Did SenesTech Hide Critical Information During Its IPO?

Did SenesTech Hide Critical Information During Its IPO?

The author of this post has a short position in the company

We recently cautioned readers on the stock of Senestech, Inc. ( $SNES ) for several reasons.  One reason was we believed the company’s highly publicized agreement (the (“Agreement”) with Neogen was not as strong as SNES and its underwriters were claiming.  Our concerns about the Agreement were based, in part, on a bearish research note published on September 28, 2016 (well before the IPO) by Hilliard Lyons Equity Research (which was not an underwriter on the SNES IPO but which covers Neogen).

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On January 23, 2017, only weeks after SNES completed its IPO, it was announced that the Agreement had been terminated.  What was not in the press release (but was instead buried in an 8k SNES filed) was that Neogen had sued SNES the previous week regarding “claims relating to, among other things, alleged breaches by the Company of the License Agreement, interference with Neogen’s business, indemnification and misrepresentation.”  The lawsuit and the serious charges it contains leads us to conclude two critical things:

  • The relationship between Neogen and SenesTech had probably been deteriorating for some time. We say this because we believe companies like Neogen don’t typically file lawsuits or terminate agreements on the spur of the moment.  Companies usually take such action only after first investing significant time and energy to resolve the situation in a friendly manner since lawsuits are generally costly and time consuming.
  • Neogen (and not SNES) wanted to terminate the Agreement. While we believe some parties have attempted to portray the termination as something SNES wanted and as something that was good for SenesTech, we find that very hard to believe.

The termination of the Agreement raises serious questions in our minds about the credibility of SNES’ management and makes us question how honest they were with investors during the recent IPO roadshow.  Specifically we wonder:

  • What changed since last month that lead to the termination of the Agreement?
  • How did the Neogen relationship deteriorate so badly and so rapidly since last month that Neogen felt compelled to take such drastic action as filing a lawsuit?
  • When did SenesTech management know its relationship with Neogen was in trouble?
  • Did knowing the Agreement might be in trouble motivate some insiders to try to sell some of their personal holdings in the IPO?
  • Would SNES have been able to price its IPO without having the Agreement (or if the Agreement had been terminated just prior to the IPO)?
  • Why did SNES settle the lawsuit, in part, by paying Neogen $1 million (a sum much greater than we believe was required based on our reading of the Agreement)?
  • Why did SNES settle the suit so quickly? Was the case against them that damning?

We believe the Agreement was critical to SNES for two reasons: (i) it provided SNES credibility by having Neogen (a multi-billion dollar company) as a partner and (ii) under the Agreement Neogen would have manufactured, distributed, and sold Contrapest in the USA since SNES lacks the scale and capacity to do such things extensively.

As we have previously stated, we believe SenesTech was in serious financial difficultly prior the IPO and was desperately in need of a cash.  While we are not accusing anyone of wrongdoing, we do wonder if SNES’ need for cash impacted its disclosure about the Agreement during the IPO.  We suspect some securities lawyers and regulators may start asking these exact same questions.

Neogen’s decision to terminate the Agreement reinforces another reason we are bearish on the stock.  We have wondered if SNES’s product is so great, why haven’t any strategic investors ever invested in this tiny company?  So, not only does SNES lack strategic investors, but now the company which was supposed to manufacture, distribute and sell SNES’s products in the USA has walked away from the company.


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