SenesTech(SNES) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company presents its unaudited condensed financial statements for the quarter and six months ended June 30, 2020 Condensed Balance Sheets The company's balance sheet reflects a notable increase in total assets primarily driven by a rise in cash reserves Condensed Balance Sheet Highlights (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash | $4,718 | $1,936 | | Total current assets | $6,200 | $3,542 | | Total assets | $7,337 | $4,979 | | Total current liabilities | $1,153 | $1,581 | | Total liabilities | $2,444 | $2,412 | | Total stockholders' equity | $4,893 | $2,567 | - Total assets increased by $2,358 thousand (47.3%) from December 31, 2019, to June 30, 2020, primarily driven by an increase in cash[9] - Total current liabilities decreased by $428 thousand (27.1%) from December 31, 2019, to June 30, 2020, mainly due to a decrease in accrued expenses[9] Condensed Statements of Operations and Comprehensive Loss The company's operating results show significant revenue growth and a reduction in net loss compared to the prior year Condensed Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue: Sales | $71 | $24 | $108 | $43 | | Gross profit | $28 | $3 | $43 | $10 | | Total operating expenses | $1,653 | $2,294 | $3,994 | $4,662 | | Net operating loss | $(1,625) | $(2,291) | $(3,951) | $(4,652) | | Net loss and comprehensive loss | $(1,629) | $(2,289) | $(3,946) | $(4,653) | | Net loss per common share - basic and fully diluted | $(0.59) | $(1.86) | $(1.99) | $(3.87) | - Sales increased by $47 thousand (195.8%) for the three months ended June 30, 2020, compared to the same period in 2019, and by $65 thousand (151.2%) for the six months ended June 30, 2020, year-over-year[10] - Net loss decreased by $660 thousand (28.8%) for the three months ended June 30, 2020, and by $707 thousand (15.2%) for the six months ended June 30, 2020, compared to the respective prior year periods[10] Condensed Statement of Changes in Stockholders' Equity (Deficit) Stockholders' equity improved significantly due to proceeds from the issuance of common stock during the period Changes in Stockholders' Equity (in thousands) | Item | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Balance, March 31, 2020 / December 31, 2019 | $2,074 / $2,567 | $2,567 | | Issuance of common stock, sold for cash, net | $4,307 | $5,743 | | Stock-based compensation | $141 | $291 | | Net loss | $(1,629) | $(4,360) | | Balance, June 30, 2020 | $4,893 | $4,893 | - Total stockholders' equity increased from $2,567 thousand at December 31, 2019, to $4,893 thousand at June 30, 2020, primarily due to net proceeds from common stock issuances[12] - The company issued 1,574,308 shares of common stock for cash, net, generating $4,307 thousand during the three months ended June 30, 2020[12] Condensed Statements of Cash Flows Cash flows reflect reduced operating cash burn and a substantial increase in financing activities Condensed Statements of Cash Flows Highlights (in thousands) | Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(3,573) | $(3,907) | | Net cash provided by (used in) investing activities | $44 | $(47) | | Net cash provided by financing activities | $6,311 | $1,609 | | Net change in cash | $2,782 | $(2,345) | | Cash at end of period | $4,718 | $2,575 | - Net cash used in operating activities decreased by $334 thousand (8.5%) for the six months ended June 30, 2020, compared to the same period in 2019[14] - Net cash provided by financing activities significantly increased by $4,702 thousand (292.2%) for the six months ended June 30, 2020, primarily due to proceeds from common stock issuance and a PPP loan[14] Note 1 - Organization and Description of Business The company focuses on developing and commercializing fertility control technology for animal pest populations - SenesTech, Inc. develops and commercializes proprietary technology for animal pest population management, initially focusing on rat fertility control with its product ContraPest®[16][17] - ContraPest is a non-lethal, fertility control product approved by the EPA for rodent population management, registered in all 50 states and the District of Columbia[21][22] - The company has an accumulated deficit of $100.0 million and cash of $4.7 million as of June 30, 2020, and requires additional funding to continue operations and achieve profitability[30][32] Note 2 - Summary of Significant Accounting Policies This note outlines the key accounting policies, including revenue recognition, R&D costs, and lease accounting standards - The company adopted ASC 606 for revenue recognition, recognizing revenue when product is shipped or services are performed[47][48] - Research and development costs are expensed as incurred, including salaries, consulting fees, lab supplies, and regulatory compliance costs[50] Stock-based Compensation Expense (in thousands) | Period | 2020 | 2019 | | :--- | :--- | :--- | | Three Months Ended June 30 | $140 | $219 | | Six Months Ended June 30 | $291 | $471 | - 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[63] Note 3 - Fair Value Measurements The company's common stock warrant liabilities are classified within the Level 3 fair value hierarchy - The company's common stock warrant liabilities are classified as Level 3 within the fair value hierarchy due to limited activity or transparency of valuation inputs[81] - As of June 30, 2020, and December 31, 2019, there were no common stock warrant liabilities measured at fair value on a recurring basis[84] Note 4 - Credit Risk The company manages credit risk through a diverse customer base and maintains an allowance for doubtful accounts - The company is subject to concentrations of credit risk in its accounts receivable but limits this risk due to a diverse customer base[86] - An allowance for doubtful trade receivables of $123 thousand was maintained at June 30, 2020, and December 31, 2019[86] Note 5 - Prepaid Expenses Prepaid expenses saw a slight increase, primarily related to insurance and marketing programs Prepaid Expenses (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Director, officer and other insurance | $129 | $115 | | Marketing programs and conferences | $42 | $80 | | Total prepaid expenses | $284 | $257 | - Total prepaid expenses increased by $27 thousand (10.5%) from December 31, 2019, to June 30, 2020[89] Note 6 - Property and Equipment The net value of property and equipment decreased due to depreciation and amortization expenses Property and Equipment, Net (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Research and development equipment | $1,452 | $1,585 | | Office and computer equipment | $733 | $753 | | Total property and equipment, net | $564 | $738 | - Total property and equipment, net, decreased by $174 thousand (23.6%) from December 31, 2019, to June 30, 2020[90] - Depreciation and amortization expense was $71 thousand for Q2 2020 and $148 thousand for YTD 2020[90] Note 7 - Accrued Expenses Accrued expenses decreased substantially, driven by lower compensation liabilities and litigation settlement Accrued Expenses (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Compensation and related benefits | $382 | $935 | | Accrued Litigation | $0 | $238 | | Total accrued expenses | $399 | $1,193 | - Total accrued expenses decreased significantly by $794 thousand (66.6%) from December 31, 2019, to June 30, 2020, primarily due to a reduction in compensation and related benefits and the settlement of accrued litigation[91] Note 8 - Borrowings The company's borrowings increased significantly due to a loan received under the Paycheck Protection Program Summary of Borrowings (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Short-term debt | $114 | $123 | | Long-term debt, net | $714 | $137 | | Total borrowings | $828 | $260 | - Long-term debt, net, increased substantially by $577 thousand (421.2%) from December 31, 2019, to June 30, 2020[93] - The company received a $645.7 thousand loan under the Paycheck Protection Program (PPP) in April 2020, maturing April 15, 2022, with a 1.00% interest rate, subject to forgiveness[96] Note 9 - Common Stock Warrants and Common Stock Warrant Liability The number of outstanding common stock warrants increased dramatically following public and private offerings in 2020 Common Stock Warrants Outstanding | Date | Number of Warrants | | :--- | :--- | | December 31, 2019 | 489,176 | | June 30, 2020 | 2,504,597 | | Weighted-average exercise price (June 30, 2020) | $6.18 per share | - The number of outstanding common stock warrants increased significantly from 489,176 at December 31, 2019, to 2,504,597 at June 30, 2020, primarily due to new issuances in 2020 public and private offerings[100][102] - Warrants issued in January 2020 (177,500 shares) have an exercise price of $9.00 and expire July 28, 2025; Warrants issued in March 2020 (176,372 shares) have an exercise price of $2.88 and expire September 8, 2025[113][114] - In April 2020, 1,574,308 warrants were issued with an exercise price of $3.05, expiring April 24, 2025[124] Note 10 - Stockholders' Deficit The company issued a significant number of common stock shares, generating substantial net proceeds from offerings Common Stock Issued and Outstanding | Date | Shares | | :--- | :--- | | December 31, 2019 | 1,414,671 | | June 30, 2020 | 3,398,832 | - During the six months ended June 30, 2020, the company issued 1,984,161 shares of common stock, including 1,574,308 shares from a public offering and pre-funded warrant exercise, generating approximately $4,334 thousand in net proceeds[139][142] - Other issuances included 177,500 shares (net proceeds $1,200 thousand) and 176,372 shares (net proceeds $500 thousand) from registered direct offerings, 51,414 shares for warrant exercise in litigation settlement, and shares for RSU vesting and reverse stock split true-up[141][142][143] Note 11 - Stock-based Compensation This note details the company's equity incentive plans, stock option activity, and related compensation expenses - The 2018 Equity Incentive Plan authorizes the issuance of 50,000 shares, with an additional 122,279 shares available from the prior 2015 Plan[145] Stock Option Activity | Metric | Outstanding at Dec 31, 2019 | Granted | Forfeited | Outstanding at June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Number of Options | 136,489 | 25,000 | (6,000) | 155,489 | | Weighted Average Exercise Price | $28.00 | $2.44 | N/A | $24.83 | Stock-based Compensation Expense (in thousands) | Category | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Research and development | $2 | $5 | | General and administrative | $138 | $286 | | Total | $140 | $291 | - As of June 30, 2020, unrecognized compensation cost related to restricted stock units and unvested options was $719 thousand, to be recognized over a weighted average period of 33 months[158] Note 12 - Commitments and Contingencies The company outlines its lease commitments and confirms no material pending or threatened litigation - The company is not aware of any pending or threatened litigation that could materially adversely affect its financial position[159] - The company has finance leases for equipment expiring through April 2022 and operating leases for corporate headquarters and manufacturing facilities expiring in November 2024 and December 2020, respectively[160][161][164] Future Minimum Lease Payments (in thousands) as of June 30, 2020 | Year | Finance Leases | Operating Lease | | :--- | :--- | :--- | | 2020 | $32 | $116 | | 2021 | $58 | $136 | | 2022 | $28 | $138 | | 2023 | $0 | $141 | | 2024 | $0 | $132 | | Total | $118 | $663 | Note 13 - Subsequent Events This note discusses the ongoing impact of the COVID-19 pandemic and a new lease agreement - The COVID-19 pandemic has caused significant slowdowns and delays in field studies and sales efforts, potentially impacting future results of operations[166] - The company entered into a new lease in Phoenix, Arizona, on June 22, 2020, for manufacturing and warehousing, commencing August 1, 2020, and expiring November 30, 2024[167] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, results of operations, and the ongoing impact of COVID-19 Overview The company has a history of operating losses and an accumulated deficit, with ongoing concerns about COVID-19's impact - SenesTech has sustained significant operating losses since inception, with net losses of $1.6 million for Q2 2020 and $4.4 million for YTD 2020[175] - As of June 30, 2020, the company had an accumulated deficit of $100.0 million and cash and cash equivalents of $4.7 million[174] - Stock-based compensation represented 8.5% and 7.3% of total operating expenses for the three and six months ended June 30, 2020, respectively[177] - The COVID-19 pandemic has caused significant slowdowns in field studies and sales efforts, potentially impacting future results, and the company has concerns over customer spending[180] Components of our Results of Operations This section details the primary drivers of the company's revenues and major expense categories - Net sales primarily derive from commercial sales of ContraPest and related components, along with consulting and implementation services[181] - Research and development expenses include personnel costs, product development expenses, and facility-related costs, all expensed as incurred[182][183] - Selling, general and administrative expenses include salaries, stock-based compensation, facility costs, and professional fees, with a focus on improving cost structure and shifting resources to commercialization[185][186] - The company has federal and state net operating loss carryforwards of approximately $61.3 million and $47.8 million, respectively, as of June 30, 2020, with a full valuation allowance recorded[192] Comparison of the Three and Six Months Ended June 30, 2020 and 2019 The company's financial performance improved with increased sales, higher gross margins, and reduced operating expenses Key Financial Performance Comparison (in thousands) | Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $71 | $24 | $108 | $43 | | Cost of Sales | $43 | $21 | $65 | $33 | | Gross Profit | $28 | $3 | $43 | $10 | | Gross Profit Margin | 39.4% | 12.5% | 39.8% | 23.3% | | Research and Development Expenses | $226 | $463 | $522 | $927 | | Selling, General and Administrative Expenses | $1,427 | $1,831 | $3,472 | $3,735 | | Net Operating Loss | $(1,625) | $(2,291) | $(3,951) | $(4,652) | | Net Loss | $(1,629) | $(2,289) | $(3,946) | $(4,653) | - Net sales increased by $47 thousand (195.8%) in Q2 2020 and $65 thousand (151.2%) in YTD 2020, partly due to internet sales capability and customer product implementation services, though offset by COVID-19 impacts[195][204] - Gross profit margin improved significantly to 39.4% in Q2 2020 (from 12.5% in Q2 2019) and 39.8% in YTD 2020 (from 23.3% in YTD 2019), driven by reduced scrap expense and process efficiencies[197][206] - Research and development expenses decreased by $237 thousand (51.2%) in Q2 2020 and $405 thousand (43.7%) in YTD 2020, primarily due to reclassification of field support employees to sales and marketing and reduced personnel costs[198][208] - Selling, general and administrative expenses decreased by $400 thousand (21.8%) in Q2 2020 and $200 thousand (5.4%) in YTD 2020, mainly due to lower salary costs (including stock compensation), reduced travel, and professional service fees, partially offset by increased expenses in other areas[201][211] Liquidity and Capital Resources The company has historically funded operations through equity and debt financing and will require additional capital - The company has funded operations through equity securities sales ($73.2 million net proceeds), debt financing, licensing fees ($1.7 million), and product sales ($0.7 million) through June 30, 2020[218] - As of June 30, 2020, the company had an accumulated deficit of $100.0 million and cash and cash equivalents of $4.7 million[218] - The company received $645.7 thousand from the Paycheck Protection Program (PPP) loan to retain employees and cover payroll, lease, interest, and utility payments[219] - Additional funding will be required to support ongoing operations, marketing, sales, product development, regulatory approvals, and public company costs, especially with potential delays from the COVID-19 pandemic[221][222][223] Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Cash used in operating activities | $(3,573) | $(3,907) | | Cash provided by (used in) investing activities | $44 | $(47) | | Cash provided by financing activities | $6,311 | $1,609 | | Net increase (decrease) in cash and cash equivalents | $2,782 | $(2,345) | Critical Accounting Policies and Significant Judgments and Estimates This section highlights key accounting policies, including revenue recognition and stock-based compensation valuation - The company adopted ASC 606 for revenue recognition, identifying performance obligations and recognizing revenue upon satisfaction[235] - Stock-based compensation costs are recognized based on the estimated fair value of awards using the Black-Scholes option-pricing model, with key assumptions including expected term, volatility, risk-free interest rate, and dividend yield[236][238] - The company has irrevocably elected to 'opt out' of the extended transition period for complying with new or revised accounting standards as an emerging growth company[241] Item 3. Quantitative and Qualitative Disclosures About Market Risk There are no applicable quantitative and qualitative disclosures about market risk for the company - The company has no applicable quantitative and qualitative disclosures about market risk[242] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[245] - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2020[246] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports no material adverse effects from legal proceedings as detailed in Note 12 - Information on legal proceedings is provided in Note 12, indicating no material adverse effects on the company's financial position, results of operations, or liquidity[248][159] Item 1A. Risk Factors The company highlights the significant adverse impacts of the COVID-19 pandemic on its business operations - The COVID-19 pandemic poses significant risks, including widespread travel and transportation restrictions, closures of commercial spaces, and limitations on sales and field studies[250] - Potential adverse effects include disruptions to manufacturing, reduced customer purchasing, supply chain issues for critical raw materials from Asia, and limited ability to raise necessary financing[250] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or use of proceeds for the period - No unregistered sales of equity securities or use of proceeds were reported[251] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities during the period - No defaults upon senior securities were reported[252] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable to the company[252] Item 5. Other Information The company reports no other information for the period - No other information was reported[253] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate documents and certifications - The report includes exhibits such as the Amended and Restated Certificate of Incorporation, Bylaws, Promissory Note, Securities Purchase Agreement, 2018 Equity Incentive Plan, and a Standard Industrial/Commercial Multi-Tenant Lease[255] - Certifications from the Chief Executive Officer and Chief Financial Officer, as well as XBRL instance and taxonomy documents, are also filed as exhibits[255] SIGNATURES The report is certified by the company's Chief Executive Officer and Chief Financial Officer - The report is signed by Kenneth Siegel, Chief Executive Officer, and Thomas C. Chesterman, Chief Financial Officer and Treasurer, on August 13, 2020[257]