SenesTech, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. SenesTech develops fertility-control products for managing animal pest populations. Its lead product, ContraPest, is an EPA-registered liquid bait intended to reduce rat reproduction. The company was in early commercialization, with U.S. sales restricted to licensed pest-management professionals.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $52,000 | $318,000 |
| Gross profit | $7,000 | $318,000 |
| Operating expenses | $12.323 million | $10.834 million |
| Net loss | $12.286 million | $10.795 million |
| Net loss per share | $1.12 | $1.71 |
| Cash used in operating activities | $9.321 million | $6.696 million |
| Cash used in investing activities | $5.902 million | $57,000 |
| Cash provided by financing activities | $5.498 million | $18.438 million |
FY2017 revenue was product sales; in FY2016, revenue included $132,000 from NIH-funded services and $186,000 in Neogen license fees, with product sales below $1,000, according to MD&A. The license agreement was terminated in January 2017. Gross margin was about 13% in FY2017, versus 100% in FY2016, when reported revenue had no cost of sales.
At year-end, cash was $2.101 million and short-term investments were $5.023 million, together about $7.1 million, versus $11.826 million in cash in 2016. Current assets were $7.869 million and current liabilities $1.169 million. Debt was $768,000, plus $12,000 of related-party notes payable. Accumulated deficit was $73.6 million. The November 2017 share offering generated $5.253 million net proceeds and included warrants; shares outstanding rose to 16.4 million at year-end and 16.5 million by March 28, 2018.
Changes versus prior year
- Revenue declined 84%, primarily because FY2016 included grant and license revenue that did not recur; FY2017 product sales remained small.
- Net loss increased about 14%, as operating expenses rose 14% to $12.323 million.
- Operating cash use increased by $2.625 million. Investing cash use rose mainly because the company bought $5.0 million of short-term securities and spent $898,000 on property and equipment.
- R&D expense increased to $3.191 million from $2.705 million; selling, general and administrative expense rose to $9.132 million from $8.129 million.
- Stock-based compensation was $3.728 million, about 30% of operating expenses. The company paid Neogen $1.0 million under a settlement and terminated its license agreement.
Outlook, risks and unusual items
- Management expected full commercialization and product revenue to begin in the second quarter of 2018. It expected significant expenses and operating losses to continue for at least the next 12 months. No quantified sales or earnings guidance was provided.
- ContraPest was registered in 49 states and the District of Columbia; California registration was pending. The company planned to pursue additional uses and international approvals. It had signed U.S. distributor agreements with Univar and Target Specialty Products.
- Management said year-end cash and investments, together with anticipated revenue, should fund operations for the near future, but warned additional financing could be needed if revenue targets were missed. The independent auditor highlighted substantial doubt about the company’s ability to continue as a going concern. Financing could dilute shareholders or require reduced or delayed development and commercialization.
- Key operating risks include limited market acceptance, dependence on successful commercialization and regulatory approvals, restricted-use deployment requirements, manufacturing scale-up, and reliance on a limited source of purified triptolide. The company also identified ongoing losses, stock dilution, and a January 2018 Nasdaq minimum-bid-price deficiency notice.
- A lawsuit filed in February 2018 by New Enterprises alleges fraud, securities fraud, breach of a lock-up agreement and other claims; the company denies the claims and intends to defend itself. The filing does not provide a clear estimate of potential damages or outcome.
- Management stated disclosure controls and internal control over financial reporting were effective as of December 31, 2017; however, the filing also discusses a prior material weakness and says the auditor did not attest to internal-control effectiveness.
- ContraPest efficacy studies reported substantial fertility or population reductions in certain settings, but these study results do not establish commercial adoption or future financial performance.
Important facts for investors to verify
- Whether the anticipated Q2 2018 launch and revenue ramp occurred, and whether sales can grow enough to offset continuing cash burn.
- Current cash runway, financing needs and the impact of outstanding warrants and potential future equity issuance on dilution.
- California and other regulatory approvals, permitted product uses, and any changes to restricted-use requirements.
- Availability, cost and quality of triptolide supply, and the company’s ability to scale manufacturing and distribution.
- Status and potential financial exposure of the New Enterprises litigation, as well as Nasdaq listing compliance.
- Resolution of the filing’s going-concern warning and any remaining internal-control deficiencies.