Business context and reporting period
Senseonics Holdings, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company develops and commercializes glucose-monitoring systems; its first-generation Eversense continuous glucose monitor is designed for up to 90 days of use. It received European CE mark approval in May 2016 and began its first commercial shipment to Sweden in June. It had not received U.S. approval.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $0.019 | $0.023 | $0.019 | $0.038 |
| Cost of sales | $0.034 | — | $0.034 | — |
| Gross profit (loss) | $(0.015) | $0.023 | $(0.015) | $0.038 |
| Operating loss | $(11.550) | $(6.908) | $(22.479) | $(12.307) |
| Net loss | $(11.861) | $(7.185) | $(23.078) | $(12.877) |
- Q2 2016 gross margin was negative 79.8%, versus 100% in Q2 2015; the filing attributes the comparison to initial product-launch costs in 2016 and unrelated grant revenue with no cost of sales in 2015.
- Six-month operating expenses were $22.464 million: research and development $13.955 million, general and administrative $7.241 million, and sales and marketing $1.268 million. The increases versus 2015 reflected product development and U.S. pivotal-trial activity, added personnel, European launch spending, and public-company costs.
- Cash and cash equivalents were $36.190 million at June 30, 2016, versus $3.939 million at December 31, 2015. Total assets were $38.684 million; current liabilities were $9.567 million and total liabilities $24.226 million. Notes payable, net of discount, were $14.619 million.
- For the six months, cash used in operating activities was $17.377 million and investing activities used $0.362 million; financing provided $49.990 million, producing a $32.251 million increase in cash.
- The company reported a $183.870 million accumulated deficit. Basic and diluted loss per share was $0.13 for Q2 and $0.27 for the six months; comparisons with 2015 per-share figures are affected by the substantial increase in weighted-average shares following the acquisition and 2016 offering.
Material changes and financing
- Net loss increased by $4.676 million in Q2 and $10.201 million for the first half versus 2015, primarily as operating expenses expanded.
- The March–April public offering issued 17,239,143 shares at $2.85 per share and generated approximately $44.8 million in net proceeds. Shares outstanding were 93,368,011 at June 30; 93,389,594 were outstanding July 31.
- On June 30, the company entered into a secured loan facility for up to $30 million. It drew $15 million, using approximately $11 million to repay prior Oxford debt and a final payment fee. Up to $15 million more is available only upon specified clinical, regulatory, commercial, and revenue milestones.
- The loan matures June 1, 2020, has a minimum annual interest rate of 6.95% based on a floating-rate formula, and initially requires interest-only payments for 12 months. It is secured by substantially all assets other than intellectual property and includes restrictive covenants and default provisions. A final payment equal to 9% of funded principal is also due at maturity or earlier prepayment.
Outlook, risks, and unusual items
- Management estimated existing resources would fund operations through the third quarter of 2017, assuming the company meets conditions to borrow the remaining $15 million. The company expected significant ongoing losses and said product revenue would not meet operating needs for several years, if ever; it expects to require external capital.
- The company planned to file a U.S. PMA application by Q4 2016 and estimated FDA review could take six to 18 months. It reported 8.8% mean absolute relative difference in its completed 90-day U.S. pivotal trial. It expected European distributor expansion during the second half of 2016.
- Principal risks include failure to meet loan milestones or raise additional financing, continued operating losses and cash burn, regulatory or commercialization delays, uncertain product demand, competition, possible dilution, debt-service and covenant risks, and the potential resale of substantial shares. The filing reported no material pending legal proceedings.
- The company stated that a going-concern doubt present at December 31, 2015 had been alleviated following the offering and financing, based on its operating plan and assumed future milestone borrowing. It nevertheless cautioned that its runway estimate depends on assumptions that may prove incorrect.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level as of June 30, 2016; no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Whether Eversense achieves the clinical, FDA filing and approval, European commercialization, and revenue milestones needed to access additional loan tranches.
- Whether cash burn and actual operating needs remain consistent with management’s runway estimate through Q3 2017, particularly if milestone borrowing is delayed or unavailable.
- Whether product sales can scale and gross margins improve from the negative margin recorded on the initial commercial shipment.
- The debt’s effective cost, collateral and covenant implications, including the 9% final payment and consequences of default.
- The filing contains differing cash-flow figures in its statements and MD&A (operating cash use of $17.377 million versus approximately $17.7 million; financing cash provided of $49.990 million versus approximately $50.3 million). It also describes the notes as floating-rate in the debt terms but as fixed-rate in the market-risk discussion; investors should reconcile these disclosures.