SenesTech, Inc. — FY2020 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2020, not a standalone fourth-quarter report. SenesTech develops and commercializes ContraPest, a liquid bait designed to reduce rat reproduction. The company’s business remains dependent on commercializing this single product. ContraPest was registered in all 50 states and Washington, D.C.; its EPA label limited use to indoors and within one foot of manmade structures.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $258,000 | $143,000 |
| Grant revenue | $24,000 | $0 |
| Cost of sales | $281,000 | $101,000 |
| Gross profit | $1,000 | $42,000 |
| Operating expenses | $7.934 million | $10.329 million |
| Net loss | $7.937 million | $10.018 million |
| Net loss attributable to common shareholders | $8.373 million | $10.029 million |
| Loss per common share | $2.78 | $7.69 |
| Cash used in operating activities | $7.108 million | $8.058 million |
- Sales increased about 80% year over year, but remained limited. Cost of sales exceeded product sales; the reported gross profit was less than 1% of sales.
- Cost of sales included a $119,000 reserve for obsolete delivery-system supplies. Excluding that reserve, the filing reports gross profit of $120,000 and a 42.6% gross margin.
- Operating expenses fell $2.395 million, including lower selling, general and administrative costs and research and development expenses. Management cited restructuring, lower travel and marketing activity, and temporary executive salary reductions.
- Cash and cash equivalents were $3.643 million at year-end, compared with $1.936 million a year earlier. Current assets were $4.819 million and current liabilities $794,000. Total debt was $771,000; operating lease liabilities were $671,000. Total liabilities were $2.138 million.
- Financing provided $8.882 million in cash, primarily from common-stock issuance, warrant exercises and the $646,000 PPP loan. The company reported an accumulated deficit of $104.240 million.
Material changes and unusual items
- The 2020 net loss attributable to common shareholders included a $436,000 deemed dividend from warrant price-protection adjustments. The common-stock loss per share improved year over year, in part as weighted-average shares increased to 3.006 million from 1.304 million.
- Sales growth reflected new internet sales capability, the direct-to-customer strategy and implementation-service billings. Management said these gains were partly offset by COVID-19-related reductions in customer spending.
- COVID-19 disrupted travel, field studies, customer access and marketing, and could also affect government purchasing and supply availability.
- The company completed a 1-for-20 reverse stock split in February 2020. Year-end common shares outstanding were 5.100 million; 12.164 million were outstanding as of March 29, 2021.
- After year-end, a February 2021 private placement generated approximately $9.2 million in net proceeds. A March 2021 registered direct offering raised approximately $3.95 million gross, and March warrant exercises generated $1.209 million net. These financings involved additional share and warrant issuance.
Outlook, risks and contingencies
- Management expects continued operating losses and says additional financing may be needed. It projected that year-end cash, the February 2021 placement, anticipated revenue and additional equity sales would fund current operations for at least 12 months, while warning that lower-than-expected revenue or margins, or higher expenses, could require earlier financing.
- The auditor’s report includes a going-concern explanatory paragraph, citing operating losses and a net capital deficiency that create substantial doubt about the company’s ability to continue without additional capital. The statements do not include adjustments that might result from this uncertainty.
- Management aims to improve manufacturing economics and reach a gross margin of 50% or more; this is a goal, not quantified sales or earnings guidance. It expects to focus resources on U.S. commercialization and pursue expanded regulatory approvals.
- Commercialization risks include low product adoption, limited revenue, competition from established pest-control methods, the need to demonstrate efficacy and value, and dependence on a small sales and distribution infrastructure.
- Supply-chain risks include reliance on a single supplier for each active ingredient and triptolide sourcing from China and other Asian countries. The company also operates manufacturing at one location.
- The $646,000 PPP loan bears 1% interest and matures in April 2022. It may qualify for forgiveness, but the company gave no assurance that forgiveness would be obtained.
- The filing identifies a potential SEC enforcement or rescission claim involving the possible resale of approximately 175,000 shares under a registration statement that had not been declared effective. The filing also says management was not aware of pending or threatened litigation expected to have a material adverse effect.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor did not attest to internal-control effectiveness; the filing’s risk discussion also cautions about control deficiencies and the company’s ability to remediate or prevent material weaknesses.
Important facts for investors to verify
- Whether post-year-end financing and cash use support the company’s stated operating runway, and whether further capital raises or dilution are likely.
- Whether ContraPest sales, customer adoption and gross margins improve, particularly after the obsolete-supply reserve and COVID-19 disruption.
- Progress on EPA testing and label expansion, including the indoor-use and proximity restrictions, and completion of required testing and certifications.
- Availability, cost and quality of VCD and triptolide, and the company’s ability to scale manufacturing from a single site.
- Status of PPP loan forgiveness and the potential securities-resale matter, as well as any developments in internal-control remediation.