SenesTech, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unless otherwise noted, financial amounts below are in thousands of dollars. SenesTech develops ContraPest, a fertility-control product for rat populations, and is seeking to commercialize it.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $71 | $24 | $108 | $43 |
| Gross profit (margin) | $28 (39.4%) | $3 (12.5%) | $43 (39.8%) | $10 (23.3%) |
| Operating expenses | $1,653 | $2,294 | $3,994 | $4,662 |
| Net loss | $1,629 | $2,289 | $3,946 | $4,653 |
| Net loss per share | $(0.59) | $(1.86) | $(1.99) | $(3.87) |
| Operating cash used | — | — | $3,573 | $3,907 |
- At June 30, cash was $4.718 million, compared with $1.936 million at year-end 2019. Current assets were $6.200 million and current liabilities $1.153 million.
- Total liabilities were $2.444 million, including $828,000 of borrowings (current and long-term) and $577,000 of operating lease liabilities. Stockholders’ equity was $4.893 million.
- First-half financing provided $6.311 million, mainly from $5.743 million net common-stock proceeds and a $646,000 Paycheck Protection Program (PPP) loan. Investing activities provided $44,000 from asset sales.
- First-half net loss attributable to common shareholders was $4.360 million, including a $414,000 deemed dividend from warrant price-protection adjustments; reported net loss was $3.946 million.
Changes versus the prior comparable period
- Sales increased year over year, but remained modest. Management attributed the increase in part to internet sales and customer implementation-service billings; it said COVID-19-related reductions in customer spending offset some benefit.
- Gross margins improved, which management attributed to less scrap and manufacturing process efficiencies. Management expects further improvement from manufacturing scale-up, while also targeting a gross margin of 50% or more.
- Operating expenses declined: research and development fell as field-support employees shifted toward commercialization and other costs decreased; SG&A also declined, including from lower salaries, travel and professional fees. Management cited temporary salary reductions and pandemic-related restrictions among the factors.
- Shares outstanding increased from 1.415 million at December 31, 2019 to 3.399 million at June 30, 2020, principally following equity offerings. A 1-for-20 reverse stock split took effect in February 2020; share and per-share data are presented retrospectively for the split.
Outlook, risks and unusual items
- Management expects significant expenses and operating losses for at least the next 12 months and says additional financing will be needed to continue operations, pursue commercialization and reach profitability and positive cash flow. It warns that unavailable or inadequate financing could force delays, limits or termination of development and commercialization, or cessation of operations.
- The filing discusses substantial doubt about the company’s ability to continue as a going concern without additional capital, citing continuing losses and the risk that financing may not be available on acceptable terms.
- COVID-19 slowed field studies and sales efforts, restricted contact with customers, and may delay government purchases. The company also identifies potential manufacturing and supply-chain disruption, including for critical raw materials sourced from Asia. It reported that some field work resumed by late April, while other projects remained delayed.
- The $646,000 PPP loan bears 1% interest and matures in April 2022. Forgiveness depends on use for qualifying expenses; the company gives no assurance that any portion will be forgiven. Without forgiveness, repayments begin six months after funding.
- The company is moving manufacturing and warehousing from Flagstaff to Phoenix. A new Phoenix office/warehouse lease begins August 1, 2020 and runs through November 2024; the Flagstaff manufacturing lease expires in December 2020.
- There were no material pending or threatened legal proceedings identified by management. The filing reports no off-balance-sheet arrangements and no material change in other risk factors apart from the added COVID-19 risk discussion.
Key facts for investors to verify
- Cash use and the timing and terms of any additional financing, given the going-concern uncertainty and stated need for additional capital.
- Whether the PPP loan qualifies for full or partial forgiveness, and the repayment obligations if it does not.
- Whether sales growth, customer adoption and delayed field studies recover as pandemic restrictions ease.
- The path from reported gross margins below 40% toward management’s stated target of 50% or more.
- Potential dilution: 2,504,597 warrants were outstanding at June 30, 2020, compared with 3,398,832 common shares outstanding; the filing also describes additional equity-plan capacity approved after quarter-end.