Senestech, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unless stated otherwise, financial amounts below are in U.S. dollars; the filing presents statement amounts in thousands.
Business context
SenesTech is commercializing ContraPest, a liquid fertility-control bait designed to reduce Norway and roof rat populations. The company reports limited product revenue and continues to invest in sales, manufacturing, regulatory work and research and development. ContraPest is registered in all 50 states and the District of Columbia; 48 states had approved removal of its Restricted Use Product designation.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Sales | $160,000 | $71,000 | $248,000 | $108,000 |
| Gross profit (margin) | $41,000 (25.6%) | $28,000 (39.4%) | $79,000 (31.9%) | $43,000 (39.8%) |
| Operating expenses | $2.390 million | $1.653 million | $4.267 million | $3.994 million |
| Operating loss | $2.349 million | $1.625 million | $4.188 million | $3.951 million |
| Net loss | $1.700 million | $1.629 million | $3.521 million | $3.946 million |
| Net loss per share | $0.10 | $0.59 | $0.35 | $1.99 |
| Operating cash used | — | $4.001 million | $3.573 million |
At June 30, 2021, cash was $13.129 million, current assets $14.575 million, current liabilities $712,000, total liabilities $1.311 million and stockholders’ equity $14.324 million. Debt was $67,000, all current; operating lease liabilities were $599,000. Cash increased $9.486 million during the first half, primarily because of $13.570 million of financing cash flow, including $12.421 million net proceeds from common-stock issuance and $1.220 million from warrant exercises.
Material changes versus comparable periods
- Sales increased 125% in Q2 and 130% for the first half year over year, but remained low in absolute terms.
- Gross margin declined in both comparisons. Management attributed the pressure to customer sales incentives and manufacturing scrap during scale-up; Q2 margin was also affected by new-customer incentives.
- Q2 operating expenses rose $737,000, with higher R&D and SG&A. First-half operating expenses rose $273,000: R&D increased $388,000 while SG&A decreased $115,000.
- First-half net loss improved from $3.946 million to $3.521 million. The 2020 comparable common-stockholder loss included a $414,000 deemed dividend, so per-share and common-stockholder loss comparisons are affected by this item and a substantially larger 2021 share count.
- Q2 2021 net loss included $650,000 of PPP loan forgiveness income. The loan and related interest were forgiven in full; this is not recurring product revenue.
- Common shares outstanding increased from 5.10 million at December 31, 2020 to 12.19 million at June 30, 2021, primarily reflecting financing transactions and warrant exercises.
Outlook, risks and unusual items
Management expects continued operating losses and says current cash, anticipated revenue and additional equity sales are expected to fund current operations for at least 12 months. This expectation is conditional: lower-than-expected revenue or margins, or higher expenses, could require earlier financing. The company says it may need additional capital and could have to delay or limit commercialization and development, or discontinue operations, if financing is unavailable on acceptable terms. The filing describes substantial doubt about the company’s ability to continue as a going concern without additional capital, citing the auditor’s prior-year going-concern explanatory paragraph and ongoing losses.
Management’s commercial focus is U.S. ContraPest commercialization. It aims to achieve gross margins of 50% or more and expects manufacturing efficiencies to improve cost of sales, but provides no specific revenue or profitability forecast. COVID-19-related delays, customer spending constraints, reduced government budgets, field-study interruptions and potential supplier disruption remain risks. Management also identified regulatory approvals, market acceptance, sales-force effectiveness, manufacturing scale-up, key-personnel retention and future financing as key success factors.
The company reported no pending or threatened litigation known to management that would materially affect its financial position, results or liquidity. Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported for the quarter.
Most important facts for investors to verify
- Whether sales growth can continue from the small revenue base and translate into meaningful recurring demand.
- Whether manufacturing scrap and sales incentives decline enough to support the stated 50% gross-margin goal.
- Whether cash burn and revenue performance support the stated 12-month funding expectation, and whether further financing will be needed.
- The dilution implications of the share-count increase and 4.55 million outstanding warrants at June 30, 2021; the filing also reports 5.62 million potentially dilutive securities in total, excluded from diluted loss per share as anti-dilutive.
- The extent to which reported earnings depend on nonrecurring PPP forgiveness rather than product operations.