Renalytix Stock: The Investment Case Is Shot (NASDAQ:RNLX)

Renalytix (NASDAQ:RNLX) has a strong kidney diagnostic platform but the business on its current economics looks unsustainable to me. To succeed I think it will need to raise loads of new funds, massively diluting or perhaps totally wiping out the equity. On that basis, I change my rating to “Sell”.

Great Potential, Lousy Business Performance

The investment case for Renalytix has focused on the company’s kidney diagnostic platform. The addressable market is huge, the platform is a compelling product and the business is scalable. So far, so good – and I think all those elements of the investment case remain valid.

What has changed, however, is the amount of clarity on how management plan to get to critical mass. That approach makes the current business model look unsustainable, no matter how good the product is.

That became very clear last month, with the release of third quarter results. In the quarter, revenue was up a third on the same quarter last year, but still only to $0.8m. On its own, that relatively low level is not problematic. The challenge comes when turning from the topline to the bottom line. Operating expense jumped from an already hefty $8.5m in last year’s first quarter to $14.7m this time around.

At the end of March, cash and cash equivalents were $32.4 million. In the nine months to the end of March, the company burned through $23.3 million of net cash. At that rate, the current cash could last another 12 months give or take, though as cash burn seems to be accelerating even that brief timeline may be optimistic. Renalytix has been spending heavily to sell its system to potential customers. The expenses reflect the growing costs of that push, such as salaries for salesmen. That approach makes sense to me but the numbers simply do not add up. The company is spending huge amounts of money relative to its sales and the sales growth rate is way off what it would need to be to turn cashflow positive before the money runs out.

Raising Additional Funds

That brings us to where the company goes from here.

Back in April, it raised $30m in equity and convertible bonds. In its first quarter results, it noted that,

The Company also intends to file with the Securities and Exchange Commission a shelf registration statement on Form F-3 pursuant to which the Company may offer and sell up to $300 million of its ordinary shares, ordinary shares in the form of ADSs, debt securities and warrants, including the intention to enter into a sales agreement with a sales agent pursuant to which the Company may sell, from time to time, at its option, up to $50 million of ADSs through the sales agent in “at the market” transactions on Nasdaq.

In other words, there may be heavy shareholder dilution down the line (and not that far down the line). The company’s product seems to be attractive and could have a great future. But the company’s economics as they stand do not work at all. To fund sales efforts at the current level, it will need to raise more cash and one way or another I expect that to lead to significant dilution of shareholders.

That in itself is highly damaging to the investment case in my opinion. But I also increasingly doubt the quality of management. It has been spending like a drunken sailor but frankly has little to show for it. Sales are growing but remain tiny, while overheads have ballooned way out of proportion to sales and seemingly with a lack of financial discipline.

Valuation May Still be Overdone even after Massive Fall

My valuation history on the company lately has been bullish, most recently in my January piece Renalytix: Laying The Foundations For Growth, although my initial piece on the company back in February 2021 was bearish.

I own the stock and wish that I could remain bullish. But, even at its much-reduced price (down 92% in the past year), I feel I am now obliged to recognize the reality of current circumstances and accordingly switch my rating to “strong sell”. I plan to hold my shares simply because they are so far down, I will gain little by selling them but the rational part of my mind is also weighing selling them even for a sliver of what I paid given that I am now bearish on the name.

But I think it looks highly possible, on current business trends, that the shares will go to zero or close to zero when the company dilutes existing shareholders massively in order to raise new funds.