Senseonics Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results; amounts below are in millions of dollars unless stated otherwise. Senseonics develops and commercializes implantable Eversense continuous glucose monitoring systems.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $0.261 | $4.607 | $0.297 | $8.030 |
| Gross profit (loss) | $(1.143) | $(4.553) | $(20.777) | $(7.863) |
| Operating loss | $(12.526) | $(34.653) | $(56.357) | $(64.421) |
| Net loss | $(7.515) | $(31.074) | $(50.108) | $(60.439) |
| Net loss per share, basic and diluted | $(0.03) | $(0.17) | $(0.24) | $(0.34) |
- Q2 revenue declined about 94% year over year; six-month revenue declined about 96%. Roche did not place commercial sensor or transmitter orders in either 2020 period.
- Q2 gross margin was negative 438.1%. Six-month cost of sales rose to $21.074 million, including $15.1 million of inventory write-downs, scrap and write-offs; the filing says $16.2 million of inventory and related assets was impaired.
- Cash, cash equivalents and restricted cash were $21.597 million at June 30, down from $95.938 million at year-end 2019. Operating cash use was $45.777 million for the first half; investing cash use was $0.178 million and financing cash use was $28.386 million.
- Outstanding note principal was approximately $104.7 million at June 30. The balance sheet reported $61.192 million of long-term debt and notes payable, net, and $5.075 million of derivative liabilities. Total liabilities were $80.442 million; stockholders’ deficit was $39.605 million.
- First-half expenses included $10.931 million of debt-extinguishment losses. A $25.549 million gain from changes in derivative fair value partly offset other losses and interest expense; these noncash valuation changes materially affected reported net loss.
Material changes and unusual items
- In March, the company repaid its Solar term loan for $48.5 million, including fees and premiums, after it could not obtain a waiver. It also reduced its workforce by approximately 60%, temporarily suspended U.S. commercial sales to new patients, and shifted focus to existing users and development of the U.S. 180-day product.
- April financing included a $5.8 million Paycheck Protection Program loan and $15.0 million of Highbridge First Lien Notes. Highbridge also exchanged $24.0 million principal of 2025 Notes for Second Lien Notes, common shares and warrants. Highbridge converted $6.0 million of Second Lien principal into 13.4 million shares during Q2. These transactions and other issuances increased shares outstanding from 203.5 million at year-end to 230.6 million at June 30.
- Sales and marketing and research and development expenses fell substantially year over year, reflecting the workforce reduction and reduced commercial and development activity. The company recorded $1.4 million of one-time severance costs for the first half.
- COVID-19 reduced clinic access and insertions, disrupted demand and contributed to customer concessions and inventory impairment. Q2 reinsertion activity was better than initially expected, but insertion volumes remained below pre-pandemic levels.
Outlook, risks and contingencies
- Management said doubt about the company’s ability to continue as a going concern for the next 12 months was not alleviated as of the filing, because announced financing and collaboration transactions had not yet closed. The company said it needed significant working capital through 2020 and beyond.
- After quarter-end, Senseonics announced an Ascensia global commercialization agreement with an initial five-year term and a planned $35 million PHC senior secured convertible note financing. The company intended to use proceeds to repay the First Lien Notes for approximately $17.6 million. The note carries 9.5% interest, with a possible reduction to 8.0% following U.S. approval of the 180-day product, and is convertible at approximately $0.54 per share. These were announced transactions, not completed financing as of the filing.
- Also after quarter-end, the company agreed to an initial $3 million Series A preferred stock sale to Masters, with an option for up to a further $27 million subject to conditions. It also announced an option for up to $15 million of preferred stock from PHC, contingent on required stockholder and regulatory approvals. These securities and convertible debt could materially dilute common shareholders; preferred stock ranks senior to common stock in a liquidation.
- The company expected to submit its U.S. 180-day Eversense application to the FDA in Q3 2020 and anticipated a decision in early 2021; timing could be affected by COVID-19. It planned an iCGM submission in Q1 2021 if trial results supported it. A 365-day feasibility effort and potential future clinical trial were also described.
- Risks include continuing pandemic impacts, uncertain product demand and reimbursement, reliance on Roche and Ascensia, regulatory and manufacturing execution, debt service and restrictive covenants, potential inability to secure additional financing, and dilution. Roche’s distribution agreement was due to expire in January 2021. The company expected up to $1.3 million of possible contract-manufacturer costs if certain timelines were not met. PPP loan forgiveness was uncertain and could be reduced by the workforce cuts.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level as of June 30, 2020. The filing reported no material legal proceedings.
Most important facts for investors to verify
- Whether the announced PHC note and Masters preferred-stock transactions closed, and the resulting cash available after the planned First Lien repayment.
- Current cash runway, liquidity-covenant compliance and the company’s ability to meet debt service and other obligations.
- FDA submission and approval timing for the 180-day product, and whether commercial sales and patient insertions recover.
- Ascensia’s performance against minimum sales and marketing targets, and the effect of its revenue-sharing terms on Senseonics’ future revenue and margins.
- Potential further inventory or manufacturing charges, PPP forgiveness outcome, and dilution from debt conversions, warrants and preferred stock.