SenesTech, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial statement amounts are in thousands of dollars unless noted. SenesTech develops fertility-control products for animal pest management; its first product, ContraPest, received EPA registration in August 2016 and began commercialization.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $10 | $84 | $17 | $130 |
| Gross profit (loss) | $(2) | $84 | $1 | $130 |
| Operating expenses | $3,605 | $2,017 | $7,067 | $4,462 |
| Net loss | $(3,583) | $(1,982) | $(7,038) | $(4,470) |
| Net loss per share | $(0.35) | $(0.31) | $(0.69) | $(0.89) |
- Q2 2017 revenue was $10,000 of ContraPest sales; six-month revenue was $17,000. No Neogen license revenue was recorded in 2017. Product sales were below cost: cost of sales was $12,000 for Q2 and $16,000 year to date, attributed to manufacturing start-up inefficiencies and replacement product.
- Research and development expense was $973,000 in Q2 and $1.796 million for six months. General and administrative expense was $2.632 million and $5.271 million, respectively. Higher staffing, professional fees, commercialization activity, and public-company costs contributed to expense growth.
- Gross margin was negative in Q2 and approximately 6% for the first half, reflecting very low sales and start-up costs. The company remained substantially loss-making.
- At June 30, cash was $2.674 million and short-term held-to-maturity investments were $2.950 million, or $5.624 million combined. Current assets were $6.351 million and current liabilities $1.625 million; working capital was approximately $4.726 million.
- Six-month operating cash use was $5.636 million; investing cash use was $3.803 million, including $2.940 million of securities purchases and $863,000 of property and equipment. Financing provided $287,000. Cash declined $9.152 million from year-end 2016.
- Borrowings included $160,000 current debt and $642,000 long-term debt, net; related-party notes payable were an additional $20,000 current liability. Accumulated deficit was $68.349 million.
Material changes and unusual items
- Revenue shifted from prior-year grant and Neogen license income to minimal ContraPest sales. The Neogen exclusive license was terminated in January 2017; the parties settled litigation and claims for a $1.0 million payment, made in January. No further Neogen license revenue is anticipated.
- Operating expenses rose substantially year over year. Six-month stock-based compensation was $1.872 million, up from $1.473 million, and represented a significant recurring expense.
- Property and equipment increased to $1.656 million from $631,000 at year-end 2016. The company also purchased $2.950 million of short-term investments.
- Q2 net loss was $3.583 million versus $1.982 million in the prior-year quarter; the six-month loss widened to $7.038 million from $4.470 million. The 2016 comparison included preferred-stock dividends in comprehensive loss and certain note-related expenses; interest expense fell in 2017 as prior convertible notes had been converted or redeemed.
Outlook, risks, and controls
- Management expected product sales or royalties to begin contributing revenue in the second half of 2017, but provided no quantified sales or earnings guidance. It expects significant expenses and operating losses to continue for at least the next 12 months.
- Management stated that cash, cash equivalents, short-term investments, and anticipated revenue were expected to fund current operations for the foreseeable future under its current operating plan. It cautioned that assumptions may prove wrong and additional capital may be needed; financing may not be available on acceptable terms.
- Key execution risks include commercial acceptance of ContraPest, scaling manufacturing and distribution, further regulatory approvals, research and development outcomes, and the ability to attract and retain personnel. Failure to raise capital could require delays or reductions in development and commercialization.
- Management reported disclosure controls and procedures were effective at period-end and no material change in internal control over financial reporting occurred during the quarter. The filing reported no other material change to the annual-report risk factors beyond those discussed.
Investor verification priorities
- Track ContraPest sales, customer adoption, repeat orders, and whether revenue accelerates as management anticipated for the second half of 2017.
- Verify whether manufacturing issues and product replacements are resolved and whether gross margins improve as sales scale.
- Assess cash burn against the stated operating runway, future financing needs, and the availability and terms of any additional capital.
- Monitor regulatory progress, supply-chain readiness, and the status and effectiveness of commercialization and distribution relationships following the Neogen termination.
- Review dilution and compensation costs: stock-based compensation remained substantial, and outstanding options, restricted stock units, and warrants may dilute shareholders.