SenesTech(SNES) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company presents its unaudited condensed financial statements for the quarter ended March 31, 2020, and accompanying notes Condensed Balance Sheets The balance sheets show a decrease in total assets and stockholders' equity from December 31, 2019, to March 31, 2020 | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Cash | $1,492 | $1,936 | | Total current assets | $2,991 | $3,542 | | Total assets | $4,249 | $4,979 | | Total current liabilities | $1,455 | $1,581 | | Total liabilities | $2,175 | $2,412 | | Total stockholders' equity | $2,074 | $2,567 | | Accumulated deficit | $(98,598) | $(95,867) | Condensed Statements of Operations and Comprehensive Loss The company reported increased sales and gross profit but continued to incur a net loss impacted by a deemed dividend adjustment | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Sales | $37 | $19 | | Cost of sales | $22 | $12 | | Gross profit | $15 | $7 | | Research and development | $296 | $464 | | Selling, general and administrative | $2,045 | $1,904 | | Total operating expenses | $2,341 | $2,368 | | Net operating loss | $(2,326) | $(2,361) | | Net loss and comprehensive loss | $(2,317) | $(2,364) | | Deemed dividend-warrant price protection | $414 | $- | | Net loss attributable to common shareholders | $(2,731) | $(2,364) | | Net loss per common share | $(1.69) | $(2.01) | Condensed Statement of Changes in Stockholders' Equity (Deficit) Stockholders' equity changed due to stock issuances and warrant exercises, offset by a significant net loss for the quarter | Metric | Balance, December 31, 2019 (in thousands) | Balance, March 31, 2020 (in thousands) | | :------------------------------------ | :---------------------------------------- | :--------------------------------------- | | Common Stock (Shares) | 1,414,671 | 1,819,981 | | Common Stock (Amount) | $1 | $2 | | Additional Paid-In Capital | $98,433 | $100,670 | | Accumulated Deficit | $(95,867) | $(98,598) | | Total Stockholders' Equity (Deficit) | $2,567 | $2,074 | | Issuance of common stock, sold for cash, net | - | $1,708 | | Net loss for the three months ended March 31, 2020 | - | $(2,731) | Condensed Statements of Cash Flows Financing activities provided a significant cash inflow, partially offsetting negative operating cash flow and a net decrease in cash | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Net cash used in operating activities | $(1,871) | $(1,948) | | Net cash provided by (used in) investing activities | $40 | $(11) | | Net cash provided by (used in) financing activities | $1,387 | $(15) | | NET CHANGE IN CASH | $(444) | $(1,974) | | CASH AT END OF PERIOD | $1,492 | $2,946 | Note 1 - Organization and Description of Business SenesTech commercializes ContraPest®, a non-lethal rat fertility control product, but has sustained significant operating losses - SenesTech, Inc. develops and commercializes ContraPest®, a unique non-lethal fertility control product for rat populations, targeting both male and female rats to reduce reproduction[18][19][22] - ContraPest® is the first and only non-lethal, fertility control product approved by the EPA for rodent management, with registration in all 50 states and the District of Columbia[23][24] - The company effected a 1-for-20 reverse stock split on February 4, 2020, retrospectively adjusting all share and per share amounts[26] - SenesTech has an accumulated deficit of $98.6 million and cash and cash equivalents of $1.5 million as of March 31, 2020, and requires additional funding to continue as a going concern[27][31][33] Note 2 - Summary of Significant Accounting Policies The company outlines its significant accounting policies, including revenue recognition, leases, and stock-based compensation | Inventory Component | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------ | :----------------------------- | :----------------------------- | | Raw materials | $1,024 | $1,035 | | Finished goods | $142 | $149 | | Total net inventory | $1,162 | $1,180 | | Expense Category | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Research and development | $3 | $9 | | Selling, general and administrative | $148 | $243 | | Total stock-based compensation expense | $151 | $252 | | Potentially Dilutive Securities | March 31, 2020 | March 31, 2019 | | :------------------------------ | :------------- | :------------- | | Common stock purchase warrants | 812,963 | 321,590 | | Restricted stock unit | 5,877 | 11,895 | | Common stock options | 136,239 | 81,499 | | Total | 955,079 | 414,984 | - Effective January 1, 2019, the company adopted ASU No. 2016-02, Leases (Topic 842), recognizing right-of-use lease assets and lease liabilities on its balance sheet[67]. As of March 31, 2020, the balance in Right to Use Asset-Long Term was $622 thousand and Lease Liability-Long Term was $624 thousand[68] Note 3 - Fair Value Measurements Common stock warrant liabilities are measured at fair value and classified as Level 3 due to limited observable inputs - The company's common stock warrant liabilities are classified as Level 3 in the fair value hierarchy due to limited activity or less transparency around valuation inputs[85] - The estimated fair value of the derivative warrant liability was $0 at March 31, 2020, with no change in fair value recorded for the three months ended March 31, 2020[116] Note 4 - Credit Risk The company mitigates credit risk through a diverse customer base and maintains a reserve for doubtful trade receivables - The company maintained a reserve for doubtful trade receivables of $123 thousand at March 31, 2020, and December 31, 2019, to address potential uncollectable accounts[92] Note 5 - Prepaid Expenses Prepaid expenses increased primarily due to higher director and officer insurance and NASDAQ fees | Prepaid Expense Category | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------- | :----------------------------- | :----------------------------- | | Director compensation | $- | $9 | | Director and officer insurance | $123 | $115 | | NASDAQ fees | $43 | $- | | Legal retainer | $25 | $25 | | Marketing programs and conferences | $73 | $80 | | Professional services retainer | $8 | $8 | | Rent | $20 | $11 | | Equipment service deposits | $- | $1 | | Engineering, software licenses and other | $5 | $8 | | Total prepaid expenses | $297 | $257 | Note 6 - Property and Equipment Net property and equipment decreased due to depreciation and the sale of equipment, which generated a gain | Asset Category | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Research and development equipment | $1,470 | $1,585 | | Office and computer equipment | $733 | $753 | | Total property and equipment, gross | $2,581 | $2,716 | | Less accumulated depreciation and amortization | $(1,945) | $(1,978) | | Total net property and equipment | $636 | $738 | | Depreciation and amortization expense (3 months) | $77 | $111 | | Gain on sale of equipment (3 months) | $15 | $- | Note 7 - Accrued Expenses Accrued expenses decreased significantly, mainly due to reduced compensation and the settlement of accrued litigation | Accrued Expense Category | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------- | :----------------------------- | :----------------------------- | | Compensation and related benefits | $578 | $935 | | Accrued Litigation | $- | $238 | | Board Compensation | $9 | $17 | | Personal property and franchise tax | $10 | $2 | | Other | $3 | $1 | | Total accrued expenses | $600 | $1,193 | Note 8 - Borrowings Total borrowings decreased during the quarter, with balances outstanding for both short-term and long-term debt | Borrowing Category | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Short-term debt | $116 | $123 | | Finance lease obligations | $120 | $155 | | Other promissory notes | $92 | $105 | | Total long-term debt | $96 | $137 | | Total borrowings (gross) | $212 | $260 | - Finance lease obligations carry interest rates ranging from 7.3% to 18.3% and expire through April 2022[100]. Other promissory notes have interest rates from 13.1% to 13.3% and expire through June 2022[101] Note 9 - Common Stock Warrants and Common Stock Warrant Liability Warrant activity included new issuances from private placements and downward price adjustments resulting in deemed dividends | Warrant Type | Balance, December 31, 2019 | Issued (3 months ended March 31, 2020) | Exercised (3 months ended March 31, 2020) | Balance, March 31, 2020 | | :------------------------------------------ | :------------------------- | :------------------------------------- | :---------------------------------------- | :---------------------- | | Various (2016 and prior) | 17,059 | - | (9,375) | 7,684 | | Common Stock Offering (Nov 2017) | 143,501 | - | - | 143,501 | | Dealer Manager (Nov 2017) | 47,250 | - | (47,250) | - | | Warrant Reissue (June 2018) | 56,696 | - | - | 56,696 | | Rights Offering Warrants (Aug 2018) | 202,943 | - | - | 202,943 | | Dealer Manager (Aug 2018) | 13,393 | - | - | 13,393 | | Dealer Manager (July 2019) | 8,334 | - | - | 8,334 | | Registered Direct Offering (Jan 2020) | - | 177,500 | - | 177,500 | | Dealer Manager Warrants (Jan 2020) | - | 13,312 | - | 13,312 | | Registered Direct Offering (Mar 2020) | - | 176,372 | - | 176,372 | | Dealer Manager Warrants (Mar 2020) | - | 13,228 | - | 13,228 | | Total Outstanding Warrants | 489,176 | 380,412 | (56,625) | 812,963 | - As of March 31, 2020, the company had 812,963 shares of common stock issuable upon exercise of outstanding common stock warrants, at a weighted-average exercise price of $12.58 per share[105] - Downward adjustments to warrant exercise prices in January and March 2020, due to registered direct offerings, resulted in deemed dividends of $285 thousand and $129 thousand, respectively, on unexercised warrants with antidilution protection[106][107] - In March 2020, 51,414 common shares were issued in a cashless exercise of 56,625 warrants, settling an outstanding litigation reserve of $238 thousand[130] Note 10 - Stockholders' Deficit The number of common stock shares outstanding increased due to registered direct offerings and warrant exercises | Metric | March 31, 2020 | December 31, 2019 | | :------------------------------------ | :------------- | :---------------- | | Common stock issued and outstanding | 1,819,981 | 1,414,671 | - During the three months ended March 31, 2020, the company issued 405,310 shares of common stock, including 177,500 shares from a January 2020 offering (net proceeds $1.2 million) and 176,372 shares from a March 2020 offering (net proceeds $0.5 million)[134][135][136] Note 11 - Stock-based Compensation Stock-based compensation expense decreased from the prior year, with significant unrecognized compensation cost remaining - As of March 31, 2020, 33,758 shares of common stock were available for issuance under the 2018 Equity Incentive Plan[140] | Metric | March 31, 2020 | December 31, 2019 | | :------------------------------------ | :------------- | :---------------- | | Options Outstanding | 136,239 | 136,489 | | Weighted Average Exercise Price Per Share | $27.90 | $28.00 | | Options Exercisable | 94,298 | - | | Metric | March 31, 2020 | December 31, 2019 | | :------------------------------------ | :------------- | :---------------- | | Restricted Stock Units Outstanding | 5,877 | 5,877 | | Weighted Average Grant-Date Fair Value Per Unit | $30.28 | $30.28 | | Expense Category | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Research and development | $3 | $9 | | Selling, general and administrative | $148 | $243 | | Total stock-based compensation expense | $151 | $252 | - At March 31, 2020, total unrecognized compensation cost related to unvested options and restricted stock units was $818 thousand, to be recognized over a weighted average period of 24 months[150] Note 12 - Commitments and Contingencies The company has various lease commitments for its facilities and is involved in certain legal proceedings - An employment discrimination charge filed by a former EVP was closed by the EEOC on February 28, 2020, with no violations found[152] - The company's manufacturing facility lease in Flagstaff, Arizona, expires in December 2020, and its corporate headquarters lease in Phoenix, Arizona, expires in November 2024[154][158] | Years Ending December 31, | Finance Leases (in thousands) | Operating Lease (in thousands) | | :------------------------ | :---------------------------- | :----------------------------- | | 2020 | $50 | $174 | | 2021 | $58 | $136 | | 2022 | $28 | $138 | | 2023 | $- | $141 | | 2024 | $- | $132 | | Total minimum lease payments | $136 | $721 | Note 13 - Subsequent Events Subsequent events include the impact of COVID-19, receipt of a PPP loan, and a public offering to raise capital - The COVID-19 pandemic caused a significant slowdown in field studies and sales efforts starting in March 2020, with potential impacts on future results and challenges in communicating with customers[161] - On April 15, 2020, the company received a $645.7 thousand loan under the Paycheck Protection Program (PPP) at 1.00% interest, subject to forgiveness for qualifying expenses[162] - A public offering closed on April 24, 2020, is estimated to generate approximately $4.3 million in net proceeds, intended for working capital and ContraPest commercialization[163][164] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operating results, continued losses, and the impact of COVID-19 Forward-Looking Statements This section identifies forward-looking statements within the report that involve risks and uncertainties - Forward-looking statements in the report cover topics such as the impacts of the COVID-19 pandemic, commercialization strategies, market opportunities, regulatory approvals, financial estimates (revenue, expenses, capital), R&D plans, intellectual property, and litigation[170] Overview SenesTech has consistently incurred significant operating losses and requires further funding to sustain operations - Through March 31, 2020, the company received $68.9 million in net proceeds from equity and debt financing, $1.7 million from licensing fees, and $0.6 million from net product sales[174] | Metric | March 31, 2020 (in thousands) | March 31, 2019 (in thousands) | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net losses | $(2,700) | $(2,400) | | Accumulated deficit | $(98,600) | - | | Cash and cash equivalents | $1,500 | - | | Stock-based compensation expense | $151 | $252 | | Stock-based compensation as % of total operating expenses | 6.4% | 10.6% | - The COVID-19 pandemic has caused a significant slowdown in field studies and sales efforts, potentially impacting future results and increasing concerns over customer spending and government purchases[180] Components of our Results of Operations The company details its financial components, including sales, operating expenses, and its focus on improving cost structure - Research and development expenses primarily include employee-related costs, product development expenses, and facility-related costs[183] - The company is focused on improving its cost structure, including relocating to more cost-efficient space, organizational restructuring, and improving manufacturing processes, aiming for a 50% or greater gross margin[186] - As of March 31, 2020, the company had federal and state net operating loss carryforwards of approximately $61.3 million and $47.8 million, respectively, with a full valuation allowance recorded due to uncertainty of realization[192] Comparison of the Three Months Ended March 31, 2020 and 2019 Sales and gross profit increased, while R&D expenses decreased and SG&A expenses rose due to higher professional fees | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | Change (in thousands) | | :------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Sales | $37 | $19 | $18 | | Cost of sales | $22 | $12 | $10 | | Gross profit | $15 (40.5%) | $7 (39.0%) | $8 | | Research and development | $296 | $464 | $(168) | | Selling, general and administrative | $2,045 | $1,904 | $141 | | Net operating loss | $(2,326) | $(2,361) | $35 | | Interest income/expense, net | $(6) | $2 | $(8) | | Other income (expense), net | $15 | $(5) | $20 | | Net loss attributable to common shareholders | $(2,731) | $(2,364) | $(367) | - The decrease in R&D expenses was primarily due to a reclassification of certain field support employees to sales and marketing, and the cancellation of a facility lease[198][199] - The increase in SG&A expenses was mainly driven by a $165 thousand increase in professional service fees, largely due to legal expenses related to litigation settlement and common stock offerings[201] Liquidity and Capital Resources The company has a significant accumulated deficit and anticipates needing additional financing to support ongoing operations - As of March 31, 2020, the company had an accumulated deficit of $98.6 million and cash and cash equivalents of $1.5 million[206] - The company will need additional funding to continue operations, achieve profitability, and become cash flow positive, with the COVID-19 pandemic likely increasing this need due to potential delays in field studies and sales[208][209][211] | Cash Flow Activity | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Cash used in operating activities | $(1,871) | $(1,948) | | Cash provided by (used in) investing activities | $40 | $(11) | | Cash provided by (used in) financing activities | $1,387 | $(15) | | Net increase (decrease) in cash and cash equivalents | $(444) | $(1,974) | - Operating activities used $1.9 million in cash for both periods, primarily due to net losses[213][215]. Financing activities provided $1.4 million in 2020 from common stock issuances, compared to using $15 thousand in 2019[217][218] Critical Accounting Policies and Significant Judgments and Estimates Critical accounting policies include revenue recognition and stock-based compensation, which requires subjective assumptions - The company adopted ASC 606 for revenue recognition, identifying performance obligations similar to ASC 605[223] - Stock-based compensation expense was $151 thousand for the three months ended March 31, 2020, and $252 thousand for the same period in 2019[225][228] - The Black-Scholes option-pricing model used for stock-based awards relies on subjective assumptions including expected term (simplified method), expected volatility (comparable companies), risk-free interest rate, and zero expected dividends[226] Emerging Growth Company Status SenesTech has elected to opt out of the extended transition period for complying with new accounting standards - SenesTech has irrevocably elected to 'opt out' of the extended transition period for complying with new or revised financial accounting standards provided by the JOBS Act[229] Item 3. Quantitative and Qualitative Disclosures about Market Risk No quantitative and qualitative disclosures about market risk are applicable for this reporting period Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2020 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[233] - There were no material changes in the company's internal control over financial reporting during the quarter ended March 31, 2020[234] PART II. OTHER INFORMATION Item 1. Legal Proceedings Information regarding legal proceedings is available in Note 12 of the Condensed Financial Statements Item 1A. Risk Factors The company updated its risk factors to address the adverse impacts of the COVID-19 pandemic on its business - The COVID-19 pandemic has adversely affected the company's business through travel and transportation restrictions, impacting sales, field studies, and potentially manufacturing operations[238] - The degree to which COVID-19 may impact the company's results of operations and financial condition is currently unknown and depends on future developments of the pandemic and governmental responses[239] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were reported during the quarter that were not previously disclosed Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company Item 5. Other Information No other information is reported for the period Item 6. Exhibits This section provides an index of exhibits filed with the Quarterly Report on Form 10-Q SIGNATURES The report is certified by the duly authorized signatures of the company's CEO and CFO