Senestech, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; filed November 13, 2020. Amounts below are in thousands of dollars except per-share data and share counts. SenesTech is commercializing ContraPest, a fertility-control product for rat populations.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $77 | $36 | $185 | $79 |
| Gross profit (margin) | $36 (46.7%) | $11 (30.6%) | $79 (42.7%) | $21 (26.6%) |
| Operating expenses | $1,948 | $2,605 | $5,942 | $7,267 |
| Operating loss | $(1,912) | $(2,594) | $(5,863) | $(7,246) |
| Net loss | $(1,919) | $(2,585) | $(5,865) | $(7,238) |
| Net loss per share | $(0.56) | $(1.85) | $(2.42) | $(5.71) |
- For the nine months, operating cash use was $5,496, investing cash use was $4, and financing provided $6,281. Cash increased $781 to $2,717 from December 31, 2019.
- At September 30, 2020, current assets were $4,158 and current liabilities were $865. Total debt was $800, including $105 current and $695 long-term; operating lease liabilities were $731.
- Accumulated deficit was $102,146. The company reported $3,134 in stockholders’ equity. Nine-month financing included $5,741 net proceeds from stock issuance and $646 from a Paycheck Protection Program (PPP) loan.
Changes versus prior comparable periods
- Sales increased 114% in Q3 and 134% for the nine-month period versus 2019, from a low base. Management attributed the increases partly to online sales and customer implementation services; sales remained limited.
- Gross margin improved to 46.7% in Q3 and 42.7% for the nine months, compared with 30.6% and 26.6%, respectively. Management cited lower scrap and manufacturing process improvements.
- Operating expenses fell 25% in Q3 and 18% for the nine months. Lower compensation, travel, professional-service and facility costs contributed; some field-support costs were reclassified from research and development to sales and marketing.
- Common shares outstanding rose from 1,414,671 at year-end 2019 to 3,398,832 at September 30, 2020, primarily reflecting equity offerings. There were 4,099,512 shares outstanding November 13, 2020.
Outlook, risks and unusual items
- Management expects significant expenses and operating losses to continue for at least the next 12 months, and says additional financing will be needed to fund operations and pursue profitability and positive cash flow. Failure to obtain financing on acceptable terms could require scaling back or ending development or commercialization, or discontinuing operations.
- Management is targeting a 50% or greater gross margin and expects manufacturing efficiencies to improve cost of sales, but provides no specific revenue, earnings or cash-flow guidance.
- COVID-19 restrictions slowed field studies, sales efforts and customer communications; delayed projects may affect future results. Management also cited risks to government and customer purchasing budgets and possible disruption to supplies, including critical raw materials sourced from Asia.
- The company disclosed substantial doubt about its ability to continue as a going concern without additional capital. ContraPest commercialization, market acceptance, regulatory matters and working-capital needs remain important dependencies. The company has registrations in all 50 states and the District of Columbia, but certain testing and certification requirements remain.
- The $646 PPP loan bears 1% interest and may be forgiven for qualifying uses; forgiveness was not assured. A $414 noncash deemed dividend from warrant price-protection adjustments increased nine-month loss attributable to common shareholders to $6,279, from net loss of $5,865.
- Subsequent to quarter-end, a warrant inducement transaction generated approximately $2.93 million in gross proceeds before fees and expenses. It involved exercise of warrants for up to 1,700,680 shares at $1.725 and issuance of replacement warrants for the same number of shares, presenting potential dilution.
- Management reported no pending or threatened litigation expected to materially affect the company. Disclosure controls were deemed effective; no material change in internal control was reported.
Investor verification priorities
- Assess cash runway against operating cash use, planned spending and management’s stated need for further financing.
- Verify the status and terms of the PPP forgiveness application and any remaining repayment obligations.
- Review post-quarter warrant exercises, replacement warrants, the adjusted exercise price on older warrants and resulting fully diluted share count.
- Track whether sales growth, field-study progress and customer adoption continue despite pandemic-related constraints, and whether gross-margin improvement approaches management’s 50% target.
- Check the status of remaining regulatory testing or certification requirements and the company’s ability to maintain supply of key ingredients.