Senseonics Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Senseonics develops and commercializes implantable Eversense continuous glucose monitoring systems. Financial amounts below are in U.S. dollars; unless indicated otherwise, figures are in millions.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $0.8 | $4.3 | $1.1 | $12.3 |
| Gross profit (loss) | $0.8 | $(3.3) | $(19.9) | $(11.2) |
| Operating loss | $(12.5) | $(31.4) | $(68.8) | $(95.8) |
| Net loss | $(23.4) | $(19.5) | $(73.5) | $(79.9) |
| Net loss per share | $(0.10) | $(0.10) | $(0.33) | $(0.43) |
- Revenue fell 82% year over year in Q3 and 91% for the nine-month period. Management attributed the decline primarily to Roche order deferrals and the temporary U.S. suspension of commercial sales to new patients.
- Q3 cost of sales was a credit of $0.1 million, producing positive gross profit despite low revenue. The filing attributes the credit principally to sales of previously impaired inventory and release of supplier allowances; this is an unusual result, not evidence of a normalized gross margin.
- Nine-month cost of sales included $15.1 million of inventory write-downs for obsolescence, excess demand, or net realizable value. Inventory was $4.3 million at September 30, versus $16.9 million at year-end 2019.
- Operating expenses declined substantially year over year, reflecting the March workforce reduction and lower sales, marketing, and clinical-trial activity. The company reported a workforce reduction of approximately 60% and $1.4 million of related termination costs for the nine months.
- Cash used in operations was $59.2 million, compared with $101.5 million in the prior-year period. Investing activities used $0.2 million; financing activities used $10.2 million. Cash, cash equivalents, and restricted cash decreased $69.5 million to $26.4 million.
- At September 30, current assets were $35.8 million and current liabilities $10.1 million. Total liabilities were $96.0 million; stockholders’ deficit was $54.8 million. Reported notes payable had $120.6 million aggregate principal and a $59.6 million carrying amount, reflecting substantial discounts and issuance costs. The Solar term loan and First Lien Notes had been repaid.
- Derivative liabilities were $24.6 million at quarter-end. Noncash fair-value changes and debt extinguishment/issuance losses materially affected reported other income or expense and net loss.
Material changes, financing, and business developments
- In March 2020, Senseonics streamlined operations in response to COVID-19 and limited cash resources, temporarily suspending U.S. commercial sales to new patients while continuing support for existing users and focusing on the U.S. 180-day product submission. Insertion volumes improved more than initially expected in Q3 but remained below pre-pandemic levels.
- In August, the company issued PHC Holdings $35 million principal amount of senior secured convertible notes due 2024, bearing 9.5% interest (cash or payment-in-kind), with a potential reduction to 8.0% following specified U.S. product approval. It also issued PHC 2.94 million common shares as a financing fee and repaid the $15 million First Lien Notes for approximately $17.6 million.
- Senseonics issued Masters $3 million of Series A convertible preferred stock, with an option for Masters to purchase up to an additional $27 million, subject to conditions. The company also has a conditional option to issue up to $15 million of preferred stock to PHC following U.S. approval of the 180-day product.
- Highbridge exchanged $24 million of 2025 Notes for Second Lien Notes, common shares, and warrants. Highbridge converted $3.6 million of Second Lien principal into 9.3 million common shares during Q3. The Second Lien Notes bear 7.5% cash or 8.25% payment-in-kind interest and mature in August 2023.
- Ascensia received exclusive worldwide distribution rights for Eversense, subject to existing distribution arrangements and other exceptions. Ascensia is responsible for sales and marketing; Senseonics remains responsible for product development, manufacturing, and regulatory submissions. The agreement includes minimum revenue and sales-and-marketing commitments.
- Senseonics submitted a PMA supplement to the FDA for the 180-day U.S. Eversense product on September 30, 2020. Management anticipated an FDA decision in the first half of 2021, while noting COVID-19 could delay the timing. A feasibility program for a 365-day sensor was also underway.
- After quarter-end, the company entered a 24-month equity line agreement with Energy Capital for up to $12 million of Series B preferred stock, subject to conditions, and issued a warrant for up to 10 million common shares. Stockholders also approved an increase in authorized common shares from 450 million to 900 million.
Outlook, risks, and contingencies
- Going concern: Management stated that substantial doubt about the company’s ability to continue as a going concern for the twelve months following the filing date had not been alleviated. Management said the PHC and Masters arrangements could provide up to $42 million if completed, and estimated that closing all contemplated equity transactions would fund operations through 2021; the additional financings were contingent and not assured.
- The filing identifies continued COVID-19 effects, clinic access and insertion volumes, distributor inventory and product expiry, manufacturing interruptions, and uncertainty in demand as material operating risks. Management expected customer concessions for unsold, expiring U.S. inventory to continue into Q4.
- Commercial success depends significantly on Ascensia’s performance and U.S. regulatory approval of the 180-day product. The agreement may be terminable in specified circumstances, including failure to obtain U.S. approval by August 31, 2021.
- Debt agreements impose secured claims on substantially all assets, financial and liquidity covenants, and restrictions on operations. Debt service requirements, future refinancing access, potential covenant compliance, and the timing of contingent funding are key liquidity risks.
- Convertible notes, preferred stock, and warrants create potentially substantial dilution. Preferred stock ranks ahead of common stock in specified liquidation or change-of-control circumstances. The PPP loan was $5.8 million; forgiveness was uncertain and could be reduced by workforce reductions, leaving repayment obligations.
- Supplier and contract-manufacturer costs may arise from paused or delayed manufacturing; some amounts depend on future manufacturing timing and were not quantified as certain obligations. The filing reported no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the PHC and Masters conditional financing options and the Energy Capital equity line were drawn, and the resulting cash runway and dilution.
- Subsequent cash burn, liquidity, and compliance with minimum-cash, revenue, budget, and other debt covenants.
- FDA timing and outcome for the 180-day Eversense product, and whether Ascensia meets distribution, spending, and revenue commitments.
- Roche order activity, distributor inventory levels, customer concessions, and any further inventory or supplier-asset impairments.
- The reconciliation of reported debt carrying value to principal and contractual maturities, including convertible-note terms, payment-in-kind interest, and potential share issuance.
- PPP loan forgiveness determination and any further contingent contract-manufacturer liabilities.