Senestech, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Financial statement amounts below are in thousands of dollars unless otherwise noted.
Business context
Senestech is commercializing ContraPest, an EPA-registered fertility-control bait for Norway and roof rats, intended to complement pest-management programs. All reported revenue in the periods presented came from ContraPest sales. The company had received ContraPest registration in all 50 states and the District of Columbia; in October 2018, the EPA approved removal of its Restricted Use Pesticide designation, with individual state approvals still being pursued.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $105 | $17 | $160 | $34 |
| Gross profit (loss) | ($9) | $6 | $7 | $7 |
| Operating expenses | $2,489 | $2,956 | $9,252 | $10,023 |
| Net loss | ($2,500) | ($2,937) | ($9,278) | ($9,975) |
| Net loss attributable to common shareholders | ($2,833) | ($2,937) | ($9,611) | ($9,975) |
| Loss per share, basic and diluted | ($0.14) | ($0.28) | ($0.53) | ($0.97) |
- Margins: Q3 gross margin was negative 8.6%, versus positive 35.5% a year earlier. Nine-month gross margin was 4.4%, versus 20.6%.
- Cash flow: Nine-month operating cash use was $6,916, compared with $7,596 in 2017. Investing provided $2,592, largely from securities sales; financing provided $7,014, principally from stock issuance and warrant exercises. Cash increased $2,690 to $4,791.
- Liquidity: At September 30, cash was $4,791 and short-term investments were $2,448, or approximately $7.2 million combined. Current assets were $8,757 and current liabilities $972. Management estimated available cash and short-term investments, together with anticipated revenue, would fund current operations for at least 12 months.
- Debt and balance sheet: Short-term debt was $235 and long-term debt was $296; total liabilities were $1,291. Total assets were $9,928 and stockholders’ equity $8,637. Accumulated deficit was $83,208.
Material changes versus prior periods
- Revenue rose from a small base as distributor sales of ContraPest increased. Q3 sales reflected increased marketing and promotions.
- Cost of sales exceeded Q3 revenue, producing a gross loss. Management attributed pressure on gross profit and margins to discounts, promotions, and manufacturing-scale-up scrap, including product deemed unsellable. It expected manufacturing efficiencies to improve cost of sales as a percentage of revenue.
- Nine-month R&D expense fell to $1,746 from $2,517, primarily due to lower personnel, consulting, and facility costs. Nine-month SG&A was unchanged at $7,506.
- Common shares outstanding increased to approximately 23.4 million from 16.4 million at December 31, 2017. The August rights offering raised approximately $5.1 million net; warrant exercises generated $2.2 million during the first nine months.
- A $333 deemed dividend arose from anti-dilution price adjustments to certain warrants, increasing the loss attributable to common shareholders but not the reported net loss. Stock-based compensation was $3,090 for the first nine months, including a $1.7 million charge related to inducement warrants issued in June.
Outlook, risks, and unusual items
- Management expected ContraPest sales to increase quarter over quarter for the foreseeable future and anticipated improved manufacturing efficiency. These expectations depend on sales and margin targets and are not assurances of performance.
- The company expected continuing operating losses and cash needs. If anticipated revenue or margins are not achieved, it may cut expenses and is likely to need additional capital; unavailable or unfavorable financing could force it to delay, limit, or terminate development or commercialization efforts. It may never become profitable or generate positive cash flow.
- On September 26, 2018, Nasdaq notified the company that its bid price had remained below $1 for 30 consecutive business days. The initial compliance deadline was March 25, 2019; a reverse stock split was among the options under consideration. Failure to regain compliance could lead to delisting and impair access to capital.
- New Enterprises sued the company and Roth Capital Partners in February 2018, alleging, among other claims, fraud, securities fraud, and breach of a lock-up agreement, and seeking monetary damages. The company disputed the claims and intended to defend itself. Accrued litigation expense was $269; the filing does not clearly state whether this amount represents a reserve for this case.
- Operating-lease commitments totaled $282. The filing reported no off-balance-sheet arrangements. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether subsequent sales growth and gross-margin improvement materialized, particularly after the reported promotions and scale-up scrap.
- Cash burn and financing needs relative to management’s stated 12-month liquidity expectation; the company remained substantially loss-making and revenue was limited.
- Potential dilution from 11.7 million warrants outstanding at September 30, 2018, as well as stock options and other equity awards.
- Progress toward Nasdaq’s minimum bid-price compliance, including any reverse stock split or delisting developments.
- Developments and potential financial exposure in the New Enterprises litigation, and state-level approval of the revised ContraPest label.