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 and Evolve Mouse are considered a minimum risk pesticides 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 September 30, 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 four months; • our expectation that significant expenses and operating losses will continue for the near future; • 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 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 ability to achieve profitability or generate positive cash flows; • our expectation that we will incur substantial and increased 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 maximize market acceptance for, and generate sales of, our products, including by conducting field demonstrations for potential lead customers; • our ability to explore 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; 16 Table of Contents • our ability to further develop our product offerings and 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 successful commercialization of fertility control products in the United States and internationally; • our ability to maintain and obtain regulatory approval of our product and product candidates; • our ability to retain and attract key personnel to develop, operate, and grow our business; and • our ability to meet our working capital needs. 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, 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 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. 17 Table of Contents 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 September 30, 2024, we received net proceeds of $103.8 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 $5.0 million in net product sales. As of September 30, 2024, we had an accumulated deficit of $134.8 million and cash and cash equivalents of $2.5 million. We have incurred significant operating losses every year since our inception, with a net loss of $4.9 million for the nine months ended September 30, 2024, with $1.5 million for the three months ended September 30, 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. Based upon our current operating plan, we expect that cash and cash equivalents at September 30, 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 four 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. 18 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) 2024 2023 2024 2023 Revenues, net $ 482 $ 360 34 % $ 1,356 $ 898 51 % Cost of sales 167 184 (9) % 657 488 35 % Gross profit 315 176 79 % 699 410 70 % Operating expenses: Research and development 451 379 19 % 1,288 1,147 12 % Selling, general and administrative 1,411 1,748 (19) % 4,403 5,259 (16) % Total operating expenses 1,862 2,127 (12) % 5,691 6,406 (11) % Loss from operations (1,547) (1,951) (21) % (4,992) (5,996) (17) % Other income, net 34 4 750 % 63 19 232 % Net loss $ (1,513) $ (1,947) (22) % $ (4,929) $ (5,977) (18) % Revenues Sales, net of sales discounts and promotions, were $482,000 for the third quarter of 2024, compared to $360,000 for the third quarter of 2023. The $122,000 increase was driven by the launch of our latest Evolve product offerings, partially offset by a decrease in the number of units sold of our existing ContraPest product offerings. Launched in January 2024, and expanded during 2024 with variations in product offerings, Evolve is a soft bait containing the active ingredient cottonseed oil and represented approximately 68%, or $330,000, of revenues for the third quarter of 2024. Partially offsetting this increase, was a decline in revenue related to our ContraPest product offerings in the third quarter of 2024 when compared with the third quarter of 2023. Limited erosion of demand for ContraPest products is expected as Evolve products are accepted in the marketplace. For the nine months ended September 30, 2024, sales were $1,356,000, compared to $898,000 for the nine months ended September 30, 2023. The $458,000 increase was driven by our latest Evolve product offerings through 2024, which represented approximately 63%, or $849,000, of revenues for the nine months ended September 30, 2024. This increase was offset by a decrease related to a lower number of units sold of our existing ContraPest product offering the Elevate Bait System in the nine months ended September 30, 2024 when compared with the nine months ended September 30, 2023. Cost of Sales Cost of sales consists of costs related to products sold, including scrap and reserves for obsolescence, as well as shipping costs when charged to the customer. Cost of sales was $167,000, or 34.6% of net sales, for the third quarter of 2024, compared to $184,000, or 51.2% of net sales, for the third quarter of 2023. The lower cost of net sales is largely due to a shift in the mix of products sold, and declined largely driven by our latest product offering, Evolve, which launched in January 2024. Shipping costs, which impacts gross profit margin, was 13% and 12% of cost of sales in the third quarter of 2024 and 2023, respectively. For the nine months ended September 30, 2024, cost of sales was $657,000, or 48.5% of net sales, compared to $488,000, or 54.4% of net sales, for the nine months ended September 30, 2023. Cost of sales in 2024 was impacted during the first few months of 2024 from the higher cost of a key ingredient for our new Evolve product as we transitioned from development-stage raw materials pricing to production-level raw materials pricing. Cost of sales in 2023 was impacted by the scrapping of defective trays no longer used in our products in the first quarter of 2023. Gross Profit Gross profit for the third quarter of 2024 was $315,000, for a gross profit margin of 65.4%, compared to a gross profit of $176,000, or a gross profit margin of 48.8%, for the third quarter of 2023. Higher gross profit margin was driven by a shift 19 Table of Contents in the mix of products sold, and increased due to our latest product offering Evolve, which launched in January 2024. This increase was partially offset by lower gross profit margin related to a shift in the mix of sales through our sales channels, with higher sales to distributors in the third quarter of 2024 when compared with the third quarter of 2023. For the nine months ended September 30, 2024, gross profit was $699,000, for a gross profit margin of 51.5%, compared to $410,000, gross profit margin of 45.6%, for the nine months ended September 30, 2023. The gross profit margin in 2024 was impacted by both the higher-than-expected cost of a key ingredient in our new Evolve product during the first quarter, combined with an increased proportion of our sales coming from distributors, who are offered a lower price due to the quantities purchased. The gross profit margin in 2023 was impacted by the higher cost of sales related to the scrapping of defective tanks no longer used in our products. 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) 2024 2023 2024 2023 Personnel (including stock-based compensation) $ 282 $ 231 $ 51 $ 810 $ 687 $ 123 Facility-related 47 28 19 124 79 45 Depreciation 34 28 6 94 84 10 Supplies and maintenance 12 34 (22) 72 81 (9) Professional fees 32 34 (2) 66 112 (46) Stability studies, materials and testing 33 1 32 67 55 12 Other 11 23 (12) 55 49 6 Total $ 451 $ 379 $ 72 $ 1,288 $ 1,147 $ 141 Research and development expenses were $451,000 for the third quarter of 2024, compared to $379,000 for the third quarter of 2023. The $72,000 increase was primarily due to the realignment of the focus of our field development personnel to research and development activities, lower overhead allocation, and increased costs related to the expansion of facilities and supplies and maintenance related to research and development efforts. These increases were partially offset by lower consulting and legal fees required for research and development purposes, combined with lower expenses overall related to field and product improvement studies in the third quarter of 2024 when compared with the third quarter of 2023. For the nine months ended September 30, 2024, research and development expenses were $1,288,000, compared to $1,147,000 for the nine months ended September 30, 2023. The $141,000 increase was primarily due to the realignment of the focus of our field development personnel to research and development activities, lower overhead allocation, and increased costs related to the expansion of facilities and supplies and maintenance related to research and development efforts. These increases were partially offset by lower consulting and legal fees required for research and development purposes, combined with lower expenses overall related to field and product improvement studies in 2024 when compared with 2023. 20 Table of Contents 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) 2024 2023 2024 2023 Personnel (including stock-based compensation) $ 648 $ 880 $ (232) $ 2,143 $ 2,673 $ (530) Professional fees 305 365 (60) 971 1,236 (265) Marketing 80 82 (2) 224 199 25 Licensed software 57 60 (3) 187 188 (1) Insurance 59 120 (61) 182 299 (117) Travel and entertainment 64 53 11 179 180 (1) Facilities 39 39 — 119 116 3 Other 159 149 10 398 368 30 Total $ 1,411 $ 1,748 $ (337) $ 4,403 $ 5,259 $ (856) Selling, general and administrative expenses were $1.4 million for the third quarter of 2024, as compared to $1.7 million for the third quarter of 2023. The decrease of $337,000 was primarily due to lower personnel-related expenses resulting from both lower headcount and stock-based compensation, combined with lower professional fees and insurance costs. Consulting fees related to marketing efforts are lower in the third quarter of 2024 when compared with the third quarter of 2023 due to changes in our overall marketing program, combined with lower legal fees. Additionally, our insurance cost is lower resulting from both policy and rate changes. For the nine months ended September 30, 2024, selling, general and administrative expenses were $4.4 million, compared to $5.3 million for the nine months ended September 30, 2023. The $856,000 decrease was primarily due to lower personnel-related expenses resulting from both lower headcount and stock-based compensation, combined with lower professional fees and insurance costs. Consulting fees related to marketing efforts are lower for the nine months ended September 30, 2024 when compared with the nine months ended September 30, 2023 due to changes in our overall marketing program, combined with lower legal fees. Additionally, our insurance cost is lower resulting from both policy and rate changes. In the second quarter of 2023, personnel costs includes severance costs of $119,000 related to the termination of our former Chief Revenue Officer. Other Income, Net Other income, net for the third quarter of 2024 consisted of miscellaneous income of $29,000 and interest income of $11,000, partially offset by interest expense of $6,000. Other income consisted of interest income of $4,000 for the third quarter of 2023. During the third quarter of 2024, we realized a gain of $28,000 on the sale of equipment, which is included in miscellaneous income. Interest income was higher due to a higher average balance of cash and cash equivalents, partially offset by declining interest rates during the third quarter of 2024 when compared with the third quarter of 2023. Interest expense in the third quarter of 2024 relates to the notes payable entered into beginning in late 2023 for the purchase of certain equipment. For the nine months ended September 30, 2024, other income, net, consisted of interest income of $48,000 and miscellaneous income of $30,000, partially offset by interest expense of $15,000, compared with the nine months ended September 30, 2023, which consisted of interest income of $19,000. The higher interest income was due to a higher average balance of cash and cash equivalents, partially offset by declining interest rates for the nine months ended September 30, 2024 when compared to the nine months ended September 30, 2023. For the nine months ended September 30, 2024, miscellaneous income largely consisted of a gain realized on the sale of equipment, while interest expense relates to the notes payable entered into beginning in late 2023 for purchases of certain equipment. 21 Table of Contents Liquidity and Capital Resources Liquidity Since our inception, we have sustained significant operating losses in the course of our research and development activities and commercialization efforts and expect such losses to continue for the near future. We have generated limited revenue to date from product sales, research grants and licensing fees received under a former license. We have primarily funded our operations to date through the sale of equity securities, including convertible preferred stock, common stock and warrants to purchase common stock, and debt financing, consisting primarily of convertible notes. Through September 30, 2024, we have received net proceeds of $103.8 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other promissory notes, an aggregate of $5.0 million in net product sales and an aggregate of $1.7 million from licensing fees. As of September 30, 2024, we had an accumulated deficit of $134.8 million and cash and cash equivalents of $2.5 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 September 30, 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 four 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; • 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; 22 Table of Contents • 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, 2024 2023 Cash and cash equivalents, beginning of period $ 5,395 $ 4,775 Net cash provided by (used in): Operating activities (4,815) (5,547) Investing activities (41) (114) Financing activities 1,979 3,031 Decrease in cash and cash equivalents (2,877) (2,630) Cash and cash equivalents, end of period $ 2,518 $ 2,145 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, 2024, operating activities used $4.8 million of cash, resulting from our net loss of $4.9 million and net changes in our operating assets and liabilities of $221,000, partially offset by net non-cash charges of $335,000, 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 related to our continued efforts on formulations of new products and improvements to existing products. Net cash used by changes in our operating assets and liabilities consisted primarily of increases in accounts receivable of $121,000, inventory of $85,000, prepaid expenses of $28,000, and deposits of $41,000, combined with a net decrease in accounts payable and accrued expenses of $4,000. 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, partially offset by net changes in our operating assets and liabilities of $137,000 and by 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 efforts to commercialize our products, combined with costs related to our research and development efforts. Net cash used by changes in our operating assets and liabilities consisted of a net decrease in accounts payable and accrued expenses of $282,000 and deferred revenue of $29,000, partially offset by decreases in inventory of $150,000, and accounts receivable of $34,000. 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, 2024 and 2023, cash flows used in investing activities consisted of property and equipment 23 Table of Contents purchases. Additionally, during the nine months ended September 30, 2024, net cash used in investing activities was partially offset by proceeds received from the sale of equipment in the amount of $28,000. 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, 2024, net cash provided by financing activities consisted of net proceeds received from the exercise of warrants of $2.0 million and proceeds received from notes payable of $25,000, partially offset by repayments on notes payable of $29,000. During the nine months ended September 30, 2023, net cash provided by financing activities consisted of net proceeds of $3.0 million from the issuance of common stock and proceeds received from notes payable of $44,000, slightly offset by the payment of employee withholding taxes related to share-based awards of $11,000. 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, 2023, filed with the SEC on February 21, 2024. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.