Senseonics Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise. Senseonics develops and manufactures implantable continuous glucose monitoring systems, including Eversense. Its commercialization partner, Ascensia, distributes Eversense products.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $6.1 | $4.6 | $14.4 | $10.8 |
| Gross profit | $1.2 | $0.8 | $2.0 | $2.1 |
| Gross margin | 19.2% | 16.4% | 13.9% | 19.5% |
| Research and development | $12.8 | $11.0 | $38.0 | $28.1 |
| Selling, general and administrative | $7.4 | $7.3 | $22.6 | $23.8 |
| Operating loss | $(19.0) | $(17.6) | $(58.6) | $(49.8) |
| Net income (loss) | $(24.1) | $(60.4) | $(43.2) | $130.6 |
| Operating cash flow | Not presented by quarter | $(55.1) | $(48.9) |
- Revenue increased 32% in Q3 and 33% for the nine-month period. Management attributed the increase mainly to higher U.S. Eversense E3 shipments, partly offset by a higher revenue-share percentage payable to Ascensia.
- Q3 gross margin improved year over year, but nine-month margin declined, reflecting the revenue share, sales-channel mix, and higher manufacturing and logistics costs.
- Higher R&D spending reflected investment in next-generation technology and clinical studies. Nine-month SG&A declined modestly.
- The prior-year nine-month net income was substantially affected by non-cash fair-value gains on derivatives and an option. The 2023 comparison also includes exchange-related accounting gains and losses; reported net income therefore does not track operating performance alone.
- At September 30, cash and cash equivalents were $55.8 million and short-term investments were $69.6 million, or $125.4 million combined. Total current assets were $146.1 million and current liabilities were $17.3 million.
- Net cash used in operations was $55.1 million for the first nine months, compared with $48.9 million a year earlier. Cash increased by $20.0 million over the period, partly due to investing and financing cash flows.
- Reported debt carrying value was $40.5 million, comprising the $25.0 million term loan principal net of discount and issuance costs and the 2025 Notes. The remaining 2025 Notes principal was approximately $20.4 million. The filing’s scheduled debt maturities, including end-of-term fees, total $47.1 million.
Material changes and financing
- In September, Senseonics entered a senior secured term-loan facility of up to $50 million with Hercules and other lenders. The initial $25 million tranche was funded; additional $10 million and $15 million tranches are conditional. The facility matures September 1, 2027, bears interest at the greater of prime plus 1.40% or 9.90%, and is secured by substantially all company assets.
- The loan agreement includes a minimum unrestricted-cash covenant equal to 30% of outstanding loan amounts and, beginning July 1, 2024, a net-product-revenue performance covenant. It also includes customary restrictions and default provisions.
- Senseonics exchanged up to $30.8 million of 5.25% 2025 Notes for $7.5 million cash and 35.1 million newly issued common shares. About $20.4 million principal remained outstanding after the exchanges. The company recorded a $4.6 million exchange-related loss for the 2025 Notes transaction.
- Earlier in 2023, PHC exchanged its $35 million PHC Notes and accrued interest for a pre-funded warrant to purchase up to 68.5 million shares. PHC also purchased a warrant for 15.4 million shares for $15 million gross proceeds. These PHC warrants remained outstanding at quarter-end; the filing counts their shares as outstanding for basic EPS because they are pre-funded warrants.
- The company repaid the $15.7 million 2023 Notes in January and made a $7.5 million cash payment in the 2025 Notes exchange. It received $7.4 million net from common-stock sales under its Jefferies at-the-market program during the nine months; that program was terminated in August. A replacement Goldman Sachs at-the-market program permits up to $106.6 million of sales, but no sales had occurred by September 30.
- Common shares outstanding increased from 479.6 million at December 31, 2022 to 528.2 million at September 30, 2023. The filing warns that the 2025 Notes exchange caused dilution and that the issued shares may be resold immediately.
Outlook, risks, and other notable items
- Management expects existing cash, cash equivalents, and cash flows from future operations to fund current operating plans into 2025. It also says commercialization, product development, regulatory work, and coverage expansion will require significant working capital, and it may seek additional debt or equity financing.
- The adult cohort in the ENHANCE study completed in Q3 2023. Management expected data by year-end 2023 to support a planned FDA submission for the 365-day Eversense product in early 2024. These are expectations, not assurances.
- Sales depend on adoption by patients and healthcare providers and on insurance coverage and reimbursement. Ascensia accounted for 93% of Q3 revenue and 92% of nine-month revenue, creating significant customer concentration and related-party exposure.
- The company has incurred substantial losses and negative operating cash flows since inception; its accumulated deficit was $852.1 million. It expects further losses in the near future.
- A False Claims Act and Texas Medicaid Fraud Prevention Law case was dismissed in Senseonics’ favor in March 2023, but the relator appealed; the appeal was pending as of the filing. The company said ordinary-course litigation was not expected to have a material adverse effect, while noting litigation can entail material costs and management demands.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Eversense E3 shipment growth and broader U.S. adoption continue, including the effect of reimbursement coverage and Ascensia’s commercial execution.
- Whether gross margin can recover from the nine-month decline, given revenue-sharing terms, channel mix, and manufacturing and logistics costs.
- Progress and timing of ENHANCE results and the anticipated 365-day product FDA submission.
- Cash burn relative to management’s stated runway into 2025, and whether conditional loan tranches or additional equity financing will be needed.
- Loan covenant compliance, the cost of secured debt, and repayment of the remaining 2025 Notes.
- Potential dilution and share-sale pressure from the 35.1 million exchange shares, outstanding PHC pre-funded warrants, equity plans, and the available at-the-market program.
- Ascensia’s dominant share of revenue and the status of the pending appeal in the False Claims Act case.