Senestech, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
SenesTech develops and commercializes ContraPest, a fertility-control product for rat populations. This unaudited report covers the quarter and nine months ended September 30, 2019; financial statement amounts are in thousands of dollars, except per-share data. ContraPest was registered in all 50 states and Washington, D.C.; 47 states had approved removal of its restricted-use designation.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $36 | $105 | $79 | $160 |
| Gross profit (loss) | $11 | $(9) | $21 | $7 |
| Operating expenses | $2,605 | $2,489 | $7,267 | $9,252 |
| Net loss | $(2,585) | $(2,500) | $(7,238) | $(9,278) |
| Loss per share | $(0.09) | $(0.14) | $(0.29) | $(0.53) |
- Gross margin was 30.6% in Q3 2019 versus a gross loss margin of 8.6% in Q3 2018; for the nine months it was 26.6% versus 4.4%.
- Cash was $3,945 at September 30, 2019, down from $4,920 at December 31, 2018. Total current assets were $5,695 and current liabilities $1,205. The company reported an accumulated deficit of $93,076.
- For the first nine months, operating cash use was $6,092, investing cash use $64, and financing cash provided $5,181; cash declined by $975. Financing included $3,631 net proceeds from common stock issuance and $1,789 from warrant exercises.
- Total debt was approximately $425, comprising $129 current and $296 long-term obligations before the balance-sheet presentation of current maturities; reported short-term debt was $129 and long-term debt $167. Debt includes equipment leases and promissory notes with stated interest rates ranging from 6.4% to 13.28%.
- Common shares outstanding rose to 28,288,285 from 23,471,999 at year-end 2018. The July public offering generated approximately $3.6 million net proceeds; warrant exercises generated approximately $1.8 million.
Material changes versus prior comparable periods
- Sales fell 66% in Q3 and 51% for the nine-month period. Management attributed the decline to the transition after removal of ContraPest’s restricted-use status and a shift toward end-user “pull-through” sales, which lengthened lead-to-conversion time.
- Gross profit improved despite lower sales, primarily because 2019 had no scrap expense from manufacturing scale-up activities incurred in 2018.
- Nine-month operating expenses decreased 21%, mainly due to lower stock-based compensation, partially offset by increased salaries, professional services and legal and board-related costs. Q3 operating expenses increased 5%, including higher legal activity and costs from reclassifying field-support staff to sales and marketing.
- Nine-month net loss narrowed, while Q3 net loss increased slightly. Prior-year net loss attributable to common shareholders included a $333 deemed dividend from warrant price-protection adjustments.
- Operating cash use improved from $6,916 to $6,092 year over year, but cash declined in 2019 as financing proceeds did not fully cover operating and investing outflows.
Outlook, risks and unusual items
- Management said September 30 cash, together with anticipated revenue and any additional equity sales, was expected to fund current operations for at least six months. It expects continued significant expenses and losses and likely needs additional capital; profitability and positive cash flow are not assured. Failure to meet revenue or margin targets or raise financing could force reductions or delays to commercialization and development.
- Management is focusing resources on U.S. ContraPest commercialization and reducing operating expenses, while continuing product development, supply-chain work, field studies and regulatory efforts. No numerical revenue or earnings guidance was provided.
- A lawsuit by New Enterprises alleges fraud, securities-law violations and other claims. The court denied the company’s and Roth Capital’s motions to dismiss the amended complaint in August 2019. Roth has sought contractual indemnification; the company had not accepted the demand. Accrued litigation expense was $507 at September 30, compared with $269 at year-end. Management said it was not aware of litigation expected to have a material adverse effect, but the outcome and exposure are uncertain.
- After quarter-end, effective November 10, 2019, Chief Science Officer Loretta Mayer and Chief Research Officer Cheryl Dyer left the company. The company estimated up to $750 in salary and health-insurance continuation obligations under their employment agreements; terms were still being finalized. Jamie Bechtel became board chair; Mayer remained a director.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2018 annual report.
Investor verification priorities
- Check subsequent cash, financing, and runway against the company’s six-month liquidity estimate and its reliance on equity financing.
- Track ContraPest sales conversion, repeat demand, gross margins, and the impact of state-level regulatory status.
- Review developments in the New Enterprises lawsuit, Roth’s indemnification demand, and the final cost of the executive departures.
- Assess dilution from outstanding warrants and options; the filing lists 9.8 million warrants and 2.7 million options outstanding at September 30.