SenesTech, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited financial amounts are in thousands of dollars except per-share and share data. SenesTech commercializes ContraPest, an EPA-registered fertility-control bait for rat populations, and is developing other product candidates.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Sales shown in statements | $36 | $55 |
| Cost of sales | $20 | $39 |
| Gross profit | $16; approximately 44% margin | $16; approximately 29% margin |
| Operating expenses | $4,101 | $6,763 |
| Net loss | $(4,113) | $(6,778) |
| Net loss per share | $(0.25) | $(0.41) |
| Operating cash used | — | $(4,553) |
At June 30, cash was $1.847 million and held-to-maturity securities were $2.447 million, totaling approximately $4.3 million in cash and highly liquid investments. Total assets were $7.205 million, current liabilities $1.201 million, and stockholders’ equity $5.665 million. Short- and long-term debt totaled $554,000; a further $3,000 of related-party notes was reported separately. Accumulated deficit was $80.4 million.
Changes versus prior comparable periods
- Q2 sales increased to $36,000 from $10,000; six-month sales increased to $55,000 from $17,000. Management attributed the increase to ContraPest distributor sales. The filing’s notes give different product-revenue amounts; see investor verification items below.
- Q2 net loss widened to $4.113 million from $3.583 million, while six-month net loss narrowed to $6.778 million from $7.038 million.
- Q2 operating expenses rose to $4.101 million from $3.605 million, as general and administrative expense increased, partly offset by lower research and development expense. For six months, operating expenses declined to $6.763 million from $7.067 million.
- Six-month R&D expense decreased to $1.270 million from $1.796 million; G&A increased to $5.493 million from $5.271 million. Stock-based compensation rose to $2.735 million from $1.872 million for the six-month period, including $1.7 million related to warrants issued in June.
- Operating cash use improved from $5.636 million to $4.553 million. Cash declined by $254,000 in the first half of 2018, compared with a $9.152 million decline in the first half of 2017. The 2018 period included $2.608 million of proceeds from securities sales and $2.213 million from warrant exercises.
Outlook, risks, and notable items
- Management said June 30 liquidity, anticipated revenue, and approximately $5.4 million in net proceeds from the Rights Offering closed August 13 were expected to fund operations for the “near future.” The company expects continued significant expenses and losses; it may need further capital, cut expenses, or delay or limit development if revenue targets or financing are insufficient. No quantified revenue guidance or precise runway is provided.
- The August Rights Offering issued 5,357,052 common shares and 5,357,052 warrants at $1.15 per unit/share warrant exercise price, respectively. The filing reports 23,425,287 common shares outstanding as of August 13, 2018. The offering and potential warrant exercises create dilution risk.
- Major business risks include limited sales and market acceptance, continued dependence on external financing, regulatory approvals and restrictions, scaling manufacturing, and reliance on a single source of refined triptolide. ContraPest had registrations in all 50 states and the District of Columbia; the company had requested EPA reclassification from restricted to general use.
- New Enterprises sued SenesTech and Roth Capital in February 2018, alleging fraud, securities fraud and other claims and seeking damages. SenesTech disputes the claims and intends to defend itself. Accrued expenses include $269,000 for litigation; management said it was not aware of pending or threatened litigation expected to have a material adverse effect.
- The company regained Nasdaq’s minimum bid-price compliance in June 2018. Management concluded disclosure controls were effective at quarter-end; the filing also discusses a previously identified internal-control material weakness and the company’s ongoing remediation efforts.
- SenesTech adopted ASC 606 effective January 1, 2018, with no material financial-statement impact. Six-month capital spending was $102,000; the company also sold a field-service vehicle for $185,000 and recorded a $15,000 loss.
Important facts for investors to verify
- Reconcile reported sales of $36,000 for Q2 and $55,000 for six months with the revenue note, which states ContraPest revenue of $19,000 and $54,000, respectively; the filing text does not clearly explain the difference.
- Review the Rights Offering’s final net proceeds, post-offering share count, warrant terms, and the potential effect of the offering and outstanding warrants on dilution.
- Assess cash burn, actual revenue growth, and financing needs against management’s unquantified “near future” liquidity outlook.
- Monitor the New Enterprises litigation, the $269,000 accrued litigation amount, and any changes in exposure or control remediation disclosures.