Senseonics Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; amounts below are in U.S. dollars. Senseonics develops and commercializes implantable continuous glucose monitoring systems, including the six-month Eversense E3. Ascensia handles commercialization and began U.S. E3 sales in Q2 2022 and select European sales in Q3.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $4.6 million | $3.5 million | $10.8 million | $9.7 million |
| Gross profit (loss) | $0.8 million | $(1.2) million | $2.1 million | $(0.3) million |
| Gross margin | 16.4% | (35.3)% | 19.5% | (3.4)% |
| Operating loss | $(17.6) million | $(16.0) million | $(49.8) million | $(43.2) million |
| Net income (loss) | $(60.4) million | $42.9 million | $130.6 million | $(386.9) million |
| Net cash used in operations | Not provided for the quarter | Not provided for the quarter | $(48.9) million | $(44.3) million |
- Q3 revenue was up 31% year over year; nine-month revenue rose 12%. Management attributed growth mainly to the U.S. E3 launch, partly offset by lower sales outside the U.S.
- Research and development expense increased to $11.0 million in Q3 and $28.1 million for nine months, reflecting clinical studies, staffing and development support. SG&A was $7.3 million in Q3 and $23.8 million year to date.
- Reported nine-month net income included $193.5 million of gains from changes in fair value of derivatives and options. These non-cash valuation items materially affect reported earnings; the company remained loss-making from operations.
- At September 30, cash and cash equivalents were $35.5 million and marketable securities were approximately $127.6 million, or $163.0 million combined. Current assets were $169.3 million and current liabilities $57.6 million.
- Debt principal outstanding totaled $101.9 million: $15.7 million of 2023 Notes, $51.2 million of 2025 Notes and $35.0 million of PHC Notes. Carrying value was lower after discounts and issuance costs. The 2023 Notes mature February 1, 2023; PHC Notes mature October 31, 2024; 2025 Notes mature January 15, 2025.
- Total liabilities were $197.7 million, including $83.8 million of derivative liabilities and a $28.1 million current Energy Capital option liability. Stockholders’ deficit was $15.1 million. Common shares outstanding were 478.2 million at quarter-end.
Material changes and management outlook
- Gross margin improved substantially year over year. Management cited the shift from the 90-day to six-month product, channel mix, fewer inventory write-offs and manufacturing efficiencies.
- R&D spending rose as the company invested in next-generation technologies and clinical studies, including development of the Eversense 365-day system. Enrollment in the ENHANCE study was completed in September 2022.
- Operating cash use increased to $48.9 million from $44.3 million in the comparable nine-month period. Financing provided $31.4 million, mainly from $34.4 million of net ATM stock-sale proceeds; investing activities provided $19.5 million, principally from securities maturities and sales. Cash and cash equivalents increased by $2.0 million during the period.
- Management said existing cash, cash equivalents and expected operating cash flows were sufficient for current operating plans through 2023. It may seek additional capital to support changes in plans, strategic initiatives or financial flexibility. The company has a history of substantial losses and negative operating cash flows.
- After quarter-end, on November 7, 2022, Energy Capital exercised its right to purchase $12.0 million of Series B Preferred Stock, convertible at $0.3951 per share. This provides financing but carries potential dilution.
Risks, contingencies and unusual items
- Ascensia generated 97% of Q3 revenue and 95% of nine-month revenue, up from 92% and 88%, respectively, in 2021. This customer concentration, and Ascensia’s related-party status, are material considerations.
- The company relies on reimbursement coverage, regulatory approvals, product adoption and third-party commercialization and manufacturing. It reported positive coverage decisions reaching more than 250 million U.S. covered lives; adoption and reimbursement remain important to growth.
- Management cited potential disruption from COVID-19, inflation, interest rates, geopolitical events and European energy costs. Suppliers in Europe and sources of certain raw materials could be affected, although the company said it had not been notified of a significant conflict-related materials impact as of the filing.
- A False Claims Act and Texas Medicaid fraud complaint was amended after an initial dismissal without prejudice; Senseonics’ motion to dismiss the amended complaint was pending. Separately, Italy’s data protection authority assessed a EUR 45,000 fine; the company settled for EUR 22,500, updated its privacy notice and noted possible follow-up.
- The PHC Notes are secured and include financial covenants, including minimum revenue and liquidity targets, and customary default provisions. Fair-value movements in embedded note features and options create substantial volatility in reported earnings.
- Management concluded disclosure controls were effective at the reasonable-assurance level as of September 30, 2022, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Eversense E3 commercialization, patient adoption, reimbursement coverage and Ascensia sell-through improve enough to increase revenue and reduce customer concentration.
- Cash burn and financing needs relative to management’s stated runway through 2023, including the effects of the post-quarter $12.0 million preferred-stock purchase and its conversion dilution.
- Repayment, conversion or refinancing plans for the $15.7 million 2023 Notes due February 2023, and compliance with PHC Note covenants and liquidity requirements.
- How much future reported earnings may depend on non-cash fair-value changes rather than operating performance, and whether gross-margin gains persist.
- Progress, timing and regulatory requirements for the Eversense 365-day program, and the status and outcome of the pending False Claims Act motion.