Senseonics Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; dollar amounts below are in millions unless stated otherwise.
Business context and developments
Senseonics develops and commercializes implantable continuous glucose monitoring systems, including Eversense and Eversense XL. During the period, European product sales were made through distributors Roche and Rubin Medical. The FDA approved Eversense for U.S. marketing on June 21, 2018, and the company began U.S. distribution through its direct sales organization. Eversense XL was being commercialized in Europe.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $3.6 | $0.8 | $6.6 | $1.4 |
| Gross profit (loss) | $(0.2) | $(0.9) | $(0.6) | $(1.4) |
| Gross margin | (6)% | (111)% | (9)% | (102)% |
| Operating loss | $(20.1) | $(11.6) | $(36.0) | $(24.0) |
| Net loss | $(32.5) | $(12.4) | $(54.8) | $(25.4) |
| Basic and diluted loss per share | $(0.23) | $(0.12) | $(0.40) | $(0.26) |
- Cash and liquidity: At June 30, cash and cash equivalents were $183.9 and marketable securities were $8.0, totaling $191.9. Current assets were $207.5 and current liabilities $25.0.
- Cash flow: Six-month operating cash use was $40.4, versus $24.2 in the prior-year period. Investing activities provided $12.2, primarily from marketable securities sales and maturities. Financing activities provided $195.9.
- Debt: Term-loan principal outstanding was $20.0, secured by company assets, with a June 2020 maturity and a minimum interest rate of 6.95%. The company had $52.7 principal outstanding on 5.25% convertible senior subordinated notes due February 2023. The notes’ initial conversion price was approximately $3.40 per share. Balance-sheet carrying values were $9.6 for term notes, net of discount, and $34.5 for convertible notes, net of discount.
- Equity financing: The June offering of 38.1 million shares generated net proceeds of $149.1. Shares outstanding increased from 136.9 million at December 31, 2017 to 175.9 million at June 30, 2018.
Material changes versus prior periods
- Revenue rose to $3.6 million in Q2 and $6.6 million in the first half, driven by increased European distributor demand. Substantially all revenue came from two customers; Roche, a related party, accounted for $3.1 million of Q2 revenue and $5.6 million of first-half revenue.
- Cost of sales also increased with sales, and gross margin remained negative, although the reported loss narrowed substantially versus 2017.
- Sales and marketing expense increased to $6.2 million in Q2 and $9.6 million in the first half, reflecting U.S. launch preparation and increased staffing. R&D and general and administrative expenses also increased.
- Net loss widened, including a $10.2 million Q2 and $15.0 million first-half expense from remeasurement of the 2023 notes’ embedded derivative. This fair-value charge was non-cash in the cash-flow reconciliation.
Outlook, risks and unusual items
- Management said existing cash, cash equivalents and marketable securities were expected to fund operations through 2020, based on current plans and assumptions. The company expects continued losses and increased commercialization, R&D and administrative spending; it gave no specific revenue or earnings guidance.
- Management expects revenue to increase as commercialization expands and expects gross margins to improve over the long term, while noting margins may fluctuate. Successful commercialization, regulatory approvals and future product development remain important to achieving revenue growth and profitability.
- The company stated that the June financing alleviated the going-concern doubt that had existed at May 10, 2018. It nevertheless expects to need additional capital and cautioned that financing may not be available on acceptable terms; future equity issuance could dilute shareholders.
- Revenue and receivables are concentrated among a small number of customers, including related-party Roche. Other risks include competition, clinical and regulatory uncertainty, manufacturing and commercialization execution, and the valuation volatility of the Level 3 embedded derivative.
- There were no material legal proceedings reported. Management concluded disclosure controls and procedures were effective at the reasonable-assurance level, with no material change in internal control over financial reporting identified during the quarter.
Important facts for investors to verify
- U.S. launch progress after FDA approval, including reimbursement, clinician adoption, patient uptake and sales economics.
- Whether distributor demand and customer concentration change, particularly Roche’s share of revenue and its related-party status.
- Progress toward positive gross margins, given the company’s reported negative margins and continuing commercialization costs.
- Cash burn relative to management’s runway-through-2020 estimate, and whether further financing becomes necessary.
- Debt service, term-loan covenants and conversion-related dilution, including changes in the fair value of the embedded derivative.