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 operating losses for the foreseeable future; • our expectation that cash and cash equivalents at September 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 expectation that significant operating losses in the course of our research and development and commercialization activities will continue for the near future; • our expectation that we will continue to incur significant expenses and generate operating losses for at least the next six months; • our belief that additional financing will be needed before achieving anticipated revenue targets and margin targets; • our belief that 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; • our additional capital is needed to fund our operating losses and research and development activities before we become profitable; • our ability to achieve profitability or generate positive cash flows; • our successful commercialization of fertility control products in the United States; • our belief that 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; • our expectation that we will incur substantial and increased expenses; • our belief that we will need additional financing to fund these continuing and additional expenses; • our belief that if we encounter continued issues or delays in the commercialization of fertility control products, 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 fertility control products; • our ability to maintain and obtain regulatory approval for our product and product candidates; 15 Table of Contents • our ability to gain market acceptance, commercial viability and profitability of fertility control products 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; • 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 16 Table of Contents 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 September 30, 2023, we received net proceeds of $96.6 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 $3.4 million in net product sales. As of September 30, 2023, we had an accumulated deficit of $128.2 million and cash and cash equivalents of $2.1 million. We have incurred significant operating losses every year since our inception, with a net loss of $1.9 million for the three months ended September 30, 2023. 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 fertility control products and maintaining and obtaining regulatory approval of our products and product candidates; (ii) market acceptance, commercial viability and profitability of fertility control products 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 September 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. And, in August 2023, a certain warrant holder was induced to exercise warrants related to 2,934,575 shares by reducing the exercise price to the then current market price for our common stock. These warrants were exercised for $0.7202 per share for gross proceeds of $2.1 million, before deducting issuance costs. Of the 2,934,575 shares issued, 2,619,575 shares are held in abeyance and not considered outstanding until certain conditions are met, at which time such shares will become outstanding. The balance of the shares in abeyance will be held in abeyance until notice from the stock holder that the balance, or a portion thereof, may be issued in compliance with beneficial limitation provision in the warrants. While we have evaluated and continue to evaluate our operating expenses and concentrate our resources toward the successful commercialization of fertility control products 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. 17 Table of Contents Results of Operations The following table summarizes our results of operations for the periods presented (in thousands): Three Months Ended September 30, % Increase (Decrease) Nine Months Ended September 30, % Increase (Decrease) 2023 2022 2023 2022 Revenues, net $ 360 $ 250 44 % $ 898 $ 722 24 % Cost of sales 184 128 44 % 488 374 30 % Gross profit 176 122 44 % 410 348 18 % Operating expenses: Research and development 379 452 (16) % 1,147 1,399 (18) % Selling, general and administrative 1,748 2,289 (24) % 5,259 6,473 (19) % Total operating expenses 2,127 2,741 (22) % 6,406 7,872 (19) % Loss from operations (1,951) (2,619) (26) % (5,996) (7,524) (20) % Other income (expense), net 4 (27) (115) % 19 (23) (183) % Net loss $ (1,947) $ (2,646) (26) % $ (5,977) $ (7,547) (21) % Revenues Sales, net of sales discounts and promotions, were $360,000 for the third quarter of 2023, compared to $250,000 for the third quarter of 2022. Sales increased by $110,000, 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 TM , which was launched in June 2022, and, most recently, our Isolate Bait System TM , which was launched in August 2023. For the nine months ended September 30, 2023, sales were $898,000, compared to $722,000 for the nine months ended September 30, 2022. The $176,000 increase was primarily due to an increase in the number of units sold, including our Elevate Bait System product offering, and, most recently, our Isolate Bait System, which was launched in August 2023. Cost of Sales Cost of sales consisted primarily of the cost of products sold, including scrap and reserves for obsolescence, and was $184,000, or 51.2% of net sales, for the third quarter of 2023, compared to $128,000, or 51.2% of net sales, for the third quarter of 2022. For the nine months ended September 30, 2023, cost of sales was $488,000, or 54.4% of net sales, compared to $374,000, or 51.8% of net sales, for the nine months ended September 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 third quarter of 2023 was $176,000, for a gross profit margin of 48.8%, compared to a gross profit of $122,000, or a gross profit margin of 48.8%, for the third quarter of 2022. For the nine months ended September 30, 2023, gross profit was $410,000, for a gross profit margin of 45.6%, compared to $348,000, gross profit margin of 48.2%, for the nine months ended September 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 50.3% for the nine months ended September 30, 2023. 18 Table of Contents Research and Development Expenses Research and development expenses consisted of the following (in thousands): Three Months Ended September 30, Increase (Decrease) Nine Months Ended September 30, Increase (Decrease) 2023 2022 2023 2022 Personnel (including stock-based compensation) $ 231 $ 284 $ (53) $ 687 $ 787 $ (100) Professional fees 34 68 (34) 112 216 (104) Depreciation 28 24 4 84 103 (19) Facilities 28 29 (1) 79 82 (3) Other 58 47 11 185 211 (26) Total $ 379 $ 452 $ (73) $ 1,147 $ 1,399 $ (252) Research and development expenses were $379,000 for the third quarter of 2023, compared to $452,000 for the third quarter of 2022. The $73,000 decrease was primarily due to lower headcount and consulting and legal fees required for research and development purposes. For the nine months ended September 30, 2023, research and development expenses were $1,147,000, compared to $1,399,000 for the nine months ended September 30, 2022. The $252,000 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. In 2022, we incurred costs related to product improvement and continue into 2023 using the results from those studies for product development. Selling, General and Administrative Expenses Selling, general and administrative expenses consisted of the following (in thousands): Three Months Ended September 30, Increase (Decrease) Nine Months Ended September 30, Increase (Decrease) 2023 2022 2023 2022 Personnel (including stock-based compensation) $ 880 $ 952 $ (72) $ 2,673 $ 3,137 $ (464) Professional fees 365 639 (274) 1,236 1,539 (303) Insurance 121 143 (22) 299 454 (155) Marketing 81 261 (180) 199 506 (307) Travel and entertainment 53 46 7 180 152 28 Facilities 39 38 1 116 116 — Other 209 210 (1) 556 569 (13) Total $ 1,748 $ 2,289 $ (541) $ 5,259 $ 6,473 $ (1,214) Selling, general and administrative expenses were $1.7 million for the third quarter of 2023, as compared to $2.3 million for the third quarter of 2022. The decrease of $541,000 was primarily due to consulting and legal fees required for general corporate purposes largely due to higher legal fees incurred in the third quarter of 2022 and lower marketing costs resulting from changes in our overall marketing program. See Note 9 in our Notes to Condensed Financial Statements for a discussion of our legal matter. Additionally, personnel-related expenses were lower due to lower headcount and stock-based compensation. For the nine months ended September 30, 2023, selling, general and administrative expenses were $5.3 million, compared to $6.5 million for the nine months ended September 30, 2022. The $1,214,000 decrease was primarily due to lower personnel-related expenses resulting from both lower stock-based compensation and lower headcount, lower marketing 19 Table of Contents costs resulting from changes in our overall marketing program, and lower consulting and legal fees required for general corporate purposes largely due to higher legal fees incurred in the third quarter of 2022 related to our outstanding legal matter. Additionally, insurance is lower than the comparable period of 2022 resulting from both policy and rate changes. 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 third quarter of 2023 consisted of interest income, which was $3,000 higher than the third quarter of 2022 due to higher interest rates of the comparable periods. Additionally, the third quarter of 2022 included a $28,000 loss on the sale of property and equipment. For the nine months ended September 30, 2023, other income, net, consisted of interest income, which was $15,000 higher than the nine months ended September 30, 2022 due to higher interest rates of the comparable periods. Additionally, the nine months ended September 30, 2022 included $1,000 of interest expense related to certain notes payable and finance leases that expired in 2022, a $28,000 loss on the sale of property and equipment and $2,000 of miscellaneous income. 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 September 30, 2023, we have received net proceeds of $96.6 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other promissory notes, an aggregate of $3.4 million in net product sales and an aggregate of $1.7 million from licensing fees. As of September 30, 2023, we had an accumulated deficit of $128.2 million and cash and cash equivalents of $2.1 million. Our ultimate success depends upon the outcome of a combination of factors, including the following: (i) successful commercialization of our fertility control products and maintaining and obtaining regulatory approval of our products and product candidates; (ii) market acceptance, commercial viability and profitability of our fertility control products 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 September 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 our fertility control products 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 fertility control products. In addition, we will continue to incur costs associated with operating as a public company. 20 Table of Contents 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 fertility control products and any other product candidates for which we may receive regulatory approval; • seek additional regulatory approvals for fertility control products, including to more fully expand the market and use for fertility control products 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 fertility control products and any other product candidates for which we receive regulatory approval; • continue product development of fertility control products 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. Capital Resources The following table summarizes our sources and uses of cash for each of the periods presented (in thousands): Nine Months Ended September 30, 2023 2022 Cash and cash equivalents, beginning of period $ 4,775 $ 9,326 Net cash provided by (used in): Operating activities (5,547) (6,339) Investing activities (114) (163) Financing activities 3,031 (32) Decrease in cash and cash equivalents (2,630) (6,534) Cash and cash equivalents, end of period $ 2,145 $ 2,792 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 nine months ended September 30, 2023, operating activities used $5.5 million of cash, resulting from our net loss of $6.0 million and net changes in our operating assets and liabilities of $137,000, partially offset by net non-cash charges of $567,000, 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 $282,000 and 21 Table of Contents deferred revenue of $29,000 and an increase in prepaid expenses of $7,000, partially offset by decreases in inventory of $150,000 and accounts receivable of $34,000. During the nine months ended September 30, 2022, operating activities used $6.3 million of cash, resulting from our net loss of $7.5 million, partially offset by net changes in our operating assets and liabilities of $457,000 and by non-cash charges of $751,000, consisting primarily of stock-based compensation, depreciation and amortization expense and loss on sale of property and equipment. 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 decreases in accounts payable and accrued expenses of $551,000 and deferred revenue of $48,000 and an increase in inventory of $48,000, partially offset by increases in prepaid expenses of $174,000 and accounts receivable of $16,000. 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 nine months ended September 30, 2023 and 2022, cash flows used in investing activities consisted of property and equipment purchases. During the nine months ended September 30, 2022, net cash used in investing also included proceeds received from the sale of property and equipment of $4,000. Cash Flows from Financing Activities— Financing activities provide cash for both day-to-day operations and capital requirements as needed. During the nine months ended September 30, 2023, net cash provided by financing activities consisted of net proceeds of $3.0 million from the issuances of common stock and $44,000 from the financing of certain equipment, slightly offset by the payment of employee withholding taxes of $11,000. During the nine months ended September 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.