Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial
statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information,
the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve
risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report
on Form 10-K, particularly in the sections of this report titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking
Statements.”
Overview
Since
our inception, we have sustained significant operating losses in the course of our research and development activities and commercialization
efforts and expect such losses to continue for the near future. We have generated limited revenue to date from product sales, research
grants and licensing fees received under a former license. We have primarily funded our operations to date through the sale of equity
securities, including convertible preferred stock, common stock and warrants to purchase common stock; and debt financing, consisting
primarily of convertible notes.
As
of December 31, 2021, we had received net proceeds of $84.3 million from our sales of common stock, preferred stock and issuance of convertible
and other promissory notes, an aggregate of $1.7 million from research grants and licensing fees and an aggregate of $1.5 million in
product sales. At December 31, 2021, we had an accumulated deficit of $112.5 million and cash and cash equivalents of $9.3 million.
On
April 15, 2020, we also received cash proceeds of $645,700 from the Paycheck Protection Program (or “PPP”) of the Coronavirus
Aid, Relief, and Economic Security Act (“CARES Act”). We used the proceeds from the PPP Loan to retain employees, maintain
payroll and make lease, interest and utility payments. On June 18, 2021, the Company received notification from BMO Harris Bank National
Association as the lender in a promissory note pursuant to the CARES Act, that such loan was forgiven in full under the terms of the
program.
We
have incurred significant operating losses every year since our inception. Our net losses were $8.3 million and $8.4 million for the
years ended December 31, 2021 and 2020, respectively. We expect to continue to incur significant expenses and generate operating losses
for at least the next 12 months.
We
will need additional funding to continue to fund our operations, achieve profitability and become cash flow positive, we 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
it is difficult to measure the effect and impact of the COVID-19 pandemic on revenue for the years ended December 31, 2021 and December
31, 2020, the travel and other restrictions that started in March 2020 resulted in a significant slowdown in our proof-of-concept field
studies and sales efforts. While we were able to resume field studies in some important projects by mid-year 2020 and initially believed
that we would re-start all our most significant field studies as we obtained limited waivers of certain travel bans, we still have delays
on certain projects that might remain on hold until certain businesses and government entities return to more normal operations. Continued
delays or new restrictions on travel or operations as a result of new outbreaks and variants could impact our results in future quarters.
Initially, we believed that pest control would continue through the COVID-19 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 about distributor, pest control operator
and individual consumer spending as restrictive measures related to the COVID-19 pandemic continue. Extended stay at home orders across
the world, whether imposed by governments or individual businesses, 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 continue to be severely
strained as a result of the COVID-19 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.
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 for the year ended December 31, 2021 and December 31, 2020 was $0.8 million and $0.6
million, respectively, which represented 8.3% and 8.1%, respectively, of our total operating expenses for those periods.
24
Components
of our Results of Operations
Grant
Revenue
Grant
revenue is comprised entirely of grant funding provided by the City of Phoenix, Arizona for jobs created and new employee training in
the City of Phoenix, Arizona during the years ended December 31, 2021 and December 31, 2020.
Sales
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.
Cost
of Sales
Cost
of sales consist primarily of cost of products sold, including scrap and reserves for obsolescence. 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, improving
our manufacturing and supply processes and reducing staffing.
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:
We
expense research and development costs as incurred.
We
continue to investigate other applications of our core technology to other product candidates and modifications to our existing products
to expand usability, 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
plan to continue to utilize various forms of stock-based compensation awards 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.
25
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 any recognized gains or losses related to the sale of fixed assets. In the year ended December
31, 2021, other income also included the reversal of a payroll benefits accrual from 2019 that was reversed as the liability period had
expired.
Income
Taxes
Deferred
tax assets and liabilities are determined based on differences between the financial statement and tax basis 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 for the years ended December 31, 2021
and December 31, 2020 has been affected by the valuation allowance on the Company’s deferred tax assets.
The
Company has not recorded any U.S. federal or state income tax benefits for our net operating losses incurred since inception or for our
research and development tax credits generated to date, due to the uncertainty regarding our ability to realize a benefit from these
tax attributes in the future. Based on tax return activity through December 31, 2021, the Company has federal and state net operating
loss carryforwards of approximately $77.2 million and $63.7 million, respectively, not considering any potential Internal Revenue Code
of 1986 (“IRC”) Section 382 annual limitation discussed below. The federal loss carryforwards begin to expire in 2029, unless
previously utilized. The state loss carryforwards expire in 2041, unless previously utilized. Included in the $77.2 million of federal
loss carryforwards are approximately $32.7 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 carryforwards is subject to an annual limitation under Section 382 and 383 of the Internal
Revenue Code od 1986, and similar state tax provisions due to ownership change limitations that 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 and
383. results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more
than 50 percent 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 occur, the Company’s net operating losses could be
limited
During
the quarter ended June 30, 2021, the Company received notification that a loan to the Company under the Paycheck Protection Program (the
“PPP”) in the amount of approximately $646 thousand was forgiven in full pursuant to the PPP program under the Coronavirus
Aid, Relief, and Economic Security Act (the “CARES Act”). Section 1106(i) of the CARES Act specifically requires taxpayers
to exclude canceled indebtedness from PPP loans from gross income, and accordingly, the debt forgiveness amount is nontaxable to the
Company. Subsequent to the passage of the CARES Act, the IRS issued Notice 2020-32, which precludes a deduction for an expense that
would otherwise be deductible if the payment results in the forgiveness of a loan, thereby preventing entities from claiming a double
tax benefit on the qualifying expenses for PPP loans. On December 27, 2020, the Consolidated Appropriations Act (“CAA”) was
signed into law, which reverses existing IRS guidance provided in Notice 2020-32 by allowing taxpayers to fully deduct any business expenses,
regardless of whether the expense was paid for using forgiven PPP loan proceeds. None of the other provisions of the CARES Act or CAA
had a material impact to the Company’s tax accounts.
26
Comparison
of the Years December 31, 2021 to 2020
The
following table summarizes our results of operations for the years ended December 31, 2021 and 2020:
SENESTECH,
INC.
STATEMENTS
OF OPERATIONS AND COMPREHENSIVE LOSS
(In
thousands, except shares and per share data)
For the Years
Ended December 31,
Revenue:
Grant revenue $ 24 $ 24
Operating expenses:
Selling, general and administrative 7,224 6,440
Other income (expense):
Interest income 4 3
Interest expense (11 ) (28 )
Payroll Protection Program loan forgiveness 673 -
Other income - 21
Total other income 666 (4 )
Net loss and comprehensive loss (8,268 ) (7,937 )
Deemed dividend-warrant price protection-revaluation adjustment - 436
Net loss attributable to common shareholders $ (8,268 ) $ (8,373 )
Net loss per common share - basic and fully diluted $ (0.74 ) $ (2.78 )
Grant
Revenue
Grant revenue for the years ended December 31, 2021 and December 31,
2020 was $24,000and was granted for jobs created and related new employee training in the City of Phoenix, Arizona during the 12 months
ended December 31, 2021 and December 31, 2020.
Sales
Sales,
shown net of sales discounts and promotions, were $576,000 for the year ended December 31, 2021, compared to $258,000 for year ended
December 31, 2020. Sales increased by $318,000 in 2021 due, in part, to the continued focus of our internet sales initiatives, 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 enhanced strategic partnerships and collaborations with key distributors and PMPs. While these initiatives
continue to progress, we believe the benefits of these initiatives continue to be impacted by reduced spending by customers due to the
COVID-19 pandemic.
27
Cost
of Sales
Cost
of sales was $356,000, or 61.8% of sales, exclusive of grant revenue for the year ended December 31, 2021, compared to $281,000, or 108.9%
of sales, exclusive of grant revenue for the year ended December 31, 2020. The increase in cost of sales of $75,000 in 2021 is primarily
due to higher sales volume offset by lower reserves for obsolete product delivery system supplies of $119,000 and higher scrap expense
in 2020. Without the reserve for delivery system supplies, cost of sales for the year ended December 31, 2020 would have been $162,000,
or 62.8% of sales.
Gross
Profit
Gross profit for the year ended December 31, 2021 was $244,000, or 42.4%
of sales, compared to a gross profit of $1,000, or less than 1% of sales, for the year ended December 31, 2020. The increase in gross
profit was primarily due to increased sales and the impact of a reserve for obsolete product delivery system supplies of $119,000 recorded
in the year ended December 31, 2020. Gross profit for the year ended December 31, 2020 would have been $120,000, or 42.6% of sales, without
this reserve.
Research
and Development Expenses
Years Ended December 31, Increase
(in thousands)
Direct research and development expenses:
Personnel related (including stock-based compensation) $ 847 $ 604 $ 243
Total research and development expenses $ 1, 954 $ 1,494 $ 460
Research
and development expenses were $2.0 million for the year ended December 31, 2021, compared to $1.5 million for the year ended December
31, 2020. The $460,000 increase in research and development expenses was primarily due to an increase in manufacturing personnel-related
costs of $243,000, an increase in professional fees of $162,000, a decrease in facility related expenses of $68,000 and an increase in
other research and development expenses of $123,000.
The
increase in manufacturing personnel-related costs relative to the same period of 2020, which was impacted by the COVID-19 pandemic, in
addition to increases in manufacturing and regulatory headcount to meet current and future demand.
The
increase in professional fees expenses of $162,000 in the year ended December 31, 2021 compared to the same period in 2020 was primarily
due to increased regulatory legal expenses and expenses related to field and regulatory compliance studies.
Facility-related
expenses decreased $68,000 primarily due to the expiration of a facility lease of 7,632 square feet of manufacturing space in Flagstaff,
Arizona at December 31, 2020 as discussed in Note 13 - Commitments and Contingencies to our financial statements included elsewhere in
this Annual Report on Form 10-K.
The
year over year increase in other research and development expenses of $123,000 was primarily due to increased expenses related to field
and regulatory compliance studies and increased shipping expenses due to higher sales volume during the period.
28
Selling,
General and Administrative Expenses
Years Ended December 31, Increase
(in thousands)
Direct selling, general and administrative expenses:
Personnel related (including stock-based compensation) $ 3,940 $ 3,516 $ 424
Total selling, general and administrative expenses $ 7,224 $ 6,440 $ 784
Selling,
general and administrative expenses were $7.2 million for the year ended December 31, 2021, compared to $6.4 million for the year ended
December 31, 2020. The increase of $784,000 in selling, general and administrative expenses was primarily due to an increase of $424,000
in net salary costs, including stock compensation expenses and an increase in other selling, general and administrative expenses of $516,000,
offset by a $139,000 reduction in professional fees and a reduction in facility related costs of $17,000.
Net
salaries and wages for the year ended December 31, 2021 were $424,000 higher than the same period in 2020, primarily due to recognition
of incentive compensation expense for employees of $362,000 and increased stock compensation due to the issuance of certain common stock
option awards of $125,000 offset by net headcount reductions in selling and marketing positions due to hiring delays.
The
reduction in professional fees was primarily due to reduced legal expenses related to a litigation settlement incurred in the year ended
December 31, 2020 that were not incurred in the same period of 2021, partially offset by an increase in professional services expenses
relating to legal patent registration filings in the year ended December 31, 2021.
The
increase in other selling, general and administrative expenses of $516,000 from $1.4 million for the year ended December 31, 2020 to
$1.9 million for the year ended December 31, 2021 was primarily due to an increase in marketing expenses of $386,000 as a result of costs
associated with rebranding activities to highlight our commercial focus and continued on-line marketing program expansion, an increase
in travel expenses of $84,000 as a direct result of eased COVID-19 travel restrictions in 2021 that were put in place at the end of March
2020, and an increase in director and officer and other insurance premiums of $75,000, offset by reduced depreciation expense due to
certain assets becoming fully depreciated after December 31, 2020.
The
decrease in facilities related expenses of $17,000 to $156,000 for the year ended December 31, 2021 from $173,000 for the year ended
December 31, 2020 is a direct result of the expiration of a facility lease of 7,632 square feet of manufacturing space in Flagstaff,
Arizona at December 31, 2020.
Interest
Income/Expense, Net
We
recorded $7,000 of interest expense, net for the year ended December 31, 2021, as opposed to interest expense, net of $25,000 for the
year ended December 31, 2020. The decrease in interest expense, net of $18,000 was a result of reduced interest expense as a result of
finance leases and promissory notes that expired during the year ended December 31, 2021 and increased interest income for the year ended
December 31, 2021 as a result of higher investments in cash invested in money market accounts.
Paycheck
Protection Program Loan Forgiveness
PPP
loan forgiveness income for the year ended December 31, 2021 represents the forgiveness of a promissory note pursuant to the PPP under
the CARES Act that we secured under this program
Other
Income (Expense), Net
We
recorded $21,000 of other income (expense), net for each of the years ended December 31, 2021 and December 31, 2020. Other income (expense),
net for the year ended December 31, 2021 primarily represented a payroll benefits accrual from 2019 that was reversed as the liability
period had expired. Other income (expense), net for the year ended December 31, 2020 primarily represented income recognized for gains
on sale of certain fixed assets during the year.
29
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 a former license. We have primarily funded our operations to date through the sale of equity
securities, including convertible preferred stock, common stock and warrants to purchase common stock; and debt financing, consisting
primarily of convertible notes.
Through
December 31, 2021, we had received net proceeds of $84.3 million from our sales of common stock, preferred stock and issuance of convertible
and other promissory notes, an aggregate of $1.7 million from research grants and licensing fees and an aggregate of $1.5 million in
product sales. At December 31, 2021, we had an accumulated deficit of $112.5 million and cash and cash equivalents of $9.3 million.
As
discussed in Note 8 - Borrowings of our Notes to Financial Statements included elsewhere in this Annual Report on Form 10-K, on April
15, 2020, we received cash proceeds of $645,700 from the PPP of the CARES Act. We used the proceeds from the PPP loan to retain employees,
maintain payroll and make lease, interest and utility payments. This loan was fully forgiven under terms of the PPP on June 14, 2021.
Our
ultimate success depends upon the outcome of a combination of factors, including the following: (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.
Based upon our current operating plan, we expect that cash and cash equivalents
at December 31, 2021, in combination with anticipated revenue and any additional sales of our equity securities, will be sufficient to
fund our current operations for at least the next 12 months. We have evaluated and will continue to evaluate our operating expenses and
will concentrate our resources toward the successful commercialization of ContraPest in the United States. However, if anticipated revenue
targets and margin targets are not achieved or expenses are more than we have budgeted, we may need to raise additional financing before
that time. If we need more financing, including within the next 12 months, and we are unable to raise the necessary capital through the
sale of our securities, we may be required to take other measures that could impair our ability to be successful and operate as a going
concern. In any event, we may require additional capital in order to fund our operating losses and research and development activities
before we become profitable and may opportunistically raise capital. We may never achieve profitability or generate positive cash flows,
and unless and until we do, we will continue to need to raise capital through equity or debt financing. If such equity or debt financing
is not available at adequate levels or on acceptable terms, we may need to delay, limit or terminate commercialization and development
efforts or discontinue operations.
Additional
Funding Requirements
We expect our expenses to continue or increase in connection with our ongoing
activities, particularly as we focus on marketing and sales of ContraPest. Further, the COVID-19 pandemic will likely continue to delay
the 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:
● maintain and protect our intellectual property portfolio; and
We
believe we will need additional financing to fund these continuing and additional expenses.
30
Cash
Flows
The
following table summarizes our sources and uses of cash for each of the years presented:
Year Ended December 31,
Cash used in operating activities $ (7,779 ) $ (7,108 )
Cash used in investing activities (99 ) (67 )
Cash provided by financing activities 13,561 8,882
Net increase (decrease) in cash and cash equivalents $ 5,683 $ 1,707
Operating
Activities.
During
the year ended December 31, 2021, operating activities used $7.8 million of cash, primarily resulting from our net loss of $8.3 million,
offset by changes in our operating assets and liabilities of $0.1 million and non-cash charges of $0.4 million. Our net loss was primarily
attributed to research and development activities and our selling, general and administrative expenses, as we generated limited product
sales and grant revenue during the year. Net cash generated by changes in our operating assets and liabilities for the year ended December
31, 2021 consisted primarily of a $215,000 increase in accrued expenses and accounts payable and a decrease in other assets of $12,000,
offset by increases in net inventories of $56,000, prepaid expenses of $52,000 and a net increase in accounts receivable-trade of $52,000.
During
the year ended December 31, 2020, operating activities used $7.1 million of cash, primarily resulting from our net loss of $7.9 million
and changes in our operating assets and liabilities of $0.1 million offset by non-cash charges of $0.9 million. Our net loss was primarily
attributed to research and development activities and our selling, general and administrative expenses, as we generated limited product
sales and no research grant and licensing revenue during the year. Net cash used by changes in our operating assets and liabilities for
the year ended December 31, 2020 consisted primarily of a decrease in accrued expenses and accounts payable of $524,000 offset by a decrease
in prepaid expenses of $79,000, a decrease in inventories of $235,000 and a net increase in accounts receivable and other assets of $127,000.
Investing
Activities
During
the year ended December 31, 2021, we used $99,000 of cash in investing activities, which consisted of $100,000 for the purchases of property
and equipment, offset by $1,000 of cash received on the sales of property and equipment.
During
the year ended December 31, 2020, we used $67,000 of cash in investing activities, which consisted of $114,000 for the purchases of property
and equipment, offset by $47,000 of cash received on the sales of property and equipment.
Financing
Activities
During
the year ended December 31, 2021, net cash provided by financing activities was $13.6 million as a result of $12.4 million in net proceeds
from the issuance of common stock and $1.3 million in proceeds from warrant exercises, partially offset by $135,000 of repayments related
to notes payable and finance lease obligations.
During
the year ended December 31, 2020, net cash provided by financing activities was $8.9 million as a result of $5.7 million in net proceeds
from the issuance of common stock, $2.6 million in proceeds from warrant exercises and $646,000 from the issuance of notes payable, partially
offset by $110,000 of repayments related to notes payable, finance lease obligations and payment of employee withholding taxes related
to share-based awards.
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 — Summary of Significant Accounting Policies to our
financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those
most critical to the judgments and estimates used in the preparation of our financial statements.
31
Revenue
Recognition
Effective
January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers
(“ASC 606”). Under ASC 606, we recognize 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 us under ASC 606 are straightforward
and similar to the unit of account and performance obligation determination under ASC Topic 605, Revenue Recognition.
We
recognize revenue when product is shipped at a fixed selling price on payment terms of 30 to 120 days from invoicing. We recognize other
revenue earned from pilot studies, consulting and implementation services upon the performance of specific services under the respective
service contract.
We
derive 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.
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 $765,000 and $645,000 for the years ended December 31, 2021 and 2020, respectively.
We expect to continue to grant stock options and other equity-based awards, such as restricted stock units, in the future and to 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:
32
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.
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:
Years Ended December 31,
(In thousands)
Selling, general and administrative expenses $ 762 $ 636
Research and development expense 3 9
Total stock-based compensation expense $ 765 $ 645
The
intrinsic value of stock options outstanding as of December 31, 2021 is $0.
Off-Balance
Sheet Arrangements
None.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not
applicable.
33
Item 8. Financial Statements and Supplementary Data.
SENESTECH,
INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID 2738) F-2
Statements of Cash Flows for the years ended December 31, 2021 and 2020 F-6
Notes to Financial Statements F-7
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of SenesTech, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of SenesTech, Inc. (the Company) as of December 31, 2021 and 2020, and the related statements
of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period
ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the
results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with
accounting principles generally accepted in the United States of America.
Going
Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 1 to the financial statements, the Company suffered a net loss from operations and has a net capital deficiency, which raises
substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in
Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical
Audit Matters
The
critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated
or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
As
discussed in Note 1 to the financial statements, the Company had a going concern due to a continual net loss, stockholders’ deficiency
and cash used in operations.
Auditing
management’s evaluation of a going concern can be a significant judgment given the fact that the Company uses management estimates
on future revenues and expenses which are not able to be substantiated.
To
evaluate the appropriateness of the going concern, we examined and evaluate the financial information that was the initial cause along
with management’s plans to mitigate the going concern and management’s disclosure on going concern.
/s/ M&K CPAS, PLLC
We have served as the Company’s auditor since 2017.
F-2
SENESTECH,
INC.
BALANCE
SHEETS
(In
thousands, except shares and per share data)
December 31, December 31,
ASSETS
Current assets:
Accounts receivable trade, net 77 25
Right to use asset-operating leases 511 665
Property and equipment, net 334 538
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt $ 32 $ 98
Total current liabilities 943 794
Long-term debt, net - 673
Operating lease liability 523 671
Commitments and contingencies (See note 13) - -
Stockholders’ equity:
Total liabilities and stockholders’ equity $ 11,501 $ 6,022
The accompanying notes are an integral part of these financial statements.
F-3
SENESTECH,
INC.
STATEMENTS
OF OPERATIONS AND COMPREHENSIVE LOSS
(In
thousands, except shares and per share data)
For the Years
Ended December 31,
Revenue:
Grant revenue $ 24 $ 24
Operating expenses:
Selling, general and administrative 7,224 6,440
Other income (expense):
Interest income 4 3
Interest expense (11 ) (28 )
Payroll Protection Program loan forgiveness 673 -
Other income - 21
Total other income 666 (4 )
Net loss and comprehensive loss (8,268 ) (7,937 )
Deemed dividend-warrant price protection-revaluation adjustment - 436
Net loss attributable to common shareholders $ (8,268 ) $ (8,373 )
Net loss per common share - basic and fully diluted $ (0.74 ) $ (2.78 )
The
accompanying notes are an integral part of these financial statements.
F-4
SENESTECH,
INC.
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In
thousands, except shares and per share data)
For The Years Ended December 31, 2020 and 2021 Additional Total
Common Stock Paid-In Accumulated Stockholders’
Shares Amount Capital Deficit Equity (Deficit)
Stock based compensation - - 645 - 645
Issuance of common stock upon cashless exercise of warrants 51,414 - 238 - 238
Issuance costs of common stock for services 4,543 - - - -
Issuance of common stock for fractional shares-20-1 reverse split 24 - - - -
Warrant antidilution price protection adjustment - - 436 - 436
Stock based compensation - - 765 - 765
Issuance costs of common stock for service 20,951 - - -
The
accompanying notes are an integral part of these financial statements.
F-5
SENESTECH,
INC.
STATEMENTS
OF CASH FLOWS
(In
thousands)
For the Years
Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 303 288