SenesTech, Inc. 10-K

ITEM 1. BUSINESS. Overview We have developed and are commercializing products for managing animal pest populations, initially rat populations, through fertility control. We currently have two product lines of fertility control products: ContraPest and Evolve. As far back as we can trace, rats have been foe to mankind. Posing threats to human and animal health, food security, and infrastructure around the world, we have spent centuries trying to solve the problem. Rats carry or can spread at least 35 diseases, globally posing a dangerous risk to public health and safety and agriculture. Through consumption and contamination, rats destroy at least 20% of the global stored food supply every year. Additionally, rats cause over $27 billion in damage to public and private infrastructure annually in the United States alone by burrowing beneath foundations, as well as gnawing on electrical wiring, insulation, fire proofing systems, electronics and computer equipment. Over the centuries, the most prevalent response to rat infestations has been to try to eliminate them through the use of lethal tools such as traps and rodenticides. However, there are growing concerns about secondary exposure and bioaccumulation of rodenticides. While some of these challenges are of recent concern, the efficacy of the response to rat infestations has always been limited by the rat’s extraordinary reproductive rate. ContraPest®, our initial product, is a novel liquid bait in the pest control industry, containing the active ingredients 4-vinylcyclohexene diepoxide (“VCD”) and triptolide. ContraPest targets the reproductive systems of both male and female Norway and roof rats beginning with the first breeding cycle following consumption, which can lead to sustained reductions of the rat population. ContraPest is a highly palatable liquid formulation that reduces fertility in both male and female rats. The high fat content and sweet taste of ContraPest promotes sustained consumption even when other sought-after food sources are present. In both field and laboratory settings, consumption of ContraPest occurs even in the presence of abundant water sources and plentiful food choices, including animal feed, trash and other options. Additionally, ContraPest does not cause illness in rats, and, therefore, it does not change behavior or result in bait aversion. Accordingly, ContraPest offers a new tool used in coordination with rodenticides as part of an integrated pest management program. Additionally, ContraPest can be successfully used as an alternative to traditional rodenticides altogether, an important option in the increasing number of jurisdictions that are restricting the use of second-generation anti-coagulant products. The registration process with the EPA for ContraPest began 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. ContraPest is registered in all 50 states, 49 of which have approved the removal of the RUP designation, as well as the District of Columbia and five major U.S. territories. In certain cases, our registrations are conditional and require completion of testing. We continue to actively seek to comply with these requirements. On March 10, 2022, the EPA granted a sub-label for ContraPest allowing for an alternative delivery system in a hanging bait station designed to target roof rat habitats and infestations, currently marketed as Elevate Bait System™. We are continuously enhancing ContraPest to align with the unique needs and environments of our customers in our target verticals while simultaneously pursuing regulatory approvals and amendments to the existing U.S. registration to broaden its use and marketability. When regulatory and financial conditions permit, we will seek regulatory approval for additional jurisdictions beyond the United States. Evolve, our second product, is a novel soft bait product in the pest control industry. Evolve targets the reproductive systems of both male and female rats, which can lead to sustained reductions of the rat population. Evolve is a soft bait 6 Table of Contents containing the active ingredient cottonseed oil. Evolve limits the reproduction of male and female rats within one to two breeding cycles following consumption. Evolve has not been registered by the EPA. Evolve qualifies for exemption from registration as a minimum risk pesticide under FIFRA Section 25(b). All applicable requirements for registration, manufacturing, selling, or distributing into designated states and territories have been met. There are 10 states that accept the federal exemption for pesticide registration with the respective state. For those states that do not accept the federal exemption, we began the registration process for those states in October 2023. To date, we are authorized to sell Evolve in 30 states. We were incorporated in the state of Nevada in July 2004. On November 12, 2015, we 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. In November 2023, we amended our amended and restated certificate of incorporation to effect a 1-for-12 reverse split of our issued and outstanding shares of common stock. The accompanying 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, and per share amounts contained in our financial statements have been retrospectively adjusted. Current Challenges in Pest Control Methodologies Two base rats, a male and female, can produce 15,000 descendants in approximately 12 months. Lethal control measures such as traps and rodenticides are often at the forefront of rat control programs, but this reproduction rate, intelligence, and genetic resistance to the active ingredients in rodenticides can negatively impact results of traditional mitigation efforts. Rats reach sexual maturity at approximately nine weeks of age. Females can give birth to six litters per year, an average of 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. Resistance to traditional rodenticides creates challenges for rodent control programs. Rats, like all animals, are hard-wired to survive and some rats can be born with a genetic mutation making them resistant to certain rodenticides. Studies show that resistance is increasing in rat species. This resistance is passed onto their offspring who will then carry this resistant trait into future generations. Because of the above factors, traditional rodenticide producers are continually challenged to develop new, more lethal chemicals to control future rat populations. Rodenticides may affect other species within the food chain. It has been reported that animals that prey on rats such as raptors, large cats, foxes, and other mammals of concern have significant levels of rodenticide present in their bodies due to persistence of the rodenticide in the rat tissue, which may also result in contamination of the food supply. Additionally, there is growing concern about the rise in reported cases of adverse effects that rodenticides have on children and pets due to accidental, direct exposure. In November 2022, the EPA released an update to its Endangered Species Act workplan which intends to expand the mitigation efforts for 90 species potentially affected by rodenticides. The EPA will perform biological evaluations to analyze the potential effects of the rodenticides on listed species and their designated critical habitats and will identify mitigation measures for these species and critical habitats to avoid or minimize exposure from the rodenticides. When the plan is described, they will consider it the Rodenticide Strategy. A portion of the draft plan includes a focus on addressing effects to primary consumers of rodenticide bait (mammals and birds) and to secondary consumers that consume primary consumers (mammals, birds, and reptiles). These changes to the EPA’s review and registration policies could affect filings with the agency due to expanded test requirements for mammals, birds, reptiles, and critical habitats. Even though ContraPest is not a traditional rodenticide, these requirements (or a subset) may impact our registration in the future since it is classified in the rodenticide category with the EPA. We will maintain 7 Table of Contents close contact with the EPA as their final guidance with respect to this policy was released in December 2023 with an intended final biological evaluation due November 2024. 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; IPM is based upon this concept. An effective IPM program needs to reduce the existing rat population while preventing the population from rebounding. Based on company field research, the addition of a fertility control product to an IPM program has demonstrated improved efficacy of more than 90% with sustained population suppression. Maintaining a fertility control program reduces the reproduction and therefore the risk of future population spikes, known in the industry as the rebound effect. 8 Table of Contents (source: company studies) Other Applications While our proprietary technology is effective on rat species, our technology can be applied to other mammalian species. We have explored and continue to evaluate fertility control in mice, feral dogs, and other species. This preliminary data indicates potential for the continued development of fertility control technology in general. We believe that the size of the rat control market is 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. Business Strategy Our goal is for fertility control to be a standard tool utilized in pest management in IPM programs across all verticals. We will achieve this through the following: End User Awareness and Adoption. Our focus is educating end users on the rapid reproduction rate of rats, which draws attention to the complex issue of gaining control of an infestation if you do not have control of rat fertility. As more rodenticides come to market to address rat populations, attention will be drawn to the impact other rodenticides may have to other species due to bioaccumulation, and the benefit of ContraPest and Evolve having a low potential for bioaccumulation. Tailored Value Propositions. While the general desire to achieve and maintain control of rat populations is universal among end users, each vertical has a specific pain point which may be improved through the use of fertility control. By working with our existing customers and conducting field research, we are understanding and leveraging unique opportunities in our sales strategies across verticals. Our approaches include, but are not limited to the following: • Product Development. The needs of customers in each vertical vary due to environment and limitations, requiring ongoing innovation, exploration of additional species, and the pursuit of additional regulatory approvals for ContraPest and Evolve both in the United States and globally. • Strategic Partnerships. Alignment with industry leaders and organizations accelerate awareness, adoption, product innovation and development. 9 Table of Contents • Efficiencies. Through securing more reliable, affordable suppliers for our raw materials, and continuous development of our manufacturing process, we will be able to increase profits while scaling to meet rising product demand, and production of additional registered products. Marketing and Sales Approach ContraPest is differentiated in what is otherwise a very crowded pest control market. It is the only product registered with the EPA that restricts fertility in both male and female rats and is designed to be non-lethal. As first and second generation anti-coagulants come under increased scrutiny for non-target accidental consumption or for bioaccumulation with impact on non-target species as rodenticides travel up the food chain, their use is being restricted or even banned in select areas across the United States and globally. These increasing restrictions and bans create an opportunity for ContraPest, as industry professionals are looking for effective tools to serve their customers and gain control of rat populations through nontraditional means. Like ContraPest, Evolve is also differentiated in the pest control market due to its unique approach to restrict fertility in rats as opposed to other lethal means. In addition, Evolve meets the EPA’s FIFRA Section 25(b) minimum risk pesticide conditions. Evolve is exempt from federal registration because it poses little to no risk to human health and the environment and is made from food ingredients, within tolerances of exemption for both food and nonfood applications, which allows it to be used in agricultural applications. Because the pest industry in the United States has demonstrated a reluctance to adopt new technologies, the marketing of fertility control has primarily been aimed at end-user awareness, creating pull through demand with Pest Management Providers (“PMP”) by applying pressure for PMPs to use fertility control as part of their IPM. Additionally, within our target verticals, agribusiness, commercial, distributors, e-commerce, pest management, municipalities, and zoos and sanctuaries, many large targets employ internal pest management teams as opposed to contracting with service providers. For these reasons, the end-user is our primary target in order to grow market penetration for fertility control products. While pain points and benefits are unique to each vertical, they have shared core value propositions. • Fertility control is effective. Lab tests and field research demonstrate more than 90% reduction in rat populations when added to an IPM with sustained population suppression; • Our proprietary formulations and feeding systems optimize consumption and provides targeted delivery for maximum efficacy; • ContraPest and Evolve are specifically designed to minimize exposure hazard for handlers and non-targeted species such as wildlife, livestock, and pets, with Evolve being designated by the EPA as a minimum risk product; and • Fertility control can be used as an anchor or enhancement for an IPM program, and as a solution to decrease reliance on poisons or other lethal control options. Three core sales channels drive revenue allowing SenesTech to reach a wider customer base and target different segments of the market. • e-Commerce. E-commerce provides a hub to push end-users for further education as well as providing 24/7 availability for purchasing products and managing subscriptions. • Field Sales. Field sales allow for personal interaction, consultation, and development of potential customers. Field sales representatives, in charge of regional territories across the United States, focus in the larger account segments, attending trade shows and educational opportunities within target verticals. • Distributors and resellers. Distributors and resellers serve as an expansion of our sales team, increasing our reach by leveraging the established networks and connections of these third-party businesses. Additionally, the logistics and marketing support offered through these partners reduces cost and effort required to expand our sales. 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 10 Table of Contents 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 proprietary process in order to stabilize the final formulation. This process allows ContraPest to be delivered to rats in a palatable, effective manner, and it is designed to be non-lethal. Evolve contains one active ingredient, cottonseed oil, a plant-derived food product. Evolve also contains several other inactive food ingredients. Currently, we source cottonseed oil from standard food suppliers, and it is available from a variety of sources. Our manufacturing process for Evolve involves the incorporation of our active ingredient, in low concentration, into several inactive ingredients. Once incorporated, the entire product is packaged inside of a casing and cut to length for sale. This process allows Evolve to be delivered to rats in a palatable, effective manner, and it is designed to be non-lethal. Currently, we have production scale capability in our facilities in Arizona to manufacture ContraPest and Evolve. Our internal production capabilities allow us to meet our current and anticipated demand through 2024. Scientific Background Regarding our Product 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. The active ingredients in our products cause specific loss of small ovarian follicles (both primordial and primary) and growing follicles (secondary and antral). In males, the active ingredients in our products exert a significant suppression of male fertility by preventing sperm maturation and impairing the movement of sperm. The safety and efficacy of our active ingredients and products are supported by considerable evidence. The active ingredients are rapidly metabolized by the rat, limiting the possibility of bioaccumulation or effect on non-target species. Further, based on laboratory and toxicology studies, ContraPest and Evolve should not cause rats to become ill or change their behavior. Furthermore, ContraPest and Evolve are contraceptives, not sterilants, limiting fertility in male and female rats beginning with the first breeding cycle following consumption. The average duration of infertility post consumption ranges from 42 to over 180 days. Other Potential Products We have begun work on the application of ContraPest and Evolve on other species, such as mice, and expect to introduce an additional product during 2024. Competition Currently, we are unaware of any other non-lethal fertility control products targeting rats that are registered by the EPA. There are non-registered products being sold online that claim to control rodent reproduction. We do not believe these to be competitive products. Our principal competition are large corporations with greater resources that offer a wider range of products. Generally, these are lethal pest control products largely consisting of rodenticide-based products and other tools that PMPs use in their IPM. 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. 11 Table of Contents United States Review and Approval Processes In the United States, the EPA regulates the sale, distribution and use of any pesticide under 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, and as of July 12, 2018, we have received registration for ContraPest in all 50 states, the District of Columbia, and five major U.S. territories. 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, 49 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) 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 labeling. We continue to seek to comply with these requirements. The EPA has an exemption under FIFRA, Section 25(b) which exempts certain pesticides from federal registration based on six criteria for minimum risk. Evolve qualifies from registration as a minimum risk pesticide under FIFRA, Section 25(b). All applicable requirements for registration, manufacturing, selling, or distributing into designated sates and territories have been met. Evolve has not been registered by the EPA but is in the process for registration in all 50 states, the District of Columbia, and five major U.S. territories. There are 10 states that accept the federal exemption for pesticide registration within the respective state. For those states that do not accept the federal exemption, we began the registration process for those states in October 2023. To date, we are authorized to sell Evolve in 30 states. 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, 2023, we had 25 full-time employees and no part-time employees. Within our workforce, eight employees are engaged in research and development and 17 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. 12 Table of Contents 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. 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 have initiated registration for Evolve. We 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 Exchange Act. 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.