Senseonics(SENS) - 2019 Q1 - Quarterly Report

PART I: Financial Information This section provides a comprehensive overview of the company's financial performance, position, and related disclosures ITEM 1: Financial Statements This section presents unaudited consolidated financial statements: balance sheets, income, equity, cash flows, and detailed notes Condensed Consolidated Balance Sheets This statement presents the company's financial position, detailing assets, liabilities, and stockholders' equity | Metric | March 31, 2019 (unaudited) | December 31, 2018 | | :--------------------------------- | :------------------------- | :------------------ | | Assets | | | | Cash and cash equivalents | $103,675 | $136,793 | | Total current assets | $125,110 | $158,106 | | Total assets | $129,401 | $159,973 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $27,459 | $28,886 | | Total liabilities | $85,457 | $88,712 | | Total stockholders' equity | $43,944 | $71,261 | | Total liabilities and stockholders' equity | $129,401 | $159,973 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss This statement outlines the company's revenues, expenses, and net loss over specific reporting periods | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Revenue | $3,423 | $2,946 | | Cost of sales | $6,733 | $3,308 | | Gross profit | $(3,310) | $(362) | | Sales and marketing expenses | $12,834 | $3,441 | | Research and development expenses | $7,108 | $8,113 | | General and administrative expenses | $6,516 | $4,011 | | Operating loss | $(29,768) | $(15,927) | | Total other income (expense), net | $403 | $(6,346) | | Net loss | $(29,365) | $(22,273) | | Basic and diluted net loss per common share | $(0.17) | $(0.16) | | Basic and diluted weighted-average shares outstanding | 176,954,116 | 137,069,008 | Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) This statement tracks changes in the company's equity accounts, including common stock and accumulated deficit | Metric | Balance, December 31, 2018 | Balance, March 31, 2019 | | :--------------------------------------- | :------------------------- | :---------------------- | | Common Stock Shares | 176,918 | 176,958 | | Common Stock Amount | $177 | $177 | | Additional Paid-In Capital | $428,878 | $430,926 | | Accumulated Deficit | $(357,794) | $(387,159) | | Total Stockholders' Equity (Deficit) | $71,261 | $43,944 | Changes during Q1 2019: * Exercise of stock options: $23 thousand (Additional Paid-In Capital increased by $23 thousand) * Stock-based compensation expense and vesting of RSUs: $2,025 thousand (Additional Paid-In Capital increased by $2,025 thousand) * Net loss: $(29,365) thousand (Accumulated Deficit increased by $(29,365) thousand) Unaudited Condensed Consolidated Statements of Cash Flows This statement categorizes cash flows from operating, investing, and financing activities | Cash Flow Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(30,152) | $(20,499) | | Net cash (used in) provided by investing activities | $(490) | $16,187 | | Net cash (used in) provided by financing activities | $(2,476) | $49,064 | | Net (decrease) increase in cash and cash equivalents | $(33,118) | $44,752 | | Cash and cash equivalents, at end of period | $103,675 | $60,902 | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and additional information supporting the financial statements 1. Organization This note describes the company's business, its focus on glucose monitoring systems, and its corporate structure - Senseonics Holdings, Inc. is a medical technology company focused on designing, developing, and commercializing glucose monitoring systems to improve diabetes management. Its wholly-owned subsidiary is Senseonics, Incorporated[19] 2. Liquidity This note addresses the company's ability to meet short-term obligations and its going concern considerations - The Company has incurred substantial operating losses since inception and has not generated significant product revenues. Its ability to achieve profitability depends on product development and regulatory approvals, requiring significant working capital[20] - Management concluded that existing cash and cash equivalents will not be sufficient to meet anticipated operating needs through Q1 2020, raising substantial doubt about the Company's ability to continue as a going concern through March 31, 2020[22] - The Company plans to finance operations through external capital (equity/debt) but may face challenges in raising additional funds on acceptable terms, potentially leading to delays, suspensions, or liquidation[23] 3. Summary of Significant Accounting Policies This note outlines the key accounting principles, estimates, and revenue recognition policies applied - The financial statements are prepared in accordance with U.S. GAAP, with certain disclosures omitted as permitted for interim reports. Management uses estimates for areas like stock-based compensation, asset recoverability, and deferred taxes[24][25][26] - The Company operates and manages its business as a single segment: glucose monitoring products[27] - Revenue is recognized when customers obtain control of products, typically at delivery. The Eversense Bridge Program, launched in March 2019, provides financial assistance to eligible U.S. patients, treated as a reduction of revenue[43][44][45][46] - The Company adopted ASC 842 (Leases) effective January 1, 2019, using a modified retrospective approach. This resulted in the recognition of operating lease assets of $2,235 thousand and operating lease liabilities of $2,319 thousand (current and non-current portions) on the balance sheet[62][63] Revenue Concentration by Customer (Q1 2019 vs. Q1 2018) | Customer | Q1 2019 Revenue % | Q1 2018 Revenue % | | :------- | :---------------- | :---------------- | | One primary customer | 70% | 100% | Revenues by Geographic Region (Q1 2019) | Region | Amount (in thousands) | % of Total | | :-------------------- | :-------------------- | :--------- | | Outside of the United States | $2,607 | 76.2% | | United States | $816 | 23.8% | | Total | $3,423 | 100.0% | Note: All revenues in Q1 2018 were from sales outside the United States. 4. Inventory, net This note details the composition and valuation of the company's inventory, including finished goods and raw materials | Inventory Category | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----------------- | :---------------------------- | :----------------------------- | | Finished goods | $1,746 | $1,457 | | Work-in-process | $11,010 | $7,211 | | Raw materials | $1,614 | $1,563 | | Total | $14,370 | $10,231 | 5. Prepaid Expenses and Other Current Assets This note provides a breakdown of the company's prepaid expenses and other short-term assets | Category | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :---------------------------- | :----------------------------- | | Contract manufacturing | $2,490 | $2,962 | | Marketing and sales | $675 | $287 | | IT and software | $295 | $244 | | Interest receivable | $670 | $239 | | Clinical and preclinical | $340 | $111 | | Other | $228 | $142 | | Total | $4,698 | $3,985 | 6. Accrued Expenses and Other Current Liabilities This note details the company's accrued expenses and other short-term liabilities | Category | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :---------------------------- | :----------------------------- | | Contract manufacturing | $6,436 | $6,068 | | Compensation and benefits | $1,885 | $3,685 | | Interest on notes payable and 2023 Notes | $557 | $1,268 | | Product warranty | $311 | $816 | | Sales and marketing services | $2,122 | $738 | | Professional services | $1,428 | $727 | | Clinical and preclinical | $649 | $147 | | Other | $366 | $402 | | Total | $13,754 | $13,851 | 7. Leases This note describes the company's lease agreements and the impact of new lease accounting standards - The Company leases approximately 33,000 square feet of research and office space under a non-cancelable operating lease expiring in 2023, with an option to renew for an additional five-year term. A separate cancelable operating lease for 12,000 square feet expires in June 2019[68][69] - With the adoption of ASC 842, the Company recorded a right-of-use asset of $2,131 thousand and corresponding lease liabilities of $2,222 thousand as of March 31, 2019[71] Maturity of Undiscounted Lease Payments (as of March 31, 2019) | Year | Amount (in thousands) | | :--- | :-------------------- | | 2019 (remaining nine months) | $461 | | 2020 | $629 | | 2021 | $648 | | 2022 | $668 | | 2023 | $282 | | Total | $2,688 | | Present value adjustment | $(466) | | Present value of lease liabilities | $2,222 | 8. Notes Payable This note details the company's outstanding debt obligations, including term loans and convertible notes - The Company has Term Loans totaling $25.0 million from Oxford Finance LLC and Silicon Valley Bank, bearing a floating annual interest rate with a minimum floor of 6.95%. Monthly principal payments began in January 2018, with a maturity date of June 1, 2020[74][75] - In January and February 2018, the Company issued $53.0 million in aggregate principal amount of 5.25% convertible senior subordinated notes due 2023 (2023 Notes). These notes are convertible into common stock at an initial conversion price of approximately $3.40 per share[82][83] - The embedded conversion option and related provisions of the 2023 Notes were bifurcated and recorded as a derivative liability, initially valued at $17.3 million, and are remeasured each reporting period[84][85] Scheduled Maturities of 2023 Notes and Term Loans (as of March 31, 2019) | Year | Amount (in thousands) | | :--- | :-------------------- | | 2019 (remaining nine months) | $7,500 | | 2020 | $5,000 | | 2021 | — | | 2022 | — | | 2023 | $52,700 | | Total | $65,200 | 9. Stockholders' Equity This note outlines the components of stockholders' equity, including common stock, warrants, and equity plans - As of March 31, 2019, the Company had 450,000,000 authorized shares of common stock ($0.001 par value) and 176,958,487 shares issued and outstanding. No preferred stock was outstanding[87][88] - The Company has issued 10-year stock purchase warrants to lenders in connection with Term Loans, with exercise prices ranging from $1.86 to $3.86 per share. The fair value of these warrants ($0.5 million) was recorded as a discount to the Notes[89] - The 2015 Equity Incentive Plan (amended and restated) allows for incentive stock options, non-qualified stock options, and restricted stock awards. As of March 31, 2019, 844,301 shares remained available for grant under this plan[90][91][92] 10. Fair Value Measurements This note explains the company's fair value accounting practices and the measurement of financial instruments - The Company applies fair value accounting using a three-level hierarchy. Level 1 inputs are quoted prices in active markets, Level 2 are observable inputs other than Level 1, and Level 3 are unobservable inputs[95][96] - The embedded features of the 2023 Notes are classified as a Level 3 liability, measured at fair value on a recurring basis. Its fair value decreased from $17.091 million at December 31, 2018, to $15.019 million at March 31, 2019, reflecting a $2.072 million change in fair value[99] 11. Income Taxes This note discusses the company's income tax position, including deferred tax assets and valuation allowances - The Company has not recorded any tax provision or benefit for the three months ended March 31, 2019 or 2018. A full valuation allowance has been provided for net deferred tax assets due to uncertainty of future benefit realization[104] ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Senseonics' financial condition and results for Q1 2019, detailing revenue, costs, expenses, liquidity, and ongoing losses Overview This section covers the company's core business, product offerings, and financial performance summary - Senseonics is a medical technology company developing and commercializing continuous glucose monitoring (CGM) systems, Eversense and Eversense XL, designed for long-term implantable use (up to 90 and 180 days, respectively)[108] - Eversense and Eversense XL are approved for sale in Europe, the Middle East, and Africa (EMEA), while Eversense is approved in the United States[108] - The Company launched the Eversense Bridge Program in March 2019 in the U.S. to provide financial assistance to eligible patients, aiming to increase access and stimulate payor coverage decisions[115] - The Company has never been profitable, reporting net losses of $29.4 million for Q1 2019 and $22.3 million for Q1 2018, with an accumulated deficit of $387.2 million as of March 31, 2019. Significant expenses are expected to continue for commercialization and R&D[116][117] European Commercialization of Eversense This section details the company's commercialization strategy and agreements for Eversense in Europe - Senseonics has distribution agreements with Rubin Medical (Scandinavia) and Roche Diagnostics (EMEA, excluding certain countries) for Eversense and Eversense XL[109][110][112] - In January 2019, the agreement with Roche was amended to extend through January 31, 2021, expanding Roche's exclusive distribution rights to 17 additional countries, including Brazil, Russia, India, and China[112] - Eversense XL, with a sensor life of up to 180 days, received CE mark in September 2017 and began commercialization in Europe in Q4 2017[113] United States Development and Commercialization of Eversense This section outlines the development, regulatory approval, and commercialization efforts for Eversense in the U.S - The Eversense system received PMA approval from the FDA on June 21, 2018, following the PRECISE II pivotal clinical trial which showed a MARD of 8.4% over 90 days[114] - U.S. distribution of Eversense began in July 2018 through the Company's direct sales and marketing organization[114] - Category III CPT codes have been received for sensor insertion and removal, with plans to pursue a Category I CPT code[114] Financial Overview This section provides an overview of the company's revenue generation, cost structure, and expense trends - Revenue is generated from sales of Eversense and Eversense XL systems to distributors in Europe and fulfillment partners in the U.S. The Eversense Bridge Program reimbursements are accounted for as a reduction of revenue[119][120] - Cost of sales includes raw materials, contract manufacturing fees, warranty reserves, inventory valuation reserves, scrap, and shipping costs. Gross margin is expected to improve long-term with increased sales volume but may fluctuate[121] - Sales and marketing expenses are expected to increase substantially due to expanded commercialization efforts in the U.S. and Europe[122] - Research and development expenses, primarily for Eversense and future enhancements, are expected to increase in absolute dollars but decline as a percentage of total expenses as commercialization expands[123][125] - General and administrative expenses are increasing due to public company operations, including additional personnel, legal, accounting, and compliance costs. These are expected to further increase after the Company no longer qualifies as an 'emerging growth company' by December 31, 2019[126][127] - Other income (expense), net, includes interest income, interest expense on convertible notes and term loans, and changes in the fair value of derivative liability related to the 2023 Notes' embedded conversion option[128] Results of Operations This section compares the company's financial performance for the three months ended March 31, 2019 and 2018 Comparison of Three Months Ended March 31, 2019 and 2018 (in thousands) | Metric | March 31, 2019 | March 31, 2018 | Period-to-Period Change | | :------------------------------------ | :------------- | :------------- | :---------------------- | | Revenue | $3,423 | $2,946 | $477 | | Cost of sales | $6,733 | $3,308 | $3,425 | | Gross profit | $(3,310) | $(362) | $(2,948) | | Sales and marketing expenses | $12,834 | $3,441 | $9,393 | | Research and development expenses | $7,108 | $8,113 | $(1,005) | | General and administrative expenses | $6,516 | $4,011 | $2,505 | | Operating loss | $(29,768) | $(15,927) | $(13,841) | | Total other income (expense), net | $403 | $(6,346) | $6,749 | | Net loss | $(29,365) | $(22,273) | $(7,092) | - Revenue increased by $0.5 million (16.2%) primarily due to U.S. Eversense sales following its July 2018 launch[131] - Cost of sales increased by $3.4 million (103.5%) due to U.S. sales and write-offs from product design changes and yield losses, leading to a significant decrease in gross margin from (12.3)% to (96.7)%[132][133] - Sales and marketing expenses surged by $9.4 million (273%) due to increased headcount and marketing costs for the U.S. launch[134] - Research and development expenses decreased by $1.0 million (12.4%) due to reduced development efforts at contract manufacturers and completion of U.S. PMA approval activities, partially offset by higher clinical trial expenses[136] - General and administrative expenses rose by $2.5 million (62.4%) due to increased headcount and other operational support costs[137] - Total other income (expense), net, improved by $6.7 million, primarily driven by a $2.1 million decrease in the fair value of derivative liability in Q1 2019 compared to a $4.8 million increase in Q1 2018[138] Liquidity and Capital Resources This section discusses the company's cash position, funding needs, and debt obligations - The Company has incurred substantial losses and negative cash flows from operations since inception, with a net loss of $29.4 million for Q1 2019 and an accumulated deficit of $387.2 million[139] - As of March 31, 2019, cash and cash equivalents totaled $103.7 million. The Company does not expect this to be sufficient to fund operations through Q1 2020 and will require additional capital through equity offerings, debt financings, or collaborations[140][146][147] - The Company has $25.0 million in Term Loans with Oxford and SVB, bearing a floating interest rate (minimum 6.95%) and maturing June 1, 2020. It also has $52.7 million in 5.25% convertible senior subordinated notes due 2023[148][149][150][155][157] Summary of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(30,152) | $(20,499) | | Net cash (used in) provided by investing activities | $(490) | $16,187 | | Net cash (used in) provided by financing activities | $(2,476) | $49,064 | | Net (decrease) increase in cash and cash equivalents | $(33,118) | $44,752 | - Net cash used in operating activities increased to $30.2 million in Q1 2019 from $20.5 million in Q1 2018, driven by net loss and changes in operating assets and liabilities (e.g., inventory increase, accounts receivable decrease)[160][161] - Net cash used in investing activities was $0.5 million in Q1 2019 (capital expenditures, lease payments), a shift from $16.2 million provided in Q1 2018 (sales/maturities of marketable securities)[162] - Net cash used in financing activities was $2.5 million in Q1 2019 (Term Loan principal payments), a decrease from $49.1 million provided in Q1 2018 (2023 Notes issuance, stock option exercise)[163][164] - The Company has no material off-balance sheet arrangements and expects to no longer qualify as an 'emerging growth company' by December 31, 2019, which will require compliance with additional reporting requirements[166][168] ITEM 3: Quantitative and Qualitative Disclosures about Market Risk This section discusses the Company's exposure to market risks, including interest rate and foreign currency fluctuations, and their potential financial impact Interest Rate Risk This section details the company's exposure to interest rate fluctuations and their potential impact - The Company's primary exposure to market risk is interest rate sensitivity. As of March 31, 2019, it held $103.7 million in cash and cash equivalents, primarily in interest-bearing money market accounts[172] - Due to the short-term maturities and low-risk profile of its cash equivalents, a hypothetical 100 basis point change in interest rates would not materially affect their fair market value. The interest rates on the 2023 Notes and Term Loans are fixed[174] Foreign Currency Risk This section discusses the company's exposure to foreign currency exchange rate fluctuations - The majority of international sales are denominated in Euros, making the Company's dollar value of sales susceptible to exchange rate fluctuations. A strengthening U.S. dollar could decrease revenue from these sales[175] - To date, foreign currency transaction gains and losses have not been material, and a hypothetical 10% change in exchange rates is not expected to have a material impact on operating results or financial condition. The Company does not currently engage in hedging transactions[175] ITEM 4: Controls and Procedures This section details the evaluation of disclosure controls and procedures and reports on changes in internal control over financial reporting - As of March 31, 2019, management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level[176][177] - There were no changes in internal control over financial reporting during the quarter ended March 31, 2019, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[178] PART II: Other Information This section covers non-financial disclosures, including legal proceedings, risk factors, and exhibit listings ITEM 1: Legal Proceedings This section states that the Company is not currently involved in any material legal proceedings - The Company is not currently a party to any material legal proceedings and is unaware of any pending or threatened legal proceedings that could have a material adverse effect on its business, operating results, or financial condition[180] ITEM 1A: Risk Factors This section refers to the risk factors previously disclosed in the Company's Annual Report on Form 10-K - The Company's risk factors have not materially changed from those described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2018[181] ITEM 2: Unregistered Sales of Equity and Securities and Use of Proceeds This item is not applicable for the reporting period ITEM 3: Defaults Upon Senior Securities This item is not applicable for the reporting period ITEM 4: Mine Safety Disclosures This item is not applicable for the reporting period ITEM 5: Other Information This item indicates no other information to report ITEM 6: Exhibits This section lists the exhibits filed or incorporated by reference, including organizational documents, agreements, and certifications - The exhibits include the Amended and Restated Certificate of Incorporation, Bylaws, Certificate of Amendment, Fourth Amendment to Distribution Agreement with Roche, Executive Employment Agreements, and various certifications (Sarbanes-Oxley Act, XBRL documents)[188] SIGNATURES This section provides the official signatures certifying the accuracy and completeness of the financial report - The report was signed on May 9, 2019, by Jon Isaacson, Chief Financial Officer (Principal Financial Officer) of Senseonics Holdings, Inc[195]