SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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

Prepaid Expenses

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

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Equipment held under capitalfinance 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 capitalfinance leases is amortized over the shorter of the lease term or estimated useful life of the asset. The Company incurs repair and maintenance costs on its major equipment. Repair and maintenance costsequipment, which are expensed as incurred.

Impairment of Long-Lived Assets

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

Revenue RecognitionSENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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

Revenue Recognition

Effective January 1, 2018, the Company adopted ASC 606 —Revenue from Contracts with Customers(“ASC 606”).Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies whenby applying the following steps: (1) persuasive evidence of an arrangement exists;identify the contract with a customer; (2) identify the performance of service has been renderedobligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to a customer or delivery has occurred; (3)each performance obligation in the amount of fee to be paid by a customercontract; and (5) recognize revenue when each performance obligation is fixed and determinable; and (4) the collectability of the fee is reasonably assured.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS 

(In thousands, except share and per share data)

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

The Company has generatedrecognizes revenue fromwhen product is shipped at a license agreement with a strategic partner, pursuant to which the Company had granted to such partner the exclusive right to manufacture and distribute its product, ContraPest, once the required regulatory approvals were received. This licensing agreement was subsequently terminatedfixed selling price on January 23, 2017. Thepayment terms of the licensing agreement contained multiple elements or deliverables, as discussed below. Management evaluates whether the arrangement involving the multiple deliverables contains more than one unit of accounting. To determine the units of accounting under a multiple-element arrangement, management evaluates certain separation criteria, including whether the deliverables have stand-alone value, based on the relevant facts and circumstances of the arrangement.

The Company determined that the license granted pursuant30 to the license agreement did not have stand-alone value and, therefore, the nonrefundable, upfront license fee payments received by the Company are recognized on a straight-line basis over the estimated related performance period (i.e.120 days from the effective date of the agreement through the estimated completion date of the Company’s substantive performance obligations).

In accordance with the terms of the license agreement, the Company was also to receive a future fixed amount of contingent milestone payments (i.e. post-regulatory approval license fees) and contingent sales-based royalties to be received upon the achievement of certain milestone events. The milestone events under the agreement include regulatory approval, patent issuance or alternative intellectual property coverage, and sales-based events. The Company did not earn or receive any of the potential contingent milestone payments, as the milestone events to receive such post-approval license fees and sales-based royalties were not achieved. The Company recognizes revenue that is contingent upon the achievement of a substantive milestone event in its entirety in the period in which the milestone is achieved. A milestone is considered substantive when the consideration payable to the Company for such milestone has all of the following characteristics: (i) there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved; (ii) the event can only be achieved based in whole or part on either the Company’s performance or a specific outcome resulting from the Company’s performance; and (iii) if achieved, the event would result in additional payments being due to the Company. As the potential contingent consideration was to be received only upon the achievement of milestone events that are considered substantive, the Company would only recognize such revenue in the period the milestone is achieved and the milestone payments became due and collectible. In addition, the Company accounts for sales-based royalties as revenue upon achievement of certain sales milestones. 

Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue on the balance sheet. Amounts expected to be recognized as revenue in the next twelve months following the balance sheet date are classified as a current liability.

invoicing. The Company recognizes other revenue earned from pilot studies upon the performance of specific services under the respective service contract.

For the nine months ended September 30, 2017, theThe Company generated net revenuesderives revenue primarily from commercial sales of $34.products.

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, and costs incurred related to conducting scientific trials and field studies, and regulatory compliance costs.costs, and manufacturing costs associated with process improvement. Also, included in research and development expenses is an allocation of facilities related costs, including depreciation of research and development equipment.

SENESTECH, INC.Stock-based Compensation

NOTES TO CONDENSED FINANCIAL STATEMENTS 

(In thousands, except share and per share data)

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

Stock-based Compensation

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

For equity instruments issued to non-employees, the stock-based consideration is measured using a fair value method. The measurementSENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 2 - Summary of the stock-based compensation is subject to re-measurement as the underlying equity instruments vest.Significant Accounting Policies – (continued)

The stock-based compensation expense recorded for the three and nine months ended September 30, 2017March 31, 2020 and 20162019, is as follows:

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

Income Taxes

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

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

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

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

SENESTECH, INC. 

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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

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, the Series A convertible preferred stock (prior to its conversion into common stock), Series B convertible preferred stock (prior to its conversion into common stock), convertible promissory notes (prior to their conversion), common stock purchase warrants, and common stock options are considered to be potentially dilutive securities but have been excluded from the calculation of diluted loss per share attributable to common stockholders because their effect would be anti-dilutive given the net loss reported for the three and nine months ended September 30, 2017March 31, 2020 and 2016.2019. Therefore, basic and diluted loss per share attributable to common stockholders wasare the same for all periodseach period presented.

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):

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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

In May 2017,Adoption of New Accounting Standards:

Effective January 1, 2019, the FASB issuedCompany adopted Accounting Standard UpdateStandards Updated (“ASU”)No. 2016-02, 2017-9,Compensation — Stock CompensationLeases (Topic 718): Scope of Modification Accounting842)  (“ASU2017-9”), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.Per (“ASU 2017-9, an entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whetherNo. 2016-02”).  Under ASU No. 2016-02, an entity is required to apply modification accounting underrecognize right-of-use lease assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements.  The Company elected the amendmentsoptional transition method provided by the FASB in ASU 2017-9.ASU 2017-9 is effective for public business entities for annual2018-11, Leases (Topic 842): Targeted Improvements, and interim periods in fiscal years beginning after December 15, 2017.Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for whichas a result, has not restated its condensed consolidated financial statements havefor prior periods presented. The Company has elected the practical expedients upon transition to retain the lease classification and initial direct costs for any leases that existed prior to adoption. The Company has also not yet been issued and (2)reassessed whether any contracts entered into prior to adoption are leases. The Company applied the new guidance to all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendmentsoperating leases within the scope of the standard that were in this ASU should be applied prospectively to an award modifiedeffect on January 1, 2019, or entered into after, the adoption date.  Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.  The adoption ofASU 2017-9 isdid not expected to have a material impact on the Company’s financial statementsconsolidated statement of comprehensive income (loss).  However, the new standard established $87 of liabilities and corresponding right-of-use assets of $87 on the Company’s consolidated balance sheet for leases, primarily related to operating leases on rented office properties, that existed as of the January 1, 2019, adoption date. 

At March 31, 2020, the balance in Right to Use Asset-Long Term and Lease Liability-Long Term was $622 and ($624) respectively and at December 31, 2019, the balance in Right to Use Asset-Long Term and Lease Liability-Long Term was $699 and ($694) respectively.

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

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

SENESTECH, INC. 

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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

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

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

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

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

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

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

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

In August 2016,2018, the FASB issued ASU No. 2016-15,Statement of Cash Flows (Topic230): Classification of Certain Cash Receipts and Cash Payments.authoritative guidance intended to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this ASU provide guidance on the following eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest ratealso requires presentation of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds fromcapitalized implementation costs in the settlementstatement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interestsfinancial position and in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Current GAAP does not include specific guidance on these eight cash flow classification issues. The amendments of this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of ASU No. 2016-15 is not expected to have a material impact on the Company’s financial statements or related disclosures.

In March 2016, the FASB issued ASU No. 2016-09,Improvements to Employee Share-Based Payment Accounting(“ASU 2016-09”). This standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09flows in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented, and the expense related to the capitalized implementation costs to be presented in the same line item in the statement of operations as the fees associated with the hosting element (service) of the arrangement. This guidance is effective for annual periods beginning after December 15, 2016 and2019, including interim periods within those annual periods, for public business entities. The method ofwith early adoption is dependent on the specific aspect of accounting addressed in this new guidance. Early adoption was permitted in any interim or annual period. ASU 2016-09 was adopted bypermitted. . Effective January 1, 2020, the Company and did not have a material impact on the Company’s financial statements or related disclosures.

In February 2016, the FASB issued ASU No. 2016-02,Leases(“ASU 2016-02”). This standard amends various aspects of existing accounting guidance for leases, including the recognition of a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This standard also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early adoption is permitted and the new standard must be adopted using a modified retrospective approach, and provides for certain practical expedients. The Company is evaluating the impact of the adoption of ASU 2016-02 on its financial statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01,Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities(“ASU 2016-01”). This standard affects the accounting for equity instruments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 is effective in the first quarter of 2019. The Company is evaluating the impact of the adoption of ASU 2016-01 on its financial statements and related disclosures.

In November 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2015-17,Balance Sheet Classification of Deferred Taxes, which eliminates the guidance in Topic 740, Income Taxes, that required an entityand determined there was no applicability to separate deferred tax assets and liabilities between current and noncurrent amounts in a classified balance sheet. The amendments require that all deferred tax assets and liabilities of the same jurisdiction or a tax filing group, as well as any related valuation allowance, be offset and presented as a single noncurrent amount in a classified balance sheet. The standard became effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, and may be applied on either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company has adopted this standard retrospectively for all periods presented. The adoption of this standard did not have a material impact on the Company’s financial statements.

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

The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expense. There are no uncertain tax positions as of September 30, 2017 or December 31, 2016at this time and as such, no interest or penalties were recorded in income tax expense.

In August 2014, the FASB issued ASU No. 2014-15,Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern(“ASU 2014-15”). This standard requires management to perform an evaluation in each interim and annual reporting period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year of the date the financial statements are issued. If such conditions or events exist, ASU 2014-14 also requires certain disclosures of management’s plans and evaluation, as well as the plans, if any, that are intended to mitigate those conditions or events that will alleviate the substantial doubt. ASU No. 2014- 15 is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption was permitted for annual or interim reporting periods for which the financial statements have not been previously issued. ASU 2014-15 was adopted by the Company and did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.

In May 2014 the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers. Since ASU 2014-09 was issued, several additional ASUs have been issued to clarify various elements of the guidance. These standards provide guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Adoption of the new standard is effective for reporting periods beginning after December 15, 2017. We plan to use the modified retrospective method of adoption and will adopt the standard as of January 1, 2018, the beginning of our next fiscal year.. We have completed an initial evaluation of the potential impact from adopting the new standard, including a detailed review of performance obligations for all material revenue streams. Based on this initial evaluation, we do not expect adoption will have a materialno impact on our financial position, results of operations, or cash flows. Related disclosures will be expanded

Other than the items noted above, there have been no new accounting pronouncements not yet effective or adopted in line with the requirements of the standard. We will continuecurrent year that we believe have a significant impact, or potential significant impact, to our evaluation until our adoption of the new standard.unaudited condensed consolidated interim financial statements.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 3 - Fair Value Measurements

The carrying amountsCompany issued common stock warrants to purchase shares of certaincommon stock in June of 2015 (see Note 11 — Stock-based Compensation for more details) that contain a cash settlement provision resulting in a common stock warrant liability that is revalued at the Company’s financial instruments, including cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short maturities. Assets and liabilities recordedend of each reporting period.

We value these warrant derivatives at fair value on a recurring basis in the balance sheets, as well as assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values.value. The accounting guidance for fair value, providesamong other things, establishes a consistent framework for measuring fair value and requires certain disclosures about howexpands disclosure for each major asset and liability category measured at fair value is determined.on either a recurring or nonrecurring basis. Fair value is defined as the price that would be received upon the sale ofto sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurementreporting date. The accounting guidance also establishesframework 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:

The Company’s cash equivalents, which include money market funds,common stock warrant liabilities are classified as Level 13 because they are valued using quoted market prices. The Company’s marketable securities consist of held to maturity securities and are generally classified as Level 2 because their value is based on valuations using significant inputs derived from or corroborated by observable market data.

In certain cases where there is limited activity or less transparency around the inputs to valuation, securities are classified as Level 3. Level 3 liabilities consist of common stock warrant liability.valuation.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 3 - Fair Value Measurements – (continued)

Items Measured at Fair Value on a Recurring Basis

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

⁽¹⁾ The change in the fair value of the common stock warrant and convertible notes payable for the three and nine months ended September 30, 2017 was recorded as a decrease to other income (expense) and interest expense of $30 and $69, respectively, in the statements of operations and comprehensive loss.

Financial Instruments Not Carried at Fair Value

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

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 4 - Investment in Securities Held to MaturityCredit Risk

As of September 30, 2017, investment in securities held to maturity primarily consisted of corporate fixed income securities and commercial paper. The Company did not have investments prior to the first quarter of 2017. The Company classifies all investments as held to maturity as these investments are short term, highly liquid investments which we intend to hold to maturity. Held to maturity securities are recorded at cost and gains and losses are only recognized as the sale or redemption of the securities is realized. Realized gains and losses are included in non-operating other income (expense) on the condensed statement of operations and are derived using the specific identification method for determining the cost of the securities sold. During the three and nine months ended September 30, 2017, the Company had a minimal amount of net realized gain (loss) on investments recorded. Interest and dividends on investments held to maturity are included in interest and other income, net, in the condensed statements of operations.

The followingCompany is potentially subject to concentrations of credit risk in its accounts receivable. Credit risk with respect to receivables is limited due to the number of companies comprising the Company’s customer base, however the Company did identify a summarypotentially uncollectable account and at March 31, 2020 and December 31, 2019 maintained a reserve for this receivable balance of held$123. The Company does not require collateral or other securities to maturity securities at September 30, 2017:support its accounts receivable.

Note 5 - Prepaid Expenses

Prepaid expenses consist of the following:

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 6 - Property and Equipment

Property and equipment, net consist of the following:

* Shorter of lease term or estimated useful life

In the three months ended March 31, 2020, the Company received net proceeds of $40 in the sale of research and development equipment and office and computer equipment, resulting in a gain on the sale of these assets of $15.

Depreciation and amortization expense was approximately $118$77 and $49$111 for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, and $272 and $143 for the nine months ended September 30, 2017 and 2016,2019, respectively.

Note 7 - Accrued Expenses

Accrued expenses consist of the following:

Note 8 - Accrued Contract Cancellation Settlement

The accrued contract cancellation settlement of $1,000 was the result of the Company entering into a settlement agreement with Neogen Corporation in which Neogen and the Company agreed to (a) terminate the existing Exclusive License Agreement between the Company and Neogen dated May 15, 2014 (the “License Agreement”), with neither Neogen or the Company having any further obligations thereunder (other than certain confidentiality obligations); (b) dismiss with prejudice the court action filed by Neogen in the District Court for the District of Arizona on January 19, 2017 (the “Court Action”); and (c) mutually release any and all existing or future claims between the parties and their affiliates related to or arising from the License Agreement or the Court Action. Under the terms of the agreement, the Company agreed to make a one-time payment in the amount of $1,000 in settlement of all claims and termination of all existing contracts between the parties. This payment was made in January, 2017. See Note 15 for further details.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS 

(In thousands, except share and per share data)

Note 9 - Borrowings

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

TECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 8 - Borrowings

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

Finance Lease Obligations 

Finance lease obligations at March 31, 2020 are for computer and lab equipment leased through GreatAmerica Financial Services, Navitas Credit Corp. and ENGS Commercial Finance Co. These finance leases expire at various dates through April 2022 and carry interest rates ranging from 7.3% to 18.3%.

Other Promissory Notes

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

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 119 - Common Stock Warrants and Common Stock Warrant Liability

The table summarizes the common stock warrant activity as of September 30, 2017March 31, 2020 as follows:

Promissory Notes; Common StockOutstanding Warrants

In conjunction with the issuance byAs of March 31, 2020, we had 812,963 shares of common stock issuable upon exercise of outstanding common stock warrants, at a weighted-average exercise price of $12.58 per share.

On November 21, 2017, the Company issued a total of certain promissory notes, the Company issued232,875 detachable common stock warrants (“Warrants”) to purchase an aggregate 270,400issued with the second public offering of 293,000 shares of its common stock with an exercise price of $7.50at $20.00 per share. The Warrants werecommon stock warrant is exercisable until the earlier of (i) 5five years from the date of grant; (ii) December 13, 2018, or the second anniversarygrant. The common shares of the closing of our initial public offering;Company’s stock and (iii)detachable warrants exist independently as separate securities. As such, the closing of liquidation, dissolution or winding up ofCompany estimated the Company.

The Warrants have a net share settlement (cashless exercise) provision. With this provision the holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the common stock warrants, exercisable at $30.00 per share, to be $661 using a lattice model based on the timefollowing 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 warrant after deductionRight’s Offering and downward to $19.00 per share on August 13, 2018, the date of the aggregate exercise price. However, the Warrants would be exercised automatically in fullRights Offering, pursuant to the netantidilution price adjustment protection contained within these warrants. The exercise provision, without any further action on behalfprice of the holder,warrants was adjusted downward to $7.13 on January 28, 2020 in connection with a private placement of common stock. Per guidance of ASC 260, the Company recorded a deemed dividend of $285 on the 143,501 unexercised warrants that contained this antidilution price adjustment protection provision and was calculated as the difference between the fair value of the warrants immediately prior to downward exercise price adjustment and immediately after the timeadjustment using a Black Scholes model based on the Warrants would otherwise terminate.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 Warrants are considered freestanding instrumentsexercise price of the warrants was adjusted downward to $2.1122 on March 4, 2020 in connection with a private placement of common stock. Per guidance of ASC 260, the Company recorded a deemed dividend of $129 on the 143,501 unexercised warrants that contained this antidilution price adjustment protection provision and was calculated as (i) they were transferred together with the notes issued but exist independently asdifference between the fair value of the warrants immediately prior to downward exercise price adjustment and immediately after the adjustment using a separate security; (ii) they may be exercised separately fromBlack Scholes model based on the notes;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 (iii) they are exercisable for a specific period (term) and do not impact the notes if and when exercised. 

risk-free interest rate of 0.68%.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 119 -Common Stock Warrants and Common Stock Warrant Liability – (continued)

On June 20, 2018, the Company entered into an agreement with a holder of 56,696 of the November 2017 warrants to exercise its original warrant representing 56,696 shares of common stock for cash at the $30.00 exercise price for gross proceeds of $1.7 million and the Company issued to holder a new warrant to purchase 56,696 shares of common stock at an exercise price of $36.40 per share. The new warrant did not contain the antidilution price adjustment protection that was contained within the exercised warrants. In June 2018, the Company recorded stock compensation expense of $1.7 million representing the fair value of the of 56,696 inducement warrants issued. The Company estimated the fair value of the Warrantscommon stock warrants, exercisable at issuance$36.40 per share, to be $1.7 million using a Monte Carlo option pricingBlack Scholes model based on the following significant inputs: common stock price of $7.50 to $7.575;$42.20; comparable company volatility of 58.0%72.6%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 2.8%. Also, in June 2018, an additional 17,088 of the November 8, 2017 warrants that were in the money at the time of exercise, were exercised for gross proceeds of $513.

On August 13, 2018, in connection with a Rights Offering of 267,853 shares of its common stock, the Company issued 267,853 warrants to 76.7%; risk- free ratespurchase shares of 1.31% to 1.76%; and the probabilityits common stock at an exercise price of an equity event occurring.$23.00 per share. The Company reflectedestimated the amounts recorded forfair value of the Warrants issued within stockholders’ deficit, as additional paid-in-capital. Although the Warrants are a derivative that can be net share settled, the Warrants are considered indexed to the Company’s common stock warrants, exercisable at $23.00 per share, to be $3.6 million using a Monte Carlo model based on the following significant inputs: common stock price of $18.80; comparable company volatility of 159.0%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 2.77%.

In connection with the closing of the Rights Offering, the Company hasissued a warrant to purchase 13,393 shares of common stock to Maxim Partners LLC, an affiliate of the abilitydealer-manager of the Rights Offering. The Company estimated the fair value of the common stock warrants, exercisable at $34.50 per share, to settlebe $169 using a using a Monte Carlo model based on the warrant contract infollowing significant inputs: common sharesstock price of $18.80; comparable company volatility of 159.0%; remaining term 5 years; dividend yield of 0% and met the conditions within the contract to classify the Warrants as an equity instrument.risk-free interest rate of 2.77%.

Common Stock Warrant Issued for Marketing and Development Servicesto Underwriter of Common Stock Offering

In February 2016,July 2019, the Company issued to a stockholderH.C. Wainwright & Co., as placement agent, a warrant to purchase 100,0008,334 shares of common stock at an exercise price of $7.50$33.75 per share as consideration for providing marketing and development services in Southeast Asia.connection with a common stock offering in July 2019. The warrant was fully vested and exercisable on the date of grant. The common stock warrant has the similar features as the Warrants discussed above, except it is exercisable until the earlier of (i) five years from the date of grant; (ii) December 13, 2018, or the second anniversary of the closing of our initial public offering of common stock; and (iii) the closing of a liquidation, dissolution or winding up of the Company. The Company estimated the fair value of the common stock warrant to be $431 on the date of grant using a Black- Scholes option pricing model based on the following significant inputs:common stock price of $7.57; comparable company volatility of 77.8%; remaining term 3.75 years; dividend yield of 0% and risk-free rate of 2.09%. The Company recorded the fair value of the warrant as stock-based compensation expense within general and administrative expense on the date of grant.

March 2016 Promissory Notes Common Stock Warrants

In March 2016, the Company issued certain unsecured notes with common stock warrants to purchase an aggregate of 9,032 shares of common stock at an exercise price of $7.50 per share. The common stock warrants are exercisable until the earlier of (i) three years from the date of grant; (ii) December 13, 2018, or the second anniversary of the closing of our initial public offering of common stock; and (iii) the closing of a liquidation, dissolution or winding up of the Company. The Company estimated the fair value of the common stock warrants on the date of grant using a Monte Carlo pricing model based on the following significant inputs: common stock price of $7.575; comparable company volatility 79.6%; and risk-free rate of 1.49%.

August 2016 Other Advisory Services

On August 16, 2016, the Company issued to each of two advisors warrants to purchase 20,000 shares of common stock at an exercise price of $7.50 per share as consideration for providing advisory services to the Company. The warrants were fully vested and exercisable on the date of grant until the earlier of (i) three years from the date of grant; (ii) December 13, 2018, or the second anniversary of the closing of our initial public offering of common stock; and (iii) the closing of a liquidation, dissolution or winding up of the Company. The Company recorded the fair value of the warrants as stock-based compensation expense within general and administrative expense on the date of grant.

Common Stock Warrant Issued to Initial Public Offering Underwriter

In December 2016, the Company issued to the underwriter of its IPO a warrant to purchase 187,500 shares of common stock at an exercise price of $9.60 per share as consideration for providing services in connection with the Company’s initial public offering. The warrant was fully vested and exercisable on the date of grant.issuance. The common stock warrant is exercisable until five years from the date of grant. The Company estimated the fair value of the common stock warrantwarrants, exercisable at $33.75 per share, to be $939 on the date of grant$127 using a Black- Scholes option pricinglattice model based on the following significant inputs:inputs: common stock price of $8.00;$26.80; comparable company volatility of 82.1%133.3%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 1.92%2.07%.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 11 - Common Stock Warrants and Common Stock Warrant Liability – (continued)

University of Arizona Common Stock Warrant

In connection with the June 2015 amended and restated exclusive license agreement with the University of Arizona (“University”), the Company issued to the University a common stock warrant to purchase 15,000750 shares of common stock at an exercise price of $7.50$150.00 per share. The warrant was fully vested and exercisable on the date of grant, and expires, if not exercised, five years from the date of grant. In the event of a “terminating change” of the Company, as defined in the warrant agreement, the warrant holder would be paid in cash the aggregate fair market value of the underlying shares immediately prior to the consummation of the terminating change event. Due to the cash settlement provision, the derivative warrant liability was recorded at fair value and is revalued at the end of each reporting period. The changes in fair value are reported in other income (expense) in the statements of operations and comprehensive loss. The estimated fair value of the derivative warrant liability was $53 at the date of grant.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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

The estimated fair value of the derivative warrant liability was $4$0 at September 30, 2017.March 31, 2020. As this derivative warrant liability is revalued at the end of each reporting period, the fair values as determined at the date of grant and subsequent periods werewas based on the following significant inputs using a Monte Carlo option pricing model: common stock price of $7.91;$158.20; comparable company volatility of 77.7% of the underlying common stock; risk-free rates of 1.93%; and dividend yield of 0%; including the probability assessment of a terminating change event occurring. The change in fair value of the derivative warrant liability was $65$0 for the ninethree months ended September 30, 2017 andMarch 31, 2020. As such, no entry was recorded in other income (expense) in the accompanying statements of operations and comprehensive loss.

July 2015 Consulting Agreement Common Stock WarrantWarrants Issued in January and March 2020 Private Placements

In July 2015,January and March 2020, in separate private placements concurrent with registered direct offerings (collectively, the “2020 Registered Direct Offerings”) of shares of the Company’s common stock, the Company also issued a common stock warrantwarrants to purchase 121,227an aggregate of up to 353,872 shares of common stock withto certain institutional and accredited investors that participated in the 2020 Registered Direct Offerings. The warrants were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. Terms used but not otherwise defined herein will have the meanings given them in the warrants, attached as Exhibit 4.1 to our Form 8-K filed on January 28, 2020, and our Form 8-K filed on March 6, 2020.