Senseonics Holdings, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. Senseonics develops and commercializes implantable continuous glucose monitoring systems, including Eversense and the 180-day Eversense XL. Sales were primarily to European distributors Roche Diabetes Care and Rubin Medical.
Key financial metrics
Amounts are in millions of dollars except per-share data. Balance-sheet figures are as of March 31, 2018; comparison dates are noted.
| Metric | Q1 2018 / March 31, 2018 | Comparable period / December 31, 2017 |
|---|---|---|
| Revenue | $2.946 | $0.553 in Q1 2017 |
| Gross profit (margin) | $(0.362) (-12%) | $(0.492) (-89%) in Q1 2017 |
| Operating expenses | $15.565 | $11.905 in Q1 2017 |
| Operating loss | $(15.927) | $(12.397) in Q1 2017 |
| Net loss | $(22.273); $(0.16) per share | $(13.073); $(0.14) per share in Q1 2017 |
| Operating cash flow | $(20.499) | $(11.616) in Q1 2017 |
| Cash and cash equivalents | $60.902 | $16.150 at December 31, 2017 |
| Marketable securities | $4.149 | $20.300 at December 31, 2017 |
| Current assets / current liabilities | $76.807 / $21.482 | $44.915 / $23.140 at December 31, 2017 |
| Total liabilities | $90.993 | $38.677 at December 31, 2017 |
| Accumulated deficit | $286.096 | $263.823 at December 31, 2017 |
Q1 financing cash flow was $49.064 million, primarily from the convertible-note offering; investing cash flow was $16.187 million, mainly from sales and maturities of marketable securities. Cash and cash equivalents increased by $44.752 million during the quarter. Cash, cash equivalents and marketable securities totaled approximately $65.1 million at quarter-end.
Material changes versus Q1 2017
- Revenue rose by $2.393 million as shipments to Roche and Rubin increased. However, substantially all revenue remained concentrated in two customers; Roche, a related party, contributed $2.568 million and Rubin $0.368 million in Q1 2018.
- Gross margin remained negative, although it improved to -12% from -89%.
- Sales and marketing expense increased to $3.441 million from $1.140 million, primarily due to added personnel and European commercialization and potential U.S. launch preparation. Research and development expense increased to $8.113 million from $6.998 million; general and administrative expense was $4.011 million versus $3.767 million.
- Net loss widened by $9.200 million. Other expense included a $4.847 million non-cash increase in the fair value of the embedded conversion derivative liability; interest expense also increased following the debt issuance.
- Inventory increased to $5.248 million from $2.991 million at year-end 2017, mainly from higher work-in-process.
Outlook, risks, contingencies and unusual items
- Regulatory progress: On March 29, 2018, the FDA advisory panel voted 8–0 that Eversense benefits outweighed risks and separately voted 8–0 in favor of safety and efficacy. FDA approval and its timing remained uncertain; the company said it intended to launch in the U.S. promptly if approved.
- Liquidity and going concern: Management estimated that existing cash, cash equivalents and marketable securities would fund operations into the first quarter of 2019, but the filing also states that substantial doubt about the company’s ability to continue as a going concern exists and that additional capital is needed. The company expected continuing losses and said product revenue would not cover operating needs for several years, if ever. Additional financing may be unavailable or may dilute shareholders or require concessions.
- Debt and financing: The company issued $53.0 million principal amount of 5.25% convertible senior subordinated notes due 2023, generating approximately $50.8 million net proceeds. Their initial conversion price was approximately $3.40 per share. The company also had $22.5 million principal outstanding under secured term loans, with a minimum interest rate of 6.95%, monthly principal payments beginning in January 2018 and maturity in 2020. The notes are subordinated to senior debt; the term loans are secured by company assets and include restrictive covenants. A $50 million at-the-market share-sale facility was established; no shares had been sold under it as of the report date.
- Commercial and operating risks: The company cited continuing development, regulatory, manufacturing, commercialization and funding needs. It expected operating expenses to rise and gross margins to improve over the long term as volume grows, but margins may fluctuate. Product distribution had begun in 14 countries.
- Commitments and legal matters: The filing reported approximately $0.9 million of future minimum payments under a supplier development agreement and $3.291 million of operating lease obligations. It reported no material pending legal proceedings and no off-balance-sheet arrangements.
- Accounting and controls: ASC 606 was adopted January 1, 2018 using the full retrospective method, with no reported financial-statement impact. Management concluded disclosure controls were effective as of March 31, 2018 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent FDA decision, approval timing and the practical path to a U.S. launch after the favorable advisory-panel vote.
- Cash burn and financing needs against the stated runway into Q1 2019, including any use of the $50 million ATM facility.
- Revenue growth, customer concentration and progress toward positive gross margins as sales volumes increase.
- Convertible-note dilution and terms, term-loan repayment obligations and compliance with secured-loan covenants.
- Assumptions underlying the Level 3 derivative valuation and its effect on reported earnings; Q1 included a $4.847 million fair-value expense.