Senseonics Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Senseonics develops and commercializes implantable continuous glucose monitoring systems, including Eversense and Eversense XL. The filing was signed November 12, 2019. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $4.3 | $5.2 | $12.3 | $11.7 |
| Gross loss (gross margin) | $(3.3) (-77%) | $(2.6) (-50%) | $(11.2) (-91%) | $(3.2) (-27%) |
| Operating loss | $(31.4) | $(23.0) | $(95.8) | $(59.0) |
| Net loss | $(19.5) | $(31.9) | $(79.9) | $(86.7) |
| Net loss per share | $(0.10) | $(0.18) | $(0.43) | $(0.57) |
- Revenue: Q3 revenue fell 16% year over year, despite increased U.S. sales, as the new Eversense Bridge Program reduced net revenue. Nine-month revenue increased 5%, primarily due to U.S. commercialization following the July 2018 launch. Roche-related revenue was $3.4 million in Q3 and $8.7 million for nine months.
- Costs and margins: Nine-month cost of sales rose to $23.6 million from $14.9 million. The company cited obsolete inventory charges, warranty costs, manufacturer-related scrap, and higher shipped volumes. Sales and marketing expense increased to $38.6 million for nine months, while R&D was $28.7 million and G&A was $17.3 million.
- Cash flow: Operating cash use was $101.5 million for nine months, versus $67.1 million a year earlier; inventory build-up contributed to cash use. Financing provided $96.2 million. Cash and equivalents were $130.6 million at September 30, down from $136.8 million at December 31, 2018.
- Balance sheet: Current assets were $161.6 million and current liabilities $22.0 million. Total liabilities were $141.7 million, versus $88.7 million at year-end 2018; stockholders’ equity declined to $25.3 million from $71.3 million. Accumulated deficit was $437.7 million.
- Debt: At quarter-end, principal outstanding was $45.0 million under the Solar term loan, $15.7 million under the 2023 convertible notes, and $82.0 million under the 2025 convertible notes. Their combined carrying value was approximately $90.3 million after discounts and issuance costs. The Solar loan has a minimum interest rate of 8.98%, is secured by substantially all company assets, and begins scheduled principal amortization in August 2021. The convertible notes bear 5.25% interest.
Material changes and significant transactions
- In July, Senseonics raised $45.0 million in Solar term debt, issued $82.0 million of 2025 convertible notes, and completed a common-stock offering of 26.1 million shares for net proceeds of about $26.8 million. It used proceeds to repay the prior Oxford/SVB term loans and repurchase $37.0 million principal of 2023 notes.
- Nine-month net loss improved from 2018, but operating loss widened substantially. The improvement in reported net loss principally reflected a favorable $26.1 million change in the fair value of derivative liabilities in 2019, compared with an unfavorable $22.5 million change in 2018; this non-cash valuation item makes net loss less indicative of underlying operating performance.
- Common shares issued and outstanding rose to 203.4 million at September 30 from 176.9 million at December 31, 2018. The 2025 notes are convertible at an initial price of approximately $1.32 per share; potential dilution is material.
Outlook, commentary, risks, and unusual items
- Management said existing cash, based on current operating plans and the restructuring announced after quarter-end, was expected to fund operations through the end of 2020. The company anticipates continued losses and expects to need additional capital thereafter; management cautioned that assumptions could prove incorrect and cash could be used sooner.
- Management expected revenue from global product sales to increase in the remainder of 2019 and future years. It expected sales and marketing and G&A costs to decrease in the next year following restructuring, and R&D costs to decline as the PROMISE trial concludes. It expects gross margin to improve over the long term with increased sales, better yields, and scale; no quantified earnings or revenue guidance was provided.
- The PROMISE U.S. pivotal trial for a 180-day product completed enrollment at 208 subjects. Topline results were expected in the first half of 2020; if positive, the data were intended to support an FDA submission for 180-day use. The company also planned to seek iCGM designation for its 90-day system, potentially in the first half of 2020, subject to positive data and FDA review.
- In September, the company voluntarily recalled 844 sensors from doctors’ offices and distributors after a small number stopped functioning prematurely because of inadequate sensor-membrane hydration. The affected rate was 1.4% of sensors inserted during the affected period; the recorded cost was $0.4 million. No patient action was required.
- On November 7, 2019, the company announced a restructuring that reduced current, open, and planned workforce by approximately 30%, focusing on the customer experience, 180-day U.S. launch, and lower cash burn. It expected about $0.8 million in one-time severance costs in Q4 2019.
- Risks include dependence on external financing, continued operating losses, commercialization and regulatory execution, inventory obsolescence and product reliability, restrictive debt covenants and debt-service demands, and customer concentration. One related-party customer accounted for 78% of Q3 revenue and 70% for the first nine months. The company reported no material legal proceedings and stated disclosure controls were effective.
Important facts for investors to verify
- Whether cash use and the restructuring support the stated runway through year-end 2020, and what financing may be required afterward.
- Progress, results, and FDA timing for the PROMISE trial, the 180-day product, and the planned iCGM submission.
- Commercial traction, reimbursement and Bridge Program costs, gross-margin trends, and reliance on Roche and other key customers.
- Recall follow-up, sensor reliability, inventory reserves and obsolescence, and any further manufacturing or warranty costs.
- Debt covenant compliance, cash interest and future principal requirements, and potential dilution from convertible notes, warrants, and equity financing.