SenesTech, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed financial statements and related notes. Forward-Looking Statements The statements contained in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). All statements other than statements of historical facts contained or incorporated herein by reference in this Quarterly Report on Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “suggests,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “would,” “should,” “could,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding: • our expectation that we will continue to incur significant expenses and generate operating losses for the foreseeable future; • our expectation that cash and cash equivalents at March 31, 2023, in combination with anticipated revenue and any additional sales of our equity securities, will be sufficient to fund our current operations for at least the next six months; • our belief that sales increased in part due to continued focus of our internet sales initiatives, enhanced strategic partnership and collaborations with key distributors and Pest Management Professionals (“PMP”s); • our belief that the increased sales activity from our field sales organization was due in part to the launch of our new Elevate product offering; • our successful commercialization of ContraPest; • our belief that if we encounter continued issues or delays in the commercialization of ContraPest, our prior losses and expected future losses could have an adverse effect on our financial condition and negatively impact our ability to fund continued operations, obtain additional financing in the future and continue as a going concern; • our ability to enter into strategic partnerships to enable us to penetrate additional target markets and geographical locations; • our expectation that our expenses will continue or increase in connection with our ongoing activities, particularly as we focus on marketing and sales of ContraPest; • our ability to maintain and obtain regulatory approval for our product and product candidates; • our ability to gain market acceptance, commercial viability and profitability of ContraPest and other products; • our ability to market our products and establish an effective sales force and marketing infrastructure to generate significant revenue; • the success of our research and development; • our ability to retain and attract key personnel to develop, operate, and grow our business; • our ability to meet our working capital needs; • our estimates or expectations related to our revenue, cash flow, expenses, capital requirements and need for additional financing; • our plans for our business, including for research and development; 14 Table of Contents • our belief the claims against us do not have merit and our intention to aggressively defend against these accusations; • our belief the litigation against us is not likely to have a material effect on our operations; • our financial performance, including our ability to fund operations; and • developments and projections relating to our projects, competitors and our industry, including legislative developments and impacts from those developments. These forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and situations that are difficult to predict and that may cause our own, or our industry’s, actual results to be materially different from the future results that are expressed or implied by these statements. Accordingly, actual results may differ materially from those anticipated or expressed in such statements as a result of a variety of factors, including those discussed in Item 1A-“Risk Factors” of Part I of our Annual Report on Form 10-K, for the year ended December 31, 2022, filed with the SEC on March 17, 2023, and those contained from time to time in our other filings with the SEC. A number of factors could cause our actual results to differ materially from those indicated by the forward-looking statements. Such factors include, among others, the following: • the successful commercialization of our products; • market acceptance of our products; and • regulatory approval and regulation of our products and other factors and risks identified from time to time in our filings with the SEC, including this Quarterly Report on Form 10-Q. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form 10-Q about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results, performance or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance or achievements. We are subject to the information requirements of the Exchange Act, and we file or furnish reports, proxy statements and other information with the SEC. Such reports and other information we file with the SEC are available free of charge at www.senestech.com as soon as practicable after such reports are available on the SEC’s website at www.sec.gov. The SEC’s website contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Overview Since our inception, we have sustained significant operating losses in the course of our research and development and commercialization activities and expect such losses to continue for the near future. We have generated limited revenue to date from product sales, research grants and licensing fees received under our former license agreement. We have primarily funded our operations to date through the sale of equity securities, including convertible preferred stock, common stock and warrants to purchase common stock. Through March 31, 2023, we received net proceeds of $93.6 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other promissory notes, an aggregate of $1.7 million from licensing fees and an aggregate of $2.7 million in net product sales. As of March 31, 2023, we had an accumulated deficit of $124.2 million and cash and cash equivalents of $2.7 million. We have incurred significant operating losses every year since our inception, with net losses of $2.0 million and $2.3 million for the three months ended March 31, 2023 and 2022, respectively. We expect to continue to incur significant expenses and generate operating losses for at least the next six months. 15 Table of Contents Our ultimate success depends upon the outcome of a combination of factors, including the following: (i) successful commercialization of ContraPest and maintaining and obtaining regulatory approval of our products and product candidates; (ii) market acceptance, commercial viability and profitability of ContraPest and other products; (iii) the ability to market our products and establish an effective sales force and marketing infrastructure to generate significant revenue; (iv) the success of our research and development; (v) the ability to retain and attract key personnel to develop, operate and grow our business; and (vi) our ability to meet our working capital needs. Based upon our current operating plan, we expect that cash and cash equivalents at March 31, 2023, in combination with anticipated revenue and any additional sales of our equity securities, will be sufficient to fund our current operations for at least the next six months. In April 2023, we consummated a registered direct offering with certain institutional investors and issued an aggregate of 857,146 shares of our common stock for $1.75 per share for gross proceeds of $1.5 million, before deducting fees payable to the placement agent and other estimated offering expenses payable by us. While we have evaluated and continue to evaluate our operating expenses and concentrate our resources toward the successful commercialization of ContraPest in the United States, additional financing will be needed before achieving anticipated revenue targets and margin targets If we are unable to raise necessary capital through the sale of our securities, we may be required to take other measures that could impair our ability to be successful and operate as a going concern. In any event, additional capital is needed in order to fund our operating losses and research and development activities before we become profitable. We may never achieve profitability or generate positive cash flows, and unless and until we do, we will continue to need to raise capital through equity or debt financing. If such equity or debt financing is not available at adequate levels or on acceptable terms, we may need to delay, limit or terminate commercialization and development efforts or discontinue operations. Results of Operations The following table summarizes our results of operations for the periods presented (in thousands): Three Months Ended March 31, % Increase (Decrease) 2023 2022 Revenues, net $ 233 $ 195 19 % Cost of sales 141 105 34 % Gross profit 92 90 2 % Operating expenses: Research and development 387 516 (25) % Selling, general and administrative 1,750 1,907 (8) % Total operating expenses 2,137 2,423 (12) % Loss from operations (2,045) (2,333) (12) % Other income, net 8 1 700 % Net loss $ (2,037) $ (2,332) (13) % Revenues Sales, net of sales discounts and promotions, were $233,000 for the first quarter of 2023, compared to $195,000 for the first quarter of 2022. Sales increased by $38,000, in part, due to continued focus on our internet sales initiatives, augmenting our existing pull through sales strategy, where demand from the consumer market encourages, or pulls, resellers and pest management professionals to offer our products, as well as enhanced strategic partnerships and collaborations with key distributors and PMP. In addition, we saw increased sales activity from our field sales organization, including the launch of our new Elevate product offering. Cost of Sales Cost of sales consist primarily of the cost of products sold, including scrap and reserves for obsolescence, and was $141,000, or 60.4% of net sales, for the first quarter of 2023, compared to $105,000, or 53.8% of net sales, for the first quarter of 2022. The increase in cost of sales as a percentage of net sales during the first quarter of 2023 was driven by the scrapping of defective tanks no longer used in our products, which totaled $42,000. 16 Table of Contents Gross Profit Gross profit for the first quarter of 2023 was $92,000, for a gross profit margin of 39.6%, compared to a gross profit of $90,000, or a gross profit margin of 46.2%, for the first quarter of 2022. The lower gross profit margin was the direct result of scrapping defective tanks no longer used in our products. Excluding the cost associated with the scrapped inventory, gross profit margin is 57.8% for the first quarter of 2023. Research and Development Expenses Research and development expenses consisted of the following (in thousands): Three Months Ended March 31, Increase (Decrease) 2023 2022 Personnel related (including stock-based compensation) $ 242 $ 241 $ 1 Professional fees 44 90 (46) Depreciation 28 46 (18) Facility-related 26 26 — Other 47 113 (66) Total $ 387 $ 516 $ (129) Research and development expenses were $387,000 for the first quarter of 2023, compared to $516,000 for the first quarter of 2022. The $129,000 decrease was primarily due to lower consulting and legal fees required for research and development purposes, lower depreciation as several assets became fully depreciated in 2023, and lower expenses related to field and product improvement studies. Selling, General and Administrative Expenses Selling, general and administrative expenses consisted of the following (in thousands): Three Months Ended March 31, Increase (Decrease) 2023 2022 Personnel related (including stock-based compensation) $ 903 $ 1,070 $ (167) Professional fees 452 436 16 Insurance 86 166 (80) Travel and entertainment 74 46 28 Office supplies/IT 71 83 (12) Marketing 54 20 34 Facility-related 38 39 (1) Other 72 47 25 Total $ 1,750 $ 1,907 $ (157) Selling, general and administrative expenses were $1.8 million for the first quarter of 2023, as compared to $1.9 million for the first quarter of 2022. The decrease of $157,000 was primarily due to lower personnel-related expenses, both lower stock-based compensation and lower headcount, combined with lower insurance and software-related license costs. This decrease was partially offset by higher digital marketing advertising costs and travel and entertainment expenses as we continue to focus efforts on the commercialization of our products, as well as higher legal related to selling, general and administrative and software license costs. Other Income, Net Other income for the first quarter of 2023 consisted of interest income of $8,000, which was $6,000 higher than the first quarter of 2022 due to higher interest rates of the comparable periods. Additionally, we had interest expense of $1,000 for the first quarter of 2022 related to certain notes payable and finance leases that expired in 2022. 17 Table of Contents Liquidity and Capital Resources Liquidity Since our inception, we have sustained significant operating losses in the course of our research and development activities and commercialization efforts and expect such losses to continue for the near future. We have generated limited revenue to date from product sales, research grants and licensing fees received under a former license. We have primarily funded our operations to date through the sale of equity securities, including convertible preferred stock, common stock and warrants to purchase common stock; and debt financing, consisting primarily of convertible notes. Through March 31, 2023, we have received net proceeds of $93.6 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other promissory notes, an aggregate of $1.7 million from licensing fees and an aggregate of $2.7 million in net product sales. As of March 31, 2023, we had an accumulated deficit of $124.2 million and cash and cash equivalents of $2.7 million. And, in April 2023, we received net proceeds of $1.2 million from the sale of common stock. Our ultimate success depends upon the outcome of a combination of factors, including the following: (i) successful commercialization of ContraPest and maintaining and obtaining regulatory approval of our products and product candidates; (ii) market acceptance, commercial viability and profitability of ContraPest and other products; (iii) the ability to market our products and establish an effective sales force and marketing infrastructure to generate significant revenue; (iv) the success of our research and development activities; (v) the ability to retain and attract key personnel to develop, operate and grow our business; and (vi) our ability to meet our working capital needs. Based upon our current operating plan, we expect that cash and cash equivalents at March 31, 2023, in combination with anticipated revenue and any additional sales of our equity securities, will be sufficient to fund our current operations for at least the next six to nine months. We have evaluated and will continue to evaluate our operating expenses and will concentrate our resources toward the successful commercialization of ContraPest in the United States. However, if anticipated revenue targets and margin targets are not achieved or expenses are more than we have budgeted, we may need to raise additional financing before that time. If we need more financing, including within the next six to nine months, and we are unable to raise the necessary capital through the sale of our securities, we may be required to take other measures that could impair our ability to be successful and operate as a going concern. In any event, we may require additional capital in order to fund our operating losses and research and development activities before we become profitable and may opportunistically raise capital. We may never achieve profitability or generate positive cash flows, and unless and until we do, we will continue to need to raise capital through equity or debt financing. If such equity or debt financing is not available at adequate levels or on acceptable terms, we may need to delay, limit or terminate commercialization and development efforts or discontinue operations. Additional Funding Requirements We expect our expenses to continue or increase in connection with our ongoing activities, particularly as we focus on marketing and sales of ContraPest. In addition, we will continue to incur costs associated with operating as a public company. In particular, we expect to incur substantial and increased expenses as we: • work to maximize market acceptance for, and generate sales of, our products, including by conducting field demonstrations for potential lead customers; • explore strategic partnerships to enable us to penetrate additional target markets and geographical locations; • manage the infrastructure for sales, marketing and distribution of ContraPest and any other product candidates for which we may receive regulatory approval; • 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; • 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; 18 Table of Contents • 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; • maintain and protect our intellectual property portfolio; and • 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. We will need additional financing to fund these continuing and additional expenses. Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented (in thousands): Three Months Ended March 31, 2023 2022 Cash and cash equivalents, beginning of period $ 4,775 $ 9,326 Net cash used in: Operating activities (2,015) (2,029) Investing activities (1) (66) Financing activities (11) (16) Decrease in cash and cash equivalents (2,027) (2,111) Cash and cash equivalents, end of period $ 2,748 $ 7,215 Cash Flows from Operating Activities— Cash flows from operating activities are generally determined by the amount and timing of cash received from customers and payments made to vendors, as well as the nature and amount of non-cash items, including depreciation and amortization and stock-based compensation included in operating results during a given period. During the three months ended March 31, 2023, operating activities used $2.0 million of cash, primarily resulting from our net loss of $2.0 million offset by changes in our operating assets and liabilities of $178,000 and by non-cash charges of $200,000, consisting primarily of stock-based compensation and depreciation and amortization expense. Our net loss was primarily attributable to research and development activities and our selling, general and administrative expenses, as we generated limited product revenue during the period. Net cash used by changes in our operating assets and liabilities for the three months ended March 31, 2023 of $178,000 consisted primarily of a net decrease in accounts payable and accrued expenses of $301,000, partially offset by decreases in accounts receivable of $69,000, inventory of $38,000 and prepaid expenses of $28,000. During the three months ended March 31, 2022, operating activities used $2.0 million of cash, primarily resulting from our net loss of $2.3 million, changes in our operating assets and liabilities of $13,000 and by non-cash charges of $290,000, consisting primarily of stock-based compensation and depreciation and amortization expense. Our net loss was primarily attributable to research and development activities and our selling, general and administrative expenses, as we generated limited product revenue during the period. Net cash used by changes in our operating assets and liabilities for the three months ended March 31, 2022 of $13,000 consisted primarily of decreases in inventory of $54,000 and accounts receivable of $21,000, offset by a net decrease in accounts payable and accrued expenses of $33,000 and an increase in prepaid expenses of $29,000. Cash Flows from Investing Activities— Cash flows used in investing activities primarily consist of the purchase of property and equipment, offset by any proceeds received in connection with sales of property and equipment. During the three months ended March 31, 2023 and 2022, cash flows used in investing activities consisted of property and equipment purchases of $1,000 and $66,000, respectively. Cash Flows from Financing Activities— Financing activities provide cash for both day-to-day operations and capital requirements as needed. During the three months ended March 31, 2023, net cash used in financing activities consisted of the payment of employee withholding taxes of $11,000. During the three months ended March 31, 2022, net cash used in financing activities consisted of repayments notes payable and finance lease obligations of $16,000. 19 Table of Contents Critical Accounting Policies and Estimates There have been no material changes to the Company’s critical accounting policies and estimates as previously disclosed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 17, 2023. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.