The author of this article has a short position in the company.
Q: What would you do if your company had:
- accumulated losses of $58 million,
- no commercially available product,
- a “going concern” from its auditors,
- largely run out of cash,
- was expected to incur significant losses for the foreseeable future,
- no strategic investors,
- questionable strategic partnerships,
- insiders who want to sell 15% of their personal stock for proceeds of $2 million
- faced significant regulatory and other hurdles, and
- a weak (but well paid) Board of Directors?
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A: Take advantage of the JOBS Act and the hot equity markets by doing an IPO that gives you an equity market cap of $80 million and a valuation 220% higher than the last equity raise done only seven months earlier. Then, after selling the stock (presumably to lots of retail investors), support the stock with (what we consider to be) highly speculative research and perhaps some paid promotion.
Senestech (“SNES” or the “Company”) has developed and is seeking to commercialize a proprietary technology for managing animal pest populations through fertility control. This product would compete with, among other things, rodenticides (aka poison). Its product, ContraPest, induces the gradual loss of eggs in female rats and disruption of sperm in male rats. The company has conducted some tests (such as the NYC subway system in 2013) which proved the product effective. Yet, the company still generates no revenue from product sales. On the surface the product sounds amazing which is why we were intrigued why no strategic investor (a pest control company, etc.) had ever invested in the company since it was founded in 2004. As it turns out, SNES faces numerous challenges before Contrapest can generate significant product revenue, including but not limited to:
- The much touted EPA license SenesTech received for Contrapest is very limited and only allows the product to be used in liquid form, for indoor use and within 1 foot around external perimeters of buildings. The product must also be placed in bait stations and handled only by licensed applicators. These limitations greatly reduce the product’s market size and desirability.
- As noted by the Roth analyst (although we do not believe SNES has widely mentioned this) “In the rush to seek early EPA approval of Contrapest, SNES did not complete required studies to determine shelf life and storage stability, such as the ability to withstand temperature extremes.” So, without knowing the shelf life expiration or storage parameters of Contrapest, how aggressively will third parties manufacture and/or purchase the product?
- Even if there is demand for the product, SenesTech has limited salesforce and manufacturing capabilities so it will rely heavily on third parties to do much of this work. As discussed below, we have grave concerns about the willingness/ability of these third parties to do such work.
- We wonder if pesticide companies such as Neogen will be eager to market Contrapest as it will likely greatly reduce the more frequent and recurring revenue from its existing sales of rodenticides. Put another way, do you think a razor blade manufacturer would be interested in promoting a product which reduces hair growth and thus reduces the need to shave?
- SenesTech must gain approval from individual states and in some instances municipalities. To date, 14 states and Washington D.C. have approved the use of Contrapest.
Despite the hot equity markets, SenesTech had trouble getting its IPO done on December 8th by Roth, Craig-Hallum and Aegis.
- had to reduce the price range from the original $12 – $14 a share range down to $9 – $11, and then ultimately priced below the range at $8.
- (we assume because they were having difficulty getting the deal done) towards the end of the deal added another underwriter, Aegis Capital, which tends to have a very retail oriented customer base.
Weak Financial Position Pre-IPO
- SenesTech received a “Going Concern” from its auditors for its last audit which was for the year ended 2015.
- In 2016, the company did some financing prior to the IPO but as of November 18, 2016, (less than one month before the IPO priced) SNES had cash of only $440,000 (and lots of liabilities). Considering SNES lost $7 million in the first 9 months of 2016 and the company expects to continue burning cash, this cash balance seems dangerously low so we assume the company badly needed to do this IPO.
IPO Pricing Premium To Latest Equity Raise
The last equity raise SenesTech did before the IPO closed in May 2016 in which SNES raised $6.2 million by selling stock in a rights offering at $2.50 per share. Seven month later the company priced its IPO at $8.00 per share, a 220% increase from where insiders had recently invested. We wonder why investors today would pay $8 a shares today when (i) insiders were only willing to pay $2.50 a share seven months ago and (ii) the top two executives were willing to sell ~15% of their shares in the IPO at $8.
Insider Selling In IPO
As part of the IPO, SNES’s top two executives offered to sell $2 million of stock (~15% of their personal holdings) thru the over allotment option. There has been no announcement regarding the exercise of the shoe. We don’t often see insiders selling stock in an IPO and we can only wonder if the company’s prospects are so bright, why is management trying to sell shares?
To be fair we must also mention that one Director, Grover Wickersham, bought $500k of stock after the IPO. However, considering (i) his total compensation in 2015 as a Board Member was $2.3 million and (ii) his annual Board Compensation will be $95k plus 20k options, his recent investment doesn’t seen that large to us.
In addition to the approximate 10.1 million shares outstanding, SenesTech also has 1 million currently exercisable at 81c (wtd avg). Based on the company’s current stock price, this implies management is sitting on a paper profit on these options alone of $7 million, which is pretty remarkable for a company which we think was almost broke only a few months ago.
Questionable Domestic Strategic Partnership
The company does not currently have significant manufacturing or sales capabilities. As a result, in May 2014 it entered into an agreement with Neogen Corp. (ticker NEOG), a $2.5 billion market cap company that develops and markets products used in food and animal safety. Neogen sells rodenticides and the sales of these products would be greatly reduced by sales of Contrapest. Neogen was granted an exclusive license in North America to manufacture, distribute and sell Contrapest. The agreement is filed as an exhibit to the S-1 and requires Neogen to make certain milestone payments and pay certain fees/royalties. Importantly, we believe the agreement provides Neogen with many “outs” should it decide not to aggressively pursue this product.
Neogen has publicly said very little about this agreement. However, in a report about Neogen dated September 28, 2016 the research firm Hilliard Lyons stated :
“As a reminder to investors, SenesTech recently received EPA approval for its rodent contraceptive. Neogen has exclusive manufacturing and marketing rights in the U.S., Canada, and Mexico for this unique approach to rodent control. However, the EPA has given the product a narrow approval. The product may only be used in indoor settings in liquid form in combination with a third party tamper resistant bait station. Further, the product is limited to restricted use by a certified pesticide applicator. While we had not incorporated any business from this opportunity into our model, we are still disappointed by the narrow approval. Neogen does not believe they will be marketing this to their customer base given the extra regulations. Thus, the company merely stands ready for manufacturing upon any contracts SenesTech is able to gain. Neogen was unable to answer additional questions regarding the regulatory issues but did note any loosening won’t be extremely useful unless the liquid-form only mandate is repealed. This is because water is plentiful on the farm for rodents and getting them to drink the bait consistently will be difficult.” [Note we added the above bold and underline].
*******So, the company that SNES was largely relying upon to sell its product in the North America is (according to Hilliard Lyons) apparently not very interested in doing so!!
Questionable Foreign Partner
In September 2015, SenesTech granted NeoVenta Solutions an exclusive 10 year license to represent SNES in the marketing, sales and distribution of Contrapest in India and certain other countries. Neoventa is described in the S-1 as “a sales and marketing company.” Never heard of them???? Funny, neither had we. There is very little information available about Neoventa which seems odd given the (theoretically) large opportunity that might exist to sell the product in the huge market of India. We could find no evidence of Neoventa having any revenue, salesforce, infrastructure, relevant experience, etc. Neoventa does have a website that has very little information (besides some product information similar to that found in the S1) and lists no individuals, emails or phone numbers for people associated with the company. It appears the company is located at 461 S. Milpitas Blvd. Suite 1, Milpitas. CA 95035 and appears to be owned by the Kapoor Brothers (Jag and Sean) who, according to their website, own 12 Stop N Save supermarkets in San Francisco and own Bonfare Markets which sells grocery store franchises in San Francisco. Needless to say we have serious questions as to why, out of all the possible parties, SNES chose Neoventa to partner with in India.
Questionable Board Of Directors
- Of SenesTech’ five independent Board members, two are associated with S&W Seed Co (ticker SANW) which is the global leader in alfalfa seed. Wickersham is the Vice Chairman/Founder of SANW and Mr. Szot is SANW’s CFO. Mr. Wickersham was a pre-ipo investor in SNES and now owns about 7%. However, we wonder (i) why SNES has two independent Board Members from the same company and (ii) why SNES would chose two executives from SANW considering how much shareholder value has been destroyed there. Below is the performance of SANW’s stock (its IPO and 2 follow ons), as per Bloomberg.
|Date of Offering||Price Per Share||Gain/(Loss) to Date|
- Another independent Board member, Julia Williams, is an emergency department physician who appears to have no experience on the Board of other public companies.
- Another independent Board member, Bob Ramsey, age 72, is the CEO of a company that develops business models in public partnerships for ambulance and EMS services. He appears to have no experience on the Board of other public companies.
- In general we find this Board lacking the skill set appropriate for any public company and especially lacking for a company such as SenesTech.
Generous Board Compensation
- Each SNES Board Member annually gets $25k cash plus $25k in restricted stock plus options for 20k shares plus additional cash compensation for serving on Board Committees. We believe this compensation is very generous especially considering the qualifications (or lack thereof) of these Board members and considering SenesTech is burning cash.
- Total annual compensation for the 5 “independent” directors is
|Restricted stock units:||$125,000|
|Total annual comp (exc options)||$350,000|
|Plus options for 100k shares|
- We estimate that Mr. Wickersham’s annual Board compensation will be $95k (which includes $30k for being the Vice Chair…whatever that is) plus 20k options and Mr. Szot’s annual compensation will be $90k plus 20k options. In 2015, Wickersham’s total compensation as a Board member was $2.3 million.
- On January 6, 2016 SenesTech announced that Mara Aspinall (Roche, Genzyme, Safeguard Scientifics) had joined the Board. However, by the time SNES filed its S-1 nine months later, Aspinall was gone from the Board. Several other members also left the Board in 2016.
Although not widely discussed on the roadshow or in the S-1, Thomas Ziemba was the SNES’ CEO/President/Director for less than a year and resigned in December 2015. We are unware why he had such a short tenure at the company, but in July 2016 the company “resolved a legal dispute” with him by issuing him 600k shares (currently worth ~$5.0 million). The 600k shares would represent approximately 6% of SNES’ outstanding shares, but oddly he is not listed as a 5% holder in the S-1…but we digress.
Two underwriters have initiated coverage on SNES, using wildly different estimates and valuation methodologies. We don’t see how either analyst even attempts to model this company since it has no product revenue and as the Roth analyst states, SNES “in fact has no contracts or commitments in hand for the purchase of ContraPest.” Furthermore, any estimates must make broad assumptions regarding a number of factors which we doubt anyone has much visibility into including various governmental/regulatory approvals, customer adoption, infrastructure implementation (salesforce, manufacturing), pricing, costs, etc.
Roth Capital, the lead underwriter, recently launched coverage with a BUY, which isn’t shocking since Roth was the lead underwriter. Roth derives its $15 price target based on 20x 2018E P/E and 14.1x 2018 EBITDA.
Craig Hallum, another underwriter, also initiated coverage with, you guessed it, a BUY rating. Hallum derives its $15 price target with a 10 year DCF…which is an impressive feat since SNES has virtually no revenue so the assumptions made in this DCF we believe are wildly speculative.
To illustrate how difficult it is to model SenesTech, we compare the 2018 estimates (the last year for which both analysts give estimates) assumed by each sell side analyst:
Comparision Of 2018 Estimates
|Revenue||$30.1 million||$32.4 million|
So, one underwriter estimates the company will make 75c in 2018 and the other estimates it will lose (21)c. Of course if one takes Roth’s 20x P/E multiple and applies it to Hallum’s 2018EPS estimate, it would imply a stock price significantly below $8!!
Since the IPO, two companies have written favorable articles on SenesTech. We believe both of these companies cater to more retail oriented investors. One is NetworkNewsWire and the other is equities.com .
Other members of SNES’ management have backgrounds/skill sets that may not be very relevant to the company:
- The VP of Business Development , a critical role for a company with no revenue and no contracts, was most recently “ the Business Development Director for an Arizona commercial contracting company, where she was responsible for the development of their marketing, sales, and public relations strategy. She also built key customer relationships, and identified business opportunities. Ali graduated Magna Cum Laude from Clemson University earning a B.A. in Political Science. She received a Master’s Degree in Counseling from the University of Hawaii, where she graduated Summa Cum Laude. “
- The VP of Operations, a critical role for a company that anticipates significant growth, “has 16 years of banking experience and has held the positions of Branch Manager, Relationship Manager and Licensed Financial Advisor. Most recently, she was a Vice President of a community bank in Flagstaff. She has owned and operated Creative Net Solutions since the beginning of the internet evolution in 1994 and has designed and hosted websites.
- We also find it odd that a company with virtually no revenue has a CFO, a VP of Finance and a VP – Corporate Controller.
We believe SNES is a massively overvalued company that shouldn’t even be public given the tremendous uncertainty the company faces. We believe the company was desperate to raise money as was able to do so by selling stock to many investors who probably don’t really know what they own. With no strategic investors, insiders looking to sell stock and numerous questions regarding the valuation and business prospects, we wonder why so many are bullish on the stock.