Item 1. Business
Item 1. Business.
Overview
We have developed and are commercializing a global, proprietary technology
for managing animal pest populations, initially rat populations, through fertility control.
Rats pose threats to human and animal health as well as food security around
the world. In addition, rats cause extensive product loss through consumption and contamination, including in the agricultural industry.
Rats also cause significant damage to critical infrastructure by burrowing beneath foundations and gnawing on electrical wiring, insulation,
fire proofing systems, electronics and computer equipment.
The most prevalent response to rat infestations is the use of lethal tools
such as traps and rodenticides, although there are growing concerns about secondary exposure and bioaccumulation of rodenticides. These
solutions are limited by the rat’s extraordinary reproduction rate as well as their behavior.
ContraPest ® , our initial product, is unique liquid bait
in the pest control industry. ContraPest targets the reproductive systems of both male and female Norway and roof rats, which can lead
to sustained reductions of the rat population.
ContraPest is a liquid bait containing the active ingredients 4-vinylcyclohexene
diepoxide (“VCD”) and triptolide. ContraPest limits the reproduction of male and female rats beginning with the first breeding
cycle following consumption. Accordingly, it offers an alternative to traditional rodenticides in many environments and also may be used
in coordination with rodenticides as part of integrated pest management. It is an important option in the increasing number of jurisdictions
that are restricting the use of second-generation anti-coagulant products.
We began the registration process with the United States Environmental
Protection Agency (the “EPA”) for ContraPest on August 23, 2015. On August 2, 2016, the EPA granted an unconditional registration
for ContraPest as a Restricted Use Product (“RUP”), due to the need for applicator expertise for deployment. On October 18,
2018, the EPA approved the removal of the RUP designation and was reclassified as a general-use pesticide. In addition to the EPA , ContraPest
is registered in all 50 states, 48 of which have approved the removal of the RUP designation, as well as the District of Columbia. In
certain cases, our registrations are conditional and require completion of testing and we continue to seek to comply with these requirements.
We continue to develop enhancements to ContraPest that align with our
target verticals while pursuing regulatory approvals and amendments to the existing U.S. registration to broaden its use and marketability.
When ContraPest begins to generate sufficient revenue, we will seek regulatory approval for additional jurisdictions beyond the United
States.
We were formed in July 2004 and incorporated in the state of Nevada.
On November 12, 2015, we subsequently reincorporated in the state of Delaware. Our corporate headquarters and manufacturing site are in
Phoenix, Arizona. On December 8, 2016, we went public and are currently traded on the Nasdaq Capital Market (“Nasdaq”) under
the symbol SNES.
On February 4, 2020, we amended our amended and restated certificate
of incorporation to effect a 1-for-20 reverse split of our issued and outstanding shares of common stock. The accompanying condensed financial
statements and notes thereto give retrospective effect to the reverse stock split for all periods presented. All issued and outstanding
common stock, options and warrants exercisable for common stock, restricted stock units, preferred stock conversions to common stock and
per share amounts contained in our condensed financial statements have been retrospectively adjusted.
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Current Challenges in Pest Control Methodologies
Lethal control measures such as traps and rodenticides are often at
the forefront of rat control programs but reproduction, behavior, and genetic resistance can negatively impact results of mitigation efforts.
Rats reach sexual maturity at approximately nine weeks of age. Females
can give birth to six litters per year, with up to five to ten offspring each. This rapid reproduction rate can cause populations to rebound
quickly after implementing a lethal control program.
Rat behavior, either learned or innate, can negatively affect pest control
efforts. Neophobia, or the fear and avoidance of new objects, is an innate behavior that often impacts control efforts. Rats avoid bait
stations, loose bait, or traps until they are confident that these new objects pose no danger. Over time rats will begin to sample new
foods to determine if there are any negative side effects. If the food or rodenticide causes illness in rats but they do not die, they
will avoid that food or rodenticide in the future.
Genetic resistance also creates challenges for rodent control
programs. Rats can be resistant develop resistance to rodenticides due to genetic through genetic mutations. This resistance is
passed onto their offspring who will carry this resistant trait to future generations.
Because of the above factors, conventional rodenticide producers are continually
challenged to develop new, more lethal chemicals to control future rat populations.
Rodenticides have significant drawbacks, in that they may affect species
that prey on rats, including birds of prey and large cats, due to the persistence of the rodenticide in the rat tissue. In addition, there
is growing concern about the adverse effects that rodenticides may have on children and pets due to accidental, direct exposure.
Integrated Pest Management and Fertility Control
The most effective, long-term way to manage rats is by using a combination
of tools that work together to magnify the efficacy of the pest management protocol; integrated pest management (IPM) is based upon this
concept. An effective IPM program needs to reduce the existing rat population while preventing the population from rebounding. We believe
ContraPest has established a new paradigm in rodent control, making fertility control an essential component of a sustainable IPM program.
ContraPest is a highly palatable liquid formulation that reduces fertility
in both male and female rats. Rats require 10% of their body weight in water per day, making ContraPest a great tool to add to IPM programs.
The high-fat content and sweet taste promote sustained consumption even when other sought-after food sources are present. In both field
and laboratory settings, ContraPest will be consumed by rats even in the presence of abundant water sources and plentiful food choices,
including animal feed, trash and other options. Consumption of ContraPest does not cause illness in rats, and therefore, it does not change
behavior or result in bait aversion.
Adding ContraPest to an IPM program brings the rodent population down
initially and keeps it at a manageable level by minimizing reproduction and thereby limiting population rebounds. Continued maintenance
baiting of ContraPest at lower population levels dramatically reduces the risk of future population spikes, allowing customers to be more
focused on eliminating the causes of future invasions through exclusion and sanitation initiatives.
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The following graphs illustrate the incremental benefit of adding ContraPest
to IPM programs with conventional rodenticides. The data is derived from three programs we began in late 2019 to demonstrate the effectiveness
of ContraPest to potential end-users and our study of the results through monitoring rat activity by camera. The data presented shows
the incremental benefit of ContraPest deployment beyond that achieved through rodenticides. Ongoing monitoring of the program locations
has indicated that there has been no rebound in the rodent population from the current low levels.
(source: company studies)
Other Applications
While our proprietary technology is effective on rodent species, our technology
can be applied to other mammalian species. We are currently developing a fertility control product for mice. Further, we have developed
preliminary data with feral dogs, feral pigs, wallabies and brushtail possums. While this preliminary data indicates potential for the
continued development of fertility control technology in general, we are not pursuing these opportunities at this time. We believe that
the size of the rat control market as well as mice control market are sufficient for our near-term focus. We remain open to the potential
to license our technology to other strategic partners to explore its applicability to other mammalian species.
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Business Strategy
Our goal is to be a leader in the pest management industry; utilizing
fertility control technologies to limit the adverse effects caused by rodent infestations, educating PMP’s and the general public
on alternatives or enhancements to lethal rodenticides and developing additional product lines to address the needs of our customers.
Key elements of our strategy are as follows:
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work to maximize market acceptance for, and generate sales of, our products, including by conducting field demonstrations at potential lead customers;
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explore strategic partnerships to enable us to penetrate additional target markets and geographical locations;
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manage the infrastructure for sales, marketing and distribution of ContraPest and any other product candidates for which we may receive regulatory approval;
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seek additional regulatory approvals for ContraPest, including to more fully expand the market and use for ContraPest and, if we believe there is commercial viability, for our other product candidates;
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further develop our manufacturing processes to contain costs while being able to scale to meet future demand of ContraPest and any other product candidates for which we receive regulatory approval;
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continue product development of ContraPest and advance our research and development activities and, as our operating budget permits, advance the research and development programs for other product candidates;
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maintain and protect our intellectual property portfolio; and
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add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts and operations as a public company.
Marketing and Sales Approach
The pest control industry is highly competitive with a number of large
competitors developing and marketing pest control products, particularly rodenticides, and services. Because fertility control in general,
and ContraPest specifically, may be considered a disruptive technology, we have encountered resistance to initial adoption. We continue
to build a robust set of case studies to demonstrate efficacy and cost efficiency, identify lead users and expand within market segments.
In order to enhance the likelihood of success, we have currently targeted key market segments with the highest likelihood to add ContraPest
into their IPM programs. These include agribusiness (e.g., egg hen farms, grain and protein production and grain storage, transport and
sales facilities), municipalities and government agencies, e-Commerce, zoos and sanctuaries, and commercial accounts.
In the United States, ContraPest is most commonly deployed and serviced
by a licensed Pest Management Professional (“PMP”), although some customers have in house pest management service personnel.
In some circumstances, customers will request PMPs to use certain products in the provision of their service. Initially, our marketing
strategy involved sales to and through large distributors of pest control products. In 2019, we substantially modified this strategy to
create two different sources of pull-through-demand: sales to PMPs and sales directly to commercial customers. We believe that by making
end users aware of the existence and benefits of ContraPest, we are more likely to create demand through PMPs that would otherwise simply
continue to use their existing rodenticide-based IPM models. We currently market ContraPest both to pest management companies and directly
to target segments, using a direct to PMP sales channel; indirectly through distributor sales; and through our own direct sales force.
In addition, in the fourth quarter of 2019, we added a new e-Commerce tool to enable customers in each of our target segments to buy directly
from us. Finally, we have been pursuing strategic relationships with large pest management companies and key end-user organizations in
our target segments for the distribution and sale of ContraPest.
In each of our target segments we have identified potential lead customers
with whom we are working on large scale projects to demonstrate the efficacy of ContraPest in real world situations. We provide significant
product support to these customers to make sure that we are not only achieving desired results, but also obtaining the data to support
sales in the related market vertical. We believe that successful field trials with these influential end users will help drive significant
subsequent sales to other participants in the relevant market.
We are also focused on expanding regulatory approvals for ContraPest
to make the product more user friendly and available for use in an increased number of applications. These include alternative delivery
methods and expansion of the label to additional applications and/or species.
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Pricing and Value
Our pricing strategy takes into account the cost of goods sold, the
cost of competitive products and the value of our product to the end user. We believe ContraPest will be perceived as a significant value
as a complement to existing pest control products or as a non-lethal stand-alone solution for managing rat infestations and, as such,
should command a premium price. Our experience is that once potential customers understand the advantages of ContraPest, they recognize
that the benefits of long-term sustained rodent reduction dramatically offset the cost of the product. We plan to continue to use promotional
efforts to support the value message and to justify our product’s premium price, built around the following advantages:
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ContraPest uses targeted delivery for maximum efficacy;
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our proprietary gravity feeding system optimizes consumption;
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ContraPest can be used as an anchor or enhancement for an IPM program, or as a stand-alone solution to decrease reliance on lethal control options;
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ContraPest is designed, formulated and dispensed in a manner that minimizes the exposure hazard for handlers and non-targeted species such as wildlife, livestock and pets; and
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over time, as the pest population decreases, the quantity deployed and consequently, the cost of ContraPest will decrease, bringing the long-term cost of ContraPest in line with other elements of integrated pest management.
We also focus on specific advantages for the individual customer and
expect to position our product as having the following additional general advantages:
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savings by reducing loss or contamination of food and product inventories;
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savings by reducing damage to infrastructure and major production equipment;
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reduction in labor and servicing costs due to dramatically reduced rodent populations;
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creation of a more predictable cost model based on prevention versus treatment of spikes in population seen with rebound effect;
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reduction in disease vectors; and
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public relations and risk reduction advantages when reducing usage of lethal rodenticides and traps.
Raw Materials and Manufacturing Process
ContraPest contains two active ingredients, VCD, an industrial chemical,
and triptolide, a plant derived chemical. ContraPest also contains several other inactive, generally recognized as safe (GRAS), ingredients.
Currently, we source VCD from standard industrial chemical supply providers. Triptolide is derived from the Thunder God Vine, Tripterygium
wilfordii, which is commonly cultivated and harvested wild in southeastern China and other Asian countries. Triptolide is available from
a variety of sources, but the process to purify triptolide for use in ContraPest is expensive. Thus, we are investigating other, less
costly sources of triptolide.
Our manufacturing process involves the incorporation of our two active
ingredients, in low concentrations, into several inactive ingredients. Once incorporated, the entire product goes through a micro-encapsulation
process in order to stabilize the final formulation. This process allows ContraPest to be delivered to rats in a palatable, non-lethal,
and effective manner.
Currently, we have production scale capability in our facilities in
Arizona to manufacture ContraPest. Our internal production capabilities allow us to meet our current and anticipated demand through 2023
for ContraPest.
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Scientific Background Regarding our Product
ContraPest is a liquid bait containing the active ingredients VCD and
triptolide. When consumed, ContraPest targets reproduction, limiting fertility in male and female rats beginning with the first breeding
cycle following consumption.
Female rats are born with a finite number of eggs, or oocytes, and
remain fertile until death. Within the ovary, eggs develop within structures called follicles. The non-regenerating and least mature follicles
are called primordial. The primordial follicles mature through primary, secondary and antral stages and ultimately ovulate. Once the primordial
follicles have become depleted, ovarian failure occurs, which terminates reproductive capability. VCD causes specific loss of small ovarian
follicles (both primordial and primary). Triptolide causes specific loss of growing follicles (secondary and antral). In males, triptolide
exerts a significant suppression of male fertility by preventing sperm maturation and impairing the movement of sperm.
The safety and efficacy of VCD, triptolide, and ContraPest are supported
by considerable evidence. VCD and triptolide are rapidly metabolized by the rat, limiting the possibility of bioaccumulation or effect
on non-target species. Further, based on our toxicology studies, ContraPest should not cause rats to become ill, change behavior or become
more susceptible to predation.
Furthermore, ContraPest is a contraceptive, not a sterilant. The average
duration of infertility ranges from 77 to over 180 days.
Other Potential Products
We have begun work on new formulations of ContraPest – particularly
solid and semi-solid variants. Although solid bait is not essential to our near-term plans, the non-liquid formulations may expand the
potential uses of ContraPest as well as pave the way for future sales through retail stores. Our plan is to accelerate the reformulation
process through partnerships with others in the industry that will be able to give us access to proven technologies, thus reducing potential
development time.
Competition
Currently,
we are unaware of any other non-lethal fertility control products targeting rats that are registered by the EPA. There is a non-registered
product being sold online that claims to control rodent reproduction humanely. We
do not believe this is a product that can compete with us.
Our principal competition is the substitution of other tools that PMPs
use in their IPM.
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Government Regulation and Product Approval
Federal, state and local government authorities in the United States
regulate, among other things, the testing, manufacturing, quality control, approval, labeling, packaging, storage, record-keeping, distribution
and marketing of the products we develop. The process for obtaining regulatory approval and compliance with appropriate federal, state
and local regulations is rigorous and requires the expenditure of substantial time and financial resources.
United States Review and Approval Processes
In the United States, the EPA regulates the sale, distribution and
use of any pesticide under the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA). The EPA’s definition of a pesticide includes
“any substance or mixture of substances intended for preventing, destroying, repelling, or mitigating any pest.” FIFRA defines
a pest as “any insect, rodent, nematode, fungus, or weed.” To register a new product with the EPA, all active ingredients
within the product must be registered with the EPA.
The EPA granted registration for ContraPest effective August 2, 2016.
This initial EPA approval labeled ContraPest as a restricted-use product, due to the need for applicator expertise for deployment. On
October 18, 2018, the EPA removed the Restricted Use designation, meaning that we can sell ContraPest to consumers who do not have applicator
expertise. ContraPest is currently limited by EPA requirements to indoor use and to use within one foot of manmade structures. We intend
to diligently pursue additional related regulatory approvals from the EPA to support our product evolution, including seeking approval
for full outdoor use, alternative formulations and for additional rodent species. This may entail the need to complete and submit to EPA
additional studies, principally related to the effects on other animals and fish if ingested or if the product enters the water supply.
In addition to the EPA registration of ContraPest in the United States,
we must obtain registration from the various state regulatory agencies prior to selling in each state. To date, we have received registration
for ContraPest in all 50 states and the District of Columbia, 48 of which have approved the removal of the Restricted Use designation.
In addition to product registration, the EPA also approves all labeling
(the container label, instructional inserts, and the Safety Data Sheet (SDS)) of ContraPest. Generally, states accept the EPA approved
label as is. ContraPest’s labeling was submitted to states at initial registration and is resubmitted during state scheduled reregistration
or for any significant labeling change requiring EPA approval.
In certain cases, our EPA and state registrations require completion
of testing and certifications even after we have received approval for the product or its labelling. We continue to seek to comply with
these requirements.
International Review and Approval Processes
We are researching potential international markets and will evaluate
the regulatory landscapes of each prospective market. Country-specific regulatory laws have provisions that include requirements for certain
labeling, safety, efficacy and manufacturers’ quality control procedures to assure the consistency of the product, as well as company
records and reports. Some specific in-country studies will be required for particular countries, but others will generally accept an EPA
or EU compliant dossier.
Personnel
As of December 31, 2021, we had 26 full-time employees and one part-time
employee. Within our workforce, seven employees are engaged in research and development and 20 employees are engaged in sales, business
development, finance, regulatory, human resources, facilities, information technology and general management and administration.
None of our employees are represented by labor unions or covered by
collective bargaining agreements.
Intellectual Property and Other Proprietary
Rights
Maintaining a strong position in the rodenticide market requires constant
innovation along with a healthy research program to evolve product lines to remain competitive and relevant to the needs of the changing
global marketplace. We seek to protect our proprietary data and trade secrets with attention to data exchanges among employees, consultants,
collaborators and research and trade partners.
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Patent Filings
Our intellectual property portfolio supporting ContraPest consists
of nine international patent filings (in the United States, Europe, Canada, Brazil, Russia, Japan, Mexico, South Korea, and Australia)
addressing the ContraPest compound. Claims directed toward the compound include composition-of-matter involving a diterpenoid epoxide
or salts thereof in combination with an organic diepoxide, use claims for inducing follicle depletion and for reducing the reproductive
capability of a mammalian animal or non-human mammalian population. Issued claims will have a patent term extending to 2033 or longer
based on patent term determinations in each of the filing countries. The novelty of ContraPest extends to its method of field distribution
and has required innovation to perfect the dosing of our product to rodents. We have filed U.S. and international patent applications
covering our novel bait station device to effectively and efficiently deliver our rodent bait at individual bait sites that would, if
issued, offer patent term protection through at least 2036.
License Agreements
We have an exclusive patent license with the University of Arizona
for background intellectual property that we plan to employ for future product development in the domestic animal fertility control market.
The patent claims in the United States, Australia and New Zealand cover the use of 4-vinylcyclohexene diepoxide to deplete ovarian follicles
in individual mammals and mammal populations. The license agreement, signed in 2005, will terminate with the last-to-expire patent claims,
which have a term extending to 2026.
Trade Secrets and Trademarks
Beyond our patent right holdings, we broaden our intellectual property
position with trademark, trade secret, know-how and continuous scientific discovery to accompany our product development efforts. We protect
these proprietary assets with a combination of confidentiality terms in all commercial agreements or stand-alone confidentiality agreements
along with rights-ownership agreements and structured information transfer understandings prior to beginning any collaborative projects.
We own and maintain the ContraPest trademark and intend to register new trademarks for products from our evolving rodenticide product
line and for products for mammalian species beyond rodentia.
Data Sets
We have exclusive use status with the EPA for the data sets we have
developed and submitted to the EPA as part of our application for ContraPest. The exclusive use status applies to new active ingredients
and the final formulation of the ContraPest product for a period of 10 years. For five years after the 10-year period of exclusivity,
if another applicant or the EPA Administrator chooses to rely on one or more data sets that we submitted in support of an application
submitted by another applicant, the new applicant must make a binding offer to compensate us and certify to the EPA that it has done so.
If we and the offeror cannot reach agreement on the terms of the compensation for the use of such data sets, FIFRA requires resolution
by binding arbitration. The EPA rules do not describe how the compensation should be determined, and there is publicly available information
about some, but not all, binding arbitration decisions.
Where You Can Find Additional Information
We electronically file with the SEC our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934. We make available on our website at www.senestech.com, free of charge, copies of these
reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing them to, the SEC. The information
contained in, or that can be accessed through, our website is not part of, and is not incorporated into, this Annual Report on Form 10-K.
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