Senseonics(SENS) - 2021 Q1 - Quarterly Report

PART I: Financial Information ITEM 1: Financial Statements This section presents Senseonics Holdings, Inc.'s unaudited condensed consolidated financial statements and related notes for Q1 2021 and FY 2020 Condensed Consolidated Balance Sheets | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Cash and cash equivalents | $178,610 | $18,005 | | Total current assets | $191,331 | $30,246 | | Total assets | $195,947 | $35,918 | | Total current liabilities | $15,688 | $16,638 | | Derivative liabilities | $243,018 | $62,119 | | Total liabilities | $381,846 | $177,190 | | Accumulated deficit | $(898,025) | $(648,511) | | Total stockholders' deficit | $(185,899) | $(144,083) | - The company's cash and cash equivalents significantly increased from $18.0 million at December 31, 2020, to $178.6 million at March 31, 2021, primarily due to recent financing activities. Total assets also saw a substantial increase from $35.9 million to $195.9 million[8] - Derivative liabilities surged from $62.1 million to $243.0 million, contributing to a large increase in total liabilities from $177.2 million to $381.8 million. The accumulated deficit worsened from $(648.5) million to $(898.0) million[8] Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | Change (in thousands) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | | Total revenue | $2,846 | $36 | $2,810 | | Cost of sales | $2,320 | $19,670 | $(17,350) | | Gross profit (loss) | $526 | $(19,634) | $20,160 | | Operating loss | $(11,316) | $(43,831) | $32,515 | | Total other (expense) income, net | $(238,198) | $1,238 | $(239,436) | | Net loss | $(249,514) | $(42,593) | $(206,921) | | Basic and diluted net loss per common share | $(0.68) | $(0.21) | $(0.47) | - Total revenue increased significantly to $2.8 million in Q1 2021 from $36 thousand in Q1 2020. Cost of sales decreased substantially from $19.7 million to $2.3 million, leading to a positive gross profit of $0.5 million compared to a gross loss of $(19.6) million in the prior year[10] - Operating loss improved from $(43.8) million to $(11.3) million. However, a substantial increase in 'Total other (expense) income, net' from $1.2 million income to $(238.2) million expense, primarily due to non-cash fair value adjustments of derivatives and options, resulted in a much larger net loss of $(249.5) million in Q1 2021 compared to $(42.6) million in Q1 2020[10] Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Common Stock (Shares) | 427,915 | 265,582 | | Common Stock (Amount) | $428 | $266 | | Additional Paid-In Capital | $711,698 | $504,162 | | Accumulated Deficit | $(898,025) | $(648,511) | | Total Stockholders' Deficit | $(185,899) | $(144,083) | - The number of common shares outstanding increased significantly from 265.6 million at December 31, 2020, to 427.9 million at March 31, 2021, primarily due to new stock issuances and conversions of preferred stock and notes[13] - Additional paid-in capital increased by over $200 million, reflecting the capital raised through equity offerings. Despite this, the accumulated deficit grew substantially due to the net loss incurred during the period, leading to a larger total stockholders' deficit[13] Unaudited Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net cash used in operating activities | $(16,258) | $(29,048) | | Net cash used in investing activities | $(11) | $(100) | | Net cash provided by (used in) financing activities | $176,674 | $(47,985) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $160,405 | $(77,133) | | Cash, cash equivalents and restricted cash, at ending of period | $178,610 | $18,805 | - Net cash used in operating activities decreased from $(29.0) million in Q1 2020 to $(16.3) million in Q1 2021, primarily due to adjustments for non-cash items like changes in fair value of derivatives and options, despite a larger net loss[15] - Net cash provided by financing activities dramatically increased to $176.7 million in Q1 2021, compared to $(48.0) million used in Q1 2020. This was driven by significant proceeds from common stock issuance and preferred stock issuance[15] - The company experienced a net increase in cash, cash equivalents, and restricted cash of $160.4 million in Q1 2021, resulting in an ending balance of $178.6 million, a substantial improvement from the $18.8 million at the end of Q1 2020[15] Notes to Unaudited Condensed Consolidated Financial Statements 1. Organization and Nature of Operations - Senseonics Holdings, Inc. is a Delaware corporation focused on developing and commercializing long-term, implantable continuous glucose monitoring (CGM) systems for diabetes management[17] - Senseonics, Incorporated is a wholly-owned subsidiary, originally incorporated in 1996[18] 2. Liquidity and Capital Resources - The company has incurred substantial losses and cumulative negative cash flows since its inception, with an accumulated deficit of $898.0 million as of March 31, 2021. It has never been profitable[19] - Operations are primarily funded through the issuance of preferred stock, common stock, convertible notes, and debt[19] | Financing Activity | Date | Net Proceeds (in millions) | Shares Issued | | :-------------------------------- | :---------------- | :------------------------ | :---------------- | | Underwritten Public Offering | Jan 2021 | $106.1 | 59,740,259 | | Registered Direct Offering | Jan 2021 | $46.1 | 40,000,000 | | Series A Preferred Stock Purchase | Jan 2021 | $22.8 (gross) | 22,783 shares | | PHC Notes Issuance | Aug 2020 | $35.0 (principal) | 2,941,176 common shares (financing fee) | | Equity Line Agreement (Series B Preferred Stock) | Nov 2020 | Up to $12.0 | N/A (commitment) | - As of March 31, 2021, cash and cash equivalents stood at $178.6 million[19] 3. Summary of Significant Accounting Policies - Financial statements are prepared in accordance with U.S. GAAP for interim information, with certain condensations permitted by SEC rules[27] - Management makes estimates for items such as stock-based compensation, long-lived asset recoverability, deferred taxes, derivative liabilities, and inventory obsolescence, considering COVID-19 impacts[29] - The company operates and manages its business as a single segment: glucose monitoring products[30] - Revenue is recognized when customers obtain control of the product, typically upon delivery, at a fixed price to strategic partners and distributors. Variable consideration (discounts) reduces revenue[38][39][41][42] - For the three months ended March 31, 2021, 81% of total revenue was derived from one customer, Ascensia, a significant concentration change from the prior year[44] - Recently adopted ASU 2019-12 (Simplifying Income Taxes) had no material impact. ASU 2016-13 (Credit Losses) and ASU 2020-06 (Convertible Instruments) will be adopted in future periods, with no significant impact expected from ASU 2016-13[51][52][53] 4. Inventory, net | Inventory Category | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :----------------- | :----------------------------- | :----------------------------- | | Finished goods | $556 | $203 | | Work-in-process | $3,562 | $2,626 | | Raw materials | $2,466 | $2,452 | | Total | $6,584 | $5,281 | - Total inventory increased from $5.3 million at December 31, 2020, to $6.6 million at March 31, 2021, driven by increases in finished goods and work-in-process[54] - No charge for inventory obsolescence was recorded for the three months ended March 31, 2021, compared to a $15.0 million charge in the prior year period[55] 5. Prepaid Expenses and Other Current Assets | Category | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------ | :----------------------------- | :----------------------------- | | Contract manufacturing | $3,345 | $3,324 | | Insurance | $294 | $50 | | Marketing and sales | $292 | $53 | | Total | $4,451 | $3,774 | - Prepaid expenses and other current assets increased to $4.5 million at March 31, 2021, from $3.8 million at December 31, 2020, primarily due to increases in insurance and marketing/sales prepayments[56] 6. Accrued Expenses and Other Current Liabilities | Category | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Interest on notes payable | $2,929 | $1,773 | | Professional and administration services | $1,472 | $880 | | Compensation and benefits | $1,095 | $4,344 | | Product warranty and replacement obligations | $557 | $646 | | Total | $9,635 | $11,674 | - Total accrued expenses and other current liabilities decreased to $9.6 million at March 31, 2021, from $11.7 million at December 31, 2020. This was mainly due to a significant reduction in compensation and benefits accruals, partially offset by an increase in interest on notes payable[57] 7. Notes Payable, Preferred Stock and Stock Purchase Warrants - The company received a $5.8 million PPP Loan in April 2020, with a 1.0% interest rate and a two-year term. Forgiveness is possible based on usage for payroll and other eligible costs, but a workforce reduction will decrease the forgivable amount[58][59][61] - An Equity Line Agreement with Energy Capital allows for the purchase of up to $12.0 million in Series B convertible preferred stock. The associated put/call option is classified as a liability and its fair value increased to $68.9 million as of March 31, 2021[63][64] - All 25,783 shares of Series A Preferred Stock issued to Masters have been converted to common stock as of March 31, 2021, generating $22.8 million in gross proceeds[66] - The company issued $35.0 million in PHC Notes to PHC, bearing 9.5% interest (decreasing to 8.0% upon 180-day Eversense approval in the US) and maturing October 31, 2024. These notes are convertible into common stock at $0.54 per share[69][70][71] - The PHC Notes include embedded conversion features and other provisions requiring bifurcation as a derivative liability, which was recorded at $25.8 million initially and is adjusted to fair value each period[76] | Note Type | Principal (March 31, 2021, in thousands) | Carrying Amount (March 31, 2021, in thousands) | | :---------- | :--------------------------------------- | :--------------------------------------------- | | 2023 Notes | $15,700 | $13,248 | | 2025 Notes | $51,199 | $26,803 | | PHC Notes | $35,000 | $12,257 | | PPP Loan | $5,763 | $5,763 | | Total | $107,662 | $58,071 | | Interest Expense Category | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------ | :------------------------------------------ | :------------------------------------------ | | Effective Interest Rate Interest | $1,771 | $2,180 | | Debt Discount and Fees | $2,217 | $1,891 | | Issuance Costs | $67 | $58 | | Loss on Extinguishment | $3,183 | $0 | | Final Payment Fee | $0 | $240 | | Total Interest Expense | $7,238 | $4,369 | 8. Stockholders' Deficit - During Q1 2021, the company sold 99,740,259 shares of common stock through an underwritten public offering (59,740,259 shares) and a registered direct offering (40,000,000 shares)[86] - No shares were sold under the Open Market Sale Agreement in Q1 2021, compared to 175,289 shares sold for $0.1 million in Q1 2020[85] 9. Stock-Based Compensation - The 2015 Equity Incentive Plan allows for incentive stock options, non-qualified stock options, and restricted stock units. Shares reserved automatically increase annually by 3.5% of outstanding common stock[87][88] - The Inducement Plan (adopted May 2019) reserved 1,800,000 shares for inducement grants to new employees or directors[89] - The 2016 Employee Stock Purchase Plan (ESPP) allows participants to purchase common stock at 85% of the lower fair market value on the offering or purchase date, through payroll deductions[90][91] - The 1997 Stock Option Plan no longer grants new awards since the 2015 Plan became effective[94] 10. Fair Value Measurements | Financial Instrument | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Money market funds (Level 1) | $170,003 | $3 | | PHC Option (Level 3 asset) | $1,104 | $1,886 | | Energy Capital Option (Level 3 liability) | $68,923 | $16,255 | | Embedded features of 2023 Notes (Level 3 liability) | $7,085 | $622 | | Embedded features of PHC Notes (Level 3 liability) | $150,091 | $45,647 | | Embedded features of 2025 Notes (Level 2 liability) | $84,120 | $15,850 | | Masters Option (Level 3 liability) | $0 | $23,479 | - The fair value of Level 3 instruments increased significantly from $84.1 million at December 31, 2020, to $226.7 million at March 31, 2021, primarily due to a $112.6 million loss on change in fair value of derivatives and a $52.7 million loss on fair value adjustment of the Energy Capital Option[96] - Key unobservable inputs for Level 3 measurements include risky (bond) rates (15.0%-30.0%), stock price volatility (95% for PHC Notes), and probabilities of conversion provisions (5.0%-75.0%)[96] 11. Income Taxes - No tax provision or benefit was recorded for Q1 2021 or Q1 2020. A full valuation allowance is maintained against net deferred tax assets due to uncertainty of future benefit realization[97] - The CARES Act did not result in material adjustments to the company's income tax provision or net deferred tax assets[98] 12. Related Party Transactions - Ascensia, through its parent company PHC, holds a noncontrolling ownership interest and board representation. Revenue from Ascensia was $2.4 million in Q1 2021, with $1.4 million due as of March 31, 2021[99] - Roche Holding A.G. also has a noncontrolling interest. Revenue from Roche was less than $0.1 million in both Q1 2021 and Q1 2020[100] ITEM 2: Management Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Senseonics' business, strategic shifts, and financial performance for Q1 2021, covering revenue, expenses, and liquidity, highlighting the Ascensia partnership and financing Overview - Senseonics is a medical technology company developing and commercializing long-term, implantable continuous glucose monitoring (CGM) systems, Eversense and Eversense XL, for diabetes management[103] - The Eversense system offers 90-day and 180-day wear periods, significantly longer than non-implantable CGM systems (7-14 days)[103] - Revenue is generated from sales of Eversense Sensor Packs and Smart Transmitter Packs to distributors and strategic fulfillment partners[104][105] COVID-19 and Restructuring and Transition of Commercial Strategy - In March 2020, due to the COVID-19 pandemic and limited cash, Senseonics temporarily suspended commercial sales and marketing of Eversense in the US to new patients, focusing on existing users and 180-day product development[108] - A workforce reduction of approximately 60% occurred in March 2020, primarily impacting sales personnel[108] - In August 2020, a collaboration and commercialization agreement was signed with Ascensia, granting them exclusive worldwide distribution rights for Eversense CGM systems, with a phased transition of commercial responsibilities[109] - Ascensia is obligated to meet minimum annual revenue targets and sales/marketing spend to maintain exclusivity, while Senseonics remains responsible for product development and manufacturing[109] United States Development and Commercialization of Eversense - The Eversense CGM system received FDA PMA approval for 90-day use in June 2018 and non-adjunctive indication (dosing claim) in June 2019, allowing it to replace fingerstick blood glucose measurements[110][112] - The PROMISE pivotal clinical trial for the 180-day Eversense system showed a MARD of 8.5%-9.6% with reduced calibration. A PMA supplement application was submitted to the FDA on September 30, 2020[111] - FDA approved a subgroup of PROMISE trial participants to continue for 365 days to gather feasibility data for a 365-day sensor, with plans to seek IDE approval for a clinical trial in H2 2021[114] - Eversense received MRI approval in the United States in 2019, a first for the CGM category, meaning the sensor does not need to be removed during MRI scans[113] European Commercialization of Eversense - Eversense XL received CE mark in September 2017 for up to 180-day sensor life and began commercialization in Europe in Q4 2017[115] - The distribution agreement with Roche Diagnostics International AG expired on January 31, 2021, with sales transitioning to Ascensia[116][117] Financial Overview - Revenue increased by $2.8 million to $2.8 million for Q1 2021, primarily due to the transition of commercial responsibility to Ascensia and their orders for European distribution[132] - Cost of sales decreased by $17.4 million to $2.3 million, mainly due to a $15.0 million reduction in inventory obsolescence and $1.2 million in scrap expense, along with sales of previously impaired inventory[133] - Gross profit improved significantly to $0.5 million in Q1 2021 from a $(19.6) million loss in Q1 2020[134] - Sales and marketing expenses decreased by $9.5 million to $1.6 million, largely due to headcount reduction and the transfer of marketing responsibilities to Ascensia[135] - Research and development expenses decreased by $2.1 million to $5.3 million, driven by lower clinical trial costs (PROMISE trial), reduced contract fabrication, and personnel costs[136] - General and administrative expenses decreased by $0.7 million to $5.0 million, mainly from reduced legal, occupancy, and administrative expenses, partially offset by increased stock-based compensation[137] - Total other expense, net, was $(238.2) million in Q1 2021, a $239.4 million decrease from Q1 2020, primarily due to a $191.2 million non-cash loss on fair value of embedded derivatives and a $52.7 million non-cash loss on fair value adjustment of the Energy Capital Option[138] Liquidity and Capital Resources - The company has historically incurred substantial losses and negative cash flows, with an accumulated deficit of $898.0 million as of March 31, 2021[140] - As of March 31, 2021, cash and cash equivalents were $178.6 million[140] | Financing Activity | Net Proceeds (in millions) | | :-------------------------------- | :------------------------ | | Underwritten Public Offering (Jan 2021) | $106.1 | | Registered Direct Offering (Jan 2021) | $46.1 | | Masters Series A Preferred Stock (Jan 2021) | $22.8 (gross) | | PHC Notes (Aug 2020) | $35.0 (principal) | | Energy Capital Equity Line Agreement (Nov 2020) | Up to $12.0 | | PPP Loan (Apr 2020) | $5.8 | | Open Market Sale Agreement (Q1 2020) | $0.1 | | Total Net Cash Provided by Financing Activities (Q1 2021) | $176.7 | | Total Net Cash Used in Financing Activities (Q1 2020) | $(48.0) | - Management believes existing cash and cash equivalents will be sufficient to meet anticipated operating needs through 2022, contingent on successful commercialization, product development, and regulatory approvals[149][168] - Net cash used in operating activities decreased to $(16.3) million in Q1 2021 from $(29.0) million in Q1 2020, despite a larger net loss, due to significant non-cash adjustments[171][172] - Net cash provided by financing activities was $176.7 million in Q1 2021, a substantial increase from $(48.0) million used in Q1 2020, driven by common stock and preferred stock issuances[174][175] Off-Balance Sheet Arrangements - The company did not have any off-balance sheet arrangements during the three months ended March 31, 2021[176] ITEM 3: Quantitative and Qualitative Disclosures about Market Risk This section details the company's exposure to interest rate and foreign currency market risks and its current management approach Interest Rate Risk - The company's primary exposure to market risk is interest rate sensitivity, affecting its $178.6 million cash and cash equivalents held in interest-bearing money market accounts[177] - Due to the short-term maturities and low-risk profile of investments, a 100 basis point change in interest rates would not materially affect the fair market value of cash equivalents[177] - Interest rates on notes payable are fixed, and the company does not currently engage in hedging transactions for interest rate risk[177] Foreign Currency Risk - The majority of international sales are Euro-denominated, making the U.S. dollar value of sales susceptible to Euro exchange rate fluctuations[178] - 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[178] - The company does not currently engage in hedging transactions for foreign currency exchange rate risk[178] - The COVID-19 pandemic has introduced significant volatility in financial markets, potentially increasing foreign currency and interest rate risk[179] ITEM 4: Controls and Procedures This section addresses the company's internal controls over financial reporting and disclosure procedures, including SEC amendments for smaller reporting companies Changes to Smaller Reporting Company Requirements - SEC amendments to 'accelerated filer' definitions mean certain low-revenue issuers are no longer required to have an independent auditor attest to management's assessment of ICFR under SOX Section 404(b)[180] - As a result of these amendments, Senseonics is no longer required to have its independent auditor attest to its ICFR, but management must still assess its effectiveness[181] - The company will reassess its non-accelerated filer classification as of December 31, 2021, based on its public float as of June 30, 2021[182] Evaluation of Disclosure Controls and Procedures - Management, with the assistance of the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2021[183] Changes in Internal Control over Financial Reporting - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, the company's ICFR during the quarter ended March 31, 2021[184] PART II: Other Information ITEM 1: Legal Proceedings This section discloses ongoing legal proceedings, including a civil complaint filed against the company regarding marketing practices - The company is subject to litigation and claims in the ordinary course of business[185] - In February 2021, a civil complaint was filed in the Western District of Texas alleging violations of the federal False Claims Act and the Texas Medicaid Fraud Prevention Law related to the company's marketing practices for Eversense CGM System. The government declined to intervene[186] - The company is reviewing the claim and believes it has meritorious defenses[186] ITEM 1A: Risk Factors This section refers to the company's risk factors, noting no material changes from prior annual filings - The company's risk factors have not changed materially from those described in its Annual Report on Form 10-K[187] ITEM 2: Unregistered Sales of Equity and Securities and Use of Proceeds This section reports no unregistered sales of equity and securities or use of proceeds for the period - This item is not applicable for the reporting period[188] ITEM 3: Defaults Upon Senior Securities This section reports no defaults upon senior securities for the period - This item is not applicable for the reporting period[189] ITEM 4: Mine Safety Disclosures This section reports no mine safety disclosures for the period - This item is not applicable for the reporting period[190] ITEM 5: Other Information This section reports no other information for the period - No other information is reported under this item[191] ITEM 6: Exhibits This section lists the exhibits filed or incorporated by reference in the Quarterly Report on Form 10-Q - The exhibits listed on the Exhibit Index are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q[191] SIGNATURES This section contains the required signatures for the Quarterly Report on Form 10-Q - The report is duly signed on behalf of Senseonics Holdings, Inc. by Nick B. Tressler, Chief Financial Officer, on May 13, 2021[195][196][197]