Senseonics Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Financial amounts below are in millions of dollars unless otherwise noted. Senseonics develops and commercializes implantable continuous glucose monitoring systems, including Eversense and Eversense XL.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $5.2 | $2.1 | $11.7 | $3.5 |
| Cost of sales | $7.7 | $3.0 | $14.9 | $5.7 |
| Gross profit (loss) | $(2.6) | $(0.9) | $(3.2) | $(2.3) |
| Gross margin | (50)% | (41)% | (27)% | (65)% |
| Operating loss | $(23.0) | $(16.6) | $(59.0) | $(40.6) |
| Net loss | $(31.9) | $(17.4) | $(86.7) | $(42.8) |
| Basic and diluted loss per share | $(0.18) | $(0.13) | $(0.57) | $(0.39) |
- Cash flow: Nine-month operating cash outflow was $67.1 million, versus $39.5 million in 2017. Investing activities provided $13.7 million, mainly from marketable-security maturities; financing provided $194.2 million. Cash and cash equivalents increased to $157.0 million. Marketable securities were $6.0 million, for combined cash and securities of $163.0 million.
- Balance sheet: Current assets were $181.9 million and current liabilities $22.7 million at September 30. Total assets were $183.3 million; total liabilities were $106.7 million. Accumulated deficit was $350.5 million.
- Debt: Term-loan principal outstanding was $17.5 million, secured by company assets, with a June 2020 maturity and monthly principal payments underway. Convertible notes had $52.7 million principal outstanding, bear 5.25% interest, mature in February 2023, and are initially convertible at approximately $3.40 per share. The notes’ carrying amount, net of discount, was $35.3 million; a separate $39.8 million embedded-derivative liability was recorded.
Material changes versus the prior comparable period
- Revenue increased substantially, reflecting stronger European distributor demand and initial U.S. sales after the July 2018 launch. However, cost of sales exceeded revenue in both periods; Q3 gross margin deteriorated to (50)% from (41)%, while the nine-month margin improved to (27)% from (65)%.
- Sales and marketing expense rose to $7.9 million in Q3 and $17.5 million year to date, primarily supporting expanded commercialization and the U.S. launch. Research and development expense fell in Q3 to $7.4 million but rose year to date to $23.8 million. General and administrative expense increased in both comparisons.
- Net loss widened to $31.9 million in Q3 and $86.7 million year to date. Other expense included a $7.5 million Q3 and $22.5 million year-to-date noncash increase in the fair value of the 2023-note derivative, as well as higher interest expense.
- Cash and cash equivalents rose from $16.2 million at December 31, 2017, chiefly following the $149.0 million net June equity offering and $50.7 million net proceeds from convertible notes. Common shares outstanding increased from 136.9 million at year-end 2017 to 176.7 million at September 30, 2018.
Outlook, commentary, and risks
- FDA approval for the U.S. Eversense System was received June 21, 2018; U.S. distribution began in July. Management expects product revenue to increase as commercialization expands through the rest of 2018 and into 2019, and expects to market in additional countries in 2019.
- Management expects gross margin to improve over the long term as sales volumes grow, but cautions that margins may fluctuate. It expects continued losses and significant commercialization, research and development, and public-company expenses.
- Management estimated existing cash, cash equivalents, and marketable securities would fund operations into 2020, based on assumptions that could prove incorrect. The company has never been profitable and expects to need additional capital; future financing could dilute shareholders or require concessions on technology or commercial rights.
- Revenue is highly concentrated: substantially all revenue came from two customers. Roche Diabetes Care, a related party, accounted for $10.0 million of nine-month 2018 revenue; Rubin Medical accounted for $1.2 million.
- The embedded conversion option is a Level 3 fair-value estimate using significant unobservable inputs, creating potentially material reported earnings volatility. The term loans also carry collateral, restrictive covenants, and default provisions.
- The filing reports no material pending or threatened legal proceedings known to the company, no off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2018. The company anticipated recognizing additional lease assets and liabilities when adopting the lease standard in 2019.
Important facts for investors to verify
- Whether U.S. and international commercialization converts into sustained revenue growth and improved gross margins.
- Quarterly operating cash burn, inventory and manufacturing commitments, and whether the stated runway into 2020 remains achievable.
- Revenue dependence on Roche and Rubin, including the related-party relationship with Roche.
- The valuation assumptions and future earnings impact of the $39.8 million Level 3 derivative liability, and potential dilution from convertible notes and equity awards.
- Term-loan repayment obligations, covenant compliance, and the company’s access to additional financing.