Company Quick10K Filing
Senestech
Price1.00 EPS-0
Shares28 P/E-4
MCap28 P/FCF-5
Net Debt-4 EBIT-7
TEV25 TEV/EBIT-3
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-13
S-1 2020-04-03 Public Filing
10-Q 2020-03-31 Filed 2020-05-15
S-1 2020-02-11 Public Filing
S-1 2020-02-07 Public Filing
10-K 2019-12-31 Filed 2020-03-17
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-03-29
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-14
S-1 2018-06-19 Public Filing
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-03-30
10-Q 2017-09-30 Filed 2017-11-08
10-Q 2017-06-30 Filed 2017-08-14
10-K 2016-12-31 Filed 2017-03-31
8-K 2020-08-12 Earnings, Exhibits
8-K 2020-07-08 Shareholder Vote
8-K 2020-05-15
8-K 2020-04-22
8-K 2020-04-21
8-K 2020-04-21
8-K 2020-04-15
8-K 2020-03-16
8-K 2020-03-06
8-K 2020-03-05
8-K 2020-02-20
8-K 2020-01-31
8-K 2020-01-23
8-K 2019-12-18
8-K 2019-11-12
8-K 2019-08-13
8-K 2019-07-11
8-K 2019-06-18
8-K 2019-05-15
8-K 2019-05-15
8-K 2019-03-28
8-K 2019-03-20
8-K 2019-02-07
8-K 2018-11-12
8-K 2018-11-12
8-K 2018-09-26
8-K 2018-08-13
8-K 2018-06-20
8-K 2018-06-12
8-K 2018-05-14
8-K 2018-03-29
8-K 2018-03-29
8-K 2018-02-07
8-K 2018-01-30
8-K 2018-01-18
8-K 2018-01-03

SNES 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Note 1 - Organization and Description of Business
Note 2 - Summary of Significant Accounting Policies
Note 3 - Fair Value Measurements
Note 4 - Credit Risk
Note 5 - Prepaid Expenses
Note 6 - Property and Equipment
Note 7 - Accrued Expenses
Note 8 - Borrowings
Note 9 - Common Stock Warrants and Common Stock Warrant Liability
Note 10 - Stockholders' Deficit
Note 11 - Stock - Based Compensation
Note 12 - Commitments and Contingencies
Note 13 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.3 f10q0620ex10-3_senestech.htm
EX-10.4 f10q0620ex10-4_senestech.htm
EX-31.1 f10q0620ex31-1_senestech.htm
EX-31.2 f10q0620ex31-2_senestech.htm
EX-32.1 f10q0620ex32-1_senestech.htm
EX-32.2 f10q0620ex32-2_senestech.htm

Senestech Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
10.08.06.04.02.00.02017201820192020
Assets, Equity
0.2-0.6-1.4-2.3-3.1-3.92017201820192020
Rev, G Profit, Net Income
10.07.34.62.0-0.7-3.42017201820192020
Ops, Inv, Fin

10-Q 1 f10q0620_senestechinc.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

FORM 10-Q

 

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File Number: 001-37941

  

SENESTECH, INC. 

(Exact name of registrant as specified in its charter)

  

Delaware   20-2079805
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
23460 N. 19th Avenue, Suite 110
Phoenix, AZ
  85027
(Address of principal executive offices)   (Zip Code)

 

(928) 779-4143

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which
registered
Common Stock, $0.001 par value   SNES   The NASDAQ Stock Market LLC
(NASDAQ Capital Market)

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   ☒   No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐ No  ☒

  

The number of shares of common stock outstanding as of August 13, 2020: 3,398,832

 

 

 

 

 

SENESTECH, INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2020

 

TABLE OF CONTENTS

 

  

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SENESTECH, INC.

CONDENSED BALANCE SHEETS

(In thousands, except shares and per share data)

 

   June 30,   December 31, 
   2020   2019 
ASSETS  (Unaudited)     
         
Current assets:        
Cash  $4,718   $1,936 
Accounts receivable trade, net   45    26 
Accounts receivable-other   -    123 
Prepaid expenses   284    257 
Inventory   1,135    1,180 
Deposits   18    20 
Total current assets   6,200    3,542 
           
Right to use asset-operating leases   573    699 
Property and equipment, net   564    738 
Total assets  $7,337   $4,979 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Short-term debt  $114   $123 
Accounts payable   640    265 
Accrued expenses   399    1,193 
Total current liabilities   1,153    1,581 
           
Long-term debt, net   714    137 
Operating lease liability   577    694 
Total liabilities   2,444    2,412 
           
Commitments and contingencies (See note 12)   -    - 
           
Stockholders’ equity:          
Common stock, $0.001 par value, 100,000,000 shares authorized, 3,398,832 and 1,414,671 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively   3    1 
Additional paid-in capital   105,117    98,433 
Accumulated deficit   (100,227)   (95,867)
Total stockholders’ equity   4,893    2,567 
           
Total liabilities and stockholders’ equity  $7,337   $4,979 

 

See accompanying notes to financial statements.

 

1

 

 

SENESTECH, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except shares and per share data)

(Unaudited)

 

   For the Three Months   For the Six Months 
   Ended June 30,   Ended June 30, 
   2020   2019   2020   2019 
                 
Revenue:                
Sales  $71   $24   $108   $43 
Cost of sales   43    21    65    33 
Gross profit   28    3    43    10 
                     
Operating expenses:                    
Research and development   226    463    522    927 
Selling, general and administrative   1,427    1,831    3,472    3,735 
Total operating expenses   1,653    2,294    3,994    4,662 
                     
Net operating loss   (1,625)   (2,291)   (3,951)   (4,652)
                     
Other income (expense):                    
Interest income   -    11    2    26 
Interest expense   (7)   (11)   (15)   (24)
Other income (expense)   3    2    18    (3)
Total other income (expense)   (4)   2    5    (1)
                     
Net loss and comprehensive loss   (1,629)   (2,289)  $(3,946)  $(4,653)
Deemed dividend-warrant price protection-revaluation adjustment   -    -    414    - 
Net loss attributable to common shareholders  $(1,629)  $(2,289)  $(4,360)  $(4,653)
                     
Weighted average common shares outstanding - basic and fully diluted   2,760,875    1,227,628    2,186,089    1,201,917 
                     
Net loss per common share - basic and fully diluted  $(0.59)  $(1.86)  $(1.99)  $(3.87)

 

See accompanying notes to financial statements.

 

2

 

 

SENESTECH, INC.

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except shares and per share data)

(Unaudited) 

  

For The Three Months Ended June 30, 2019 and 2020

 

           Additional       Total 
   Common Stock   Paid-In   Accumulated   Stockholders’ 
   Shares   Amount   Capital   Deficit   Equity (Deficit) 
Balance, March 31, 2019   1,178,297   $1   $92,471   $(88,202)  $4,270 
                          
Issuance of common stock for services   4,311    -    2    -    2 
Stock-based compensation   -    -    219    -    219 
Issuance of common stock upon exercise of warrants   78,694    -    1,747    -    1,747 
Issuance of common stock upon exercise of stock options   326    -    -    -    - 
Payments for employee withholding taxes related to share-based awards   -    -    (24)   -    (24)
Net loss for the three months ended June 30, 2019   -    -    -    (2,289)   (2,289)
Balance, June 30, 2019   1,261,628   $1   $94,415   $(90,491)  $3,925 
                          
Balance, March 31, 2020   1,819,981   $2   $100,670   $(98,598)  $2,074 
                          
Issuance of common stock for services   4,543    -    -    -    - 
Stock-based compensation   -    -    141    -    141 
Issuance of common stock, sold for cash, net   1,574,308    1    4,306    -    4,307 
Net loss for the three months ended June 30, 2020   -    -    -    (1,629)   (1,629)
Balance, June 30, 2020   3,398,832   $3   $105,117   $(100,227)  $4,893 
                          
For The Six Months Ended June 30, 2019 and 2020                         
                          
Balance, December 31, 2018   1,173,854   $1   $92,151   $(85,838)  $6,314 
                          
Issuance of common stock for services   6,240    -    34    -    34 
Stock-based compensation   -    -    471    -    471 
Issuance of common stock upon exercise of warrants   80,285    -    1,783    -    1,783 
Issuance of common stock upon exercise of stock options   1,259    -    -    -    - 
Payments for employee withholding taxes related to share-based awards   -    -    (24)   -    (24)
Net loss for the six months ended June 30, 2019   -    -    -    (4,653)   (4,653)
Balance, June 30, 2019   1,261,638   $1   $94,415   $(90,491)  $3,925 
                          
Balance, December 31, 2019   1,414,671   $1   $98,433   $(95,867)  $2,567 
                          
Issuance of common stock for services   4,543    -    -    -    - 
Stock-based compensation   -    -    291    -    291 
Issuance of common stock upon exercise of warrants   51,414    -    238    -    238 
Issuance of common stock, sold for cash, net   1,928,180    2    5,741    -    5,743 
Warrant antidilution price protection adjustment             414         414 
Issuance of common stock for fractional shares-20-1 reverse split   24                     
Net loss for the six months ended June 30, 2020   -    -    -    (4,360)   (4,360)
Balance, June 30, 2020   3,398,832   $3   $105,117   $(100,227)  $4,893 

 

See accompanying notes to financial statements.

 

3

 

 

SENESTECH, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

  

   For the Six Months 
   Ended June 30, 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss  $(3,946)  $(4,653)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   148    213 
Stock-based compensation   291    471 
(Gain) loss on sale of equipment   (18)   2 
Loss on change in fair value of derivative   -    1 
(Increase) decrease in current assets:          
Accounts receivable - trade   (19)   (17)
Accounts receivable - other   123    - 
Other assets   11    4 
Prepaid expenses   (27)   13 
Inventory   45    (70)
Increase (decrease) in current liabilities:          
Accounts payable   375    82 
Accrued expenses   (556)   53 
Deferred rent   -    (6)
Net cash used in operating activities   (3,573)   (3,907)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Cash received on sale of property and equipment   44    - 
Purchase of property and equipment   -    (47)
Net cash provided by (used in) investing activities   44    (47)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from the issuance of common stock, net   5,743    - 
Proceeds from the issuance of notes payable   646    - 
Repayments of notes payable   (29)   (112)
Repayments of finance lease obligations   (49)   (38)
Proceeds from the exercise of warrants   -    1,783 
Payment of employee withholding taxes relating to share-based awards        (24)
Net cash provided by financing activities   6,311    1,609 
           
NET CHANGE IN CASH   2,782    (2,345)
CASH AT BEGINNING OF PERIOD   1,936    4,920 
CASH AT END OF PERIOD  $4,718   $2,575 
           
SUPPLEMENTAL INFORMATION:          
Interest paid  $15   $24 
Income taxes paid  $-   $- 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Forgiveness of accrual in warrant exercise  $238      
Deemed dividend  $414   $- 
Common stock issued on accrued bonus  $-   $32 

  

See accompanying notes to financial statements.

 

4

 

 

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

 

 

Note 1 - Organization and Description of Business

 

SenesTech, Inc. (referred to in this report as “SenesTech,” the “Company,” “we” or “us”) was formed in July 2004 and incorporated in the state of Nevada. The Company subsequently reincorporated in the state of Delaware in November 2015. Our corporate headquarters is in Phoenix, Arizona. We have developed and are seeking to commercialize a global, proprietary technology for managing animal pest populations, initially rat populations, through fertility control.

 

Although there are myriad tools available to control rat populations, most rely on some form of lethal method to achieve effectiveness. Each of these solutions is inherently limited by rat species’ resilience and survival mechanisms as well as their extraordinary rate of reproduction. ContraPest®, our initial product, is unique in the pest control industry in attacking the reproductive systems of both male and female rats, which our field data shows will result in a sustained reduction of the rat population.

 

Rats have plagued humanity throughout history. They pose significant threats to the health and food security of many communities. In addition, rodents cause significant product loss and damage through consumption and contamination. Rats also cause significant damage to critical infrastructure by burrowing beneath foundations and gnawing on electrical wiring, insulation, fire proofing systems, electronics and computer equipment.

 

The most prevalent solution to rat infestations is the use of increasingly powerful rodenticides. Although these solutions provide short term results, there are growing concerns about secondary exposure and bioaccumulation of rodenticides in the environment, as well as concerns about rodenticides that have no antidotes. The pest management industry and Pest Management Professionals (PMPs) are being asked for new solutions that are both effective and less toxic. Our goal is to provide customers with not only a solution to combat their most difficult rat problems, but also offer a non-lethal option to serve customers that are looking to decrease or remove the amount of rodenticide used in their pest control programs.

 

ContraPest is a liquid bait containing the active ingredients 4-vinylcyclohexene diepoxide (VCD) and triptolide. ContraPest limits reproduction of male and female rats beginning with the first breeding cycle following consumption. ContraPest is being marketed for use in controlling Norway and roof rat populations.

 

SenesTech began the registration process with the United States Environmental Protection Agency (EPA) for ContraPest on August 23, 2015. On August 2, 2016, the EPA granted an unconditional registration for ContraPest as a Restricted Use Product (RUP), due to the need for applicator expertise for deployment. On October 18, 2018, the EPA approved the removal of the RUP designation. We believe ContraPest is the first and only non-lethal, fertility control product approved by the EPA for the management of rodent populations.

 

In addition to the EPA registration of ContraPest in the United States, ContraPest must obtain registration from the various state regulatory agencies prior to selling in each state. We have received registration for ContraPest in all 50 states and the District of Columbia, 47 of which have approved the removal of the RUP designation.

 

We expect to continue to pursue regulatory approvals and amendments to the existing U.S. registration for ContraPest, and if ContraPest begins to generate sufficient revenue, regulatory approvals for additional jurisdictions beyond the United States. In certain cases, our EPA and state registrations require completion of testing and certifications even though we received approval for the product or its labelling. We continue to seek to comply with these requirements.

 

The Company also continues to research and develop enhancements to ContraPest that align with our target verticals and other potential fertility control options for additional species. 

 

5

 

  

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 1 - Organization and Description of Business – (continued)

 

Reverse Stock Split

 

On February 4, 2020, we amended our amended and restated certificate of incorporation to effect a 1-for-20 reverse split of our issued and outstanding shares of our common stock. The accompanying condensed financial statements and notes thereto give retrospective effect to the reverse stock split for all periods presented. All issued and outstanding common stock, options and warrants exercisable for common stock, restricted stock units, preferred stock conversions to common stock and per share amounts contained in our condensed financial statements have been retrospectively adjusted.

 

Going Concern

 

Our financial statements as of June 30, 2020 and 2019 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm included in its opinion for the years ended December 31, 2019 and 2018 an explanatory paragraph referring to our net loss from operations and net capital deficiency and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. If we encounter continued issues or delays in the commercialization of ContraPest, our prior losses and 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. There are no assurances that such financing, if necessary, will be available to us at all or will be available in sufficient amounts or on reasonable terms. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. If we are unable to generate additional funds in the future through additional financings, sales of our products, licensing fees, royalty payments or from other sources or transactions, we will exhaust our resources and will be unable to continue operations.

 

Need for Additional Capital

 

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. We have generated limited revenue to date from product sales, research grants and licensing fees received under our former license agreement with Neogen. In 2017, we began to prepare and launch commercialization of our first product, ContraPest. 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. See “Description of Capital Stock” elsewhere in this filing for a description of our public equity sales.

 

We have also raised capital through debt financing, consisting primarily of convertible notes and government loan programs; and, to a lesser extent, payments received in connection with product sales, research grants and licensing fees.

 

Through June 30, 2020, we had received net proceeds of $73.2 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 $0.7 million in net product sales. As of June 30, 2020, we had an accumulated deficit of $100.0 million and cash and cash equivalents of $4.7 million.

 

Our ultimate success depends upon the outcome of a combination of factors, including: (i) successful commercialization of ContraPest and maintaining and obtaining regulatory approvals of our products and product candidates; (ii) market acceptance, commercial viability and profitability of ContraPest 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 activities; (v) our ability to retain and attract key personnel to develop, operate and grow our business; and (vi) our ability to meet our working capital needs.

 

We will need additional funding in order to continue to fund our operations, achieve profitability and become cash flow positive, and will continue to seek additional 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.

 

6

 

 

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 1 - Organization and Description of Business – (continued)

 

Basis of Presentation

 

The accompanying unaudited condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the Company’s opinion, the unaudited condensed financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly the Company’s financial position as of June 30, 2020, the Company’s operating results for the three and six months ended June 30, 2020 and 2019, and the Company’s cash flows for the six months ended June 30, 2020 and 2019. The accompanying financial information as of December 31, 2019 is derived from audited financial statements. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2019, filed with the SEC on March 17, 2020 and April 21, 2020, respectively. All amounts shown in these financial statements and accompanying notes are in thousands, except percentages and per share and share amounts.  

 

Note 2 - Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classification of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The significant estimates in the Company’s financial statements include the valuation of preferred stock, if issued, common stock and related warrants, and other stock-based awards. Actual results could differ from such estimates.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no material impact on net earnings, financial position or cash flows.

 

Accounts Receivable-Trade

 

Accounts receivable-trade consist primarily of receivables from customers. The Company provides an allowance for doubtful trade receivables equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer’s trade accounts receivable. The allowance for doubtful trade receivables was $123 at June 30, 2020 and December 31, 2019.

 

Accounts Receivable-Other

 

Accounts receivable-other at June 30, 2020 was $0. Accounts receivable-other at December 31, 2019 consisted primarily of receivables related to insurance reimbursements due the Company. 

 

Inventories

 

Inventories are stated at the lower of cost or market value, using the first-in, first-out convention. Inventories consist of raw materials, work in progress and finished goods. Raw materials are stocked to reduce the risk of impact on manufacturing for potential supply interruptions due to COVID-19 or long lead times on certain ingredients.

 

Components of inventory are:

 

   June 30,   December 31, 
   2020   2019 
Raw materials  $995   $1,035 
Work in progress   16     
Finished goods   128    149 
Total inventory   1,139    1,184 
Less:          
Reserve for obsolete   (4)   (4)
Total net inventory  $1,135   $1,180 

  

7

 

 

SENESTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

  

Note 2 - Summary of Significant Accounting Policies – (continued)

 

Prepaid Expenses

 

Prepaid expenses consist primarily of payments made for director and officer insurance, director compensation, rent, legal and inventory purchase deposits and seminar fees to be expensed in the current year.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Equipment held under finance leases are stated at the present value of minimum lease payments less accumulated amortization.

 

Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. The cost of leasehold improvements is amortized over the life of the improvement or the term of the lease, whichever is shorter. Equipment held under finance leases is amortized over the shorter of the lease term or estimated useful life of the asset. The Company incurs repair and maintenance costs on its major equipment, which are expensed as incurred.

 

Impairment of Long-Lived Assets

 

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require long-lived assets or asset groups to be tested for possible impairment, the Company compares the undiscounted cash flows expected to be generated from the use of the asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques, such as discounted cash flow models and the use of third-party independent appraisals. The Company has not recorded an impairment of long-lived assets since its inception.

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.

 

The Company recognizes revenue when product is shipped at a fixed selling price on payment terms of 30 to 120 days from invoicing. The Company recognizes other revenue earned from pilot studies, consulting and implementation services upon the performance of specific services under the respective service contract.

 

The Company derives revenue primarily from commercial sales of products, net of discounts and promotions, as well as consulting and implementation services provided in conjunction with our product deployments. 

 

Research and Development

 

Research and development costs are expensed as incurred. Research and development expenses primarily consist of salaries and benefits for research and development employees, stock-based compensation, consulting fees, lab supplies, costs incurred related to conducting scientific trials and field studies, regulatory compliance costs, and manufacturing costs associated with process improvement. Also, included in research and development expenses is an allocation of facilities related costs, including depreciation of research and development equipment.

 

Stock-based Compensation

 

Stock based awards, consisting of restricted stock units and stock options expected to be settled in shares of the Company’s common stock, are recorded as equity awards. The grant date fair value of these awards is measured using the Black-Scholes option pricing model for stock options and grant date market value for restricted stock units. The Company expenses the grant date fair value of its stock options on a straight-line basis over their respective vesting periods. Performance-based awards are expensed over the performance period when the related performance goals are probable of being achieved.

 

8

 

  

SENESTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

 

Note 2 - Summary of Significant Accounting Policies – (continued)

 

The stock-based compensation expense recorded for the three and six months ended June 30, 2020 and 2019, is as follows:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2020   2019   2020   2019 
                 
Research and development  $2   $1   $5   $10 
General and administrative   138    218    286    461 
Total stock-based compensation expense  $140   $219   $291   $471 

 

See Note 11 for additional discussion on stock-based compensation.

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities and net operating loss carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.

 

The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. These deferred tax assets are subject to periodic assessments as to recoverability and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recorded which would increase the provision for income taxes. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.

 

The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. Only those benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities are recognized. Based on its evaluation, the Company has concluded there are no significant uncertain tax positions requiring recognition in its financial statements.

 

The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expense. There are no uncertain tax positions as of June 30, 2020 or December 31, 2019 and as such, no interest or penalties were recorded in income tax expense.

 

Comprehensive Loss

 

Net loss and comprehensive loss were the same for all periods presented; therefore, a separate statement of comprehensive loss is not included in the accompanying financial statements.

 

Loss Per Share Attributable to Common Stockholders

 

Basic loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share attributable to common stockholders is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury stock and if-converted methods. For purposes of the computation of diluted loss per share attributable to common stockholders, common stock purchase warrants, and common stock options are considered to be potentially dilutive securities but have been excluded from the calculation of diluted loss per share attributable to common stockholders because their effect would be anti-dilutive given the net loss reported for the three and six months ended June 30, 2020 and 2019. Therefore, basic and diluted loss per share attributable to common stockholders are the same for each period presented.

  

9

 

 

SENESTECH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

 

Note 2 - Summary of Significant Accounting Policies – (continued)

 

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted loss per share attributable to common stockholders (in common stock equivalent shares):

 

   June 30, 
   2020   2019 
Common stock purchase warrants   2,504,597    481,056 
Restricted stock unit   1,334    5,877 
Common stock options   155,489    121,759 
Total   2,661,420    608,692 

 

Adoption of New Accounting Standards:

 

Effective January 1, 2019, the Company adopted Accounting Standards Updated (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”).  Under ASU No. 2016-02, an entity is required to recognize right-of-use lease assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements.  The Company elected the optional transition method provided by the FASB in ASU 2018-11, Leases (Topic 842): Targeted Improvements, and as a result, has not restated its condensed consolidated financial statements for prior periods presented. The Company has elected the practical expedients upon transition to retain the lease classification and initial direct costs for any leases that existed prior to adoption. The Company has also not reassessed whether any contracts entered into prior to adoption are leases. The Company applied the new guidance to all operating leases within the scope of the standard that were in effect on January 1, 2019, or entered into after, the adoption date.  Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.  The adoption did not have a material impact on the Company’s consolidated statement of comprehensive income (loss).  However, the new standard established $87 of liabilities and corresponding right-of-use assets of $87 on the Company’s consolidated balance sheet for leases, primarily related to operating leases on rented office properties, that existed as of the January 1, 2019, adoption date. 

 

At June 30, 2020, the balance in Right to Use Asset-Long Term and Lease Liability-Long Term was $573 and ($577) respectively and at December 31, 2019, the balance in Right to Use Asset-Long Term and Lease Liability-Long Term was $699 and ($694) respectively.

 

The Company’s leases primarily relate to operating leases of rented office properties.  For contracts entered into on or after January 1, 2019, at the inception of a contract the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether the Company has the right to direct the use of the asset.  At inception of a lease, the Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.

 

For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term.  The right-of-use lease asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease.

 

10

 

 

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 2 - Summary of Significant Accounting Policies – (continued)

 

The right-of-use lease asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred.  All right-of-use lease assets are reviewed for impairment.  The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s secured incremental borrowing rate for the same term as the underlying lease.

 

The Company identified and assessed the following significant assumptions in recognizing the right-of-use lease assets and corresponding liabilities.

 

Expected lease term – The expected lease term includes both contractual lease periods and, when applicable, cancelable option periods.  When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

 

Incremental borrowing rate – As the Company’s leases do not provide an implicit rate, the Company obtained the incremental borrowing rate (“IBR”) based on the remaining term of each lease.  The IBR is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.  

 

The Company has elected not to recognize right-of-use lease assets and lease liabilities for short-term leases that have a term of 12 months or less.

 

The Company reports right-of-use lease assets within non-current assets in its consolidated balance sheet.  The Company reports the lease liabilities within long-term liabilities in its consolidated balance sheet.

 

See Note 12, Commitments and Contingencies, for future minimum lease payments and maturities.

 

In August 2018, the FASB issued authoritative guidance intended to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also requires presentation of the capitalized implementation costs in the statement of financial position and in the statement of cash flows in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented, and the expense related to the capitalized implementation costs to be presented in the same line item in the statement of operations as the fees associated with the hosting element (service) of the arrangement. This guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. Effective January 1, 2020, the Company adopted the guidance and determined there was no applicability to the Company at this time and as such, there was no impact on our financial position, results of operations, or cash flows.

 

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

 

Other than the items noted above, there have been no new accounting pronouncements not yet effective or adopted in the current year that we believe have a significant impact, or potential significant impact, to our unaudited condensed consolidated interim financial statements.

 

11

 

 

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

  

Note 3 - Fair Value Measurements

 

The Company issued common stock warrants to purchase shares of common stock in June of 2015 (see Note 11 — Stock-based Compensation for more details) that contain a cash settlement provision resulting in a common stock warrant liability that is revalued at the end of each reporting period.

 

We value these warrant derivatives at fair value. The accounting guidance for fair value, among other things, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The framework for measuring fair value consists of a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows: 

 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 

An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

 

Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:

 

  A. Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

 

  B. Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).

 

  C. Income approach: Techniques to convert future amounts to a single present amount based upon market expectations, including present value techniques, option-pricing and excess earnings models.

 

The Company’s common stock warrant liabilities are classified as Level 3 because there is limited activity or less transparency around the inputs to valuation.

 

12

 

 

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 3 - Fair Value Measurements – (continued)

 

Items Measured at Fair Value on a Recurring Basis 

 

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

 

   June 30, 2020 
   Level 1   Level 2   Level 3   Total 
Financial Liabilities:                
Common stock warrant liability  $   $   $   $ 
Total  $   $   $   $ 

 

    December 31, 2019  
    Level 1    Level 2    Level 3    Total 
Financial Assets:                    
Money market funds  $   $   $   $ 
                     
Corporate fixed income debt securities               
                     
Total  $   $   $   $ 
Financial Liabilities:                    
Common stock warrant liability  $   $   $   $ 
Total  $   $   $   $ 

  

Financial Instruments Not Carried at Fair Value

 

The carrying amounts of the Company’s financial instruments, including accounts payable and accrued liabilities, approximate fair value due to their short maturities. The estimated fair value of the convertible notes and other notes, not recorded at fair value, are recorded at cost or amortized cost which was deemed to estimate fair value.

 

Note 4 - Credit Risk

 

The Company is potentially subject to concentrations of credit risk in its accounts receivable. Credit risk with respect to receivables is limited due to the number of companies comprising the Company’s customer base, however the Company did identify a potentially uncollectable account and at June 30, 2020 and December 31, 2019 maintained a reserve for this receivable balance of $123. The Company does not require collateral or other securities to support its accounts receivable.

 

13

 

 

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

  

Note 5 - Prepaid Expenses

 

Prepaid expenses consist of the following:

 

   June 30,   December 31, 
   2020   2019 
Director compensation  $-   $9 
Director, officer and other insurance   129    115 
NASDAQ fees   28    - 
Legal retainer   25    25 
Marketing programs and conferences   42    80 
Professional services retainer   25    8 
Rent   20    11 
Equipment service deposits   2    1 
Engineering, software licenses and other   13    8 
Total prepaid expenses  $284   $257 

 

Note 6 - Property and Equipment

 

Property and equipment, net consist of the following:

 

         June 30,   December 31, 
      Useful Life  2020   2019 
Research and development equipment     5 years  $1,452   $1,585 
Office and computer equipment  (1)  3 years   733    753 
Autos     5 years   54    54 
Furniture and fixtures     7 years   41    41 
Leasehold improvements     *   283    283 
          2,563    2,716 
Less accumulated depreciation and amortization         (1,999)   (1,978)
Total        $564   $738 

 

*Shorter of lease term or estimated useful life

 

(1)

In the three and six months ended June 30, 2020, the Company received net proceeds of $4 and $40 in the sale of research and development equipment and office and computer equipment, respectively, resulting in gains on the sale of these assets of $3 and $18 for the three and six months ended June 30, 2020, respectively. 

 

Depreciation and amortization expense was approximately $71 and $102 for the three months ended June 30, 2020 and 2019, respectively, and $148 and $213 for the six months ended June 30, 2020 and 2019, respectively.

 

Note 7 - Accrued Expenses

 

Accrued expenses consist of the following:

 

   June 30,   December 31, 
   2020   2019 
Compensation and related benefits  $382   $935 
Accrued Litigation   -    238 
Board Compensation   -    17 
Personal property and franchise tax   13    2 
Other   4    1 
Total accrued expenses  $399   $1,193 

 

14

 

  

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 8 - Borrowings

 

A summary of the Company’s borrowings, including finance lease obligations, is as follows:

 

   June 30,   December 31, 
   2020   2019 
Short-term debt:        
Current portion of long-term debt   114    123 
Total short-term debt  $114   $123 
Long-term debt:          
Finance lease obligations  $106   $155 
Other promissory notes   722    105 
Total   828    260 
Less: current portion of long-term debt   (114)   (123)
Total long-term debt  $714   $137 

 

Finance Lease Obligations 

 

Finance lease obligations at June 30, 2020 are for computer and lab equipment leased through GreatAmerica Financial Services and ENGS Commercial Finance Co. These finance leases expire at various dates through April 2022 and carry interest rates ranging from 11.4% to 18.3%.

 

Other Promissory Notes

 

Also included in the table above are notes payable to Direct Capital, M2 Financing and Fidelity Capital, all for the financing of fixed assets. These notes expire at various dates through June 2022 and carry interest rates ranging from 13.1% to 13.3%.

 

Also included in the table above is a loan agreement payable to BMO Harris Bank National Association as the lender in an aggregate principal amount of $645,700 pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The loan is evidenced by a promissory note dated April 15, 2020 and matures April 15, 2022. The loan bears interest at a rate of 1.00% per annum and contains customary events of default including, among other things, payment defaults. The loan closed and was funded April 20, 2020. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. The loan is subject to forgiveness to the extent proceeds are used for qualifying expenses, including certain payroll, utility, rent and mortgage interest expenses. No assurance is provided that the Company will obtain forgiveness of the loan in whole or in part.

 

In the event the PPP loan is not forgiven in whole or in part, repayments begin six months from the date of funding.

 

15

 

 

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 9 - Common Stock Warrants and Common Stock Warrant Liability

 

The table summarizes the common stock warrant activity as of June 30, 2020 as follows:

 

           Balance               Balance               Balance 
Issue Date  Warrant Type  Term
Date
  Exercise
Price
   December 31,
2018
   Issued   Exercised   Expired   December 31,
2019
   Issued   Exercised   Expired   June 30, 2020 
                                               
2016 and prior  Various  Various-2020/2021   Various    17,059          -         -         -    17,059         -    (9,375)   (750)   6,934 
                                                         
November 21, 2017  Common Stock Offering Warrants  November 21, 2022  $2.1122 (1)   159,092    -    (15,591)   -    143,501    -         -    143,501 
                                                         
November 21, 2017  Dealer Manager Warrants  November 21, 2022  $30.00    47,250    -    -    -    47,250    -    (47,250)   -    - 
                                                         
June 20, 2018  Warrant Reissue  December 20, 2023  $36.40    56,696    -    -    -    56,696    -    -    -    56,696 
                                                         
August 13, 2018  Rights Offering Warrants  July 25, 2023  $23.00    267,853    -    (64,910)   -    202,943    -    -    -    202,943 
                                                         
August 13, 2018  Dealer Manager Warrants  August 13, 2023  $34.50    13,393    -    -    -    13,393    -    -    -    13,393 
                                                         
July 16, 2019  Dealer Manager Warrants  July 11, 2024  $33.75    -    8,334    -    -    8,334    -    -    -    8,334 
                                                         
January 28, 2020  Registered Direct Offering  July 28, 2025  $9.00    -    -    -    -    -    177,500    -    -    177,500 
                                                         
January 28, 2020  Dealer Manager Warrants  July 28, 2025  $10.00    -    -    -    -    -    13,315    -    -    13,315 
                                                         
March 6, 2020  Registered Direct Offering  September 8, 2025  $2.88    -    -    -    -    -    176,372    -    -    176,372 
                                                         
March 6, 2020  Dealer Manager Warrants  March 4, 2025  $3.76    -    -    -    -    -    13,228    -    -    13,228 
                                                         
April 21, 2020  Dealer Manager Warrants  April 21, 2025  $3.97    -    -    -    -    -    118,073    -    -    118,073 
                                                         
April 24, 2020  Registered Direct Offering  April 24, 2025  $3.05    -    -    -    -    -    1,574,308    -    -    1,574,308 
                                                         
               561,343                   489,176                   2,504,597 

 

(1)Pursuant to antidilution price adjustment protection contained within these warrants, the initial exercise price of these warrants was $30.00 per share, which adjusted downward to $29.40 on July 24, 2018, the record date of the Right’s Offering, downward to $19.00 per share on August 13, 2018, the date of the Rights Offering, downward to $7.13 per share on January 28, 2020, the date of a Registered Direct Offering and downward to $2.1122 per share on March 6, 2020, the date of a Registered Direct Offering.

16

 

  

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 9 - Common Stock Warrants and Common Stock Warrant Liability – (continued)

 

Outstanding Warrants

 

As of June 30, 2020, we had 2,504,597 shares of common stock issuable upon exercise of outstanding common stock warrants, at a weighted-average exercise price of $6.18 per share.

 

On November 21, 2017, the Company issued a total of 232,875 detachable common stock warrants issued with the second public offering of 293,000 shares of its common stock at $20.00 per share. The common stock warrant is exercisable until five years from the date of grant. The common shares of the Company’s stock and detachable warrants exist independently as separate securities. As such, the Company estimated the fair value of the common stock warrants, exercisable at $30.00 per share, to be $661 using a lattice model based on the following significant inputs: common stock price of $20.00; comparable company volatility of 73.8%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 1.87. The initial exercise price of these warrants was $30.00 per share, which adjusted downward to $29.40 on July 24, 2018, the record date of the Right’s Offering and downward to $19.00 per share on August 13, 2018, the date of the Rights Offering, pursuant to antidilution price adjustment protection contained within these warrants. The exercise price of the warrants was adjusted downward to $7.13 on January 28, 2020 in connection with a private placement of common stock. Per guidance of ASC 260, the Company recorded a deemed dividend of $285 on the 143,501 unexercised warrants that contained this antidilution price adjustment protection provision and was calculated as the difference between the fair value of the warrants immediately prior to downward exercise price adjustment and immediately after the adjustment using a Black Scholes model based on the following significant inputs: On January 28, 2020, common stock price of $7.90; comparable company volatility of 73.8%; remaining term 2.82 years; dividend yield of 0% and risk-free interest rate of 1.45%.

 

The exercise price of the warrants was adjusted downward to $2.1122 on March 4, 2020 in connection with a private placement of common stock. Per guidance of ASC 260, the Company recorded a deemed dividend of $129 on the 143,501 unexercised warrants that contained this antidilution price adjustment protection provision and was calculated as the difference between the fair value of the warrants immediately prior to downward exercise price adjustment and immediately after the adjustment using a Black Scholes model based on the following significant inputs: On March 4, 2020, common stock price of $2.88; comparable company volatility of 74.5%; remaining term 2.71 years; dividend yield of 0% and risk-free interest rate of 0.68%.

 

17

 

  

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

  

Note 9 - Common Stock Warrants and Common Stock Warrant Liability – (continued)

 

On June 20, 2018, the Company entered into an agreement with a holder of 56,696 of the November 2017 warrants to exercise its original warrant representing 56,696 shares of common stock for cash at the $30.00 exercise price for gross proceeds of $1.7 million and the Company issued to holder a new warrant to purchase 56,696 shares of common stock at an exercise price of $36.40 per share. The new warrant did not contain the antidilution price adjustment protection that was contained within the exercised warrants. In June 2018, the Company recorded stock compensation expense of $1,700 representing the fair value of the of 56,696 inducement warrants issued. The Company estimated the fair value of the common stock warrants, exercisable at $36.40 per share, to be $1,700 using a Black Scholes model based on the following significant inputs: common stock price of $42.20; comparable company volatility of 72.6%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 2.8%. Also, in June 2018, an additional 17,088 of the November 8, 2017 warrants that were in the money at the time of exercise, were exercised for gross proceeds of $513.

 

On August 13, 2018, in connection with a Rights Offering of 267,853 shares of its common stock, the Company issued 267,853 warrants to purchase shares of its common stock at an exercise price of $23.00 per share. The Company estimated the fair value of the common stock warrants, exercisable at $23.00 per share, to be $3,600 using a Monte Carlo model based on the following significant inputs: common stock price of $18.80; comparable company volatility of 159.0%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 2.77%.

 

In connection with the closing of the Rights Offering, the Company issued a warrant to purchase 13,393 shares of common stock to Maxim Partners LLC, an affiliate of the dealer-manager of the Rights Offering. The Company estimated the fair value of the common stock warrants, exercisable at $34.50 per share, to be $169 using a using a Monte Carlo model based on the following significant inputs: common stock price of $18.80; comparable company volatility of 159.0%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 2.77%.

 

Common Stock Warrant Issued to Underwriter of Common Stock Offering

 

In July 2019, the Company issued to H.C. Wainwright & Co., as placement agent, a warrant to purchase 8,334 shares of common stock at an exercise price of $33.75 per share as consideration for providing services in connection with a common stock offering in July 2019. The warrant was fully vested and exercisable on the date of issuance. The common stock warrant is exercisable until five years from the date of grant. The Company estimated the fair value of the common stock warrants, exercisable at $33.75 per share, to be $127 using a lattice model based on the following significant inputs: common stock price of $26.80; comparable company volatility of 133.3%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 2.07%.

 

University of Arizona Common Stock Warrant

 

In connection with the June 2015 amended and restated exclusive license agreement with the University of Arizona (“University”), the Company issued to the University a common stock warrant to purchase 750 shares of common stock at an exercise price of $150.00 per share. The warrant was fully vested and exercisable on the date of grant, and expires, if not exercised, five years from the date of grant. In the event of a “terminating change” of the Company, as defined in the warrant agreement, the warrant holder would be paid in cash the aggregate fair market value of the underlying shares immediately prior to the consummation of the terminating change event. Due to the cash settlement provision, the derivative warrant liability was recorded at fair value and is revalued at the end of each reporting period. The changes in fair value are reported in other income (expense) in the statements of operations and comprehensive loss. The estimated fair value of the derivative warrant liability was $53 at the date of grant. These warrants expired, unexercised, on June 26, 2020.

 

Common Stock Warrants Issued in January and March 2020 Private Placements

 

In January and March 2020, in separate private placements concurrent with registered direct offerings (collectively, the “2020 Registered Direct Offerings”) of shares of the Company’s common stock, the Company also issued warrants to purchase an aggregate of up to 353,872 shares of common stock to certain institutional and accredited investors that participated in the 2020 Registered Direct Offerings (the “2020 Warrants”). The warrants were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. Terms used but not otherwise defined herein will have the meanings given them in the warrants, attached as Exhibit 4.1 to our Form 8-K filed on January 28, 2020, and our Form 8-K filed on March 6, 2020.

 

18

 

 

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 9 - Common Stock Warrants and Common Stock Warrant Liability – (continued)

  

The warrants issued in January 2020 to purchase 177,500 shares of common stock have an exercise price of $9.00 per share, are exercisable after July 28, 2020 and will expire July 28, 2025. The Company estimated the fair value of the common stock warrants, exercisable at $9.00 per share, to be $813 using a Black Scholes model based on the following significant inputs: common stock price of $7.90; comparable company volatility of 73.8%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 1.53%.

 

The warrants issued in March 2020 to purchase 176,372 shares of common stock have an exercise price of $2.88 per share, are immediately exercisable and will expire September 8, 2025. The Company estimated the fair value of the common stock warrants, exercisable at $2.88 per share, to be $242 using a Black Scholes model based on the following significant inputs: common stock price of $2.35; comparable company volatility of 74.8%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.39%.

 

For so long as the 2020 Warrants remain outstanding, the exercise price and number of shares of common stock issuable upon exercise of the warrants are subject to adjustment as follows: (a) upon payment of a stock dividend or other distribution on a class or series of shares common stock, not including shares issued under this warrant; (b) upon subdivision (by stock spilt, stock dividend, recapitalization, or otherwise) or combination (by reverse stock split or otherwise) of shares of common stock; or (c) upon the issuance of any shares of capital stock by reclassification of shares of the common stock.

 

In the event that the Company declares or makes any dividend or other distribution of its assets to holders of its common stock, each 2020 Warrant holder will be entitled to participate in such distribution to the same extent that such holder would have participated therein if the holder had held the number of shares of common stock acquirable upon exercise of the 2020 Warrant.

 

In the event of a Fundamental Transaction, as described in the 2020 Warrants and generally including the sale, transfer or other disposition of all or substantially all of our properties or assets; our consolidation or merger with or into another person or reorganization; a recapitalization, reorganization or reclassification in which our common stock is converted into other securities, cash or property; or any acquisition of our outstanding common stock that results in any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, then the holders of the 2020 Warrants will be entitled to receive upon exercise of such warrants the kind and amount of securities, cash, assets or other property that the holders would have received had they exercised the 2020 Warrants immediately prior to such Fundamental Transaction. Subject to certain limitations, in the event of a Fundamental Transaction the 2020 Warrant holder may at its option require the Company or any Successor Entity to purchase such warrant from the holder by paying to the holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of the 2020 Warrant on the date of the consummation of the Fundamental Transaction.

 

Any time that the Company grants, issues, or sells any securities pro rata to all of the record holders of the common stock (the “2020 Purchase Right”), each holder of 2020 Warrants will be entitled to acquire the aggregate amount of securities that the holder could have acquired if the holder had held the number of shares of common stock acquirable upon exercise of the applicable 2020 Warrant. However, to the extent that an exercise of a 2020 Purchase Right would exceed the Beneficial Ownership Limitation (defined below), then to such extent the 2020 Purchase Right will be held in abeyance until such time, if ever, that complete exercise of the 2020 Purchase Right would not exceed the Beneficial Ownership Limitation.

  

After the Initial Exercisability Date, the 2020 Warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise. If, at the time a holder exercises the 2020 Warrant (but not sooner than six months following the date of such warrant), a registration statement registering the issuance of the shares of common stock underlying the 2020 Warrants under the Securities Act is not then effective or available, nor is any current prospectus thereto available, and an exemption from registration under the Securities Act is not available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the number of shares of common stock determined according to a formula set forth in the 2020 Warrant.

 

Limitations on Exercise. A holder (together with its affiliates) may not exercise any portion of the 2020 Warrants to the extent that the holder would own more than 4.99% of the outstanding common stock after exercise (the “Beneficial Ownership Limitation”), except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the Beneficial Ownership Limitation up to 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the 2020 Warrants. No fractional shares of common stock will be issued in connection with the exercise of a 2020 Warrant. In lieu of fractional shares, we will either pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price or round up to the next whole share.

 

19

 

 

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 9 - Common Stock Warrants and Common Stock Warrant Liability – (continued)

  

Except as otherwise provided in the 2020 Warrants or by virtue of such holder’s ownership of shares of our common stock, the holders of the 2020 Warrants do not have the rights or privileges of holders of our common stock, including any voting rights, unless and until they exercise such warrants.

 

Common Stock Warrants Issued in April 2020 Public Offering

 

On April 24, 2020, in connection with a previously announced public offering of 145,586 Class A Units and 1,428,722 Class B Units, the Company issued warrants to purchase 1,574,308 shares of common stock to the participants in the public offering and have an exercise price of $3.05 per share (the “April 2020 Warrants”). These warrants are immediately exercisable and will expire April 24, 2025.

 

The Common Stock, Pre-Funded Warrants and Warrants sold in this Public Offering were offered and sold pursuant to a registration statement on Form S-1 (File No. 333-236302) initially filed with the Securities and Exchange Commission (the “SEC”) on February 7, 2020, as amended (“Registration Statement”), which was declared effective by the SEC on February 14, 2020. The Post-Effective Amendment No. 2 to the Registration Statement was declared effective by the SEC on April 21, 2020.

 

The Company estimated the fair value of the common stock warrants, exercisable at $3.05 per share, to be $2,402 using a Black Scholes model based on the following significant inputs: common stock price of $2.40; comparable company volatility of 87.9%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 0.18%.

 

Common Stock Warrants Issued to Placement Agent in 2020 Registered Direct Offerings and Private Placement

 

In connection with the separate private placements concurrent with registered direct offerings of shares of the Company’s common stock in January and March 2020, the Company issued to H.C. Wainwright & Co., LLC, as placement agent, a warrant to purchase 13,228 shares of common stock and a warrant to purchase 13,313 shares of common stock. The warrants were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. These warrants have substantially similar terms as the 2020 Warrants described above, except that the placement agent warrant issued in January 2020 has an exercise price of $10.00 per share, and the placement agent warrant issued in March 2020 has an exercise price of $3.7563 per share.

 

The Company estimated the fair value of the common stock warrants issued in January, with an exercise price of $10.00 per share, to be $58 using a Black Scholes model based on the following significant inputs: common stock price of $7.90; comparable company volatility of 73.8%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 1.53%.

 

The Company estimated the fair value of the common stock warrants issued in March, with an exercise price of $3.7563 per share, to be $17 using a Black Scholes model based on the following significant inputs: common stock price of $2.35; comparable company volatility of 74.8%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.39%.

 

In connection with the public offering of 145,586 Class A Units and 1,428,722 Class B Units on April 24, 2020, the Company issued to H.C. Wainwright & Co., LLC, as placement agent, warrants to purchase 118,073 shares of common stock. The warrants were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. These warrants have substantially similar terms as the April 2020 Warrants described above, except that the placement agent warrant issued has an exercise price of $3.97 per share.

 

The Company estimated the fair value of the common stock warrants issued in April, with an exercise price of $3.97 per share, to be $167 using a Black Scholes model based on the following significant inputs: common stock price of $2.40; comparable company volatility of 87.9%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.18%.

 

Deemed Dividend Adjustment-Warrant Modified Terms Revaluation

 

On December 2, 2019, in connection with the settlement of a filed lawsuit against the Company on February 20, 2018 by New Enterprises, Ltd. (“New Enterprises”), the Company agreed to modify the terms of 6,934 common stock warrants that were originally issued to New Enterprises between September 2015 and February 2016. Specifically, the original strike price was reduced to $20.00 per warrant from $150.00 per warrant and the expiration date of these warrants was extended one year to December 13, 2020.

 

Per guidance of ASC 260, the Company recorded a deemed dividend of $11 on the 6,934 unexercised warrants that were affected by the modification of terms. The dividend was calculated as the difference between the fair value of the warrants immediately prior to modification of terms and immediately after the adjustment using a Black Scholes model based on the following significant inputs: On December 2, 2019: common stock price of $12.00; comparable company volatility of 73.2%; remaining term 0.01 years; dividend yield of 0% and risk-free interest rate of 1.63. As adjusted, common stock price of $12.00; comparable company volatility of 73.2%; remaining term 1.01 years; dividend yield of 0% and risk-free interest rate of 1.63. 

 

On March 3, 2020, the Company issued an aggregate of 51,414 common shares in a cashless exercise of 56,625 warrants issued in December 2016 and November 2017. Consideration for the exercise of these warrants was the full settlement of an outstanding litigation reserve of $238.

 

20

 

  

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 10 - Stockholders’ Deficit

 

Capital Stock

 

The Company was organized under the laws of the state of Nevada on July 27, 2004 and was subsequently reincorporated under the laws of the state of Delaware on November 10, 2015. In connection with the reincorporation, as approved by the stockholders, the Company changed its authorized capital stock to consist of (i) 100 million shares of common stock, $.001 par value, and (ii) 2 million shares of preferred stock, $0.001 par value, designated as Series A convertible preferred stock. In December 2015, the Company amended its Certificate of Incorporation to change its authorized capital stock to provide for 15 million authorized shares of preferred stock of which 7,515,000 was designated as Series B convertible preferred stock, par value $.001 per share.

 

Prior to November 10, 2015, the Company’s authorized capital stock consisted of 100 million shares of common stock, $.001 par value, and 10 million shares of preferred stock, $.001 par value.

 

Common Stock

 

The Company had 3,398,832 and 1,414,671 shares of common stock issued and outstanding as of June 30, 2020 and December 31, 2019, respectively.

 

During the six months ended June 30, 2020, the Company issued 1,984,161 shares of common stock as follows:

 

 

an aggregate of 177,500 shares in connection with a registered direct offering generating net proceeds to the Company in January 2020 of approximately $1,200, as further described below; 

     
 

an aggregate of 176,372 shares in connection with a registered direct offering generating net proceeds to the Company in March 2020 of approximately $500, as further described below; 

     
 

an aggregate of 1,574,308 shares in connection with a public offering and exercise of pre-funded warrants issued in connection with said public offering, generating net proceeds to the Company in April 2020 of approximately $4,334, as further described below;

     
 

an aggregate of 51,414 shares for the exercise of outstanding warrants in settlement of an outstanding litigation reserve of $238 (see Note 9 — Common Stock Warrants and Common Stock Warrant Liability for further details); 

     
 

an aggregate of 4,543 shares for service as a result of the vesting of restricted stock units; and 

     
  an aggregate of 24 shares for true up of shares as a result of the 1-for-20 reverse stock split effected in February 2020. 

 

Public Offerings and Registered Direct Offerings

 

On April 24, 2020, the Company closed a public offering of 145,586 Class A Units and 1,428,722 Class B Units. Each unit is comprised of one share of common stock, par value $0.001 per share or common stock equivalent in the form of a pre-funded warrant and one warrant to purchase one share of common stock. The Class A Units were offered at a public offering price of $3.176 per unit, and the Class B Units were offered at a public offering price of $3.175 per unit priced at-the-market under Nasdaq rules, generating net proceeds of approximately $4,300, including the full exercise of the pre-funded warrants sold in this offering and after deducting certain fees due to the placement agent and other estimated transaction expenses.

 

Also, in connection with the public offering noted above, the Company issued warrants to purchase 1,574,308 shares of common stock to the participants in the public offering, with an exercise price of $3.05 per share. These warrants are immediately exercisable and will expire April 24, 2025.

 

On March 6, 2020, the Company closed a registered direct offering of an aggregate of 176,372 shares of our common Stock at a purchase price of $3.005 per share for aggregate net proceeds of approximately $500, before deducting fees payable to the placement agent and other estimated offering expenses payable by us. In addition, we also issued warrants exercisable for an aggregate of up to 176,372 shares of our common stock with an exercise price of $2.88 per share. In addition, in connection with the offering, we issued the placement agent five-year warrants to purchase up to 13,228 shares of our common Stock at an exercise price of $3.7563 per share.

 

On January 28, 2020, the Company closed a registered direct offering of an aggregate of 177,500 shares of our common stock at a purchase price of $8.00 per share for aggregate net proceeds of approximately $1,200, before deducting fees payable to the placement agent and other estimated offering expenses payable by us. In addition, in a concurrent private placement, we also issued and sold warrants exercisable for an aggregate of up to 177,500 shares of our common stock with an exercise price of $9.00 per share. In connection with the offering, we issued the placement agent five-year warrants to purchase up to 13,312 shares of our common stock at an exercise price of $10.00 per share.

 

21

 

 

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 11 - Stock-based Compensation

 

On June 12, 2018, the Company’s stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”) to replace the Company’s 2015 Equity Incentive Plan (the “2015 Plan”). As of June 30, 2020, the 2018 Plan authorizes the issuance of 50,000 shares of our common stock. In addition, up to 122,279 shares of our common stock reserved for issuance under the 2015 Plan became available for issuance under the 2018 Plan to the extent such shares were available for issuance under the 2015 Plan as of June 12, 2018 or cease to be subject to awards outstanding under the 2015 Plan, such as by expiration, cancellation, or forfeiture of such awards.

 

Stock options are generally issued with a per share exercise price equal to no less than fair market value of our common stock at the date of grant. Options granted under the 2018 Plan generally vest immediately, or ratably over a two- to 36-month period coinciding with their respective service periods. Options under the 2018 Plan generally have a term of five years. Certain stock option awards provide for accelerated vesting upon a change in control.

 

As of June 30, 2020, the Company had 6,757 shares of common stock available for issuance under the 2018 Plan. Subsequently, on July 8, 2020, the Company’s stockholders approved an amendment to the 2018 Plan to increase the number of shares of common stock available for issuance under the 2018 Plan by 800,000 shares.

 

The Company measures the fair value of stock options with service-based and performance-based vesting criteria to employees, directors and consultants on the date of grant using the Black-Scholes option pricing model. The Black-Scholes valuation model requires the Company to make certain estimates and assumptions, including assumptions related to the expected price volatility of the Company’s stock, the period under which the options will be outstanding, the rate of return on risk-free investments, and the expected dividend yield for the Company’s stock.

  

22

 

 

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 11 - Stock-based Compensation – (continued)

 

The weighted-average assumptions used in the Black-Scholes option-pricing model used to calculate the fair value of options granted during the six months ended June 30, 2020 were as follows:

 

   Employee   Non-Employee 
Expected volatility   88.1%   N/A 
Expected dividend yield       N/A 
Expected term (in years)   5    N/A 
Risk-free interest rate   0.26%   N/A 

 

The weighted average grant date fair value of options granted during the six months ended June 30, 2020 was $1.65 per share, as per the table below.

 

Due to the Company’s limited operating history and lack of company-specific historical or implied volatility, the expected volatility assumption was determined based on historical volatilities from traded options of biotech companies of comparable size and stability, whose share prices are publicly available. The expected term of options granted to employees is calculated based on the mid-point between the vesting date and the end of the contractual term according to the simplified method as described in SEC Staff Accounting Bulletin 110 because the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to the limited period of time its awards have been outstanding. For non-employee options, the expected term of options granted is the contractual term of the options. The risk-free interest rate is determined by reference to the implied yields of U.S. Treasury securities with a remaining term equal to the expected term assumed at the time of grant. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The Company has not paid and does not intend to pay dividends.

 

The following table summarizes the stock option activity, for both equity plans, for the periods indicated as follows: 

 

   Number of
Options
   Weighted
Average
Exercise
Price Per
Share
   Weighted
Average
Remaining
Contractual
Term
(years)
   Aggregate
Intrinsic
Value (1)
 
Outstanding at December 31, 2019   136,489   $28.00    3.9   $ 
Granted   25,000   $2.44    4.8   $ 
Exercised      $       $ 
Forfeited   (6,000)  $       $ 
Expired      $       $ 
Outstanding at June 30, 2020   155,489   $24.83    3.9   $ 
Exercisable at June 30, 2020   99,573   $28.22    2.5   $ 

 

(1) The aggregate intrinsic value in the table was calculated based on the difference between the estimated fair market value of the Company’s stock and the exercise price of the underlying options. The estimated stock values used in the calculation were $2.00 and $11.00 per share for the six months ended June 30, 2020 and the year ended December 31, 2019, respectively.

 

Restricted Stock Units

 

The following table summarizes restricted stock unit activity for the six months ended June 30, 2020:

 

   Number of
Units
   Weighted Average
Grant-Date Fair
Value Per Unit
 
Outstanding as of December 31, 2019   5,877   $30.28 
Granted      $ 
Vested   (4,543)  $1.42 
Forfeited      $ 
Outstanding as of June 30, 2020   1,334   $1.80 

 

23

 

  

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 11 - Stock-based Compensation – (continued)

 

The stock-based compensation expense was recorded as follows:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2020   2019   2020   2019 
                 
Research and development  $2   $1   $5   $10 
General and administrative   138    218    286    461 
Total stock-based compensation expense  $140   $219   $291   $471 

 

The allocation between research and development and selling, general and administrative expense was based on the department and services performed by the employee or non-employee.

 

At June 30, 2020, the total compensation cost related to restricted stock units and unvested options not yet recognized was $719, which will be recognized over a weighted average period of 33 months, assuming the employees and non-employees complete their service period required for vesting.

 

Note 12 - Commitments and Contingencies

 

Legal Proceedings 

 

The Company may be subject to legal proceedings and claims arising from contracts or other matters from time to time in the ordinary course of business. Management is not aware of any pending or threatened litigation where the ultimate disposition or resolution could have a material adverse effect on its financial position, results of operations or liquidity.

 

Lease Commitments

 

The Company is obligated under finance leases for certain research and computer equipment that expire on various dates through April 2022. At June 30, 2020, the gross amount of office and computer equipment, and research equipment and the related accumulated amortization recorded under the finance leases was $478 and $313, respectively.

 

In February 2012, the Company entered into an operating lease for its then corporate headquarters in Flagstaff, Arizona. The lease was originally due to expire in January 2015. In December 2013, the Company amended its lease to expand into the remaining area in the building and extended the term to December 31, 2019. In February 2014, the Company further amended the lease to expand into an adjacent building. The lease requires escalating rental payments over the lease term. Minimum rental payments under the operating lease are recognized on a straight-line basis over the term of the lease and accordingly, the Company records the difference between the cash rent payments and the recognition of rent expense as a deferred rent liability. The lease is guaranteed by the former President of the Company. In December 2019, we extended the current lease for only our manufacturing facilities located in Flagstaff, Arizona, occupying a total of 7,632 square feet of space. The lease for our manufacturing facilities expires in December 2020.

 

The Company has been seeking alternate manufacturing and warehousing space in anticipation of the December 2020 Flagstaff, Arizona lease expiration and, on June 22, 2020, the Company entered into a lease in Phoenix, Arizona for approximately 5,103 square feet of office/warehouse space. The lease will commence on August 1, 2020 and expires on November 30, 2024.

 

24

 

  

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Note 12 - Commitments and Contingencies (continued)

 

On December 1, 2019, we entered into a lease for our corporate headquarters in Phoenix, Arizona where we lease and occupy approximately 5,529 square feet of office space. This lease expires in November 2024.

 

We believe that our existing facilities are adequate and meet our current needs for business, manufacturing and research.

 

Rent expense was $132 and $127 for the six months ended June 30, 2020 and 2019, respectively. The future minimum lease payments under non-cancellable operating lease and future minimum finance lease payments as of June 30, 2020 are follows:

 

   Finance
Leases
   Operating
Lease
 
Years Ending December 31,          
2020   32    116 
2021   58    136 
2022   28    138 
2023   -    141 
2024   -    132 
Total minimum lease payments  $118   $663 

 

   Finance
Leases
 
     
Less: amounts representing interest (ranging from 11.43% to 18.32%)  $12 
      
Present value of minimum lease payments   106 
      
Less: current installments under finance lease obligations   53 
      
Total long-term portion  $53 

 

Note 13 - Subsequent Events

  

The travel and other restrictions that began in March 2020 in response to the COVID-19 global pandemic have resulted in a significant slowdown in our field studies and sales efforts.  We were able to resume some projects by late-April 2020, however, we still have delays on certain projects that might remain on hold until certain government restrictions are lifted.  These delays have impacted our results of operations and could impact our results in future quarters. In addition, stay at home orders and other social distancing initiatives continue to severely limit our ability to communicate with current and potential commercial customers. COVID-19 is also placing a significant burden on federal, state and local governments, which may impede or delay our ability to sell our products to them.

 

To facilitate the relocation of manufacturing and warehousing operations from Flagstaff, Arizona to Phoenix, Arizona, on June 22, 2020, the Company entered into a lease in Phoenix, Arizona for approximately 5,103 square feet of office/warehouse space. The lease will commence on August 1, 2020 and expires on November 30, 2024 with an initial base rent of $4 per month and operating expenses of $1 per month.

 

25

 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

As used in this Quarterly Report on Form 10-Q, “SenesTech,” the “Company,” “we,” “us,” or “our” refer to SenesTech, Inc., a Delaware corporation.  

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and related notes.

 

Forward-Looking Statements

 

Some statements and information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, notes to our condensed consolidated financial statements and elsewhere in this report are not historical facts but 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”). In some cases, readers can   identify forward- looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,”   “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology, which when used are meant to signify the statement as forward-looking. These forward-looking statements include, but are not limited to:

 

  The impacts and implications of the COVID-19 pandemic;

 

 

Our commercialization and promotion strategy and plans, including key elements to our business strategy, how we commercialize, our sales approach, our hiring and retention strategy; our areas and markets of focus, our pricing strategy, our strategic relationships and which geographic markets we target;

 

  Our seeking, obtaining or maintaining regulatory approvals for our product candidates;

 

  Our expectations regarding the potential market size for our products and how the market may develop;

 

 

Our estimates or expectations related to our revenue, cash flow, expenses, capital requirements and need for additional financing;

     
  Our ability, and the time require, to improve our cost structure and gross margins, and limit our cash burn;
     
  Our plans for our business, including for research and development;

 

  Our ability to enter into strategic arrangements and to achieve the expected results from such arrangements;

 

 

The initiation, timing, progress and results of field studies and other studies and trials and our research and development programs;

 

  Our financial performance, including our ability to fund operations;

 

  Developments and projections relating to our projects, competitors and our industry;

 

 

Other risks and uncertainties, including those described or incorporated by reference under the caption “Risk Factors” in our 2019 Annual Report.

 

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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 of Part II of our Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2019, filed with the SEC on March 17, 2020 and April 21, 2020, respectively, (collectively, the “2019 Annual Report”), and Item 1A of Part II of this Form 10-Q, in each case entitled “Risk Factors,” and those contained from time to time in our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

 

Overview

 

Since our inception, we have sustained significant operating losses in the course of our research and development activities 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 our former license agreement with Neogen. In 2017, we began to prepare and launch commercialization of our first product, ContraPest. 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 raised capital through debt financing, consisting primarily of convertible notes; and, to a lesser extent, payments received in connection with product sales, research grants and licensing fees.

 

Through June 30, 2020, we had received net proceeds of $73.2 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 $0.7 million in net product sales. At June 30, 2020, we had an accumulated deficit of $100.0 million and cash and cash equivalents of $4.7 million.

 

We have incurred significant operating losses every year since our inception. Our net losses were $1.6 million and $4.4 million for the three months and six months ended June 30, 2020, respectively, and $2.3 million and $4.7 million for the three months and six months ended June 30, 2019, respectively. We expect to continue to incur significant expenses and generate operating losses for at least the next 12 months.

 

We have historically utilized, and intend to continue to utilize, various forms of stock-based awards in order to hire, retain and motivate talented employees, consultants and directors and encourage them to devote their best efforts to our business and financial success. In addition, we believe that our ability to grant stock-based awards is a valuable and necessary compensation tool that aligns the long-term financial interests of our employees, consultants and directors with the financial interests of our stockholders.

 

As a result, a significant portion of our operating expenses includes stock-based compensation expense. Stock-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy. Specifically, our stock-based compensation expense was $140,000 and $291,000 for the three and six months ended June 30, 2020, which represented 8.5% and 7.3%, respectively, of our total operating expenses for those periods and $219,000 and $471,000 for the three and six months ended June 30, 2019, respectively, which represented 9.5% and 10.1%, respectively, of our total operating expenses for those periods.

 

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We will need additional funding in order to continue to fund our operations and achieve profitability and become cash flow positive and will continue to seek additional 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.

 

While the effects of the COVID-19 pandemic did not have a significant impact on revenue during the three and six months ended June 30, 2020, the travel and other restrictions that started in March resulted in a significant slowdown in our proof of concept field studies and sales efforts. We were able to resume field studies in some important projects by late-April and initially believed that we would re-start all our most significant field studies as we obtained limited waivers of certain travel bans; however, we still have delays on certain projects that might remain on hold until the lifting of government restrictions. These delays could impact our results in future quarters. Initially, we believed that pest control would continue through the pandemic as a necessity and we were and have been able to maintain our manufacturing with cautionary, best practices put in place. However, we have concerns over distributor, pest control operator and individual consumer spending as restrictive measures related to the pandemic continue. Stay at home orders across the world have impeded our ability to communicate with current and prospective customers, potentially reducing sales until the orders are lifted. In addition, federal, state and municipal budgets are under severe strain as a result of the pandemic. This may delay or impede their ability to make near term purchases of our products. While we have stocked certain long lead time inventory raw material ingredients, any prolonged impact on the suppliers we rely on for the purchase of these items by the COVID-19 pandemic could impact future manufacturing operations.

 

Components of our Results of Operations

 

Net Sales

 

Net sales are comprised primarily of sales, net of discounts and promotions, of ContraPest and related components, to our distributors and customers, as well as consulting and implementation services provided in conjunction with ContraPest deployments. 

 

Operating Expenses

 

Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred in connection with the research and development of ContraPest and our other product candidates, which costs include:

 

  Employee related expenses, including salaries, related benefits, travel and stock-based compensation expense for employees engaged in research and development functions;

 

  Expenses incurred in connection with the development of our product candidates; and

 

  Facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and supplies.

 

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We expense research and development costs as incurred.

 

We continue to investigate other applications of our core technology to other product candidates, which includes laboratory tests and academic collaborations. We also continue to develop our supply chain, particularly identifying and improving our sourcing of triptolide, a key active ingredient for our product candidates. At this time, we cannot reasonably estimate the costs for further development of ContraPest or the cost associated with the development of any of our other product candidates.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance, sales, marketing and administrative functions. Selling, general and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, consulting, accounting and audit services.

 

We continue to focus on improving our cost structure, with the goals of shifting resources to commercialization, significantly reducing our year-over-year burn rate and achieving a 50% or greater gross margin. Steps have included relocating to more cost-efficient space, organizational restructuring, and improving our manufacturing and supply processes and reducing staffing. We expect to realize the benefits from these steps in the coming quarters.

 

We plan to continue to utilize various forms of stock-based compensation awards in order to attract and retain qualified employees. As a result, we anticipate that stock-based compensation expense will continue to represent a significant portion of our selling, general and administrative expenses for the foreseeable future.

 

Interest Income

 

Interest income consists primarily of interest income earned on cash and cash equivalents.

 

Interest Expense

 

Interest expense consists primarily of interest accrued on our finance lease and note commitments.

 

Other Income (Expense), Net

 

Other income (expense), net, consists primarily of recognized change in value of short-term investments, income (expense) related to the year-over-year fair market value adjustment of our derivative warrant and any recognized gains or losses related to the sale of fixed assets.

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities, as well as a consideration of net operating loss and credit carry forwards, using enacted tax rates in effect for the period in which the differences are expected to impact taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company’s effective tax rate has been affected by the full valuation allowance recorded since inception on the Company’s deferred tax assets.

 

Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net operating losses we have incurred in each year in our history or for our generated research and development tax credits, due to the uncertainty regarding our ability to realize a benefit from these tax attributes. At June 30, 2020, the Company has federal and state net operating loss carryforwards of approximately $61.3 million and $47.8 million, respectively, not considering any potential IRC Section 382 annual limitation discussed below. The federal loss carryforwards begin to expire in 2023, unless previously utilized. Included in the $61.3 million of federal loss carryforwards are approximately $16.8 million of net operating losses that do not expire due to the tax law changes promulgated in conjunction with the Tax Cuts and Jobs Act of 2017.

 

Additionally, the utilization of the net operating loss and tax credit carryforwards could be subject to annual limitations under sections 382 and 383 of the Internal Revenue Code of 1986, and similar state tax provisions, due to ownership change limitations that may have occurred previously or that could occur in the future. These ownership changes limit the amount of net operating loss carryforwards and other deferred tax assets that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by section 382, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. The Company has not conducted an analysis of an ownership change under section 382. To the extent that a study is completed and an ownership change is deemed to have occurred, the Company’s net operating losses could be limited.

 

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Comparison of the Three and Six Months Ended June 30, 2020 and 2019

 

The following table summarizes our results of operations for the three and six months ended June 30, 2020 and 2019:

 

   For the Three Months   For the Six Months 
   Ended June 30,   Ended June 30, 
   2020   2019   2020   2019 
                 
Revenue:                
Sales  $71   $24   $108   $43 
Cost of sales   43    21    65    33 
Gross profit   28    3    43    10 
                     
Operating expenses:                    
Research and development   226    463    522    927 
Selling, general and administrative   1,427    1,831    3,472    3,735 
Total operating expenses   1,653    2,294    3,994    4,662 
                     
Net operating loss   (1,625)   (2,291)   (3,951)   (4,652)
                     
Other income (expense):                    
Interest income   -    11    2    26 
Interest expense   (7)   (11)   (15)   (24)
Other income (expense)   3    2    18    (3)
Total other income (expense)   (4)   2    5    (1)
                     
Net loss and comprehensive loss   (1,629)   (2,289)  $(3,946)  $(4,653)
Deemed dividend-warrant price protection-revaluation adjustment   -    -   414   - 
Net loss attributable to common shareholders  $(1,629)  $(2,289)  $(4,360)  $(4,653)
                     
Weighted average common shares outstanding - basic and fully diluted   2,760,875    1,227,628    2,186,089    1,201,917 
                     
Net loss per common share - basic and fully diluted  $(0.59)  $(1.86)  $(1.99)  $(3.87)

 

Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019:

 

Net Sales

 

Net sales were $71,000 for the three months ended June 30, 2020 and $24,000 for the same period in 2019. Sales increased $47,000 due, in part, to our implementation of an internet sales capability, augmenting our existing pull through sales strategy, where demand from the consumer market encourages, or pulls, resellers and pest management professionals to offer our products, as well as billings of $17,700 for customer product implementation services. These initiatives have shown initial promise. However, we believe the benefit has been offset by reduced sales, reflecting reduced spending by customers due to COVID-19.

 

Cost of Sales

 

Cost of sales was $43,000 or 60.6% of net sales for the three months ended June 30, 2020, compared to $21,000 or 87.5% of net sales for the three months ended June 30, 2019. The increase in cost of goods sold of $22,000 in 2020 is primarily due to higher sales volume. The decrease in cost of sales as a percentage of net sales was due to reduced scrap expense and continued process improvement and efficiencies. We anticipate cost of goods sold as a percentage of sales will improve in the future due to manufacturing efficiencies as a result of scale-up activities.

 

Gross Profit

 

Gross profit for the three months ended June 30, 2020 was $28,000 or 39.4% of net sales, compared to a gross profit of $3,000 or 12.5% of net sales, for the same period in 2019. The increase in gross profit was a direct result of decreased scrap related to scale-up activities as well as continued process improvement and efficiencies.

 

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Research and Development Expenses

 

   Three Months Ended
June 30,
   Increase 
   2020   2019   (Decrease) 
   (in thousands) 
Direct research and development expenses:            
             
Personnel related (including stock-based compensation)  $82   $245   $(163)
Facility-related   55    61    (6)
Other   89    157    (68)
Total research and development expenses  $226   $463   $(237)

 

Research and development expenses were $226,000 for the three months ended June 30, 2020, compared to $463,000 for the same period in 2019. The $237,000 decrease in research and development expenses was primarily due to a decrease of $163,000 in personnel-related costs, including stock-based compensation expense, due to the classification of certain field support employees to sales and marketing and option grants fully vesting resulting in lower expense. With more focus on the commercialization of ContraPest, it was determined that these certain field support employees previously classified as research and development are now refocused on sales and marketing efforts.

 

Facility-related expense decreased $6,000 due primarily to the cancellation of a facility lease of 1,954 square feet of research and development space in Flagstaff, Arizona at December 31, 2019.

 

The decrease in other research and development expenses of $68,000 was primarily due to a reclass of other expenses related to certain field support employees to sales and marketing as described above.

 

We also continue to develop our supply chain, particularly identifying and improving our sourcing of key ingredients for our product candidates.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were approximately $1.4 million for the three months ended June 30, 2020, as compared to approximately $1.8 million for the three months ended June 30, 2019. The decrease of $400,000 in selling, general and administrative expenses was primarily due to a decrease of $275,000 in net salary costs, a decrease of $91,000 in travel expenses, a $53,000 decrease in professional service fees and $17,000 in office supplies and dues and subscription expenses, offset by an increase in expenses related to restricted use field projects. The decrease in net salary costs of $275,000 was due primarily to a decrease in stock compensation expenses as well as the impact of temporary salary reductions by management to control expenses during the COVID-19 pandemic. The decrease in professional services expenses was primarily due to reduced legal expenses and reduced Board of Director compensation expense as a result of voluntary reductions in compensation due to the COVID-19 pandemic. Legal expenses for the three months ended June 30, 2019 included expenses related to a litigation settlement that were not incurred in 2020. The decrease in travel expenses was a direct result of COVID-19 travel restrictions put in place in March 2020. Likewise, the pandemic restricted access to facilities resulting in reduced office supplies and subscriptions.

 

Interest Income/Expense, Net

 

We recorded interest expense, net of $7,000 for the three months ended June 30, 2020, as compared to interest expense, net of $0 for the same period in 2019. The $7,000 increase in interest expense, net for the period was a result of decreased interest income as a result of significantly lower interest rates, offset by higher average daily cash balances.

 

Other Income (Expense)

 

Other income, net, for the three months ended June 30, 2020, was $3,000, virtually unchanged compared to $2,000 of other income for the same period in 2019. The slight increase was due to increased gains on sale of fixed assets in the three months ended June 30, 2020.  

 

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Six Months Ended June 30, 2020 compared to Six Months Ended June 30, 2019:

 

Net Sales

 

Net sales were $108,000 for the six months ended June 30, 2020 compared to $43,000 for the same period in 2019. Sales were $65,000 higher, in part due to our implementation of an internet sales capability, augmenting our existing pull through sales strategy, where demand from the consumer market encourages, or pulls, resellers and pest management professionals to offer our products, as well as due to billings of $17,700 for customer product implementation services. This strategy has shown initial promise. However, we believe the benefit of this strategy has been offset by reduced sales, reflecting reduced spending by customers due to COVID-19.

 

Cost of Sales

 

Cost of sales was $65,000 or 60.2% of net sales for the six months ended June 30, 2020, compared to $33,000 or 76.7% of net sales for the six months ended June 30, 2019. The increase in cost of goods sold of $22,000 in 2020 is primarily due to higher sales volume. The decrease in cost of sales as a % of net sales was due to reduced scrap expense and continued process improvement and efficiencies. We anticipate cost of goods sold as a percentage of sales will improve for the foreseeable future due to manufacturing efficiencies as a result of the scale up activities.

 

Gross Profit

 

Gross profit for the six months ended June 30, 2020 was $43,000 or 39.8% of net sales, compared to a gross profit of $10,000 or 23.3% of net sales, for the same period in 2019. The increase in gross profit was a direct result of decreased scrap related to scale-up activities as well as continued process improvement and efficiencies noted above.

 

Research and Development Expenses

 

   Six Months Ended
June 30,
   Increase 
   2020   2019   (Decrease) 
   (in thousands) 
Direct research and development expenses:            
             
Personnel related (including stock-based compensation)  $221   $462   $(241)
Facility-related   79    124    (45)
Other   222    341    (119)
Total research and development expenses  $522   $927   $(405)

 

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Research and development expenses were $522,000 for the six months ended June 30, 2020, compared to $927,000 for the six months ended June 39, 2019. The $405,000 decrease in research and development expenses was primarily due to a decrease of $241,000 in personnel-related costs, including stock-based compensation expense, due to the reclassification of certain field support employees to sales and marketing, decreased facility related expenses of $45,000 and decreased other research and development expenses of $119,000.

 

With more focus on commercialization of ContraPest, it was determined that these certain field support employees previously classified as research and development are now refocused on sales and marketing efforts and were reclassified as such.

 

Facility-related expense decreased $45,000 during the six months ended June 30, 2020 over the same period in 2019 due primarily to the cancellation of a facility lease of 1,954 square feet of research and development space in Flagstaff, Arizona at December 31, 2019

 

The decrease in other research and development expenses of $119,000 was primarily due to a reclass of other expenses related to certain field support employees to sales and marketing as described above.

 

We also continue to develop our supply chain, particularly identifying and improving our sourcing of key ingredients for our product candidates.

  

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were approximately $3.5 million for the six months ended June 30, 2020, as compared to approximately $3.7 million for the six months ended June 30, 2019. The decrease of $200,000 in selling, general and administrative expenses was primarily due to lower salaries and wages of $386,000, including stock compensation expenses and reduced travel related expenses of $123,000 offset by increased professional service expenses of $90,000, increased shareholder relations expenses of $55,000, increased insurance expense of $50,000 and increased facilities expense of $42,000.

 

Net salaries and wages were lower due primarily to a decrease in stock compensation expenses related to option grants fully vesting and resulting in lower stock compensation expense as well as the impact of temporary salary reductions by management to control expenses during the COVID-19 pandemic, offset by an increase in salaries and wages due to the reclassification of certain field support employees to sales and marketing, as noted above. The decrease in travel expenses for the six months ended June 30, 2020, as compared to the same period in 2019, was a direct result of COVID-19 travel restrictions put in place in March 2020.

 

The increase in $90,000 professional services in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, was a result of increased legal expenses related to a litigation settlement and the 1-for-20 reverse stock split in March 2020, offset by lower Board of Director compensation expense as a result of voluntary reductions in compensation to control costs during the COVID-19 pandemic.

 

Shareholder relations expenses increased $55,000 primarily due to expenses and costs associated with the 1-for-20 reverse stock split effected in the first quarter of 2020, noted above. Insurance costs for the six months ended June 30, 2020 were $50,000 higher than the same period in 2019 due to higher premiums for director’s and officer’s liability coverage as well as certain key employee policies in 2020. Facilities expenses for the six months ended June 30, 2020 were $42,000 higher than the same period in 2019 due to the allocation of rent expense for corporate headquarters in Phoenix to selling and marketing.

 

Interest Income/Expense, Net

 

We recorded interest expense of $13,000, net, for the six months ended June 30, 2020, as compared to interest income, net of $2,000 for the same period in 2019. The $15,000 decrease in interest income, net, was a result of decreased interest income as a result of significantly lower interest rates, offset by higher average daily cash balances and reduced interest expense as a result of finance leases and promissory notes that expired during the six months ended June 30, 2020.

 

Other Income (Expense)

 

We recorded $18,000 of other income, net, for the six months ended June 30, 2020, compared to $3,000 of other expense, net, for the same period in 2019. The $21,000 net increase in other income was primarily due to gains on the sale of certain fixed assets during the six months ended June 30, 2020 and decreased, year-over-year fair market value adjustment of our derivative warrant in the same period.  

 

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Liquidity and Capital Resources

  

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 our former license agreement with Neogen. We have funded our operations to date through the sale of equity securities, including convertible preferred stock, common stock and warrants to purchase common stock; debt financing, consisting primarily of convertible notes; and, to a lesser extent, payments received in connection with product sales, research grants and licensing fees. 

 

Through June 30, 2020, we had received net proceeds of $73.2 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other promissory notes, and an aggregate of $1.7 million from licensing fees and an aggregate of $0.7 million from product sales. At June 30, 2020, we had an accumulated deficit of $100.0 million and cash and cash equivalents of $4.7 million.

 

As discussed in Note 8, Borrowings, of our Notes to Condensed Financial Statements, the Company also received cash proceeds of $645,700 as it relates to the Paycheck Protection Program (or “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). We are using the proceeds from the PPP Loan to retain employees, maintain payroll and make lease, interest and utility payments.

 

Our ultimate success depends upon the outcome of a combination of factors, including: (i) successful commercialization of ContraPest and maintaining and obtaining regulatory approval of our products and product candidates; (ii) market acceptance, commercial viability and profitability of ContraPest 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.

 

We will need additional funding in order to continue to fund our operations and achieve profitability and become cash flow positive and will continue to seek additional 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 ContraPest. Further, the COVID-19 pandemic will likely delay completion of field studies and achievement of sales, which will further increase our need for financing. 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;
     
  Manage the infrastructure for the sales, marketing and distribution of ContraPest and any other product candidates for which we may receive regulatory approval;

 

Continue the development of ContraPest and our other product candidates, including engaging in any necessary field studies;

 

  Seek additional regulatory approvals for ContraPest and our other product candidates;

 

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  Scale up manufacturing processes and quantities to meet future demand of ContraPest and any other product candidates for which we receive regulatory approval;

 

  Continue product development of ContraPest and advance our research and development activities and advance the research and development programs for other product candidates;

 

  Maintain, expand 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 are also increasing our expenses to expand regulatory approvals for ContraPest, with an effort to make the product more user friendly and available for use in an increased number of applications.

  

We believe we will need additional financing to fund these continuing and additional expenses.

 

Cash Flows

 

The following table summarizes our sources and uses of cash for each of the periods presented:

 

   Six Months Ended
June 30,
 
   2020   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)

 

Operating Activities.

 

During the six months ended June 30, 2020, operating activities used $3.5 million of cash, primarily resulting from our net loss of $3.9 million and by changes in our operating assets and liabilities of $48,000, offset by non-cash charges of $421,000, consisting primarily of stock-based compensation, depreciation and amortization. Our net loss was primarily attributable to research and development activities and our selling, general and administrative expenses, as we generated limited product revenue during the period. Net cash used by changes in our operating assets and liabilities for the six months ended June 30, 2020, consisted primarily of a net decrease in accrued expenses and accounts payable of $181,000 and an increase in prepaid expenses of $27,000 offset by a decrease in inventory of $45,000, a decrease in receivables of $104,000 and a decrease in other assets of $11,000.

 

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During the six months ended June 30, 2019, operating activities used $3.9 million of cash, primarily resulting from our net loss of $4.7 million offset by changes in our operating assets and liabilities of $59,000 and by non-cash charges of $687,000, consisting primarily of stock-based compensation, depreciation and amortization. Our net loss was primarily attributable to research and development activities and our selling, general and administrative expenses, as we generated limited product revenue during the period. Net cash provided by changes in our operating assets and liabilities for the six months ended June 30, 2019 consisted primarily of a net increase in accrued expenses and accounts payable of $135,000, a decrease in prepaid expenses of $13,000 and a decrease in deposits of $4,000 offset by an increase in inventory of $70,000, an increase in receivables of $17,000 and a decrease in deferred rent of $6,000.

 

Investing Activities.

 

For the six months ended June 30, 2020, net cash provided by investing activities was $44,000 due to the sale of property and equipment.

 

For the six months ended June 30, 2019, we used $47,000 in net cash related to investing activities due to purchases of property and equipment. 

 

Financing Activities.

 

During the six months ended June 30, 2020, net cash provided by financing activities was $6.3 million as a result of $5.7 million in net proceeds from the issuance of common stock and net proceeds of $646,000 from the issuance of a note pursuant to the Paycheck Protection Program, offset by $29,000 of repayments related to notes payable and $49,000 in repayments of finance lease obligations.

 

During the six months ended June 30, 2019, net cash provided by financing activities was $1.6 million as a result of proceeds from the exercise of warrants of $1.8 million offset by payments of $112,000 related to notes payable, $38,000 in payments of capital lease obligations and $24,000 of payments for employee withholding taxes related to share-based awards.

  

Off-Balance Sheet Arrangements

 

None.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are described in more detail in Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

 

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Revenue Recognition

 

Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition (“ASC 605”). Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of the fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. The performance obligations identified by the Company under Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts With Customers, are straightforward and similar to the unit of account and performance obligation determination under ASC Topic 605, Revenue Recognition.

 

Stock-Based Compensation

 

We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures, in accordance with ASC Topic 718 — Stock Compensation. We estimate the grant date fair value of the awards, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of stock-based awards is expensed on a straight-line basis over the vesting period of the respective award.

 

We recorded stock-based compensation expense of approximately $140,000 and $291,000 for the three and six months ended June 30, 2020, respectively, and $219,000 and $471,000 for the three and six months ended June 30, 2019, respectively. We expect to continue to grant stock options and other equity-based awards in the future and continue to recognize stock-based compensation expense in future periods.

 

The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, which determine the fair value of stock-based awards. If we had made different assumptions, our stock-based compensation expense, net loss and loss per share of common stock could have been significantly different. Our assumptions are as follows:

 

  Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. Our historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, we estimate the expected term by using the simplified method, which calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

 

  Expected volatility. Expected volatility is derived from the average historical volatilities of publicly traded companies within our industry that we consider to be comparable to our business over a period approximately equal to the expected term. We intend to continue to consistently apply this process using the same or similar public companies unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

  Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term.

 

  Expected dividend. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

 

  Expected forfeitures. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period that the estimates are revised.

 

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Significant Factors, Assumptions and Methodologies Used in Determining Fair Value of Our Common Stock

 

As noted above, we are required to estimate the fair value of the common stock underlying our stock-based awards when performing the fair value calculations using the Black-Scholes option-pricing model. In the absence of an active market for our common stock, we utilized methodologies in accordance with the framework of the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of our common stock. In addition, we have conducted periodic assessments of the valuation of our common stock.

 

The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. If we had made different assumptions than those used, the amount of our stock-based compensation expense, net income and net income per share amounts could have been significantly different. The fair value per share of our common stock for purposes of determining stock-based compensation expense is the closing price of our common stock as reported on the applicable grant date. The compensation cost that has been included in the statements of operations and comprehensive loss for all stock-based compensation arrangements is as follows:

 

   Three Months Ended
June 30,
  

Six Months Ended

June 30,

 
   2020   2019   2020   2019 
                 
Research and development  $2   $1   $5   $10 
General and administrative   138    218    286    461 
Total stock-based compensation expense  $140   $219   $291   $471 

 

The intrinsic value of stock options outstanding as of June 30, 2020 was $0.

 

Emerging Growth Company Status

 

The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we intend to comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.  

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this report.

 

These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

For information regarding legal proceedings in which we are involved, see Note 12 — Commitments and Contingencies under the subsection titled “Legal Proceedings” in our Notes to Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Item 1A. Risk Factors

 

Except as discussed below, there have been no material changes in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our 2019 Annual Report.

 

The impacts of the coronavirus pandemic could adversely affect our business, and other similar crises could result in similar or other harms.

 

The outbreak of the novel coronavirus (COVID-19) pandemic has resulted in widespread travel and transportation restrictions and closures of commercial spaces, industrial facilities and other spaces and businesses in and across the United States and the world, including in the locations we operate or target sales. As a result, our business has been impacted and we could face continued or more adverse effects. In addition, our results and financial condition may be adversely affected by federal or state legislation, or other similar laws, regulations, orders or other governmental or regulatory actions or best practices, that would impose new restrictions on our ability to operate our business or customers to operate their businesses. For example, our sales and technical field forces have been restricted from traveling or limited in travel, which adversely affects our ability to sell our products and complete field studies. While we have implemented cautionary procedures at our manufacturing facility, there may be disruptions to our ability to manufacture due to current and additional workplace controls. Our customers may be less inclined or unable to purchase our products or continue product studies due to restrictions under which they may be operating. Those restrictions are more severe in some jurisdictions, such as California. If financial markets continue to tighten, we may have more limited ability to raise necessary financing. We source some of our critical raw materials from Asia, and the coronavirus has caused supply chain disruptions, which could limit a timely supply of materials. Each of these could have negative effects on our business, results of operations, financial condition and cash flows. Even if the coronavirus pandemic passes, another crisis with similar effects could develop and harm our business, financial results and liquidity. The degree to which COVID-19 may impact our results of operations and financial condition is unknown at this time and will depend on future developments, including the ultimate severity and the duration of the pandemic, and further actions that may be taken by governmental authorities or businesses or individuals on their own initiatives in response to the pandemic. 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None

 

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Item 6.  Exhibits

 

INDEX TO EXHIBITS

 

Exhibit       Filed or
Furnished
      Incorporated by Reference
Number   Description   Herewith   Form   Filing Date   Exhibit   File No.
                         
3.1   Amended and Restated Certificate of Incorporation, as amended by the Certificate of Amendment to the Amended and Restated Certificate of Incorporation       10-K   3/17/2020   3.1   001-37941
                         
3.2   Amended and Restated Bylaws       S-1   9/21/2016   3.5   333-213736
                         
10.1   Promissory Note, dated April 15, 2020, by and between the Company and BMO Harris Bank National Association       8-K   4/21/2020   10.1   001-37941
                         
10.2   Form of Securities Purchase Agreement, dated as of April 21, 2020, between the Company and the purchaser thereto       8-K   4/24/2020   10.1   001-37941
                         
10.3+   SenesTech, Inc. 2018 Equity Incentive Plan, as amended, and forms of agreement thereunder   X                
                         
10.4   Standard Industrial/Commercial Multi-Tenant Lease, between the Company and Duke Go PP, LLC, dated as of June 22, 2020   X                
                         
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934   X                
                         
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934   X                
                         
32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   X                
                         
32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   X                
                         
101.INS   XBRL Instance Document   X                
                         
101.SCH   XBRL Taxonomy Extension Schema   X                
                         
101.CAL   XBRL Taxonomy Extension Calculation Linkbase   X                
                         
101.DEF   XBRL Taxonomy Extension Definition Linkbase   X                
                         
101.LAB   XBRL Taxonomy Extension Label Linkbase   X                
                         
101.PRE   XBRL Taxonomy Extension Presentation Linkbase   X                

 

+Indicates a management contract or compensatory plan.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  SENESTECH, INC.
(Registrant)
     
Dated: August 13, 2020 By: /s/ Kenneth Siegel
    Kenneth Siegel
    Chief Executive Officer
     
Dated: August 13, 2020 By: /s/ Thomas C. Chesterman
    Thomas C. Chesterman
    Chief Financial Officer and Treasurer

 

 

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