EDGAR 10-K Filing

Company CIK: 1680378
Filing Year: 2022
Filename: 1680378_10-K_2022_0001213900-22-015848.json

---

ITEM 1. BUSINESS
Item 1. Business.
Overview
We have developed and are commercializing a global, proprietary technology for managing animal pest populations, initially rat populations, through fertility control.
Rats pose threats to human and animal health as well as food security around the world. In addition, rats cause extensive product loss through consumption and contamination, including in the agricultural industry. 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 response to rat infestations is the use of lethal tools such as traps and rodenticides, although there are growing concerns about secondary exposure and bioaccumulation of rodenticides. These solutions are limited by the rat’s extraordinary reproduction rate as well as their behavior.
ContraPest®, our initial product, is unique liquid bait in the pest control industry. ContraPest targets the reproductive systems of both male and female Norway and roof rats, which can lead to sustained reductions of the rat population.
ContraPest is a liquid bait containing the active ingredients 4-vinylcyclohexene diepoxide (“VCD”) and triptolide. ContraPest limits the reproduction of male and female rats beginning with the first breeding cycle following consumption. Accordingly, it offers an alternative to traditional rodenticides in many environments and also may be used in coordination with rodenticides as part of integrated pest management. It is an important option in the increasing number of jurisdictions that are restricting the use of second-generation anti-coagulant products.
We began the registration process with the United States Environmental Protection Agency (the “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 and was reclassified as a general-use pesticide. In addition to the EPA , ContraPest is registered in all 50 states, 48 of which have approved the removal of the RUP designation, as well as the District of Columbia. In certain cases, our registrations are conditional and require completion of testing and we continue to seek to comply with these requirements.
We continue to develop enhancements to ContraPest that align with our target verticals while pursuing regulatory approvals and amendments to the existing U.S. registration to broaden its use and marketability. When ContraPest begins to generate sufficient revenue, we will seek regulatory approval for additional jurisdictions beyond the United States.
We were formed in July 2004 and incorporated in the state of Nevada. On November 12, 2015, we subsequently reincorporated in the state of Delaware. Our corporate headquarters and manufacturing site are in Phoenix, Arizona. On December 8, 2016, we went public and are currently traded on the Nasdaq Capital Market (“Nasdaq”) under the symbol SNES.
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 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.
Current Challenges in Pest Control Methodologies
Lethal control measures such as traps and rodenticides are often at the forefront of rat control programs but reproduction, behavior, and genetic resistance can negatively impact results of mitigation efforts.
Rats reach sexual maturity at approximately nine weeks of age. Females can give birth to six litters per year, with up to five to ten offspring each. This rapid reproduction rate can cause populations to rebound quickly after implementing a lethal control program.
Rat behavior, either learned or innate, can negatively affect pest control efforts. Neophobia, or the fear and avoidance of new objects, is an innate behavior that often impacts control efforts. Rats avoid bait stations, loose bait, or traps until they are confident that these new objects pose no danger. Over time rats will begin to sample new foods to determine if there are any negative side effects. If the food or rodenticide causes illness in rats but they do not die, they will avoid that food or rodenticide in the future.
Genetic resistance also creates challenges for rodent control programs. Rats can be resistant develop resistance to rodenticides due to genetic through genetic mutations. This resistance is passed onto their offspring who will carry this resistant trait to future generations.
Because of the above factors, conventional rodenticide producers are continually challenged to develop new, more lethal chemicals to control future rat populations.
Rodenticides have significant drawbacks, in that they may affect species that prey on rats, including birds of prey and large cats, due to the persistence of the rodenticide in the rat tissue. In addition, there is growing concern about the adverse effects that rodenticides may have on children and pets due to accidental, direct exposure.
Integrated Pest Management and Fertility Control
The most effective, long-term way to manage rats is by using a combination of tools that work together to magnify the efficacy of the pest management protocol; integrated pest management (IPM) is based upon this concept. An effective IPM program needs to reduce the existing rat population while preventing the population from rebounding. We believe ContraPest has established a new paradigm in rodent control, making fertility control an essential component of a sustainable IPM program.
ContraPest is a highly palatable liquid formulation that reduces fertility in both male and female rats. Rats require 10% of their body weight in water per day, making ContraPest a great tool to add to IPM programs. The high-fat content and sweet taste promote sustained consumption even when other sought-after food sources are present. In both field and laboratory settings, ContraPest will be consumed by rats even in the presence of abundant water sources and plentiful food choices, including animal feed, trash and other options. Consumption of ContraPest does not cause illness in rats, and therefore, it does not change behavior or result in bait aversion.
Adding ContraPest to an IPM program brings the rodent population down initially and keeps it at a manageable level by minimizing reproduction and thereby limiting population rebounds. Continued maintenance baiting of ContraPest at lower population levels dramatically reduces the risk of future population spikes, allowing customers to be more focused on eliminating the causes of future invasions through exclusion and sanitation initiatives.
The following graphs illustrate the incremental benefit of adding ContraPest to IPM programs with conventional rodenticides. The data is derived from three programs we began in late 2019 to demonstrate the effectiveness of ContraPest to potential end-users and our study of the results through monitoring rat activity by camera. The data presented shows the incremental benefit of ContraPest deployment beyond that achieved through rodenticides. Ongoing monitoring of the program locations has indicated that there has been no rebound in the rodent population from the current low levels.
(source: company studies)
Other Applications
While our proprietary technology is effective on rodent species, our technology can be applied to other mammalian species. We are currently developing a fertility control product for mice. Further, we have developed preliminary data with feral dogs, feral pigs, wallabies and brushtail possums. While this preliminary data indicates potential for the continued development of fertility control technology in general, we are not pursuing these opportunities at this time. We believe that the size of the rat control market as well as mice control market are sufficient for our near-term focus. We remain open to the potential to license our technology to other strategic partners to explore its applicability to other mammalian species.
Business Strategy
Our goal is to be a leader in the pest management industry; utilizing fertility control technologies to limit the adverse effects caused by rodent infestations, educating PMP’s and the general public on alternatives or enhancements to lethal rodenticides and developing additional product lines to address the needs of our customers. Key elements of our strategy are as follows:
● work to maximize market acceptance for, and generate sales of, our products, including by conducting field demonstrations at potential lead customers;
● explore strategic partnerships to enable us to penetrate additional target markets and geographical locations;
● manage the infrastructure for sales, marketing and distribution of ContraPest and any other product candidates for which we may receive regulatory approval;
● seek additional regulatory approvals for ContraPest, including to more fully expand the market and use for ContraPest and, if we believe there is commercial viability, for our other product candidates;
● further develop our manufacturing processes to contain costs while being able to scale to meet future demand of 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, as our operating budget permits, advance the research and development programs for other product candidates;
● maintain and protect our intellectual property portfolio; and
● add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts and operations as a public company.
Marketing and Sales Approach
The pest control industry is highly competitive with a number of large competitors developing and marketing pest control products, particularly rodenticides, and services. Because fertility control in general, and ContraPest specifically, may be considered a disruptive technology, we have encountered resistance to initial adoption. We continue to build a robust set of case studies to demonstrate efficacy and cost efficiency, identify lead users and expand within market segments. In order to enhance the likelihood of success, we have currently targeted key market segments with the highest likelihood to add ContraPest into their IPM programs. These include agribusiness (e.g., egg hen farms, grain and protein production and grain storage, transport and sales facilities), municipalities and government agencies, e-Commerce, zoos and sanctuaries, and commercial accounts.
In the United States, ContraPest is most commonly deployed and serviced by a licensed Pest Management Professional (“PMP”), although some customers have in house pest management service personnel. In some circumstances, customers will request PMPs to use certain products in the provision of their service. Initially, our marketing strategy involved sales to and through large distributors of pest control products. In 2019, we substantially modified this strategy to create two different sources of pull-through-demand: sales to PMPs and sales directly to commercial customers. We believe that by making end users aware of the existence and benefits of ContraPest, we are more likely to create demand through PMPs that would otherwise simply continue to use their existing rodenticide-based IPM models. We currently market ContraPest both to pest management companies and directly to target segments, using a direct to PMP sales channel; indirectly through distributor sales; and through our own direct sales force. In addition, in the fourth quarter of 2019, we added a new e-Commerce tool to enable customers in each of our target segments to buy directly from us. Finally, we have been pursuing strategic relationships with large pest management companies and key end-user organizations in our target segments for the distribution and sale of ContraPest.
In each of our target segments we have identified potential lead customers with whom we are working on large scale projects to demonstrate the efficacy of ContraPest in real world situations. We provide significant product support to these customers to make sure that we are not only achieving desired results, but also obtaining the data to support sales in the related market vertical. We believe that successful field trials with these influential end users will help drive significant subsequent sales to other participants in the relevant market.
We are also focused on expanding regulatory approvals for ContraPest to make the product more user friendly and available for use in an increased number of applications. These include alternative delivery methods and expansion of the label to additional applications and/or species.
Pricing and Value
Our pricing strategy takes into account the cost of goods sold, the cost of competitive products and the value of our product to the end user. We believe ContraPest will be perceived as a significant value as a complement to existing pest control products or as a non-lethal stand-alone solution for managing rat infestations and, as such, should command a premium price. Our experience is that once potential customers understand the advantages of ContraPest, they recognize that the benefits of long-term sustained rodent reduction dramatically offset the cost of the product. We plan to continue to use promotional efforts to support the value message and to justify our product’s premium price, built around the following advantages:
● ContraPest uses targeted delivery for maximum efficacy;
● our proprietary gravity feeding system optimizes consumption;
● ContraPest can be used as an anchor or enhancement for an IPM program, or as a stand-alone solution to decrease reliance on lethal control options;
● ContraPest is designed, formulated and dispensed in a manner that minimizes the exposure hazard for handlers and non-targeted species such as wildlife, livestock and pets; and
● over time, as the pest population decreases, the quantity deployed and consequently, the cost of ContraPest will decrease, bringing the long-term cost of ContraPest in line with other elements of integrated pest management.
We also focus on specific advantages for the individual customer and expect to position our product as having the following additional general advantages:
● savings by reducing loss or contamination of food and product inventories;
● savings by reducing damage to infrastructure and major production equipment;
● reduction in labor and servicing costs due to dramatically reduced rodent populations;
● creation of a more predictable cost model based on prevention versus treatment of spikes in population seen with rebound effect;
● reduction in disease vectors; and
● public relations and risk reduction advantages when reducing usage of lethal rodenticides and traps.
Raw Materials and Manufacturing Process
ContraPest contains two active ingredients, VCD, an industrial chemical, and triptolide, a plant derived chemical. ContraPest also contains several other inactive, generally recognized as safe (GRAS), ingredients. Currently, we source VCD from standard industrial chemical supply providers. Triptolide is derived from the Thunder God Vine, Tripterygium wilfordii, which is commonly cultivated and harvested wild in southeastern China and other Asian countries. Triptolide is available from a variety of sources, but the process to purify triptolide for use in ContraPest is expensive. Thus, we are investigating other, less costly sources of triptolide.
Our manufacturing process involves the incorporation of our two active ingredients, in low concentrations, into several inactive ingredients. Once incorporated, the entire product goes through a micro-encapsulation process in order to stabilize the final formulation. This process allows ContraPest to be delivered to rats in a palatable, non-lethal, and effective manner.
Currently, we have production scale capability in our facilities in Arizona to manufacture ContraPest. Our internal production capabilities allow us to meet our current and anticipated demand through 2023 for ContraPest.
Scientific Background Regarding our Product
ContraPest is a liquid bait containing the active ingredients VCD and triptolide. When consumed, ContraPest targets reproduction, limiting fertility in male and female rats beginning with the first breeding cycle following consumption.
Female rats are born with a finite number of eggs, or oocytes, and remain fertile until death. Within the ovary, eggs develop within structures called follicles. The non-regenerating and least mature follicles are called primordial. The primordial follicles mature through primary, secondary and antral stages and ultimately ovulate. Once the primordial follicles have become depleted, ovarian failure occurs, which terminates reproductive capability. VCD causes specific loss of small ovarian follicles (both primordial and primary). Triptolide causes specific loss of growing follicles (secondary and antral). In males, triptolide exerts a significant suppression of male fertility by preventing sperm maturation and impairing the movement of sperm.
The safety and efficacy of VCD, triptolide, and ContraPest are supported by considerable evidence. VCD and triptolide are rapidly metabolized by the rat, limiting the possibility of bioaccumulation or effect on non-target species. Further, based on our toxicology studies, ContraPest should not cause rats to become ill, change behavior or become more susceptible to predation.
Furthermore, ContraPest is a contraceptive, not a sterilant. The average duration of infertility ranges from 77 to over 180 days.
Other Potential Products
We have begun work on new formulations of ContraPest - particularly solid and semi-solid variants. Although solid bait is not essential to our near-term plans, the non-liquid formulations may expand the potential uses of ContraPest as well as pave the way for future sales through retail stores. Our plan is to accelerate the reformulation process through partnerships with others in the industry that will be able to give us access to proven technologies, thus reducing potential development time.
Competition
Currently, we are unaware of any other non-lethal fertility control products targeting rats that are registered by the EPA. There is a non-registered product being sold online that claims to control rodent reproduction humanely. We do not believe this is a product that can compete with us.
Our principal competition is the substitution of other tools that PMPs use in their IPM.
Government Regulation and Product Approval
Federal, state and local government authorities in the United States regulate, among other things, the testing, manufacturing, quality control, approval, labeling, packaging, storage, record-keeping, distribution and marketing of the products we develop. The process for obtaining regulatory approval and compliance with appropriate federal, state and local regulations is rigorous and requires the expenditure of substantial time and financial resources.
United States Review and Approval Processes
In the United States, the EPA regulates the sale, distribution and use of any pesticide under the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA). The EPA’s definition of a pesticide includes “any substance or mixture of substances intended for preventing, destroying, repelling, or mitigating any pest.” FIFRA defines a pest as “any insect, rodent, nematode, fungus, or weed.” To register a new product with the EPA, all active ingredients within the product must be registered with the EPA.
The EPA granted registration for ContraPest effective August 2, 2016. This initial EPA approval labeled ContraPest as a restricted-use product, due to the need for applicator expertise for deployment. On October 18, 2018, the EPA removed the Restricted Use designation, meaning that we can sell ContraPest to consumers who do not have applicator expertise. ContraPest is currently limited by EPA requirements to indoor use and to use within one foot of manmade structures. We intend to diligently pursue additional related regulatory approvals from the EPA to support our product evolution, including seeking approval for full outdoor use, alternative formulations and for additional rodent species. This may entail the need to complete and submit to EPA additional studies, principally related to the effects on other animals and fish if ingested or if the product enters the water supply.
In addition to the EPA registration of ContraPest in the United States, we must obtain registration from the various state regulatory agencies prior to selling in each state. To date, we have received registration for ContraPest in all 50 states and the District of Columbia, 48 of which have approved the removal of the Restricted Use designation.
In addition to product registration, the EPA also approves all labeling (the container label, instructional inserts, and the Safety Data Sheet (SDS)) of ContraPest. Generally, states accept the EPA approved label as is. ContraPest’s labeling was submitted to states at initial registration and is resubmitted during state scheduled reregistration or for any significant labeling change requiring EPA approval.
In certain cases, our EPA and state registrations require completion of testing and certifications even after we have received approval for the product or its labelling. We continue to seek to comply with these requirements.
International Review and Approval Processes
We are researching potential international markets and will evaluate the regulatory landscapes of each prospective market. Country-specific regulatory laws have provisions that include requirements for certain labeling, safety, efficacy and manufacturers’ quality control procedures to assure the consistency of the product, as well as company records and reports. Some specific in-country studies will be required for particular countries, but others will generally accept an EPA or EU compliant dossier.
Personnel
As of December 31, 2021, we had 26 full-time employees and one part-time employee. Within our workforce, seven employees are engaged in research and development and 20 employees are engaged in sales, business development, finance, regulatory, human resources, facilities, information technology and general management and administration.
None of our employees are represented by labor unions or covered by collective bargaining agreements.
Intellectual Property and Other Proprietary Rights
Maintaining a strong position in the rodenticide market requires constant innovation along with a healthy research program to evolve product lines to remain competitive and relevant to the needs of the changing global marketplace. We seek to protect our proprietary data and trade secrets with attention to data exchanges among employees, consultants, collaborators and research and trade partners.
Patent Filings
Our intellectual property portfolio supporting ContraPest consists of nine international patent filings (in the United States, Europe, Canada, Brazil, Russia, Japan, Mexico, South Korea, and Australia) addressing the ContraPest compound. Claims directed toward the compound include composition-of-matter involving a diterpenoid epoxide or salts thereof in combination with an organic diepoxide, use claims for inducing follicle depletion and for reducing the reproductive capability of a mammalian animal or non-human mammalian population. Issued claims will have a patent term extending to 2033 or longer based on patent term determinations in each of the filing countries. The novelty of ContraPest extends to its method of field distribution and has required innovation to perfect the dosing of our product to rodents. We have filed U.S. and international patent applications covering our novel bait station device to effectively and efficiently deliver our rodent bait at individual bait sites that would, if issued, offer patent term protection through at least 2036.
License Agreements
We have an exclusive patent license with the University of Arizona for background intellectual property that we plan to employ for future product development in the domestic animal fertility control market. The patent claims in the United States, Australia and New Zealand cover the use of 4-vinylcyclohexene diepoxide to deplete ovarian follicles in individual mammals and mammal populations. The license agreement, signed in 2005, will terminate with the last-to-expire patent claims, which have a term extending to 2026.
Trade Secrets and Trademarks
Beyond our patent right holdings, we broaden our intellectual property position with trademark, trade secret, know-how and continuous scientific discovery to accompany our product development efforts. We protect these proprietary assets with a combination of confidentiality terms in all commercial agreements or stand-alone confidentiality agreements along with rights-ownership agreements and structured information transfer understandings prior to beginning any collaborative projects. We own and maintain the ContraPest trademark and intend to register new trademarks for products from our evolving rodenticide product line and for products for mammalian species beyond rodentia.
Data Sets
We have exclusive use status with the EPA for the data sets we have developed and submitted to the EPA as part of our application for ContraPest. The exclusive use status applies to new active ingredients and the final formulation of the ContraPest product for a period of 10 years. For five years after the 10-year period of exclusivity, if another applicant or the EPA Administrator chooses to rely on one or more data sets that we submitted in support of an application submitted by another applicant, the new applicant must make a binding offer to compensate us and certify to the EPA that it has done so. If we and the offeror cannot reach agreement on the terms of the compensation for the use of such data sets, FIFRA requires resolution by binding arbitration. The EPA rules do not describe how the compensation should be determined, and there is publicly available information about some, but not all, binding arbitration decisions.
Where You Can Find Additional Information
We electronically file with the SEC our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We make available on our website at www.senestech.com, free of charge, copies of these reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing them to, the SEC. The information contained in, or that can be accessed through, our website is not part of, and is not incorporated into, this Annual Report on Form 10-K.

---

ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
As discussed immediately prior to Item 1 of Part I, “Business” under “Cautionary Note Regarding Forward-Looking Statements,” our actual results could differ materially from those expressed in our forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed below. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations. If any of the following risks occur, our business, financial condition, operating results, cash flows and the trading price of our common stock could be materially adversely affected.
Risks Relating to our Business
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 have been and are more severe in some jurisdictions, such as California. If financial markets tighten, we may have more limited ability to raise necessary financing. The COVID-19 pandemic is also placing a significant budgetary burden on federal, state and local governments, which may impede or delay their ability to purchase our products. 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 the COVID-19 pandemic 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.
Our success is dependent on the successful commercialization of ContraPest.
The EPA granted registration approval for ContraPest effective August 2, 2016, and as of July 12, 2018, we have received registration for ContraPest in all 50 states and the District of Columbia. However, we have not yet had significant sales of ContraPest, which is our only product to date that is available for commercialization and the generation of revenue.
ContraPest and our other product candidates, if approved, may not achieve adequate market acceptance necessary for commercial success.
Even following receipt of regulatory approval for ContraPest or future regulatory approval of our other product candidates, such products may not gain market acceptance. Market acceptance of any of our product candidates for which we receive approval depends on a number of factors, including the following:
● the potential and perceived advantages of product candidates over alternative or complementary products;
● the effectiveness of our sales and marketing efforts and those of our collaborators;
● the efficacy and safety of such product candidates as demonstrated in trials;
● the uses, indications or limitations for which the product candidate is approved;
● product labeling or product insert requirements of the EPA or other regulatory authorities;
● the timing of market introduction of our products as well as future competitive or alternative products;
● relative convenience and ease of use; and
● unfavorable publicity relating to the product.
If we cannot successfully commercialize our products, especially ContraPest, we will not become profitable.
If any of our approved product candidates fail to achieve sufficient market acceptance, we will not be able to generate significant revenues or become profitable. The commercial success of ContraPest will depend on a number of factors, including the following:
● the execution of our commercial strategy and the successful expansion of our commercial organization;
● our success in educating end users about the benefits, administration and use of ContraPest;
● the effectiveness of our own or our potential strategic partners’ marketing, sales and distribution strategy and operations;
● convincing PMPs to deploy ContraPest in quantity as an enhancement to, or replacement of, their current strategy of rodenticide use;
● continued refinement of our pricing strategy;
● our ability to manufacture quantities of ContraPest using commercially acceptable processes and at a scale sufficient to meet anticipated demand and enable us to reduce our cost of manufacturing; and
● a continued acceptable safety profile of ContraPest.
Many of these factors are beyond our control. If we are unable to successfully commercialize ContraPest, we may not be able to earn sufficient revenues or profits to continue our business.
We will require additional capital to fund our operations. Failure to obtain this necessary capital if needed may force us to delay, limit, or terminate our product development efforts or other operations.
Commercialization of ContraPest and developing further product candidates, including conducting experiments and field studies, obtaining and maintaining regulatory approval and commercializing any products approved for sale, is a time-consuming, expensive and uncertain process that takes years to complete. We expect our expenses to continue and to increase in connection with our ongoing activities, particularly as we advance our commercialization activities. We may expand our operations, and as a result of many factors, some of which may be currently unknown to us, our expenses may be higher than expected. Securing additional financing may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates, including ContraPest. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to take certain actions, including the following:
● significantly delay, scale back or discontinue the development or commercialization of our product candidates, including ContraPest;
● seek strategic partners for the manufacturing, sales and distribution of ContraPest or any of our other product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; and
● relinquish, or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.
The occurrence of any of the events described above would have a material adverse effect on our business, operating results and prospects and on our ability to develop our product candidates.
ContraPest is the first product we have marketed, and if we are unable to establish and maintain an effective sales force and marketing and distribution infrastructures, or enter into and rely upon acceptable third-party relationships, we may be unable to generate any revenue.
We continue to develop a functional infrastructure for the sales, marketing, and distribution of our products and the cost of establishing and maintaining such an infrastructure may exceed the cost-effectiveness of doing so. In order to market ContraPest and any other products that may be approved by the EPA and comparable foreign regulatory authorities, we must continue to build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services for which we would incur substantial costs. If we are unable to establish and maintain adequate sales, marketing, and distribution capabilities, whether independently or with third parties, we may not be able to generate sufficient product revenue to become profitable. Without an effective internal commercial organization or the support of a third party to perform sales and marketing functions, we may be unable to compete successfully.
Risks Regulations Have on Our Business
Regulatory approval processes of the EPA and comparable foreign regulatory authorities are lengthy, time-consuming and unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business may fail.
The EPA review process for a product with one or more new active ingredients typically takes approximately two years to complete and approval is never guaranteed. In addition, we continue to seek approvals to expand labels and use designations for ContraPest to broaden its market and usability. Our efforts could fail to receive marketing approval from the EPA or, with respect to ContraPest or our product candidates, from a comparable foreign regulatory authority for many reasons, including the following:
● disagreement over the design or implementation of our trials;
● failure to demonstrate a product candidate is safe or works according to our claims;
● failure to demonstrate a product candidate’s benefits outweigh its risks;
● disagreement over our interpretation of data;
● disagreement over whether to accept efficacy results from trials;
● the insufficiency of data collected from trials to obtain regulatory approval;
● irreparable or critical compliance issues relating to our manufacturing process; or
● changes in the approval policies or regulations that render our data insufficient for approval.
Any of these factors, some of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market any of our product candidates. Any such setback in our pursuit of regulatory approval could have a material adverse effect on our business and prospects.
Even following receipt of any regulatory approval for ContraPest and our other product candidates, we will continue to face extensive regulatory requirements and our products may face future development and regulatory difficulties.
Even following receipt of any regulatory approval for ContraPest or our product candidates, our products will be subject to ongoing requirements by the EPA and comparable state and foreign regulatory authorities governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information.
The safety profile of any product will continue to be closely monitored by the EPA and comparable foreign regulatory authorities after approval. In addition, we may be required, from time to time, to provide further testing results and certifications to the EPA and state regulatory agencies for ContraPest.
For instance, we have found it challenging to produce applicable stability test results for certain of our active ingredients, due in part to the small quantities used in the final product and continue to work with the EPA to develop appropriate biological or chemical measurements of product stability. Because our data continue to demonstrate the long-term efficacy of ContraPest, we believe that the testing is a matter we will resolve.
If the EPA or comparable foreign regulatory authorities become aware of new information after approval of ContraPest or any other product candidate, or we are unable to adequately complete required testing and certification requirements, a number of potentially significant negative consequences could result, including the following:
●
we may be forced to suspend marketing of such product;
●
regulatory authorities may withdraw their approvals of such product after certain procedural requirements have been met;
●
regulatory authorities may require additional warnings on the label that could diminish the usage or otherwise limit the commercial success of such product;
● the EPA or other regulatory bodies may issue safety alerts, press releases or other communications containing warnings about such product;
● the EPA may require the establishment or modification of restricted use, or a comparable foreign regulatory authority may require the establishment or modification of a similar strategy that may, for instance, restrict distribution of our product and impose burdensome implementation requirements on us;
● we may be required to change the way the product is administered or conduct additional trials;
● we could be sued and held liable for harm caused;
● we may be subject to litigation or product liability claims; and
● our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations and prospects.
Moreover, existing government regulations may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of ContraPest or any other product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and/or be subject to different marketing requirements or fines or enhanced government oversight and reporting obligations, which would adversely affect our business, prospects, and ability to achieve or sustain profitability.
Our future success is also dependent on regulatory approval and commercialization of our other product candidates.
We are actively working on a semi-solid product as well as an alternative dispenser. We also plan to continue work on a product to control fertility in mice. We cannot commercialize our product candidates in the United States without first obtaining regulatory approval for each product and each use pattern from the EPA or, if applicable, the Food and Drug Administration, or FDA, and from any related applicable state authorities. Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, the law requires that applicants demonstrate through laboratory and field studies and related data showing that the product candidate will perform its intended function without causing unreasonable adverse effects on the environment. The EPA or a comparable foreign regulatory authority may require more information, including additional data to support approval that may delay or prevent approval.
Even following receipt of any regulatory approval for ContraPest and our other product candidates, we will continue to be subject to regulation of our manufacturing processes and advertising practices.
As a manufacturer of pest control products, we are subject to continual government oversight and periodic inspections by the EPA and other regulatory authorities. If we or a regulatory agency discover problems with a facility where our products are manufactured, a regulatory agency may impose restrictions on the manufacturing facility, including requiring recall or withdrawal of the product from the market or suspension of manufacturing until certain procedural requirements have been met. The occurrence of any such event or penalty could limit our ability to market ContraPest or any other product candidates and generate revenue.
In addition, the EPA strictly regulates the advertising and promotion of pest control products, and these pest control products may only be marketed or promoted for their EPA approved uses, consistent with the product’s approved labeling. Advertising and promotion of any product candidate that obtains approval in the U.S. will be heavily scrutinized by the EPA, other applicable state regulatory agencies and the public. Violations, including promotion of our products for unapproved or off-label uses, are subject to enforcement actions, inquiries and investigations, and civil, criminal and/or administrative sanctions imposed by the EPA.
Failure to obtain regulatory approval in foreign jurisdictions would prevent ContraPest or any other product candidates from being marketed in those jurisdictions.
To market and sell our products globally, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. Obtaining foreign regulatory approvals and maintaining compliance with foreign regulatory requirements could result in significant delays, difficulties, and cost for us and could delay or prevent the introduction of our products in certain countries. Approval by the EPA does not ensure approval by regulatory authorities in other countries or jurisdictions, but EPA approval may influence decisions by the foreign regulatory authority. If we are unable to obtain approval of ContraPest or for any of our other product candidates by regulatory authorities in the world market, the commercial prospects of that product candidate may be significantly diminished and our business prospects could decline.
Risks Related to our Operations and Supply Chain
We depend on key personnel to operate our business. If we are unable to retain, attract and integrate qualified personnel, our ability to develop and successfully grow our business could be harmed.
We believe that our success is highly dependent on our ability to attract and retain highly skilled and experienced sales, research and development, and other personnel. If one or more of our executive officers or key employees terminates employment or becomes disabled or experiences long-term illness, we may not be able to replace their expertise, fully integrate new personnel or replicate the prior working relationships, and the loss of their services might significantly delay or prevent the achievement of our research and development and business objectives. Qualified individuals with the breadth of skills and experience in our industry that we require are in high demand, and we may incur significant costs to attract them. Many of the other companies that we compete against for qualified personnel have greater financial and other resources, different risk profiles and a more established history in the industry. They also may provide more diverse opportunities and better chances for career advancement. Our failure to attract and/or retain key personnel could impede the achievement of our research and development and commercialization objectives.
We have internal manufacturing capabilities to meet our current and near term forecasted demand for ContraPest, however, we must develop additional manufacturing capability or rely upon third parties to manufacture our products to meet future demand and our single location manufacturing operations could be disrupted.
Our existing internal manufacturing platform is adequate for meeting our current and near term forecasted demand for ContraPest. We may be required to spend significant time and resources to expand these manufacturing facilities to fully meet future demand. If we are unable to develop full-scale manufacturing capabilities, we may not be able to meet demand of our products without relying on third party manufacturers, which could adversely affect our operations or financial condition.
In addition, if our manufacturing operations fail or are disrupted for any reason, including because of labor, disasters, and/or equipment malfunctions, among others, our ability to timely produce ContraPest may be adversely affected, which would harm our sales and reputation. We only operate in a single location, which means we do not have back-up facilities to produce our products during a time when our manufacturing facility becomes unavailable.
We will need to expand our operations and grow the size of our organization, and we may experience difficulties in managing this growth.
As of December 31, 2021, we had 26 full-time employees. As our development and commercialization plans and strategies develop, we will need additional managerial, operational, sales, marketing, scientific and financial headcount and other resources. Our management, personnel, and systems currently in place may not be adequate to support this future growth. Future growth would impose significant added responsibilities on members of management, including the following:
● identifying, recruiting, maintaining, motivating and integrating additional employees with the expertise and experience we will require;
● managing our internal development efforts effectively while complying with our contractual obligations to licensors, licensees, contractors and other third parties;
● managing additional relationships with various strategic partners, suppliers and other third parties;
● managing our trials effectively, which we anticipate being conducted at numerous field study sites;
● improving our managerial, development, operational, marketing, production and finance reporting systems and procedures; and
● expanding our facilities.
Our failure to accomplish any of these tasks could prevent us from successfully growing our business.
Business or supply chain disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses, particularly because we have limited suppliers and a critical ingredient is sourced from China.
Our operations could be subject to a variety of potential business disruptions, including power shortages, telecommunications failures, water shortages, floods, fires, earthquakes, extreme weather conditions, medical epidemics and other natural or manmade disasters or other interruptions, for which we are predominantly self-insured. We do not carry insurance for all categories of risk that our business may encounter. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. Moreover, we rely on third parties to supply various ingredients and other items which are critical for producing our product candidates.
We currently use one supplier for each of our two active ingredients, triptolide and VCD. Our ability to produce our product candidates would be disrupted if the operations of these suppliers are affected by a man made or natural disaster or other business interruption. Because triptolide is sourced from China and other Asian countries, we have a greater risk of supply interruption, including as a result of tariff and trade disputes, or disruptive events like the outbreak of COVID-19. The ultimate impact on our operations from any business interruption impacting us or any of our significant suppliers is unknown, but our operations and financial condition would likely suffer adverse consequences. Further, any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our business, results of operations, financial condition and cash flows from future prospects.
We are dependent on triptolide, a key ingredient for ContraPest, which has limited sources and must be in a very refined condition.
If we are unable to develop additional sources of or alternatives to triptolide, a key ingredient for ContraPest, our long-term ability to produce ContraPest at a cost effective price could be in jeopardy. If market demand for triptolide causes the price to increase beyond our ability to market at a competitive price or causes the quality of the refined ingredient to be less than needed for our production, our ability to commercialize ContraPest could be limited or delayed, which would adversely affect our business, results of operations and financial condition.
A variety of risks associated with marketing our product candidates internationally could materially adversely affect our business.
We may seek regulatory approval of our product candidates outside of the U.S. and, in that case, we expect that we will be subject to additional risks related to operating in foreign countries if we obtain the necessary approvals, including the following:
● differing regulatory requirements in foreign countries;
● unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;
● economic weakness, including inflation or political instability in particular foreign economies and markets;
● compliance with tax, employment, immigration and labor laws for employees living or traveling internationally;
● foreign taxes, including withholding of payroll taxes;
● foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;
● difficulties staffing and managing foreign operations;
● workforce uncertainty in countries where labor unrest is more common than in the United States;
● potential liability under the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, or comparable foreign regulations;
● challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;
● production shortages resulting from any events affecting raw material supply or manufacturing capabilities internationally; and
● business interruptions resulting from geopolitical actions, including war and terrorism.
These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations.
Risks Relating to Protections of our Intellectual Property and Legal Actions
If we fail to obtain or protect intellectual property rights, our competitive position could be harmed.
We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws, and confidentiality, licensing, and other agreements with employees and third parties, all of which offer only limited protection. Our commercial success will depend in part on our ability to obtain and maintain intellectual property protection in the United States and other countries with respect to our proprietary technology and products. Where we deem appropriate, we seek to protect our proprietary position by filing patent applications in the United States and internationally related to our novel technologies and products that are important to our business. However, our financial resources constrain us from seeking protection in every instance, so we may rationalize and selectively pursue expensive patent protection. Patent positions can be highly uncertain, involve complex legal and factual questions and be the subject of litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patents, including those patent rights licensed to us by third parties, are highly uncertain.
The steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, both inside and outside the United States. The rights already granted under any of our currently issued patents and those that may be granted under future issued patents may not provide us with the proprietary protection or competitive advantages we are seeking. If we are unable to obtain and maintain protection for our technology and products, or if the scope of the protection obtained is not sufficient, our competitors could develop and commercialize technology and products similar or superior to ours, and our ability to successfully commercialize our technology and products may be adversely affected.
With respect to patent rights, we do not know whether any of our pending patent applications for any of our technologies or products will result in the issuance of patents that protect such technologies or products, or if our licensed patent will effectively prevent others from commercializing competitive technologies and products. Our pending patent applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications. Further, the examination process may require us to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue. Because the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, issued patents that we own or have licensed from third parties may be challenged in the courts or patent offices in the U.S. and internationally. Such challenges may result in the loss of patent protection, the narrowing of claims in such patents, or the invalidity or unenforceability of such patents, which could limit our ability to stop others from using or commercializing similar or identical technology and products or limit the duration of the patent protection for our technology and products. Protecting against the unauthorized use of our patented technology, trademarks and other intellectual property rights, is expensive, difficult, and in some cases, may not be possible. In some cases, it may be difficult or impossible to detect third party infringement or misappropriation of our intellectual property rights, even in relation to issued patent claims, and proving any such infringement may be even more difficult.
Intellectual property rights do not necessarily address all potential threats to any competitive advantage we may have.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:
● others may be able to make compounds that are the same as or similar to our future products but that are not covered by the claims of the patents that we own or have exclusively licensed;
● we might not have been the first to file patent applications covering certain of our inventions;
● others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing on our intellectual property rights;
● issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;
● our competitors might conduct research and development activities in the U.S. and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;
● we may not develop additional proprietary technologies that are patentable or otherwise protectable;
● employees may violate confidentiality and proprietary invention assignment agreements and we may not have the resources to enforce those agreements or otherwise enforce our patent rights; and
● the patents of others may have an adverse effect on our business.
Our technology may be found to infringe third party intellectual property rights.
Third parties may in the future assert claims or initiate litigation related to their patent, copyright, trademark and other intellectual property rights in technology that is important to us. The asserted claims and/or litigation could include claims against us, our licensors, or our suppliers alleging infringement of intellectual property rights with respect to our product candidates or components of those products. Regardless of the merit of the claims, they could be time consuming, resulting in costly litigation and diversion of technical and management personnel, or require us to develop non-infringing technology or enter into license agreements. We cannot assure you that licenses will be available on acceptable terms, if at all. Furthermore, because of the potential for significant damage awards, which are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims resulting in large settlements. If any infringement or other intellectual property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results and financial condition could be materially adversely affected.
If our product candidates, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and we may have to take certain actions, including the following:
● obtain licenses, which may not be available on commercially reasonable terms, if at all;
● redesign our product candidates or processes to avoid infringement;
● stop using the subject matter claimed to be held by others;
● pay damages; or
● defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources.
We may need to license intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.
A third party may hold intellectual property, including patent rights that are important or necessary to the development of our product candidates. It may be necessary for us to use the patented or proprietary technology of a third party to manufacture or otherwise commercialize our own technology or products, in which case we would be required to obtain a license from such third party. Licensing such intellectual property may not be available or may not be available on commercially reasonable terms, which could have a material adverse effect on our business and financial condition.
We may be subject to legal proceedings in the ordinary course of our business that could result in significant harm to our business, financial condition and operating results.
We could be subject to legal proceedings and claims from time to time in the ordinary course of our business, including actions arising from tort, contract or other claims. See “Legal Proceedings” elsewhere in this filing for more information. Litigation is expensive, time consuming, and could divert management’s attention away from running our business. The outcome of litigation or other proceedings is subject to significant uncertainty, and it is possible that an adverse resolution of one or more such proceedings could result in reputational harm and/or significant monetary damages, injunctive relief or settlement costs that could adversely affect our results of operations or financial condition as well as our ability to conduct our business as it is presently being conducted. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims and might not be available on terms acceptable to us. In addition, regardless of merit or outcome, claims brought against us that are uninsured or underinsured could result in unanticipated costs, which could harm our business, financial condition and operating results and reduce the trading price of our stock.
For example, we have become aware that we were involved in a transaction in which an investor of the Company may have resold approximately 175,000 shares of our common stock pursuant to a registration statement that was not declared effective by the Securities and Exchange Commission (SEC). As a result, it is possible that the SEC brings an action against us, or we may ultimately be responsible for an action for rescission by purchasers of the securities that were resold. If the SEC were to bring such an enforcement action against us, or if purchasers were to bring such an action for rescission, it may have a material adverse effect on our financial position.
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the use of ContraPest and any of our other products. If we cannot successfully defend ourselves against claims from our product users, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in the following:
● decreased demand for any product that we may develop;
● termination of field studies or other research and development efforts;
● injury to our reputation and significant negative media attention;
● significant costs to defend the related litigation;
● substantial monetary awards to plaintiffs;
● loss of revenue;
● diversion of management and scientific resources from our business operations; and
●
the inability to commercialize our product candidates.
We may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on products that had unanticipated side effects, including, without limitation, any potential adverse effects of our products on humans or other species. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.
Risks Related to our Reporting and Cybersecurity
We have not fully assessed our internal control over financial reporting. If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our Common Stock.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.
This Annual Report on Form 10-K for the year ended December 31, 2021 does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the SEC for smaller reporting companies. As a result, we have not yet fully assessed our internal control over financial reporting and are unable to assure that the measures we have taken to date, together with any measures we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting, or to avoid potential future material weaknesses.
If we are unable to develop and maintain an effective system of internal control over financial reporting, successfully remediate any existing or future material weaknesses in our internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports and Nasdaq listing requirements, investors may lose confidence in our financial reporting, and our stock price may decline as a result.
Privacy breaches and other cyber security risks related to our business could negatively affect our reputation, credibility and business.
We are making sales through our new e-Commerce tool, which depends on information technology systems and networks. We are also responsible for storing data relating to our customers and employees and rely on third party vendors for the storage, processing and transmission of personal and Company information. Consumers, lawmakers and consumer advocates alike are increasingly concerned over the security of personal information transmitted over the Internet, consumer identity theft and privacy. We do not control our third-party service providers and cannot guarantee that they have implemented reasonable security measures to protect our employees’ and customers’ identity and privacy, or that no electronic or physical computer break-ins or security breaches will occur in the future. Our systems and technology are vulnerable from time-to-time to damage, disruption or interruption from, among other things, physical damage, natural disasters, inadequate system capacity, system issues, security breaches, “hackers,” email blocking lists, computer viruses, power outages and other failures or disruptions outside of our control. A significant breach of customer, employee or Company data could damage our reputation and our relationship with customers, and could result in lost sales, sizable fines, significant breach-notification costs and lawsuits, as well as adversely affect our results of operations. We may also incur additional costs in the future related to the implementation of additional security measures to protect against new or enhanced data security and privacy threats, or to comply with state, federal and international laws that may be enacted to address those threats.
Risks Related to our Capital Stock, Funding and Trading in our Stock
We have incurred significant operating losses every quarter since our inception and anticipate that we will continue to incur significant operating losses in the future.
Investment in product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to become commercially viable or gain regulatory approval. To date, we have financed our operations primarily through the sale of equity securities and debt financings as well as research grants. We have not generated sufficient revenue from product sales to date to achieve profitability . We continue to incur significant sales, marketing, research, development, and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in every reporting period since our inception. For the years ended December 31, 2021 and 2020, we reported net losses of $8.3 million and $8.4 million, respectively. As of December 31, 2021, we had an accumulated deficit since inception of $112.5 million.
Since inception, we have dedicated a majority of our resources to the discovery and development and marketing of our proprietary product candidates. We expect to continue to incur significant expenses and operating losses for the foreseeable future. The size of our losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. In particular, we expect to incur substantial and increased expenses as we perform the following:
● attempt to achieve market acceptance for our products;
● continue to establish an infrastructure for the sales, marketing and distribution of ContraPest and any other product candidates for which we may receive regulatory approval;
● scale up manufacturing processes and quantities for the commercialization of ContraPest and any other product candidates for which we receive regulatory approval;
● continue the research and development of ContraPest and our other product candidates, including engaging in any necessary field studies;
● seek regulatory approvals for ContraPest in various jurisdictions and for our other product candidates;
● expand our research and development activities and advance the discovery 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 clinical development and commercialization efforts and operations as a public company.
We may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors that may adversely affect our financial condition. Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our financial condition. If ContraPest or any other product candidate does not gain or maintain sufficient regulatory approval, or if approved, fails to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the value of our company could cause you to lose all or part of your investment.
If we are unable to continue as a going concern, our securities will have little or no value.
We have incurred operating losses since our inception, and we expect to continue to incur significant expenses and operating losses for the foreseeable future. Our financial statements as of December 31, 2021 and 2020 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, 2021 and 2020 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 or greater than anticipated expenses, 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 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. If we cannot continue as a going concern, our stockholders would likely lose most or all of their investment in us.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Until such time, if ever, as we can generate sufficient product revenues, we expect to finance our cash needs primarily through the sale of equity securities and debt financings, and possibly through credit facilities and government and foundation grants. We may also seek to raise capital through third party collaborations, strategic alliances and similar arrangements. We currently do not have any committed external source of funds.
Raising funds in the future may present additional challenges and future financing may not be available in sufficient amounts or on terms acceptable to us, if at all. The terms of any financing arrangements we enter into may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities by us, or the possibility of such issuance, may cause the market price of our shares to decline. For example, during 2020, we completed equity financings that resulted in the issuance of shares of Common Stock and warrants to purchase Common Stock, resulting in substantial dilution to the existing stockholders. Similarly, in the first quarter of 2021, we again issued shares of Common Stock and warrants to purchase Common Stock, resulting in additional substantial dilution to the existing stockholders. We generally have raised capital as the opportunity arises.
Certain of our agreements with investors and our outstanding warrants contain provisions that impose limitations on our ability to participate in certain variable rate transactions, including at-the-market transactions, which may limit our opportunities to obtain financing in sufficient amounts or on acceptable terms. The sale of additional equity or convertible debt securities would dilute all of our stockholders, and if such sales occur at a deemed issuance price that is lower than the current exercise price of our outstanding warrants sold to investors in November 2017, the exercise price for those warrants would adjust downward to the deemed issuance price pursuant to price adjustment protection contained within those warrants. Our various warrants contain other terms that may affect our fundraising.
The incurrence of indebtedness through credit facilities would result in increased fixed payment obligations and, potentially, the imposition of restrictive covenants. Those covenants may include limitations on our ability to incur additional debt, making capital expenditures or declaring dividends, and may impose limitations on our ability to acquire, sell, or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.
If we raise additional funds through collaborations, strategic alliances, or licensing arrangements or other marketing or distribution arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected.
If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts, or grant others rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Our share price may be volatile, which could subject us to securities class action litigation and your investment in our securities could decline in value.
Our stock could be subject to wide fluctuation in response to many risk factors listed in this section, and others beyond our control, including the following:
● market acceptance and commercialization of our products;
● our being able to timely demonstrate achievement of milestones, including those related to revenue generation, cost control, cost effective source supply, and regulatory approvals;
● our ability to remain listed on Nasdaq;
● results and timing of our submissions with the regulatory authorities;
● failure or discontinuation of any of our development programs;
● regulatory developments or enforcements in the United States and non-U.S. countries with respect to our products or our competitors’ products;
● failure to achieve pricing acceptable to the market;
● regulatory actions with respect to our products or our competitors’ products;
● actual or anticipated fluctuations in our financial condition and operating results or our continuing to sustain operating losses;
● competition from existing products or new products that may emerge;
● announcements by us or our competitors of significant acquisitions, strategic arrangements, joint ventures, collaborations or capital commitments;
● issuance of new or updated research or reports by securities analysts;
● announcement or expectation of additional financing efforts, particularly if our cash available for operations significantly decreases or if the financing efforts result in a price adjustment to certain outstanding warrants;
● fluctuations in the valuation of companies perceived by investors to be comparable to us;
● share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
● disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
● entry by us into any material litigation or other proceedings;
● sales of our Common Stock by us, our insiders, or our other stockholders;
● exercise of outstanding warrants;
● market conditions for equity securities; and
● general economic and market conditions unrelated to our performance.
Furthermore, the capital markets can experience extreme price and volume fluctuations that may affect the market prices of equity securities of many companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions such as recessions, interest rate changes, or international currency fluctuations, may negatively impact the market price of shares of our Common Stock. In addition, such fluctuations could subject us to securities class action litigation, which could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. You may not realize any return on your investment in us and may lose some or all of your investment.
Future sales, or the possibility of future sales, of a substantial number of our common shares could adversely affect the price of the shares and dilute stockholders.
Future sales of a substantial number of shares of our Common Stock, or the perception that such sales will occur, could cause a decline in the market price of our Common Stock. This is particularly true if we sell our stock at a discount. As of March 29, 2022, we had 121,714 shares of our Common Stock subject to outstanding warrants that contain anti-dilution adjustments that provide for an adjustment to the exercise price for certain dilutive issuances of securities. If we offer or issue additional securities at a deemed price lower than the current exercise price of these outstanding warrants, these warrants will adjust pursuant to the price adjustment protection contained within these warrants. For example, our January 2020 registered direct offering resulted in an additional downward adjustment of the exercise price of these warrants from $19.00 per share to $7.126 per share and our inducement offering in October 2020 resulted in an additional downward adjustment of the exercise price of these warrants from $7.126 per share to $1.3659 per share. Any future issuance of Common Stock or securities convertible or exercisable into our Common Stock could cause a further downward adjustment of the exercise price of these warrants to the deemed issuance price if the issuance price is less than the exercise price of the warrants at the time of the new issuance.
Also, in the future, we may issue additional shares of our Common Stock or other equity or debt securities convertible into Common Stock in connection with a financing, acquisition, litigation settlement, employee arrangements, or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and could cause our common share price to decline.
An active market in the shares may not continue to develop in which investors can resell our Common Stock.
We cannot predict the extent to which an active market for our Common Stock will continue to develop or be sustained, or how the development of such a market might affect the market price for our Common Stock. Market conditions in effect at the time you acquire our stock may not be indicative of the price at which our Common Stock will trade in the future. Investors may not be able to sell their Common Stock at or above the price they acquired it.
If securities or industry analysts, or other sources of information, do not publish research, or publish inaccurate or unfavorable research or other information about our business, our stock price and trading volume could decline.
The trading market for our Common Stock may depend on the research, reports and other information that securities or industry analysts, or other third-party sources of information, publish about us or our business. We do not have any control over these analysts or other third-party sources of information. From time to time inaccurate or unfavorable research or other information about our business, financial condition, results of operations and stock ownership may be published. We cannot assure that analysts will cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our share price could decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline. If incorrect or misleading information is disseminated publicly by third parties about us, our stock price could decline.
We may not be able to comply with all applicable listing requirements or standards of The Nasdaq Capital Market and Nasdaq could delist our Common Stock.
Our Common Stock is listed on The Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards. On March 2, 2022, we received a letter from the listing qualifications staff (the “Staff”) of Nasdaq providing notification that the bid price for our common stock had closed below $1.00 per share for the previous 30 consecutive business days and our common stock no longer meets the minimum bid price requirement for continued listing under Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have an initial period of 180 calendar days, or until August 29, 2022, to regain compliance. To regain compliance, the closing bid price of our common stock must be $1.00 per share or more for a minimum of 10 consecutive business days at any time before August 29, 2022.
In the event that we are unable to regain compliance with Rule 5550(a)(2) by August 29, 2022, we may be eligible for an additional 180 calendar day compliance period. To qualify, we would need to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price requirement, and would need to provide written notice of our intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary. Further, the liquidity of the shares of our Common Stock may be affected adversely by a reverse stock split given the reduced number of shares that are outstanding following a reverse stock split. In addition, a reverse stock split could increase the number of stockholders who own odd lots (less than 100 shares) of our Common Stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.
In the event that we remain non-compliant with Rule 5550(a)(2), our Common Stock could be delisted from The Nasdaq Capital Market, which could have a material adverse effect on our financial condition and which could cause the value of our Common Stock to decline. If our Common Stock is not eligible for listing or quotation on another market or exchange, trading of our Common Stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our Common Stock, and there would likely be a reduction in our coverage by security analysts and the news media, which could cause the price of our Common Stock to decline further. In addition, it may be difficult for us to raise additional capital if we are not listed on a national securities exchange.
The reverse stock split may decrease the liquidity of the shares of our Common Stock.
On February 20, 2020, we implemented a 1-for-20 reverse stock split of our common stock to regain compliance with the minimum bid price requirement of Nasdaq. The liquidity of the shares of our Common Stock may be affected adversely by the reverse stock split given the reduced number of shares that are outstanding following the reverse stock split. In addition, the reverse stock split increased the number of stockholders who own odd lots (less than 100 shares) of our Common Stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.
Our corporate documents, Delaware law and certain warrants contain provisions that could discourage, delay or prevent a change in control of our company.
Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable. For example, our certificate of incorporation currently provides for a staggered board of directors, whereby directors serve for three-year terms, with approximately one-third of the directors coming up for reelection each year. Having a staggered board will make it more difficult for a third party to obtain control of our board of directors through a proxy contest, which may be a necessary step in an acquisition of us that is not favored by our board of directors. Additionally, most of our warrants provide a Black Scholes value-based payment to the warrant holders in connection with certain transactions that may discourage, delay or prevent a merger or acquisition.
We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval, which could discourage a third party from making a takeover offer and could delay or prevent a change of control. For purposes of Section 203, “interested stockholder” means, generally, someone owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in Section 203.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
Not applicable.

---

ITEM 2. PROPERTIES
Item 2. Properties.
As of December 31, 2021, our corporate headquarters is located in Phoenix, Arizona, where we lease and occupy approximately 5,529 square feet of office space pursuant to a lease that commenced on December 1, 2019 and expires on November 30, 2024. Also, as of December 31, 2021, our manufacturing facility occupied a separate facility in Phoenix, Arizona, where we lease and occupy approximately 5,105 square feet of space. The lease for our manufacturing facility commenced on August 1, 2020 and expires on November 30, 2024. We believe that our existing facilities are adequate and meet our current needs for business, manufacturing and research.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
Information regarding our legal proceedings is discussed in Note 13 to our financial statements, which is incorporated herein by reference.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the Nasdaq Capital Market under the symbol “SNES.” Our common stock was initially listed for trading on the Nasdaq Capital Market on December 8, 2016.
Holders
As of March 29, 2022, there were approximately 696 holders of record of our common stock. Because many shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to determine the total number of beneficial owners represented by these holders of record.
Dividends
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Company
We withhold shares of common stock in connection with the vesting of restricted stock units to satisfy required tax withholding obligations when they occur. There were no purchases of our equity securities during the 12 months ended December 31, 2021.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
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:
● employee related expenses, including salaries, related benefits, travel and stock-based compensation expense for employees engaged in research and development functions, including that portion of manufacturing not included in cost of goods sold;
● expenses incurred in connection with the development of our product candidates including related regulatory and production expenses; and
● facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and supplies.
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.
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.
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
Sales
Total revenue
Cost of sales
Gross profit
Operating expenses:
Research and development 1,954 1,494
Selling, general and administrative 7,224 6,440
Total operating expenses 9,178 7,934
Net operating loss (8,934 ) (7,933 )
Other income (expense):
Interest income
Interest expense (11 ) (28 )
Payroll Protection Program loan forgiveness -
Other income -
Total other income (4 )
Net loss and comprehensive loss (8,268 ) (7,937 )
Deemed dividend-warrant price protection-revaluation adjustment -
Net loss attributable to common shareholders $ (8,268 ) $ (8,373 )
Weighted average common shares outstanding - basic and fully diluted 11,191,814 3,006,475
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.
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
(Decrease)
(in thousands)
Direct research and development expenses:
Personnel related (including stock-based compensation) $ 847 $ 604 $ 243
Professional fees
Facility related (68 )
Other
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.
Selling, General and Administrative Expenses
Years Ended
December 31, Increase
(Decrease)
(in thousands)
Direct selling, general and administrative expenses:
Personnel related (including stock-based compensation) $ 3,940 $ 3,516 $ 424
Professional fees 1,179 1,318 (139 )
Facility-related (17 )
Other 1,949 1,433
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.
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:
● work to maximize market acceptance for, and generate sales of, our products, including by conducting field demonstrations at potential lead customers;
● explore strategic partnerships to enable us to penetrate additional target markets and geographical locations;
● manage the infrastructure for sales, marketing and distribution of ContraPest and any other product candidates for which we may receive regulatory approval;
● seek additional regulatory approvals for ContraPest, including to more fully expand the market and use for ContraPest and, if we believe there is commercial viability, for our other product candidates;
● further develop our manufacturing processes to contain costs while being able to scale to meet future demand of 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, as our operating budget permits, advance the research and development programs for other product candidates;
● maintain and protect our intellectual property portfolio; and
● add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts and operations as a public company.
We 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 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.
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:
● 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.
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
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
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
SENESTECH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID 2738)
Balance Sheets as of December 31, 2021 and 2020
Statements of Operations and Comprehensive Loss for the years ended December 31, 2021 and 2020
Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2021 and 2020
Statements of Cash Flows for the years ended December 31, 2021 and 2020
Notes to Financial Statements
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.
Houston, TX
March 29, 2022
SENESTECH, INC.
BALANCE SHEETS
(In thousands, except shares and per share data)
December 31, December 31,
ASSETS
Current assets:
Cash $ 9,326 $ 3,643
Accounts receivable trade, net
Prepaid expenses
Inventory 1,001
Deposits
Total current assets 10,656 4,819
Right to use asset-operating leases
Property and equipment, net
Total assets $ 11,501 $ 6,022
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt $ 32 $ 98
Accounts payable
Accrued expenses
Total current liabilities
Long-term debt, net -
Operating lease liability
Total liabilities 1,466 2,138
Commitments and contingencies (See note 13) -
-
Stockholders’ equity:
Common stock, $0.001 par value, 100,000,000 shares authorized, 12,207,283 and 5,099,512 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively
Additional paid-in capital 122,531 108,119
Accumulated deficit (112,508 ) (104,240 )
Total stockholders’ equity 10,035 3,884
Total liabilities and stockholders’ equity $ 11,501 $ 6,022
The accompanying notes are an integral part of these financial statements.
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
Sales
Total revenue
Cost of sales
Gross profit
Operating expenses:
Research and development 1,954 1,494
Selling, general and administrative 7,224 6,440
Total operating expenses 9,178 7,934
Net operating loss (8,934 ) (7,933 )
Other income (expense):
Interest income
Interest expense (11 ) (28 )
Payroll Protection Program loan forgiveness -
Other income -
Total other income (4 )
Net loss and comprehensive loss (8,268 ) (7,937 )
Deemed dividend-warrant price protection-revaluation adjustment -
Net loss attributable to common shareholders $ (8,268 ) $ (8,373 )
Weighted average common shares outstanding - basic and fully diluted 11,191,814 3,006,475
Net loss per common share - basic and fully diluted $ (0.74 ) $ (2.78 )
The accompanying notes are an integral part of these financial statements.
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)
Balance, December 31, 2019 1,414,671 $ 1 $ 98,433 $ (95,867 ) $ 2,567
Stock based compensation - -
-
Issuance of common stock, sold for cash, net 1,928,180 5,739 -
5,741
Issuance of common stock upon exercise of warrants, net 1,700,680 2,628 -
2,630
Issuance of common stock upon cashless exercise of warrants 51,414 -
-
Issuance costs of common stock for services 4,543 -
-
-
-
Issuance of common stock for fractional shares-20-1 reverse split -
-
-
-
Warrant antidilution price protection adjustment - -
-
Net loss for the year ended December 31, 2020 - -
-
(8,373 ) (8,373 )
Balance, December 31, 2020 5,099,512 $ 5 $ 108,119 $ (104,240 ) $ 3,884
Stock based compensation - -
-
Issuance costs of common stock for service 20,951 -
-
-
Issuance of common stock, sold for cash, net 6,163,854 12,415 -
12,421
Issuance of common stock upon exercise of warrants 922,966 1,249 -
1,250
Shares forfeited for payment of employee withholding taxes related to share based awards - -
(17 ) -
(17 )
Net loss for the year ended December 31, 2021 - -
-
(8,268 ) (8,268 )
Balance, December 31, 2021 12,207,283 $ 12 $ 122,531 $ (112,508 ) $ 10,035
The accompanying notes are an integral part of these financial statements.
SENESTECH, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
For the Years
Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (8,268 ) $ (7,937 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Stock-based compensation
Paycheck Protection Program loan forgiveness (646 ) -
Gain on sale of equipment - (21 )
(Increase) decrease in current assets:
Accounts receivable - trade (52 )
Accounts receivable - other -
Other assets
Prepaid expenses (52 )
Inventory (56 )
Deposits
(8 )
Increase (decrease) in current liabilities:
Accounts payable (71 )
Accrued expenses (663 )
Net cash used in operating activities (7,779 ) (7,108 )
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received on sale of property and equipment
Purchase of property and equipment (100 ) (114 )
Net cash provided by (used in) investing activities (99 ) (67 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of common stock, net 12,421 5,741
Proceeds from the issuance of notes payable -
Repayments of notes payable (39 ) (73 )
Repayments of finance lease obligations (54 ) (62 )
Proceeds from the exercise of warrants 1,250 2,630
Payment of employee withholding taxes related to share based awards (17 ) -
Net cash provided by financing activities 13,561 8,882
NET CHANGE IN CASH 5,683 1,707
CASH AT BEGINNING OF PERIOD 3,643 1,936
CASH AT END OF PERIOD $ 9,326 $ 3,643
SUPPLEMENTAL INFORMATION:
Interest paid $ 11 $ 28
Income taxes paid $ -
$ -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Forgiveness of accrual in warrant exercise $ -
$ 238
Deemed dividend $ -
$ 436
The accompanying notes are an integral part of these financial statements.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
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 commercializing 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 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 (the “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, we must obtain registration from the various state regulatory agencies prior to selling in each state. To date, we have received registration for ContraPest in all 50 states and the District of Columbia, 48 of which have approved the removal of the Restricted Use designation.
In addition to product registration, the EPA also approves all labeling (the container label, instructional inserts, and the Safety Data Sheet (SDS)) of ContraPest. Generally, states accept the EPA approved label as is. ContraPest’s labeling was submitted to states at initial registration and is resubmitted during state scheduled reregistration or for any significant labeling change requiring EPA approval.
We expect to continue to pursue regulatory approvals and amendments to the existing U.S. registration for ContraPest to broaden the marketability and use of 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 additional testing and certifications even though we have 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.
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.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. Organization and Description of Business - (continued)
Going Concern
Although our audited financial statements for the years ended December 31, 2021 and December 31, 2020 were prepared under the assumption that we would continue our operations as a going concern, the report of our independent registered public accounting firm that accompanies our financial statements for the years ended December 31, 2021 and December 31, 2020 contains a going concern qualification in which such firm expressed substantial doubt about our ability to continue as a going concern, based on the financial statements at that time. Specifically, as noted above, we have incurred operating losses since our inception, and we expect to continue to incur significant expenses and operating losses for the foreseeable future. These prior losses and expected future losses have had, and will continue to have, an adverse effect on our financial condition. 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. 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 Note 9 Common Stock Warrants and Common Stock Warrant Liability 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 December 31, 2021, we had received net proceeds of $84.3 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 $1.5 million in net 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 on April 15, 2020, we received cash proceeds of $645,700 from the Paycheck Protection Program (“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. 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 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.
Major Customer
We did not have any customers that accounted for 10% or more of sales for the year ended December 31, 2021. We did have one major customer that accounted for approximately $44, or 15% of sales, for the year ended December 31, 2020. We expect to maintain the relationships with these customers.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
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 our 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 year presentation. These reclassifications had no impact on net earnings, financial position or cash flows.
Cash and Cash Equivalents
We consider money market fund investments to be cash equivalents. We had cash equivalents in the form of money market fund investment of $8,800 and $1,500 at December 31, 2021 and December 31, 2020, respectively, included in cash as reported.
Accounts Receivable-Trade
Accounts receivable-trade consist primarily of receivables from customers. We provide 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. We did not have any allowance for doubtful trade receivables at December 31, 2021 or at December 31, 2020.
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 the COVID-19 pandemic or long lead times on certain ingredients.
Reserves for obsolete inventory consist of reserves primarily related to obsolete product containers and delivery systems.
Components of inventory are:
December 31,
Raw materials $ 937 $ 950
Work in progress
Finished goods
Total inventory 1,030 1,068
Less:
Reserve for obsolete (29 ) (123 )
Total net inventory $ 1,001 $ 945
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies - (continued)
Prepaid Expenses
Prepaid expenses consist primarily of payments made for director and officer insurance, marketing services, rent, legal and inventory purchase deposits and seminar/trade show 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 are amortized over the shorter of the lease term or estimated useful life of the asset. The Company incurs maintenance costs on its major equipment. Repair and maintenance costs 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. We have not recorded an impairment of long-lived assets since our inception.
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.
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.
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, as well as manufacturing costs associated with process improvement and other research. Research and development expenses include an allocation of facilities related costs, including depreciation of equipment.
Stock-based Compensation
Stock-based awards, consisting of stock options and restricted stock units expected to be settled in shares of our 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. We expense the grant date fair value of our stock-based awards on a straight-line basis over their respective vesting periods.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
2. Summary of Significant Accounting Policies - (continued)
The stock-based compensation expense recorded for the 12 months ended December 31, 2021 and 2020, is as follows:
Years Ended
December 31,
Research and development $ 3 $ 9
General and administrative
Total stock-based compensation expense $ 765 $ 645
See Note 11 - Stock-Based Compensation for additional discussion on stock-based compensation.
Income Taxes
We account 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.
We record net deferred tax assets to the extent we believe 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, we consider 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. We currently maintain a full valuation allowance against its deferred tax assets.
We apply 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 our evaluation, we have concluded there are no significant uncertain tax positions requiring recognition in our financial statements.
We recognize interest and/or penalties related to uncertain tax positions in income tax expense. There are no uncertain tax positions as of December 31, 2021 or December 31, 2020 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, restricted stock units 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 years ended December 31, 2021 and 2020. Therefore, basic and diluted loss per share attributable to common stockholders was the same for all periods presented.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
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):
December 31,
Common stock purchase warrants 4,531,447 2,582,697
Restricted stock unit 32,072
Common stock options 1,087,820 496,471
Total 5,619,934 3,111,240
Accounting Standards Issued but Not Yet Adopted
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 condensed consolidated financial statements.
3. Fair Value Measurements
We issued common stock warrants to purchase shares of common stock in June of 2015 (see Note 9 - Common Stock Warrants and Common Stock Warrant Liability) that expired in June of 2020. These warrants contained a cash settlement provision that resulted in a common stock warrant liability that was revalued at the end of each reporting period.
We valued 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.
Our common stock warrant liabilities were classified as Level 3 because there was limited activity or less transparency around the inputs to valuation.
Financial Instruments Not Carried at Fair Value
The carrying amounts of our financial instruments, including accounts payable and accrued liabilities, approximate fair value due to their short maturities. The estimated fair value of the long-term debt, not recorded at fair value, are recorded at cost or amortized cost, which was deemed to estimate fair value.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
4. Credit Risk
We are potentially subject to concentrations of credit risk in our accounts receivable. Credit risk with respect to receivables is limited due to the number of companies comprising our customer base. However, we did identify a potentially uncollectable account at December 31, 2019 and maintained a reserve for this receivable balance of $123. At December 31, 2020, the account was deemed uncollectable and offset against the reserve. At December 31, 2021, we did have two customers that accounted for 33% of total receivables. We deemed these accounts fully collectable. We did not have any potentially uncollectable accounts at December 31, 2021 and therefore, did not record a reserve for uncollectable accounts at December 31, 2021. We do not require collateral or other securities to support its accounts receivable.
5. Prepaid expenses
Prepaid expenses consisted of the following:
December 31,
Director, officer and other insurance $ 109 $ 18
Marketing programs and conferences
Patents -
Legal retainer -
Professional service retainer -
Rent -
Engineering, software licenses and other
Total prepaid expenses $ 230 $ 178
6. Property and Equipment
Property and equipment, net consisted of the following:
December 31,
Useful Life
Research and development equipment 5 years $ 1,425 $ 1,397
Office and computer equipment 3 years
Autos 5 years
Furniture and fixtures 7 years
Leasehold improvements *
Construction in progress
2,439 2,623
Less accumulated depreciation and amortization
2,105 2,085
Total property and equipment
$ 334 $ 538
* Shorter of lease term or estimated useful life
(1) For the years ended December 31, 2021 and December 31, 2020, we received net proceeds of $1 and $47 in the sale of research and development equipment and office and computer equipment, respectively, resulting in gains on the sale of these assets of $0 and $21 for the years ended December 31, 2021 and December 31, 2020, respectively.
Depreciation and amortization expense was approximately $303 and $288 for the years ended December 31, 2021 and 2020, respectively.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
7. Accrued Expenses
Accrued expenses consisted of the following:
December 31,
Compensation, severance and related benefits
$
$
Legal services
-
Product warranty
-
Personal property and franchise tax
Other
Total accrued expenses
$
$
8. Borrowings
A summary of our borrowings, including finance lease obligations, was as follows:
At December 31,
Short-term debt:
Current portion of long-term debt $ 32 $ 98
Total short-term debt $ 32 $ 98
Long-term debt:
Finance lease obligations $ -
$ 79
Other unsecured promissory notes -
Total -
Less: current portion of long-term debt
Total long-term debt $ -
$ 673
Finance Lease Obligations
Finance lease obligations at December 31, 2021 was for manufacturing equipment leased through ENGS Commercial Finance Co. This finance lease expires on April 18, 2022 and carries an interest rate of 11.4%.
Other Promissory Notes
Also included in the table above is a note payable to Fidelity Capital for the financing of a computing fixed asset. This note expires on July 1, 2022 and carries interest rate of 13.3%.
On June 18, 2021, we received notification from BMO Harris Bank National Association as the lender in a promissory note pursuant to the PPP under the CARES Act, that a loan to us under this program in the amount of $645,700 was forgiven in full under the terms of the program. The forgiveness of this note and related interest was recorded as other income on the Statements of Operations and Comprehensive Loss for the year ended December 31, 2021.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
9. Common Stock Warrants and Common Stock Warrant Liability
The table below summarizes common stock warrant activity for the years ended December 31, 2021and December 31, 2020, by warrant type.l
Issue Date Warrant Type Term
Date Exercise
Price Balance
December 31,
Issued Exercised Expired Balance
December 31,
Issued Exercised Expired Balance
December 31,
2016 and prior Various Various-2020/2021 Various 17,059 -
(9,375 ) (7,684 ) -
-
-
-
-
November 21, 2017 Common Stock Offering Warrants November 21, 2022 $ 1.3659
(1) 143,501 -
-
-
143,501 -
(21,787 ) -
121,714
November 21, 2017 Dealer Manager Warrants November 21, 2022 $ 30.00
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
202,943 -
-
-
202,943 -
(499 ) -
202,444
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 -
-
-
177,500
January 28, 2020 Dealer Manager Warrants July 28, 2025 $ 10.00
-
13,315 -
-
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 -
-
-
13,228
April 21, 2020 Dealer Manager Warrants April 21, 2025 $ 3.97
-
118,073 -
-
118,073 -
-
-
118,073
April 24, 2020 Registered Direct Offering April 24, 2025 $ 3.05
-
1,574,308 (1,524,308 ) -
50,000 -
-
-
50,000
October 26, 2020 Private Warrant Inducement April 27, 2026 $ 1.73
-
1,700,680
1,700,680 -
(700,680 ) -
1,000,000
October 26, 2020 Dealer Manager Warrants April 27, 2026 $ 2.16
-
85,034
85,034 -
-
-
85,034
February 2, 2021 Private Placement Agreement August 2, 2026 $ 2.216
-
-
-
-
-
2,194,427 - - 2,194,427
February 2, 2021 Dealer Manager Warrants August 2, 2026 $ 2.848
-
-
-
-
-
329,164 - - 329,164
March 23, 2021 Dealer Manager Warrants March 23, 2026 $ 2.50
-
-
-
-
-
148,125 - - 148,125
489,176
2,582,697
4,531,447
(1) The initial exercise price of these warrants was $30.00 per share. Pursuant to antidilution price adjustment protection contained within these warrants, the initial exercise price of these warrants was 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. These warrants were further adjusted downward from $19.00 to $7.13 and to $2.1122 on January 28, 2020 and March 4, 2020, respectively, in connection with separate Registered Direct Offerings. These warrants were further adjusted downward from $2.1122 to $1.3659 on October 26, 2020 in connection with a Registered Direct Offering. These warrants are subject to further adjustment pursuant to antidilution price adjustment protection.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
9. Common Stock Warrants and Common Stock Warrant Liability - (continued)
As of December 31, 2021, we had 4,531,447 shares of common stock issuable upon exercise of outstanding common stock warrants, at a weighted-average exercise price of $4.00 per share.
On November 21, 2017, we issued a total of 232,875 detachable common stock warrants issued with the second public offering of 293,000 shares of our common stock at $20.00 per share. The common stock warrant is exercisable until five years from the date of grant. Our common stock and detachable warrants exist independently as separate securities. As such, we 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, we 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, we 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%.
The exercise price of the warrants was adjusted downward to $1.3659 on October 26, 2020 in connection with an inducement offering of common stock. Per guidance of ASC 260, we recorded a deemed dividend of $22 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 October 26, 2020, common stock price of $1.47; comparable company volatility of 96.5%; remaining term 2.08 years; dividend yield of 0% and risk-free interest rate of 0.18%.
On June 20, 2018, we 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 we 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, we recorded stock compensation expense of $1,700 representing the fair value of the of 56,696 inducement warrants issued. We 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 our common stock, we issued 267,853 warrants to purchase shares of our common stock at an exercise price of $23.00 per share. We 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, we 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. We 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%.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
9. Common Stock Warrants and Common Stock Warrant Liability - (continued)
Common Stock Warrant Issued to Underwriter of Common Stock Offering
In July 2019, we 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. We 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%.
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 our common stock, we 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 Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on January 28, 2020 and our Current Report on Form 8-K filed with the SEC on March 6, 2020.
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. We 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. We 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 we declare or make any dividend or other distribution of our assets to holders of our 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 us 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 we grant, issue, or sell any securities pro rata to all of the record holders of our 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.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
9. Common Stock Warrants and Common Stock Warrant Liability - (continued)
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.
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, we 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 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.
We 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 our common stock in January and March 2020, we 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.
We 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%.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
9. Common Stock Warrants and Common Stock Warrant Liability - (continued)
We 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, we 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.
We 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%.
Common Stock Warrants Issued in October 2020 Private Warrant Inducement
In October 2020, in connection with an inducement agreement with an existing accredited investor to exercise 1,700,680 outstanding warrants to purchase an equal number of shares of our common stock, we issued new unregistered warrants to purchase up to an aggregate of 1,700,680 shares of common stock at an exercise price of $1.725 per share. The warrants issued were immediately exercisable with an exercise period of five and one-half years from the date of issuance. The Original Warrants were issued on March 6, 2020 and on April 24, 2020. Pursuant to the Letter Agreement, the per share exercise price of the Original Warrants were reduced from $2.88 and $3.05, respectively, to $1.725. We estimated the fair value of the common stock warrants, exercisable at $1.725 per share, to be $1,806 using a Black Scholes model based on the following significant inputs: common stock price of $1.47; comparable company volatility of 96.5%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.18%.
Common Stock Warrants Issued to Placement Agent in October 2020 Inducement Offering
In connection with the private warrant inducement in October 2020 of 1,700,680 shares of our common warrants, we issued to H.C. Wainwright & Co., LLC, as placement agent, warrants to purchase 85,034 shares of common stock. These warrants have substantially similar terms as the 2020 Warrants described above, except that the placement agent warrant issued in October 2020 has an exercise price of $2.156 per share.
We estimated the fair value of these common stock warrants, with an exercise price of $2.156 per share, to be $86 using a Black Scholes model based on the following significant inputs: common stock price of $1.47; comparable company volatility of 96.5%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.18%.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
9. Common Stock Warrants and Common Stock Warrant Liability - (continued)
Common Stock Warrants Issued in February 2021 Private Placement Agreement
In February 2021, in connection with a private placement agreement with certain institutional and accredited investors, we issued common stock warrants to purchase up to an aggregate of 2,194,427 shares of common stock at an exercise price of $2.216 per share. The warrants were exercisable immediately and have an exercise period of five and one-half years from the date of issuance. The warrant holder may not exercise any portion of such holder’s warrants to the extent that the holder, together with its affiliates, would beneficially own more than 4.99% (or, at the election of the holder, 9.99%) of our outstanding shares of common stock immediately after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the beneficial ownership limitation to up to 9.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise. We estimated the fair value of the common stock warrants, exercisable at $2.216 per share, to be $3,052 using a Black Scholes model based on the following significant inputs: common stock price of $1.93; comparable company volatility of 95.6%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.18%.
Common Stock Warrants Issued to Placement Agent in February 2021 Private Placement Agreement
In connection with the private placement in February 2021, we issued to H.C. Wainwright & Co., LLC, as placement agent, warrants to purchase up to 329,164 shares of common stock with an exercise price of $2.8481 per share. The warrants are exercisable immediately and have an exercise period of five and one-half years from the date of issuance. We estimated the fair value of these common stock warrants, with an exercise price of $2.8481 per share, to be $435 using a Black Scholes model based on the following significant inputs: common stock price of $1.93; comparable company volatility of 95.6%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.18%.
Common Stock Warrants Issued to Placement Agent in March 2021 Registered Direct Offering
On March 23, 2021, we consummated a registered direct offering with certain institutional investors and issued an aggregate of 1,975,000 shares of our common stock, par value $0.001 per share at a purchase price of $2.00 per share for gross proceeds to us of approximately $3.95 million, before deducting fees payable to the placement agent and other estimated offering expenses payable by us. The 1,975,000 shares of common stock sold in the offering were offered and sold pursuant to a prospectus, dated August 24, 2018, and a prospectus supplement, dated March 22, 2021, in connection with a takedown from our shelf registration statement on Form S-3 (File No. 333-225712).
In connection with the registered direct offering in March 2021, we issued to H.C. Wainwright & Co., LLC, as the placement agent, warrants to purchase up to 148,125 shares of common stock. The placement agent warrants will be exercisable commencing six months following the date of issuance, expire five years following the date of sale and have an exercise price per share of $2.50 per share. The placement agent warrants, and the shares of common stock issuable upon exercise thereof, will be issued in reliance on the exemption from registration provided in Section 4(a)(2) under the Securities Act of 1933, as amended, and Regulation D promulgated thereunder. We estimated the fair value of these common stock warrants, with an exercise price of $2.50 per share, to be $181 using a Black Scholes model based on the following significant inputs: common stock price of $1.76; comparable company volatility of 100.8%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 0.31%.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
9. Common Stock Warrants and Common Stock Warrant Liability - (continued)
Deemed Dividend Adjustment-Warrant Modified Terms Revaluation
On March 3, 2020, we 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.
On October 26, 2020, in connection with the private warrant inducement with an existing accredited investor to exercise 1,700,680 outstanding warrants (“Original Warrants”), we agreed to modify the terms of the original warrants that were originally issued on March 6, 2020 and on April 24, 2020. Pursuant to the agreement, the per share exercise price of the original warrants were reduced from $2.88 and $3.05, respectively, to $1.725.
Per recent proposed guidance of ASC 260, we determined that this was an exchange of the existing 1,700,680 warrants that were affected and the difference between the fair value of the warrants immediately prior to modification of terms and immediately after the adjustment was a cost of raising capital and was recorded as a reduction of equity. The difference between the fair value of the warrants immediately prior to modification of terms and immediately after the adjustment was calculated as $237, using a Black Scholes model based on the following significant inputs: On October 26, 2020: common stock price of $1.47; comparable company volatility of 96.5%; remaining term 4.5-4.8 years; dividend yield of 0% and risk-free interest rate of 0.18.
10. Stockholders’ Deficit
Capital Stock
We organized under the laws of the state of Nevada on July 27, 2004 and subsequently reincorporated under the laws of the state of Delaware on November 10, 2015. In connection with the reincorporation, as approved by the stockholders, we changed our authorized capital stock to consist of (i) 100 million shares of common stock, $0.001 par value, and (ii) 2 million shares of preferred stock, $0.001 par value, designated as Series A convertible preferred stock. In December 2015, we amended our Certificate of Incorporation to change our 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, our 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
We had 12,207,283 and 5,099,512 shares of common stock issued and outstanding as of December 31, 2021 and December 31, 2020, respectively.
During the year ended December 31, 2021, we issued 7,107,771 shares of common stock as follows:
● an aggregate of 4,188,854 shares in connection with a private placement offering and exercise of pre-funded warrants issued in connection with the offering, generating net proceeds to us in February 2021 of approximately $8,898, as further described below;
● an aggregate of 1,975,000 shares in connection with a registered direct offering generating net proceeds to us in March 2021 of approximately $3,523, as further described below;
● an aggregate of 922,966 shares in connection with the exercise of common stock warrants in March, June, July and October, 2021, generating net proceeds to us of approximately $1,250, as further described below; and
● an aggregate of 20,951 shares for service as a result of the vesting of restricted stock units.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
10. Stockholders’ Deficit - (continued)
Public Offerings and Registered Direct Offerings
On February 2, 2021, we consummated a private placement with certain institutional and accredited investors and issued an aggregate of 3,968,854 shares of our common stock, par value $0.001 per share at a purchase price of $2.2785 per share, pre-funded warrants to purchase up to an aggregate of 420,000 shares of common stock at a purchase price of $2.2775 per pre-funded warrant and associated warrants to purchase up to an aggregate of 2,194,427 shares of common stock, for gross proceeds of approximately $10.0 million, prior to deducting placement agent fees and offering expenses. At March 29, 2021, all 420,000 pre-funded shares had been distributed. In connection with the offering, we issued the placement agent warrants to purchase up to 329,164 shares of common stock with an exercise price of $2.8481 per share.
On March 23, 2021, we consummated a registered direct offering with certain institutional investors and issued an aggregate of 1,975,000 shares of our common stock, par value $0.001 per share at a purchase price of $2.00 per share for gross proceeds to us of approximately $3.95 million, pursuant to a prospectus, dated August 24, 2018, and a prospectus supplement, dated March 22, 2021, in connection with a takedown from our shelf registration statement on Form S-3 (File No. 333-225712).
In connection with the offering, we issued the placement agent warrants to purchase up to 148,125 shares of common stock at an exercise price per share of $2.50 per share.
On March 19, 2021, June 22, 2021, July 15, 2021 and October 7, 2021, we issued an aggregate of 700, 680, 499, 5,616 and 16,171 shares of commons stock for the exercise of certain warrants, respectively. The net proceeds to us for these exercises was $1,250.
11. Stock-Based Compensation
On June 12, 2018, our stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”) to replace our 2015 Equity Incentive Plan (the “2015 Plan”). On July 8, 2020, our 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 from 50,000 to 850,000. In addition, up to 122,279 shares of our common stock previously reserved for issuance under the 2015 Plan are 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 thereafter cease to be subject to awards outstanding under the 2015 Plan, such as by expiration, cancellation, or forfeiture of such awards.
On June 24, 2021, our 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 3,000,000 shares.
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 December 31, 2021, we had 2,838,100 shares of common stock available for issuance under the 2018 Plan.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
11. Stock-based Compensation - (continued)
Stock Options
We measure the fair value of stock options with service-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 us to make certain estimates and assumptions, including assumptions related to the expected price volatility of our stock, the period during which the options will be outstanding, the rate of return on risk-free investments, and the expected dividend yield for our stock.
The weighted-average assumptions used in the Black-Scholes option-pricing model used to calculate the fair value of options granted during the year ended December 31, 2021 were as follows:
Employee
Expected volatility 95.8 %
Expected dividend yield -
Expected term (in years) 3.01
Risk-free interest rate 0.46 %
The weighted average grant date fair value of options granted during the year ended December 31, 2021 was $0.97 per share, as per the table below.
The weighted-average assumptions used in the Black-Scholes option-pricing model used to calculate the fair value of options granted during the year ended December 31, 2020, were as follows:
Employee
Expected volatility 92.1 %
Expected dividend yield -
Expected term (in years) 3.5
Risk-free interest rate 0.17 %
Due to our 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 we do 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 our 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 our history and expectation of dividend payouts. We have not paid and do not intend to pay dividends.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
11. Stock-based Compensation - (continued)
The table summarizes the stock option activity 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 $ 27.85 3.9 $ -
Granted 370,397 $ 1.37 4.9 $ -
Exercised -
$ -
-
$ -
Forfeited (10,415 ) $ -
-
$ -
Expired -
$ -
-
$ -
Outstanding at December 31, 2020 496,471 $ 8.63 3.9 $ -
Granted 598,649 $ 0.97 4.6 $ -
Exercised -
$ -
-
$ -
Forfeited (3,300 ) $ -
-
$ -
Expired (4,000 ) $ -
-
$ -
Outstanding at December 31, 2021 1,087,820 $ 4.08 3.9 $ -
Exercisable at December 31, 2021 649,153 $ 5.38 1.8 $ -
(1) The aggregate intrinsic value on the table was calculated based on the difference between the estimated fair value of our stock and the exercise price of the underlying option. The estimated stock values used in the calculation was $0.98 and $1.73 per share for each of the years ended December 31, 2021 and 2020, respectively.
The weighted average grant date fair value of options granted to employees for the year ended December 31, 2021 was $0.97 per share.
At December 31, 2021, the total compensation cost related to non-vested options not yet recognized was $581, which will be recognized over a weighted average period of 27 months, assuming the grantees complete their service period required for vesting.
Restricted Stock Units
The following table summarizes restricted stock unit activity for the years ended December 31, 2021 and 2020:
Number of
Units Weighted Average
Grant Date Fair Value Per Unit
Outstanding as of December 31, 2019 5,877 $ 30.28
Granted 30,738 (1) $ 1.97
Vested (4,543 ) $ 1.42
Forfeited -
$ -
Outstanding as of December 31, 2020 32,072 $ 4.13
Granted -
$ -
Vested (31,405 ) $ 4.22
Forfeited -
$ -
Outstanding as of December 31, 2021 $ 1.80
(1) 30,738 restricted stock units were granted on July 23, 2020 with a weighted average grant date fair value of $1.97.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
11. Stock-based Compensation - (continued)
The stock-based compensation expense was recorded as follows:
Years Ended
December 31,
Research and development $ 3 $ 9
General and administrative
Total stock-based compensation expense $ 765 $ 645
The allocation between research and development and general and administrative expense was based on the department and services performed by the employee or non-employee.
12. Income Taxes
The components of the pretax loss from operations for the years ended December 31, 2021 and 2020 are as follows (in thousands):
Years Ended
December 31,
U.S. Domestic $ (8,268 ) $ (8,373 )
Foreign -
-
Pretax loss from operations $ (8,268 ) $ (8,373 )
The provision for income taxes from continuing operations for the years ended December 31, 2021 and 2020 are as follows:
Years Ended
December 31,
Current $ $
Federal -
-
State -
-
Foreign -
-
Total current -
-
Deferred
Federal -
-
State -
-
Foreign -
-
Total deferred -
-
Total income tax expense (benefit) $ -
$ -
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
12. Income Taxes - (continued)
Tax Rate Reconciliation
A reconciliation of income taxes to the amount computed by applying the statutory federal income tax rate to the net loss is summarized as follows :
Years Ended
December 31,
Income tax benefit at statutory rates $ (1,736 ) $ (1,758 )
State income tax, net of federal benefit (329 ) (309 )
Permanent items -
Stock-based compensation
PPP loan forgiveness (137 ) -
Change in rate -
-
Stock compensation DTA adjustment -
-
Change in valuation allowance 1,976 1,982
RTP and other -
Income tax expense (benefit) $ -
$ -
Significant components of our deferred tax assets as of December 31, 2021 and 2020 are shown below.
A valuation allowance has been recognized to offset the net deferred tax assets as realization of such deferred tax assets have not met the more likely than not threshold.
December 31,
Deferred tax assets:
ASC 842 leases $ 130 $ 167
Federal and state net operating loss carryovers 19,448 17,548
Stock-Based Compensation
Compensation accruals and other
Depreciation -
Total deferred tax assets 20,050 18,105
Valuation allowance for deferred tax assets (19,916 ) (17,940 )
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Depreciation (7 ) -
ASC 842 assets (127 ) (165
Total deferred tax liabilities (134 ) (165 )
$ -
$ -
At December 31, 2021, we had federal and state net operating loss carryforwards of approximately $77.2 million and $63.7 million, respectively, not considering the IRC Section 382 annual limitation discussed below. The federal loss carryforwards begin to expire in 2029, unless previously utilized. In addition, we had approximately $32.7 million of the total $77.2 million of net operating losses that do not expire, as these losses were generated after the law change introduced as part of the Tax Cuts and Jobs Act. The state net operating losses expire if not utilized by 2041.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
12. Income Taxes - (continued)
Additionally, the utilization of the net operating loss carryforwards could be subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 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 percentage points over a three-year period. We have 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, our net operating losses could be limited.
The following table summarizes the activity related to our gross unrecognized tax benefits at the beginning and end of the years ended December 31, 2021 and 2020 (in thousands):
Years Ended
December 31,
Gross unrecognized tax benefits at the beginning of the year $ -
$ -
Increases related to current year positions -
-
Increases related to prior year positions -
-
Decreases related to prior year positions -
-
Expiration of unrecognized tax benefits -
-
Gross unrecognized tax benefits at the end of the year $ -
$ -
None of the unrecognized tax benefits would affect our annual effective tax rate.
We do not expect a significant change in unrecognized tax benefits over the next 12 months.
We file income tax returns in the United States and Arizona with general statutes of limitations of three and four years, respectively. Due to net operating losses incurred, our tax returns from inception to date are subject to examination by taxing authorities. Our policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. As of December 31, 2021, we had no interest or penalties accrued for uncertain tax positions.
13. Commitments and Contingencies
Legal Proceedings
In July 2020, Kennan E. Kaedar, our former corporate general counsel (the “Plaintiff”), commenced an action against us in the Superior Court of the State of California, for the County of San Diego. The complaint alleges, among other things, that we breached the Plaintiff’s employment contract with us, as well as the implied covenant of good faith and fair dealing, by refusing to issue him the balance of stock options he claims we owe him. In September 2021, the Plaintiff also named the following individuals as defendants: Loretta Mayer, Cheryl Dyer, Thomas C. Chesterman, Kim Wolin, Grover Wickersham, Marc Dumont, Bob Ramsey, Matthew Szot, Julia Williams, and Bill Baker. The Plaintiff alleges that such individuals agreed to knowingly and wrongfully withhold the stock options owed to him and are knowingly in receipt of stolen property. The Plaintiff seeks compensatory damages in excess of $500,000, treble damages and reasonable attorneys’ fees. We do not believe the claims described above have merit and intend to aggressively defend against these accusations. We do not believe that this litigation is likely to have a material effect on our operations.
In addition to the matter described above, we may be subject to other 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 other pending or threatened litigation where the ultimate disposition or resolution could have a material adverse effect on our financial position, results of operations or liquidity.
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
13. Commitments and Contingencies - (continued)
Lease Commitments
We are obligated under finance leases for certain research and computer equipment that expire on various dates through July 2023. At December 31, 2021, the gross amount of office and computer equipment, and research equipment and the related accumulated amortization recorded under the finance leases was $478 and $442, respectively.
In February 2012, we entered into an operating lease for our then corporate headquarters in Flagstaff, Arizona. The lease was originally due to expire in January 2015. In December 2013, we amended our lease to expand into the remaining area in the building and extended the term to December 31, 2019. In February 2014, we further amended the lease to expand into an adjacent building. The lease required escalating rental payments over the lease term. Minimum rental payments under the operating lease were recognized on a straight-line basis over the term of the lease and accordingly, we recorded the difference between the cash rent payments and the recognition of rent expense as a deferred rent liability. The lease was guaranteed by the former President of our Company. In December 2019, we extended the current lease for only our manufacturing facilities are located in Flagstaff, Arizona, occupying a total of 7,632 square feet of space. The lease for our manufacturing facilities expired in December 2020.
On November 16, 2016, we leased an additional 1,954 square feet of research and development space, also in Flagstaff, Arizona. This lease expired on November 15, 2018 but was extended for an additional 24 months, through November 2020. A subsequent amendment to the lease allows for us to cancel the lease at any time through the lease term with 30 days notice. We provided a 30-day cancellation notice effective February 2020.
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.
On August 1, 2020, we entered into a lease for our manufacturing and research facility in Phoenix, Arizona where we occupy approximately 5,105 square feet of manufacturing and warehouse space. This lease expires on November 30, 2024.
We believe that our existing facilities are adequate and meet our current needs for business, manufacturing and research.
Rent expense was $222 and $286 for the years ended December 31, 2021 and 2020, respectively. The future minimum lease payments under non-cancellable operating lease and future minimum finance lease payments as of December 31, 2021 are follows:
Finance
Leases Operating
Lease
Years Ending December 31,
$ 28 $ 194
-
-
Total minimum lease payments $ 28 $ 578
SENESTECH, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)
13. Commitments and Contingencies - (continued)
Finance
Leases
Less: amounts representing interest (11.43%) $ (1 )
Present value of minimum lease payments
Less: current installments under finance lease obligations (27 )
Total long-term portion $ -
14. Related Party Transactions
Related party transactions are conducted in the normal course of business and, unless otherwise noted, are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. In connection with consulting agreements in place, during each of the years ended December 31, 2021 and December 30, 2020, $50,400 of cash payments were made to the Kito Impact Foundation of which Dr. Bechtel, the Chair of our board, serves as chief executive officer.
15. Subsequent Events
COVID-19
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 during 2020 and into 2021, 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 limit our ability to communicate with current and potential commercial customers. Further, new stay at home orders and other social distancing initiatives may be reimplemented at any time. The COVID-19 pandemic is also placing a significant budgetary burden on federal, state and local governments, which may impede or delay their ability to purchase our products.
Nasdaq
On March 2, 2022, we received a letter from the listing qualifications staff (the “Staff”) of The Nasdaq Stock Market (“Nasdaq”) providing notification that the bid price for our common stock had closed below $1.00 per share for the previous 30 consecutive business days and our common stock no longer meets the minimum bid price requirement for continued listing under Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have an initial period of 180 calendar days, or until August 29, 2022, to regain compliance. To regain compliance, the closing bid price of our common stock must be $1.00 per share or more for a minimum of 10 consecutive business days at any time before August 29, 2022.
If we do not regain compliance with Rule 5550(a)(2) by August 29, 2022, we may be eligible for an additional 180 calendar day compliance period. To qualify, we would need to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price requirement, and would need to provide written notice of our intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq would notify us that our securities would be subject to delisting. In the event of such notification, we may appeal the Staff’s determination to delist our securities, but there can be no assurance the Staff would grant our request for continued listing.
The Nasdaq notification has no immediate effect on the listing of our common stock on the Nasdaq Capital Market. We intend to actively monitor the bid price of our common stock and our minimum market value of listed securities and will consider options available to us to achieve compliance with the Nasdaq listing rules. There can be no assurance that we will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with the other listing standards for the Nasdaq Capital Market.
Settlement of Restricted Stock Units
On March 1, 2022, the Company issued 5,000 shares of common stock in the settlement of restricted stock units that were issued and vested during the period.
Other Subsequent Events
We have evaluated subsequent events from the balance sheet date through March 29, 2022, the date at which the financial statements were issued, and determined that there were no other items that require adjustment to or disclosure in the financial statements.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In connection with the preparation of this Annual Report on Form 10-K, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, as of December 31, 2021, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2021.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. All internal control systems, no matter how well designed, have inherent limitations. Even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management is committed to continue monitoring our internal controls over financial reporting and will modify or implement additional controls and procedures that may be required to ensure the ongoing integrity of our consolidated financial statements.
With the participation of our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2021. In making this assessment, the Company used the framework established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO). Based on this assessment, management has concluded that internal control over financial reporting was effective as of December 31, 2021 based on those criteria.
This annual report does not include an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for smaller reporting companies.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
Not Applicable.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item relating to our directors and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2022 Annual Meeting of Stockholders.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required by this Item relating to our directors and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2022 Annual Meeting of Stockholders.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item relating to our directors and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2022 Annual Meeting of Stockholders.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item relating to our directors and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2022 Annual Meeting of Stockholders.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
The information required by this Item relating to our directors and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2022 Annual Meeting of Stockholders.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules.
(a) Financial Statements and Schedules
1. Consolidated Financial Statements are listed in the Index to Consolidated Financial Statements on page of this report.
2. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because of the absence of the conditions under which they are required or because the information required is shown in the financial statements or notes above.
(b) Exhibits
SENESTECH, INC.
INDEX TO EXHIBITS
Exhibit
Number
Description
3.1
Amended and Restated Certificate of Incorporation, as amended by the Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K, filed with the SEC on March 17, 2020 (File no. 001-37941))
3.2
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.5 to the Registrant’s Registration Statement on Form S- 1, filed with the SEC on September 21, 2016 (File no. 333-213736))
4.1
Description of Securities (incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K/A, filed with the SEC on April 21, 2020 (File no. 001-37941))
4.2
Form of the Registrant’s Common Stock certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1, filed with the SEC on October 7, 2016 (File no. 333-213736))
4.3+
Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on December 21, 2016 (File no. 001-37941))
4.4
Form of Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1, filed with the SEC on November 16, 2017 (File no. 333-221433))
4.5
Form of Underwriter’s Warrant, as amended (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on November 21, 2017 (File no. 001-37941))
4.6
Form of Restricted Stock Unit Notice and Agreement (incorporated by reference to Exhibit 4.6 to the Registrant’s Annual Report on Form 10-K, filed with the SEC on March 17, 2020 (File no. 001-37941))
4.7
Form of New Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on June 20, 2018 (File no. 001-37941))
4.8
Form of Warrant issued to investors in Rights Offering (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2018 (File no. 001-37941))
4.9
Form of Warrant issued to dealer-manager in Rights Offering (incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2018 (File no. 001-37941))
4.10
Warrant Agency Agreement, dated August 13, 2018, between the Registrant and Transfer Online, Inc. (incorporated by reference to Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2018 (File no. 001-37941))
4.11
Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on July 17, 2019 (File no. 001-37941))
4.12
Form of Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 28, 2020 (File no. 001-37941))
4.13
Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 28, 2020 (File no. 001-37941))
4.14
Form of Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on March 6, 2020 (File no. 001-37941))
4.15
Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on March 6, 2020 (File no. 001-37941))
4.16
Form of New Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on October 27, 2020 (File no. 001-37941))
4.17
Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on October 27, 2020 (File no. 001-37941))
4.18
Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 2, 2021 (File no. 001-37941))
4.19
Form of Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 2, 2021 (File no. 001-37941))
4.20
Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 2, 2021 (File no. 001-37941))
10.3+
SenesTech, Inc. 2018 Equity Incentive Plan, as amended, and forms of agreement thereunder (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on August 13, 2020 (File no. 001-37941))
10.4+
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on September 21, 2016 (File no. 333-213736))
10.7+
Employment Letter Agreement by and between the Registrant and Kenneth Siegel dated May 16, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2019 (File no. 001-37941))
10.8+
Employment Offer Letter by and between the Registrant and Thomas Chesterman dated November 20, 2015 (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on September 21, 2016 (File no. 333-213736))
10.9+
Employment Letter Agreement by and between the Registrant and Kim Wolin dated January 28, 2020 (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on February 13, 2020 (File no. 333-236302))
10.10+
Employment Letter Agreement by and between the Registrant and Steven Krause, dated January 12, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K/A, filed with the SEC on April 21, 2020 (File no. 001-37941))
10.11
Promissory Note, dated April 15, 2020, by and between the Company and BMO Harris Bank National Association (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on April 21, 2020 (File no. 001-37941))
10.14*
Lease by and between the Registrant and Pinnacle Campus Office-Retail, LLC, dated as of November 18, 2019
10.15
Standard Industrial/Commercial Multi-Tenant Lease, between the Company and Duke Go PP, LLC, dated as of June 22, 2020 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on August 13, 2020 (File no. 001-37941))
10.16
Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on July 17, 2019 (File no. 001-37941))
10.17
Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 28, 2020 (File no. 001-37941))
10.18
Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on March 6, 2020 (File no. 001-37941))
10.19
Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on April 24, 2020 (File no. 001-37941))
10.20
Form of Letter Agreement, dated as of October 23, 2020, between the Company and the purchaser thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on October 27, 2020 (File no. 001-37941))
10.21
Form of Securities Purchase Agreement, dated as of January 27, 2021 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 2, 2021 (File no. 001-37941))
10.22
Form of Registration Rights Agreement, dated as of January 27, 2021 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 2, 2021 (File no. 001-37941))
21.1*
List of Subsidiaries of the Registrant
23.1*
Consent of M&K CPAS, PLLC, independent registered public accounting firm
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
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
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
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith.
+ Indicates a management contract or compensatory plan.
(c) Financial Statement Schedules
None