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 belief that Evolve is considered a minimum risk pesticide under the United States Environmental Protection Agency’s (the “EPA’s”) Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”), Section 25(b); • 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 March 31, 2024, 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 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 belief that we may require additional capital in order 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 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; 12 Table of Contents • our ability to maximize market acceptance for, and generate sales of, our products, including by conducting field demonstrations for potential lead customers; • our ability to enter into strategic partnerships to enable us to penetrate additional target markets and geographical locations; • our ability to manage the infrastructure for sales, marketing and distribution of fertility control products and any other product candidates for which we may receive regulatory approval; • our ability to seek 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; • our ability to 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; • our ability to 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; • our ability to maintain and protect our intellectual property portfolio; • our ability to 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; • our expectation that our expenses may continue or increase in connection with our ongoing activities, particularly as we focus on marketing and sales of fertility control products; • our successful commercialization of fertility control products in the United States; • our ability to maintain and obtain regulatory approval of our product and product candidates; • our ability to gain market acceptance, commercial viability and profitability of our fertility control products and any 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 activities; • 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 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 13 Table of Contents those discussed in Item 1A-“Risk Factors” of Part I of our Annual Report on Form 10-K, for the year ended December 31, 2023, filed with the SEC on February 21, 2024, 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 regain and maintain compliance with Nasdaq’s continued listing requirements; • 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. Although sales of our product have increased over the last three years, 17% in 2023, 77% in 2022 and 123% in 2021, we are not yet able to fund operations by product sales alone. 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. We have also generated limited revenue from research grants and licensing fees received under former license agreements. Through March 31, 2024, we received net proceeds of $101.8 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 $4.1 million in net product sales. As of March 31, 2024, we had an accumulated deficit of $131.7 million and cash and cash equivalents of $3.6 million. We have incurred significant operating losses every year since our inception, with a net loss of $1.8 million for the three months ended March 31, 2024. 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. 14 Table of Contents Based upon our current operating plan, we expect that cash and cash equivalents at March 31, 2024, 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. 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 and internationally, 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) 2024 2023 Revenues, net $ 415 $ 233 78 % Cost of sales 280 141 99 % Gross profit 135 92 47 % Operating expenses: Research and development 370 387 (4) % Selling, general and administrative 1,608 1,750 (8) % Total operating expenses 1,978 2,137 (7) % Loss from operations (1,843) (2,045) (10) % Other income, net 11 8 38 % Net loss $ (1,832) $ (2,037) (10) % Revenues Sales, net of sales discounts and promotions, were $415,000 for the first quarter of 2024, compared to $233,000 for the first quarter of 2023. The $182,000 increase was driven by the launch of our latest product Evolve in November 2023. Evolve is a soft bait containing the active ingredient cottonseed oil and represented approximately 56%, or $232,000, of revenues for the first quarter of 2023. Cost of Sales Cost of sales consisted primarily of the cost of products sold, including scrap and reserves for obsolescence, and was $280,000, or 67.5% of net sales, for the first quarter of 2024, compared to $141,000, or 60.4% of net sales, for the first quarter of 2023. Cost of sales in the first quarter of 2024 was impacted by the higher cost of a key ingredient in our new Evolve product, as we transitioned from development-stage raw materials pricing to production-level raw materials pricing. Cost of sales in the first quarter of 2023 was impacted by the scrapping of defective trays no longer used in our products, which totaled $42,000. Gross Profit Gross profit for the first quarter of 2024 was $135,000, for a gross profit margin of 32.5%, compared to a gross profit of $92,000, or a gross profit margin of 39.6%, for the first quarter of 2023. The gross profit margin in the first quarter of 2024 was impacted by both the higher-than-expected cost of a key ingredient in our new Evolve product, combined with an increased proportion of our sales coming from distributors. The gross profit margin in the first quarter of 2023 was impacted by the higher cost of sales related to the scrapping of defective tanks during no longer used in our products. 15 Table of Contents Research and Development Expenses Research and development expenses consisted of the following (in thousands): Three Months Ended March 31, Increase (Decrease) 2024 2023 Personnel (including stock-based compensation) $ 198 $ 242 $ (44) Facility-related 39 26 13 Depreciation 30 28 2 Supplies and maintenance 28 30 (2) Professional fees 18 44 (26) Stability studies, materials and testing 16 3 13 Other 41 14 27 Total $ 370 $ 387 $ (17) Research and development expenses were $370,000 for the first quarter of 2024, compared to $387,000 for the first quarter of 2023. The $17,000 decrease was primarily due to lower headcount and consulting and legal fees required for research and development purposes, which was partially offset by higher expenses overall related to field and product improvement studies in the first quarter of 2024 when compared with the first quarter of 2023. Selling, General and Administrative Expenses Selling, general and administrative expenses consisted of the following (in thousands): Three Months Ended March 31, Increase (Decrease) 2024 2023 Personnel (including stock-based compensation) $ 862 $ 903 $ (41) Professional fees 314 452 (138) Marketing 73 54 19 Licensed software 69 65 4 Insurance 61 86 (25) Travel and entertainment 59 74 (15) Facilities 40 38 2 Other 130 78 52 Total $ 1,608 $ 1,750 $ (142) Selling, general and administrative expenses were $1.6 million for the first quarter of 2024, as compared to $1.8 million for the first quarter of 2023. The decrease of $142,000 was primarily due to lower professional fees. Consulting fees related to marketing efforts are lower in the first of 2024 when compared with the first quarter of 2023 due to changes in our overall marketing program, while legal fees are lower due to the settlement of a legal matter in November 2023. Additionally, personnel-related expenses were lower due to lower headcount and stock-based compensation and insurance is lower resulting from both policy and rate changes. These decreases were offset by higher franchise fees in the first quarter of 2024 when compared to the first quarter of 2023. Other Income, Net Other income, net for the first quarter of 2024 consisted of interest income of $15,000, partially offset by interest expense of $4,000, while the first quarter of 2023 consisted of interest income of $8,000. 16 Table of Contents Interest income was higher due to a combination of a higher average balance of cash and cash equivalents and higher interest rate during the first quarter of 2024 when compared with the first quarter of 2023. Interest expense in the first quarter of 2024 relates to the notes payable entered into in late 2023 related to the purchase of certain equipment. 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, 2024, we have received net proceeds of $101.8 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other promissory notes, an aggregate of $4.1 million in net product sales and an aggregate of $1.7 million from licensing fees. As of March 31, 2024, we had an accumulated deficit of $131.7 million and cash and cash equivalents of $3.6 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 any 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, 2024, 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. 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 and internationally. 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 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. 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; 17 Table of Contents • 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): Three Months Ended March 31, 2024 2023 Cash and cash equivalents, beginning of period $ 5,395 $ 4,775 Net cash provided by (used in): Operating activities (1,829) (2,015) Investing activities (2) (1) Financing activities (2) (11) Decrease in cash and cash equivalents (1,833) (2,027) Cash and cash equivalents, end of period $ 3,562 $ 2,748 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, 2024, operating activities used $1.8 million of cash, resulting from our net loss of $1.8 million and net changes in our operating assets and liabilities of $119,000, partially offset by net non-cash charges of $122,000, 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 increases in inventory of $79,000 and accounts receivable of $66,000, a net decrease in accounts payable and accrued expenses of $11,000, and a decrease in deferred revenue of $3,000, partially offset by decrease in prepaid expenses of $42,000. During the three months ended March 31, 2023, operating activities used $2.0 million of cash, resulting from our net loss of $2.0 million, partially offset by net 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 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 $301,000, partially offset by increases in accounts receivable of $69,000, inventory of $38,000, and prepaid expenses of $28,000. 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 18 Table of Contents months ended March 31, 2024 and 2023, cash flows used in investing activities consisted of property and equipment purchases. 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, 2024, net cash used in financing activities consisted of repayments on notes payable of $8,000, partially offset by proceeds received from the exercise of warrants of $6,000. During the three months ended March 31, 2023, net cash used in financing activities consisted of the payment of employee withholding taxes related to share-based awards. 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, 2023, filed with the SEC on February 21, 2024. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.