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 (the “Securities Act”), 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 June 30, 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 three 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 primarily due to an increase in the number of product units sold, including our Elevate Bait System TM ; • our successful commercialization of ContraPest; • our belief that if we encounter continued issues or delays in the commercialization of ContraPest, our 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; • our financial performance, including our ability to fund operations; • our ability to maintain compliance with Nasdaq’s continued listing requirements; 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 June 30, 2023, we received net proceeds of $94.8 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 $3.0 million in net product sales. As of June 30, 2023, we had an accumulated deficit of $126.2 million and cash and cash equivalents of $2.2 million. 15 Table of Contents We have incurred significant operating losses every year since our inception, with net losses of $2.0 million and $2.6 million for the three months ended June 30, 2023 and 2022, respectively. We expect to continue to incur significant expenses and generate operating losses for at least the next six months. 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 June 30, 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 three months. In July 2023, we initiated a public offering of shares of our common stock, together with Series D and Series E warrants to purchase shares of our common stock seeking aggregate gross proceeds of up to $7.5 million. 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 June 30, % Increase (Decrease) Six Months Ended June 30, % Increase (Decrease) 2023 2022 2023 2022 Revenues, net $ 305 $ 277 10 % $ 538 $ 472 14 % Cost of sales 163 141 16 % 304 246 24 % Gross profit 142 136 4 % 234 226 4 % Operating expenses: Research and development 381 431 (12) % 768 947 (19) % Selling, general and administrative 1,761 2,277 (23) % 3,511 4,184 (16) % Total operating expenses 2,142 2,708 (21) % 4,279 5,131 (17) % Loss from operations (2,000) (2,572) (22) % (4,045) (4,905) (18) % Other income, net 7 3 133 % 15 4 275 % Net loss $ (1,993) $ (2,569) (22) % $ (4,030) $ (4,901) (18) % Revenues Sales, net of sales discounts and promotions, were $305,000 for the second quarter of 2023, compared to $277,000 for the second quarter of 2022. Sales increased by $28,000, 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 PMPs. In particular, we saw increased sales activity from our field sales team, as we continue to optimize our sales organization. The higher sales was primarily due to an increase in the number of product units sold, including our Elevate Bait System, which was launched in June 2022. 16 Table of Contents For the six months ended June 30, 2023, sales were $538,000, compared to $472,000 for the six months ended June 30, 2022. The $66,000 increase was primarily due to an increase in the number of units sold, including our Elevate Bait System product offering. Cost of Sales Cost of sales consisted primarily of the cost of products sold, including scrap and reserves for obsolescence, and was $163,000, or 53.6% of net sales, for the second quarter of 2023, compared to $141,000, or 50.9% of net sales, for the second quarter of 2022. We have experienced an increase in the cost of certain product components in 2023, and when combined with changes in the underlying mix of products sold, our cost of sales as a percent of sales for the second quarter of 2023 is higher when compared with the second quarter of 2022. For the six months ended June 30, 2023, cost of sales was $304,000, or 56.5% of net sales, compared to $246,000, or 52.1% of net sales, for the six months ended June 30, 2022. The higher cost of sales as a percentage of net sales was driven by the scrapping of defective trays no longer used in our products in the first quarter of 2023, which totaled $42,000. Gross Profit Gross profit for the second quarter of 2023 was $142,000, for a gross profit margin of 46.4%, compared to a gross profit of $136,000, or a gross profit margin of 49.1%, for the second quarter of 2022. For the six months ended June 30, 2023, gross profit was $234,000, for a gross profit margin of 43.5%, compared to $226,000, gross profit margin of 47.9%, for the six months ended June 30, 2022. The lower gross profit margin was the driven by the effects of scrapping defective tanks during no longer used in our products. Excluding the cost associated with the scrapped inventory, gross profit margin was 51.3% for the six months ended June 30, 2023. Research and Development Expenses Research and development expenses consisted of the following (in thousands): Three Months Ended June 30, Increase (Decrease) Six Months Ended June 30, Increase (Decrease) 2023 2022 2023 2022 Personnel (including stock-based compensation) $ 214 $ 262 $ (48) $ 456 $ 503 $ (47) Professional fees 34 58 (24) 78 148 (70) Depreciation 28 33 (5) 56 79 (23) Facilities 25 27 (2) 51 53 (2) Other 80 51 29 127 164 (37) Total $ 381 $ 431 $ (50) $ 768 $ 947 $ (179) Research and development expenses were $381,000 for the second quarter of 2023, compared to $431,000 for the second quarter of 2022. The $50,000 decrease was primarily due to lower headcount and consulting and legal fees required for research and development purposes. Such decreases were partially offset by higher expenses related to field and product improvement studies resulting from the completion of a stability study in the second quarter of 2023. For the six months ended June 30, 2023, research and development expenses were $768,000, compared to $947,000 for the six months ended June 30, 2022. The $179,000 decrease was primarily due to lower headcount, consulting and legal fees required for research and development purposes, lower depreciation as several assets became fully depreciated in 2023 and lower expenses overall related to field and product improvement studies. 17 Table of Contents Selling, General and Administrative Expenses Selling, general and administrative expenses consisted of the following (in thousands): Three Months Ended June 30, Increase (Decrease) Six Months Ended June 30, Increase (Decrease) 2023 2022 2023 2022 Personnel (including stock-based compensation) $ 890 $ 1,115 $ (225) $ 1,793 $ 2,185 $ (392) Professional fees 419 464 (45) 871 900 (29) Insurance 93 145 (52) 179 311 (132) Travel and entertainment 53 60 (7) 127 106 21 Office supplies/IT 65 86 (21) 136 169 (33) Marketing 63 225 (162) 117 245 (128) Facilities 39 39 — 77 78 (1) Other 139 143 (4) 211 190 21 Total $ 1,761 $ 2,277 $ (516) $ 3,511 $ 4,184 $ (673) Selling, general and administrative expenses were $1.8 million for the second quarter of 2023, as compared to $2.3 million for the second quarter of 2022. The decrease of $516,000 was primarily due to lower personnel-related expenses, both lower stock-based compensation and lower headcount, and lower marketing costs resulting from changes in our overall marketing program. Additionally, insurance is lower as well as consulting and legal fees required for general corporate purposes. For the six months ended June 30, 2023, selling, general and administrative expenses were $3.5 million, compared to $4.2 million for the six months ended June 30, 2022. The $673,000 decrease was primarily due to lower personnel-related expenses, both lower stock-based compensation and lower headcount, lower insurance and lower marketing costs resulting from changes in our overall marketing program. Additionally, consulting and legal fees required for general corporate purposes is lower than the comparable period of 2022. These decreases were partially offset by an increase in travel and entertainment costs related to increased sales-related activities. Other Income, Net Other income for the second quarter of 2023 consisted of interest income, which was $6,000 higher than the second quarter of 2022 due to higher interest rates of the comparable periods. Additionally, we had miscellaneous income of $2,000 for the second quarter of 2022 related to the sale of certain assets. For the six months ended June 30, 2023, other income, net, consisted of interest income, which was $12,000 higher than the six months ended June 30, 2022 due to higher interest rates of the comparable periods. Additionally, for the six months ended June 30, 2022, we had interest expense of $1,000 related to certain notes payable and finance leases that expired in 2022 and miscellaneous income of $2,000 related to the sale of certain assets. 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 June 30, 2023, we have received net proceeds of $94.8 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other promissory notes, an aggregate of $3.0 million in net product 18 Table of Contents sales and an aggregate of $1.7 million from licensing fees. As of June 30, 2023, we had an accumulated deficit of $126.2 million and cash and cash equivalents of $2.2 million. 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 June 30, 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 three 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 three 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; • 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. 19 Table of Contents Capital Resources The following table summarizes our sources and uses of cash for each of the periods presented (in thousands): Six Months Ended June 30, 2023 2022 Cash and cash equivalents, beginning of period $ 4,775 $ 9,326 Net cash provided by (used in): Operating activities (3,757) (4,148) Investing activities (21) (146) Financing activities 1,199 (32) Decrease in cash and cash equivalents (2,579) (4,326) Cash and cash equivalents, end of period $ 2,196 $ 5,000 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 six months ended June 30, 2023, operating activities used $3.8 million of cash, resulting from our net loss of $4.0 million and net changes in our operating assets and liabilities of $130,000, partially offset by net non-cash charges of $403,000, consisting primarily of stock-based compensation and depreciation and amortization expense. Our net loss was driven by costs related to our selling, general and administrative activities resulting from our continued efforts to commercialize our products, combined with research and development costs. Net cash used by changes in our operating assets and liabilities consisted primarily of a net decrease in accounts payable and accrued expenses of $359,000, partially offset by decreases in prepaid expenses of $92,000, inventory of $88,000, and accounts receivable of $71,000. During the six months ended June 30, 2022, operating activities used $4.1 million of cash, resulting from our net loss of $4.9 million, partially offset by net changes in our operating assets and liabilities of $198,000 and by non-cash charges of $555,000, consisting primarily of stock-based compensation and depreciation and amortization expense. Our net loss was driven by costs related to our selling, general and administrative activities resulting from our efforts to commercialize our products, combined with our research and development costs. Net cash provided by changes in our operating assets and liabilities consisted of a net decrease in accounts payable and accrued expenses of $259,000, a decrease in deferred revenue of $41,000 and an increase in inventory of $25,000, partially offset by increases in prepaid expenses of $108,000 and accounts receivable of $19,000. 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 six months ended June 30, 2023 and 2022, cash flows used in investing activities consisted of property and equipment purchases of $21,000 and $146,000, respectively. Cash Flows from Financing Activities— Financing activities provide cash for both day-to-day operations and capital requirements as needed. During the six months ended June 30, 2023, net cash used in financing activities consisted of net proceeds of $1.2 million from the issuance of common stock, slightly offset by the payment of employee withholding taxes of $11,000. During the six months ended June 30, 2022, net cash used in financing activities consisted of repayments of notes payable and finance lease obligations of $32,000. Critical Accounting Policies and Estimates There have been no material changes to our critical accounting policies and estimates as previously disclosed in Item 7 of our 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. 20 Table of Contents