Senseonics Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Senseonics develops and commercializes implantable continuous glucose monitoring systems, including Eversense and Eversense XL.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $4.61 | $3.62 | $8.03 | $6.57 |
| Gross profit (loss) | $(4.55) | $(0.22) | $(7.86) | $(0.58) |
| Gross margin | (99)% | (6)% | (98)% | (9)% |
| Operating loss | $(34.65) | $(20.06) | $(64.42) | $(35.99) |
| Net loss | $(31.07) | $(32.50) | $(60.44) | $(54.77) |
| Basic and diluted loss per share | $(0.17) | $(0.23) | $(0.34) | $(0.40) |
- Q2 revenue increased about 27%, primarily from U.S. sales following the 2018 U.S. launch; the six-month increase was partly offset by lower related-party revenue. Roche accounted for $3.1 million of Q2 revenue and $5.3 million for the first half of 2019.
- Q2 cost of sales rose to $9.16 million. Management cited higher warranty expense, obsolete-inventory charges tied to design changes, contract-manufacturer yield losses and costs associated with U.S. sales. Inventory obsolescence provision was $2.3 million for the first half.
- Q2 sales and marketing expense rose to $14.18 million from $6.18 million, mainly reflecting U.S. launch staffing and marketing. R&D was $10.50 million versus $8.29 million, largely due to clinical studies. G&A was approximately flat at $5.42 million.
- Q2 net loss improved year over year despite a larger operating loss, chiefly because the derivative liability produced $4.89 million of other income, versus $10.17 million of expense in Q2 2018. The six-month derivative fair-value gain was $6.96 million, compared with a $15.01 million loss in 2018; these noncash fair-value changes materially affect reported net loss.
- Operating cash use was $65.86 million for the first half, compared with $40.37 million in 2018. Investing cash use was $0.74 million; financing cash use was $4.91 million, including $5.0 million of term-loan principal payments. Cash and cash equivalents fell to $65.30 million from $136.79 million at year-end 2018.
- At June 30, current assets were $93.98 million and current liabilities $33.60 million; total assets were $98.40 million, total liabilities $83.22 million and stockholders’ equity $15.17 million. The balance sheet reported $52.7 million of 2023 Notes principal and $10.0 million of current Term Loans, with accrued Term Loan interest also recorded.
Changes, outlook and material developments
- Management expected revenue from U.S. and European product sales to increase, but said reported distributor shipments do not necessarily track end-user sales. It expected gross margin to improve over the long term as volumes grow, while warning margins may fluctuate.
- The company expected continuing losses and significant operating and development expenses. Management stated that cash, together with July 2019 financing transactions, was expected to fund operations through the end of 2020; the estimate depends on assumptions and capital could be used sooner than anticipated.
- In June 2019, the FDA approved a non-adjunctive dosing indication for Eversense; the company planned a U.S. rollout in the second half of 2019. The PROMISE trial is evaluating use for up to 180 days in the U.S.; topline results were expected in the first half of 2020. The company also reported that Eversense and Eversense XL were approved in EMEA, subject to applicable local requirements.
- The Eversense Bridge Program, launched in March 2019, provides eligible-patient assistance recorded as a reduction of revenue. The company cautioned that limited program experience makes estimated reimbursements for shipped but unsold products uncertain and potentially subject to material change.
- After quarter-end, Senseonics completed a $28.7 million gross common-stock offering at $1.10 per share; issued $82.0 million of 5.25% convertible notes due 2025 and repurchased $37.0 million principal of 2023 Notes; and borrowed $45.0 million under a Solar term loan, using $11.6 million to repay the Oxford/SVB loans. These transactions extend financing but add debt, covenants and potential dilution. The 2025 Notes have an initial conversion price of about $1.32 per share; Solar lenders received warrants for 1.125 million shares at $1.20.
- The Solar loan bears floating interest at a minimum rate of 8.98%, is secured by substantially all company assets, and includes liquidity and trailing-revenue covenants. Principal amortization was scheduled to begin in August 2021, subject to revenue-based extension conditions.
Risks, contingencies and unusual items
- The business has a long history of losses and limited product revenue; it depends on successful commercialization, regulatory approvals, clinical outcomes and access to additional capital. Failure to raise funds could require delayed or reduced development or commercialization.
- Revenue was concentrated: two customers generated a majority of revenue, and one customer represented 68% of Q2 2019 revenue (85% in Q2 2018). Roche is a related party and a significant distributor.
- Negative gross margins, warranty costs, inventory obsolescence, manufacturing yields and estimates under the new patient-access program are key operating uncertainties.
- Debt agreements impose restrictive covenants and default provisions. The company disclosed a risk that remaining 2023 Notes holders could challenge the indenture amendment associated with the July financing, potentially affecting the business and financial condition.
- International sales are primarily denominated in euros; the company does not hedge currency exposure. Management said a hypothetical 10% exchange-rate change was not expected to have a material effect based on the exposure at the time.
- The filing reports no material legal proceedings and no material change in previously disclosed contractual obligations as of June 30. Disclosure controls and procedures were assessed as effective at a reasonable-assurance level.
Investor verification points
- Reconcile the filing’s six-month net-loss figures: the financial statements report $60.4 million, while one MD&A passage states $61.2 million.
- Track end-user adoption and reimbursement separately from shipments to distributors, especially Roche concentration and Bridge Program reimbursements.
- Monitor gross-margin recovery, warranty claims, inventory write-downs and manufacturing yields.
- Verify progress and timing for the U.S. non-adjunctive rollout, PROMISE trial results and any FDA submission for 180-day use.
- Assess cash burn against management’s end-of-2020 funding expectation, and monitor Solar loan covenants, floating interest costs, remaining 2023 Notes and dilution from equity and convertible securities.