as of June 30, 2016. Therefore, we issued secured notes to the Lenders for aggregate gross proceeds of $15.0 million, or the Notes, on June 30, 2016. We used approximately $11.0 million from the proceeds from the Notes to repay the outstanding balance under our previously existing Loan and Security Agreement with Oxford, dated as of July 31, 2014, including the applicable final payment fee due thereunder of $1 million. On November 22, 2016, the funding conditions for the Tranche 2 Term Loan were satisfied; therefore, we issued secured notes to the Lenders for aggregate gross proceeds of $5.0 million. On March 29, 2017, the funding conditions for the Tranche 3 Term Loan were satisfied; therefore, we issued secured notes to the Lenders for aggregate gross proceeds of $5.0 million. ~~We may borrow the Tranche 4 Term Loan on or before December 31, 2017 if we receive PMA approval~~

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~~from the FDA for Eversense, and achieve trailing six-month revenue for the applicable period of measurement of at least $4.0 million.~~ The maturity date for all Term Loans is June 1, 2020, or the Maturity Date.

The Term Loans bear interest at a floating annual rate of 6.31% plus the greater of (i) 90-day U.S. Dollar LIBOR reported in the Wall Street Journal or (ii) 0.64%, provided that the minimum floor interest rate is 6.95%, and require monthly payments. The monthly payments initially ~~consist~~consisted of ~~interest-only. After 18 months,~~interest-only through December 31, 2017. In January 2018, we began to make monthly principal payments that will continue until the ~~monthly payments will convert to payments of principal and monthly accrued interest, with the principal amount being amortized over the ensuing 30 months.~~Maturity Date.

We may elect to prepay all Term Loans prior to the Maturity Date subject to a prepayment fee equal to 3.00% if the prepayment occurs within one year of the funding date of any Term Loan, 2.00% if the prepayment occurs during the second year following the funding date of any Term Loan, and 1.00% if the prepayment occurs more than two years after the funding date of any Term Loan and prior to the Maturity Date. As of June 30, 2018, the outstanding balance of the Term Loans was $20.0 million.

The Amended and Restated Loan and Security Agreement contains customary events of default, including bankruptcy, the failure to make payments when due, the occurrence of a material impairment on the Lenders’ security interest over the collateral, a material adverse change, the occurrence of a default under certain other agreements entered into by us, the rendering of certain types of judgments against us, the revocation of certain of our government approvals, violation of covenants, and incorrectness of representations and warranties in any material respect. Upon the occurrence of an event of default, subject to specified cure periods, all amounts owed by us would begin to bear interest at a rate that is 5.00% above the rate effective immediately before the event of default, and may be declared immediately due and payable by Lenders.

Pursuant to the Amended and Restated Loan and Security Agreement, we also issued to the Lenders 10‑year stock purchase warrants to purchase an aggregate of 116,581, 63,025 and 80,645 shares of common stock with an exercise price of $3.86, $2.38, and $1.86 per ~~share.~~share, respectively.

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The ~~Notes~~Term Loans are collateralized by all of our consolidated ~~assets other than our intellectual property.~~assets. The ~~Notes~~Term Loans also contain certain restrictive covenants that limit our ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions, as well as financial reporting requirements. We incurred issuance costs related to the ~~Notes~~Term Loans of approximately ~~$568,648~~$0.6 million that are being amortized as additional interest expense over the term of the ~~Notes~~Term Loans using the effective interest method. The fair value of the stock purchase warrants, which was estimated to be ~~$526,209,~~$0.5 million, was recorded as a discount to the ~~Notes,~~Term Loans, which is also being amortized as additional interest expense over the term of the ~~Notes~~Term Loans using the effective interest method.

At maturity (or earlier prepayment), we are also required to make a final payment equal to 9.00% of the aggregate principal balances of the funded Term Loans. This fee is being accrued as additional interest expense over the term of the Notes using the effective interest method. In the event that we achieve the requirements to borrow the Tranche 4 Term Loan, and elect not to borrow that tranche, we are obligated to pay the Lenders a non-utilization fee of 2.00% of the undrawn amount.

In January 2018, we issued $50.0 million in aggregate principal amount of 2023 Notes, and in February 2018, we issued an additional $3.0 million in aggregate principal amount of 2023 Notes. The 2023 Notes are general, unsecured, senior subordinated obligations and bear interest at a rate of 5.25% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2018. The 2023 Notes will mature on February 1, 2023, unless earlier repurchased or converted. Payment of the principal of, and accrued and unpaid interest, if any, on the maturity date, and the fundamental change repurchase price of (excluding cash payable in lieu of delivering fractional shares of our common stock), the 2023 Notes is subordinated to the prior payment in full in cash or other payment satisfactory to the holders of senior debt, of all existing and future senior debt, which includes our indebtedness under the Amended and Restated Loan and Security Agreement with the Lenders and any refinancing thereof.

~~Table~~The 2023 Notes are convertible into shares of ~~Contents~~our common stock at the option of the holders at any time prior to the close of business on the business day immediately preceding the maturity date. The conversion rate is initially 294.1176 shares of common stock per $1,000 principal amount of 2023 Notes (equivalent to an initial conversion price of approximately $3.40 per share of common stock), subject to customary adjustments. 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 our common stock. In addition, following certain corporate events that occur prior to the maturity date, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2023 Notes in connection with such a corporate event.

In the second quarter of 2018, we issued 73,529 shares of common stock upon the conversion of $250,000 in aggregate principal amount of the 2023 Notes. As of June 30, 2018, the aggregate outstanding principal amount of the 2023 Notes was $52.7 million.

Cash Flows

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


	Six Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2018		2017
	(in thousands)				(unaudited)
Net cash used in operating activities	$	(24,201)	$	(17,377)	$	(40,367)	$	(24,201)
Net cash used in investing activities		(877)		(362)
Net cash provided by (used in) investing activities						12,239		(877)
Net cash provided by financing activities		45,489		49,990		195,906		45,489
Net increase in cash and cash equivalents	$	20,411	$	32,251	$	167,778	$	20,411

Net cash used in operating activities

Net cash used in operating activities was $40.4 million for the six months ended June 30, 2018, and consisted of a net loss of $54.8 million and a net change in operating assets and liabilities of $5.4 million (consisting of a net increase in accounts receivable, prepaid expenses and other current assets, inventory, and deposits and other assets of $7.4 million, net of an increase in accounts payable, accrued expenses and other current liabilities, accrued interest, and

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deferred rent of $2.0 million), partially offset by stock-based compensation expense of $3.1 million, an increase in the fair value of derivative liability of $15.0 million, non-cash interest expense of $1.5 million, and depreciation and write-down of the carrying value of our inventory to net realizable value of an aggregate amount of $0.2 million.

Net cash used in operating activities was $24.2 million for the six months ended June 30, 2017, and consisted ~~primarily~~ of a net loss of $25.4 million and a net change in operating assets and liabilities of $1.1 million (consisting of an increase in accounts receivable, inventory, and prepaid expenses and other current assets of $4.0 million, net of an increase in accrued expenses and interest of $2.9 million), partially offset by stock-based compensation expense of $1.7 million, and depreciation, non-cash interest expense, and the write-down of the carrying value of our inventory to net realizable value in the aggregate amount of $0.6 million.

Net cash ~~used in operating~~provided by (used in) investing activities

Net cash provided by investing activities was ~~$17.4~~$12.2 million for the six months ended June 30, ~~2016,~~ 2018, and consisted ~~primarily~~sales and maturities of ~~a net loss~~marketable securities of ~~$23.1~~$20.3 million, ~~partially~~ offset by ~~stock-based compensation expense~~purchases of ~~$1.1 million, depreciation and non-cash interest expense~~marketable securities of ~~$0.1 million, a net change in fair value of warrants of $0.3~~$7.9 million and ~~a net change in assets and liabilities~~capital expenditures of $4.2 million (consisting of an increase in accounts payable, accrued expenses and interest, and deferred rent of $4.3 million, net of decreases in prepaid expenses, inventory, deposits and other assets of $0.1 million).

~~Net cash used in investing activities~~$0.2 million.

Net cash used in investing activities was $0.9 million for the six months ended June 30, 2017, and consisted of purchases of marketable securities of $8.0 million and capital expenditures of $0.2 million, partially offset by sales and maturities of marketable securities of $7.3 million.

Net cash ~~used in investing~~provided by financing activities

Net cash provided by financing activities was ~~$0.4~~$195.9 million for the six months ended June 30, ~~2016,~~2018, and consisted primarily of ~~capital expenditures for laboratory equipment~~$149.4 million from the issuance of common stock in our June 2018 Offering, $50.7 million from the issuance of the 2023 Notes, and ~~leasehold improvements.~~

~~Net cash provided~~$1.0 million from the exercise of stock options, partially offset by ~~financing activities~~aggregate principal payments on our Term Loans of $5.0 million.

Net cash provided by financing activities was $45.5 million for the six months ended June 30, 2017, and consisted primarily of the net proceeds received from ~~the~~our offering of common stock in May 2017 ~~Offering~~ of $40.4 million, notes payable and warrants of $5.0 million, and the exercise of stock options of $0.1 million.

~~Net cash provided by financing activities was $50.0 million for the six months ended June 30, 2016,~~ ~~and consisted primarily of the net proceeds received from the March 2016 Offering of $45.8 million and notes payable of $4.2 million~~.

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Contractual Obligations

The following summarizes our contractual obligations as of June 30, ~~2017.~~2018 (in thousands).


	Payment due by period										Payment due by period
			Remainder of						After				Remainder of						After
Contractual Obligations	Total		2017		2018-2019		2020-2021		2021		Total		2018		2019-2020		2021-2022		2022
	(in thousands)
Operating lease obligations	$	3,753	$	308	$	1,218	$	1,277	$	950	$	3,139	$	300	$	1,241	$	1,316	$	282
Payments under corporate development agreement(1)		1,996		707		381		908		—		577		—		577		—		—
Principal payments under Notes(2)		25,000		—		20,000		5,000		—		20,000		5,000		15,000		—		—
Interest payments under Notes(2)		5,603		942		2,302		2,359		—		4,078		791		3,287		—		—
Principal payments under 2023 Notes(3)												52,700		—		—		—		52,700
Interest payments under 2023 Notes(3)												13,841		1,390		5,534		5,534		1,383
Total contractual obligations	$	36,352	$	1,957	$	23,901	$	9,544	$	950	$	94,335	$	7,481	$	25,639	$	6,850	$	54,365

(1)

Represents minimum payment obligations under a corporate development agreement to purchase current application-specific integrated circuits, which are subcomponents of the sensors used in Eversense.

(2)

Represents the principal and interest payment schedule for the ~~$25~~$20.0 million principal amount of the Notes that were outstanding as of June 30, ~~2017.~~2018.

(3)

Represents the principal and interest payment schedule for the $52.7 million principal amount of the 2023 Notes that were outstanding as of June 30, 2018.

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Off‑Balance Sheet Arrangements

During three and six months ended June 30, ~~2017~~2018 we did not have, and we do not currently have, any off‑balance sheet arrangements, as defined under SEC rules.

JOBS Act

In April 2012, the JOBS Act was enacted. Section 107(b) of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation, (i) not being required to provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes‑Oxley Act and (ii) not being required to comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (b) the last day of our fiscal year ending December 31, 2019; (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous six years; or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our

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estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in our financial statements prospectively from the date of the change in estimate.

Management considers an accounting policy to be critical if it is important to our financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. The development and selection of these critical accounting policies have been determined by our management. Due to the significant judgment involved in selecting certain of the assumptions used in these areas, it is possible that different parties could choose different assumptions and reach different conclusions.

Effective January 1, 2018, we adopted Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, using the full retrospective transition method. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract

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inception, once the contract is determined to be within the scope of ASC Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

We believe there have been no other material changes to our critical accounting policies and use of estimates as disclosed in the footnotes to our audited financial statements for the year ended December 31, ~~2016~~2017 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on ~~February 23, 2017.~~March 13, 2018.

ITEM 3: Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of June 30, ~~2017,~~2018, we had cash, cash equivalents, and marketable securities of ~~$41.4~~$191.9 million. We generally hold our cash in interest-bearing money market accounts. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents. Additionally, the interest ~~rate~~rates on our 2023 Notes isand our Term Loans are fixed. We do not currently engage in hedging transactions to manage our exposure to interest rate risk.

Foreign Currency Risk

Our reporting currency is the U.S. dollar. We expect that our international sales through distributors and the costs we incur in connection with our international operations will be ~~denominated~~ in currencies other than the U.S. ~~dollars. Therefore,~~dollar, primarily the Euro. However, we do not ~~expect~~believe that ~~our results~~an immediate 10% increase or decrease in the relative value of operations will be materially affected by foreign exchange rate risks. However, our distributors' sales of our products in international markets to their customers will be denominated in local currencies. Therefore, it is possible that, when the U.S. dollar ~~appreciates, products sales could be adversely impacted, as our products will become more expensive~~ to ~~the customers of our distributors.~~other currencies would have a material effect on operating results. We do not currently engage in any hedging transactions to manage our exposure to foreign currency exchange rate risk.

ITEM 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of our management, including our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, ~~2017,~~2018, the end of the period covered by this Quarterly Report. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will

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succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected. Based on the evaluation of our disclosure controls and procedures as of June 30, ~~2017,~~2018, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended June 30, ~~2017~~2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1: Legal Proceedings

From time to time, we are subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results or financial condition.

ITEM 1A: Risk Factors

Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. Except for the risk factors described below, our risk factors as of the date of this Quarterly Report on Form 10-Q have not changed materially from those described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016,~~2017, filed with the SEC on ~~February 23, 2017.~~March 13, 2018.

Risks Related to our ~~Financial Results~~Accounting Policies and ~~Need for Financing~~Principles

~~We will need~~If our estimates relating to ~~raise substantial additional funds~~our critical accounting policies are based on assumptions or judgments that change or prove to be incorrect, our operating results could fall below expectations of financial analysts and investors, resulting in the future, and these funds may not be available on acceptable terms or at all. A failure to obtain this necessary capital when needed could force us to delay, limit, scale back or cease some or all operations.a decline in our stock price.

AtThe preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates, assumptions and judgments that affect the ~~time that~~amounts reported in the ~~unaudited~~ consolidated financial statements ~~for the quarter ended June 30, 2017 included in this report were completed,~~and accompanying notes. We base our estimates on historical experience and on various other assumptions that we ~~did not have sufficient cash to fund our operations as currently and planned~~believe to be ~~conducted through~~reasonable under the ~~second quarter~~circumstances, the results of ~~2018 without additional financing~~which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and therefore, we concluded there was substantial doubt about our ability to continue as a going concern. At June 30, 2017, we had approximately $41.4 million in aggregate cash, cash equivalents and marketable securities, and we have insufficient committed sources of additional capital to fund our operations as described in this Quarterly Report for more than a limited period of time. We believe our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations into the second quarter of 2018 without substantially curtailing our current and planned operations or obtaining additional financing. The continued growth of our business, including the establishment of our sales and marketing infrastructure, and research and development activities will significantly increase our expenses. In addition, the amount of our future product sales is difficult to predict and actual sales may not be in line with our expectations. As a result, we may be required to seek substantial additional funds in the future. Our future capital requirements will depend on many factors, including:

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~~the cost of obtaining and maintaining regulatory clearance or approval for Eversense or future versions of Eversense;~~

~~the costs associated with developing and commercializing our products;~~

~~any change in our development priorities regarding our future versions of Eversense;~~

~~the revenue generated by sales of Eversense or future versions of Eversense;~~

~~the costs associated with expanding our sales and marketing infrastructure;~~

~~any change in our plans regarding the manner in which we choose to commercialize our products in the United States;~~

~~the cost of ongoing compliance with regulatory requirements;~~

expenses ~~we incur in connection with potential litigation or governmental investigations;~~

~~anticipated or unanticipated capital expenditures; and~~

~~unanticipated general and administrative expenses.~~

As a result of these and other factors, we do not know the extent to which we may be required to raise additional capital. We may in the future seek additional capital from public or private offerings of our capital stock, which may include additional follow-on offerings or through an at-the-market facility, borrowings under credit lines or other sources. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaborations, licensing, joint ventures, strategic alliances, partnership arrangements or other similar arrangements, it may be necessary to relinquish valuable rights to our potential future products or proprietary technologies, or grant licenses on terms that are not ~~favorable~~readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of financial analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, stock-based compensation and income taxes. Moreover, the new revenue recognition guidance, ASC Topic 606, Revenue from Contracts with Customers, requires more judgment than did the prior guidance.

Our financial results may be adversely affected by changes in accounting principles applicable to us.

We may not be able to generate sufficient cash to service our indebtedness, which currently consists of our term loan with the Lenders. In addition, although we potentially have the ability to borrow additional funds under the Amended and Restated Loan and Security Agreement, we may be unable to borrow those additional funds or we may be unable to generate sufficient cash to service any additional indebtedness that we do incur.

In June 2016, we issued secured Notes to Oxford and SVB, or the Lenders, in a private placement for aggregate gross proceeds of $15.0 million, pursuant to a Term Loan under our Amended and Restated Loan and Security Agreement that matures on June 1, 2020. We used approximately $11.0 million from the proceeds from the Notes to repay the outstanding balance under our previously existing Loan and Security Agreement with Oxford, dated as of July 31, 2014, including the applicable final payment fee due thereunder of $1 million. In November 2016, we borrowed an additional $5 million upon the achievement of certain milestones, and in March 2017, we borrowed another $5 million upon the achievement of certain milestones. Our obligations under the Amended and Restated Loan and Security Agreement are secured by a first priority security interest in substantially all of our assets, other than our intellectual property. Our Amended and Restated Loan and Security Agreement with the Lenders also contains certain restrictive covenants that limit our ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements or enter into various specified transactions, as well as financial reporting requirements. We were in compliance with the affirmative and restrictive covenants as of June 30, 2017. We may also enter into other debt agreements in the future which may contain similar or more restrictive terms.

In addition, pursuant to the Amended and Restated Loan and Security Agreement, we may also have the ability to borrow up to an aggregate of an additional $5 million upon the achievement of specified milestones, and the funding of specific tranches under the agreement, through the end of 2017. We will not be able to borrow the additional $5 million under the Amended and Restated Loan and Security Agreement if we do not achieve the specified milestones.

Our ability to make scheduled monthly payments or to refinance our debt obligations depends on numerous factors, including the amount of our cash reserves and our actual and projected financial and operating performance. These amounts and our performanceU.S. GAAP are subject to ~~certain financial~~interpretation by the FASB, the SEC, and ~~business factors, as well as prevailing economic~~other bodies formed to promulgate and competitive conditions, some of which may be beyond our control. We cannot assure you that we will maintain a level of cash reserves or cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our existing or future indebtedness. If our cash flows and capital resources are insufficient to fund our

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debt service obligations, we may be forced to curtail our operations, reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, or that these actions would permit us to meet our scheduled debt service obligations. Failure to comply with the conditions of the Amended and Restated Loan and Security Agreement could result in an event of default, which could result in an acceleration of amounts due under the Amended and Restated Loan and Security Agreement. We may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated payments, and the Lenders could seek to enforce security interests in the collateral securing such indebtedness, which would have a material adverse effect on our business.

~~Risks Related to our Intellectual Property~~

We may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships with third-parties that may not result in the development of commercially viable products or the generation of significant future revenues.

In the ordinary course of our business, we may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances, partnerships or other arrangements to develop products and to pursue new markets. Proposing, negotiating and implementing collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships may be a lengthy and complex process. Other companies, including those with substantially greater financial, marketing, sales, technology or other business resources, may compete with us for these opportunities or arrangements. We may not identify, secure, or complete any such transactions or arrangements in a timely manner, on a cost-effective basis, on acceptable terms or at all. We have limited institutional knowledge and experience with respect to these business development activities, and we may also not realize the anticipated benefits of any such transaction or arrangement. In particular, these collaborations may not result in the development of products that achieve commercial success or result in significant revenues and could be terminated prior to developing any products.

Additionally, we may not be in a position to exercise sole decision making authority regarding the transaction or arrangement, which could create the potential risk of creating impasses on decisions, and our future collaborators may have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals. It is possible that conflicts may arise with our collaborators, such as conflicts concerning the achievement of performance milestones, or the interpretation of significant terms under any agreement, such as those related to financial obligations or the ownership or control of intellectual property developed during the collaboration. If any conflicts arise with any future collaborators, they may act in their self-interest, which may be adverse to our best interest, and they may breach their obligations to us.interpret appropriate accounting principles. For example, ~~one~~in May 2014, the FASB issued accounting standards update No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. We adopted this guidance as of our vendors who provides a component to the Eversense sensor has communicated to us its belief that one of its employees should be named as a co-inventor on a related patent application. We have communicated to the third party that its employee should not be named as a co-inventor and its employee has not been named as a co-inventor to date. In addition, we may have limited control over the amount and timing of resources that any future collaborators devote to our or their future products. Disputes between us and our collaborators may resultJanuary 1, 2018. Any difficulties in litigation or arbitration which would increase our expenses and divert the attention of our management. Further, these transactions and arrangements will be contractual in nature and will generally be terminable under the terms of the applicable agreements and, in such event, we may not continue to have rights to the products relating to such transaction or arrangement or may need to purchase such rights at a premium.

If we enter into in-bound intellectual property license agreements, we may not be able to fully protect the licensed intellectual property rights or maintain those licenses. Future licensors could retain the right to prosecute and defend the intellectual property rights licensed to us, in which case we would depend on the ability of our licensors to obtain, maintain and enforce intellectual property protection for the licensed intellectual property. These licensors may determine not to pursue litigation against other companies or may pursue such litigation less aggressively than we would. Further, entering into such license agreements could impose various diligence, commercialization, royalty or other obligations on us. Future licensors may allege that we have breached our license agreement with them, and accordingly seek to terminate our license, which could adversely affect our competitive business position and harm our business prospects.

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~~The medical device industry is characterized by patent litigation, and we~~implementing these pronouncements or adequately accounting after adoption could become subject to litigation that could be costly, result in the diversion of management's time and efforts, stop our development and commercialization measures, harm our reputation or require us to pay damages.

Our success will depend in part on not infringing the patents or violating the other proprietary rights of third-parties. Significant litigation regarding patent rights exists in our industry. Our competitors in both the United States and abroad, many of which have substantially greater resources and have made substantial investments in competing technologies, may have applied for or obtained or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make and sell our products. The large number of patents, the rapid rate of new patent issuances, and the complexities of the technology involved increase the risk of patent litigation.

The medical device industry in general, and the glucose testing sector of this industry in particular, are characterized by the existence of a large number of patents and frequent litigation based on assertions of patent infringement. We are aware of numerous patents issued to third parties that may relate to the technology used in our business, including the design and manufacture of CGM sensors and CGM systems, as well as methods for continuous glucose monitoring. Each of these patents contains multiple claims, any one of which may be independently asserted against us. The owners of these patents may assert that the manufacture, use, sale or offer for sale of our CGM sensors or CGM systems infringes one or more claims of their patents. Furthermore, there may be additional patents issued to third parties of which we are presently unaware that may relate to aspects of our technology that such third parties could assert against us and materially and adversely affect our business. In addition, because patent applications can take many years to issue, there may be patent applications that are currently pending and unknown to us, which may later result in issued patents that third parties could assert against us and harm our business.

In preparation for commercializing our Eversense products, we are performing an analysis, the purpose of which is to review and assess publicly available information to determine whether third parties hold any valid patent rights that a well-informed court would more likely than not find that we would infringe by commercializing our products, understanding that there are risks and uncertainties associated with any litigation and no predictions or assurances can be made regarding the outcome of any such litigation. Although our review and analysis are not complete and subject to the express limitations in the preceding sentence, we are not aware of any such valid patent rights. Moreover, we have not previously performed an exhaustive review of this type, and we cannot be certain that it will not result in our locating patent rights relating to our products of which we were not previously aware.

In the future, we could receive communications from various industry participants alleging our infringement of their intellectual property rights. Any potential intellectual property litigation could force us to do one or more of the following:

~~stop selling our products or using technology that contains the allegedly infringing intellectual property;~~

~~incur significant legal expenses;~~

~~pay substantial damages to the party whose intellectual property rights we are allegedly infringing;~~

~~redesign those products that contain the allegedly infringing intellectual property; or~~

attempt to obtain a license to the relevant intellectual property from third-parties, which may not be available on reasonable terms or at all, and if available, may be non-exclusive, thereby giving our competitors access to the same technology.

~~Patent litigation can involve complex factual and legal questions, and its outcome is uncertain. Any litigation or claim against us, even those without merit, may~~ cause us to ~~incur substantial costs, and could place a significant strain on~~fail to meet our financial ~~resources, divert the attention of management from our core business, stop our development and commercialization measures~~reporting obligations, which could result in regulatory discipline and harm ~~our reputation. Further, as the number of participants~~investors’ confidence in ~~the diabetes market increases, the possibility of intellectual property infringement claims against us increases.~~us.

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

(a) Sales of Unregistered Securities

~~None.~~In the second quarter of 2018, we issued 138,768 shares of common stock upon the net exercise of warrants at an exercise price of $1.79 per share. The issuance of these securities was exempt from registration under Section 3(a)(9) of the Securities Act.

~~Table~~In the second quarter of ~~Contents~~2018, we issued 73,529 shares of common stock upon the conversion of $250,000 in aggregate principal amount of the 2023 Notes, at a conversion rate of 294.1176 shares per $1,000 principal amount converted (or a conversion price of approximately $3.40 per share). The issuance of these securities was exempt from registration under Section 3(a)(9) of the Securities Act.

ITEM 3: Defaults Upon Senior Securities

Not applicable.

ITEM 4: Mine Safety Disclosures

Not applicable.

ITEM 5: Other Information

None.

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ITEM 6: Exhibits

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

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~~SIGNATURES~~

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


	~~SENSEONICS HOLDINGS, INC.~~


~~Date: August 9, 2017~~	~~By:~~	~~/s/ R. Don Elsey~~
		~~R. Don Elsey~~
		~~Chief Financial Officer~~
		~~(Principal Financial Officer)~~

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~~Exhibit Index~~


Exhibit No.		Document

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

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

3.3*		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Senseonics Holdings, Inc.

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

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

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

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

** These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURES

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


	SENSEONICS HOLDINGS, INC.


Date: August 8, 2018	By:	/s/ R. Don Elsey
		R. Don Elsey
		Chief Financial Officer
		(Principal Financial Officer)


2017 (remaining six months)	$	—
2018		10,000
2019		10,000
2020		5,000
Total	$	25,000