SenesTech, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; the supplied filing text does not provide a separate fourth-quarter results summary.
Business context
SenesTech develops and commercializes fertility-control products for managing animal pest populations. Its first commercial product, ContraPest, is a liquid bait intended to reduce reproduction in Norway and roof rats. The company began generating product revenue in 2017 and reported expanded commercialization efforts in 2018. EPA removed ContraPest’s Restricted Use designation in October 2018; state registrations were reported in all 50 states and the District of Columbia, although the filing gives differing counts for states that had removed the designation.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $297,000 | $52,000 |
| Cost of sales | $241,000 | $45,000 |
| Gross profit / margin | $56,000 / 18.9% | $7,000 / 13.5% |
| Operating expenses | $11.936 million | $12.323 million |
| Net loss | $11.908 million | $12.286 million |
| Net loss attributable to common shareholders | $12.241 million | $12.286 million |
| Basic and diluted loss per share | $0.63 | $1.12 |
| Cash used in operations | $9.129 million | $9.321 million |
- Sales rose by $245,000, attributed to increased distributor sales, marketing and promotions. Cost of sales was 81.1% of sales, compared with 86.5%; management attributed the lower percentage to process improvements, while noting higher costs from promotions and scrapped product during manufacturing scale-up.
- Research and development expense declined to $2.404 million from $3.191 million; selling, general and administrative expense increased to $9.532 million from $9.132 million. Stock-based compensation was $3.412 million, or approximately 28.6% of operating expenses.
- At year-end, cash was $4.920 million, inventory $1.261 million, total current assets $6.671 million, total current liabilities $1.163 million, total assets $7.754 million, and stockholders’ equity $6.314 million. Total debt, including current and long-term debt, was approximately $480,000.
- Cash increased by $2.819 million during 2018, reflecting $6.932 million in financing inflows and $5.016 million in investing inflows, partly offset by operating cash use. Financing included $5.132 million net proceeds from common stock and $2.213 million from warrant exercises.
- Shares outstanding increased from 16.404 million at year-end 2017 to 23.472 million at year-end 2018. The 2018 rights offering issued 5.357 million shares and warrants; warrants outstanding totaled 11.227 million at year-end.
Outlook, risks and unusual items
- Management expected cash, short-term investments, anticipated revenue and additional equity sales to fund current operations for at least 12 months from year-end 2018. It also said additional capital would likely be needed during 2019 and that operations were expected to continue generating losses for at least the next 12 months. The independent auditor’s report cited substantial doubt about the company’s ability to continue as a going concern.
- No numerical revenue, margin or profitability guidance was provided. Management expected product sales to increase year over year and anticipated manufacturing efficiencies, but warned that missed revenue or margin targets and unavailable financing could require expense reductions or constrain commercialization and development.
- Key risks include limited commercial adoption and low sales relative to expenses; reliance on external financing; dependence on triptolide, which has limited sources and costly purification; manufacturing scale-up; regulatory requirements; and potential dilution from equity issuance and warrants.
- A $333,000 deemed dividend resulted from anti-dilution adjustments to certain warrants. The company reported a net loss of $11.908 million, but the loss attributable to common shareholders was $12.241 million after this adjustment.
- New Enterprises, Ltd. sued the company and Roth Capital Partners, alleging, among other claims, fraud and securities fraud and seeking damages. The court dismissed the initial complaint, but a motion to amend was pending as of the filing. A former executive also filed an EEOC discrimination charge; the filing reported no substantive action at that time.
- The company reported that management considered internal control over financial reporting effective at year-end; the auditor did not attest to internal controls. The audited financial statements received an unqualified opinion, with a going-concern emphasis.
Investor verification priorities
- Verify actual post-filing cash runway, financing needs and any subsequent capital raises against the going-concern warning.
- Track ContraPest sales growth, customer retention, distributor sell-through and gross-margin improvement; two customers accounted for approximately 65% of 2018 sales.
- Assess dilution potential from the 11.227 million outstanding warrants, their exercise terms and any further anti-dilution adjustments.
- Reconcile the filing’s conflicting counts for states that removed the Restricted Use designation: 23 states in the business discussion versus nine in a financial-statement note.
- Monitor the New Enterprises litigation, the EEOC matter and any related financial exposure.