See accompanying notes to financial statements.

SENESTECH, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except shares and per share data)

(Unaudited)

See accompanying notes to financial statements.

SENESTECH, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except shares and per share data)

(Unaudited)

For The Three Months Ended September 30, 2018 and 2019

The accompanying notes are an integral part of these financial statements.

See accompanying notes to financial statements.

SENESTECH, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except shares and per share data)

(Unaudited)

See accompanying notes to financial statements.

SENESTECH, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except shares and per share data)

(Unaudited) 

See accompanying notes to financial statements.

SENESTECH, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to financial statements.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

Note 1 - Organization and Description of Business

SenesTech, Inc. (referred to in this report as “SenesTech,” the “Company,” “we” or “us”) was formed in July 2004 and incorporated in the state of Nevada. The Company subsequently reincorporated in the state of Delaware in November 2015. Our corporate headquarters is in Flagstaff,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 are available to fightcontrol rat infestations, communities, food producers, zoospopulations, most rely on some form of lethal method to achieve effectiveness. Each of these solutions is inherently limited by rat species’ resilience and sanctuaries and others continue to face challenges in controlling today’s infestations. Infestations result in significant infrastructure damage,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 additional riskssignificant threats to the health and food security of many communities. In addition, rodents cause significant product loss and damage through consumption and contamination. Rats also cause significant damage to critical infrastructure by burrowing beneath foundations and gnawing on electrical wiring, insulation, fire proofing systems, electronics and computer equipment.

The most prevalent solution to rat infestations is the use of increasingly powerful rodenticides. Although these challenges,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)Pest Management Professionals (“PMPs”) are being increasingly asked for new solutions to help solve the problem. With growing concerns about rat resistance to rodenticidesthat are both effective and a growing interest in non-lethal options, it is becoming increasingly important for PMPs to have new tools at their disposal.less toxic. Our goal is to provide customers with not only a solution to combat their most difficult infestations,rat problems, but also offer a non-lethal option to serve customers that are looking to decrease or remove the amount of poisonrodenticide used in their pest managementcontrol programs.

Our first fertility control product, ContraPest is a liquid bait containing the active ingredients 4-vinylcyclohexene diepoxide (VCD)(“VCD”) and triptolide. When consumed, ContraPest targetslimits reproduction limiting fertility inof male and female rats beginning with the first breeding cycle following consumption. ContraPest is being marketed for use in controlling rat populations, specifically Norway and roof rats. On August 23, 2015,rat populations.

SenesTech began the registration process with the United States Environmental Protection Agency (EPA)(the “EPA”) for ContraPest on August 23, 2015. On August 2, 2016, the EPA granted an unconditional registration approval for ContraPest as a Restricted Use Product Due to Professional Expertise (referred to in this report as a “Restricted Use designation”(“RUP”), effective August 2, 2016.due to the need for applicator expertise for deployment. On October 18, 2018, the EPA approved the removal of the Restricted UseRUP 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, weContraPest must obtain registration from the various state regulatory agencies prior to selling in each state. As of the date of this report, weWe have received registration for ContraPest in all 50 states and the District of Columbia, 47 of which have approved the removal of the Restricted UseRUP designation.

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

Potential 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 CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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

Going Concern

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

Need for Additional Capital

Since our inception, we have sustained significant operating losses in the course of our research and development and commercialization activities and expect such losses to continue for the near future. We have generated limited revenue to date from product sales, research grants and licensing fees received under our former license agreement with Neogen. In 2017, we began to prepare and launch commercialization of our first product, ContraPest. We have primarily funded our operations to date through the sale of equity securities, including convertible preferred stock, common stock and warrants to purchase common stock. See Note 10 for a description of our public equity sales.

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

Through September 30, 2019,2020, we had received net proceeds of $67.2$73.2 million from our sales of our common stock, preferred stock and warrant exercises and issuance of convertible and other promissory notes, an aggregate of $1.7 million from licensing fees and an aggregate of $0.5$0.8 million in net product sales. AtAs of September 30, 2019,2020, we had an accumulated deficit of $93.1$102.2 million and cash and cash equivalents of $3.9$2.7 million.

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

Based upon our current operating plan, we expect that cash and cash equivalents at September 30, 2019,We will need additional funding in combination with anticipated revenue and any additional sales of our equity securities, will be sufficientorder to continue to fund our current operations, for at least the next six months. We have takenachieve profitability and become cash flow positive, and will continue to take actions to reduce our operating expenses and to concentrate our resources toward the successful commercialization of ContraPest in the U. S. However, if anticipated revenue targets and margin targets are not achieved and we are unable to raise necessary capital through the sale of our securities, we may be required take other measures that could impair our ability to be successful and operate as a going concern. In any event, we are likely to requireseek additional capital in order to fund our operating losses and research and development activities until we become profitable. 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.

SENESTECH, INC.

 NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)efforts or discontinue operations.

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

Basis of Presentation

The accompanying unaudited condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the Company’s opinion, the unaudited condensed financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly the Company’s financial position as of September 30, 2019,2020, the Company’s operating results for the three and nine months ended September 30, 20192020 and 2018,2019, and the Company’s cash flows for the nine months ended September 30, 20192020 and 2018.2019. The accompanying financial information as of December 31, 20182019 is derived from audited financial statements. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2018, both2019, filed with the SEC on March 29, 2019.17, 2020 and April 21, 2020, respectively. All amounts shown in these financial statements and accompanying notes are in thousands, except percentages and per share and share amounts.  

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 2 - Summary of Significant Accounting Policies

Use of Estimates

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

Reclassifications

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

Accounts ReceivableReceivable-Trade

Accounts receivablereceivable-trade consist primarily of trade receivables.receivables from customers. The Company provides an allowance for doubtful trade receivables equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer’s trade accounts receivable. The allowance for doubtful trade receivables was less than $1$123 at September 30, 20192020 and December 31, 2019.

Accounts Receivable-Other

Accounts receivable-other at September 30, 2020 was $0. Accounts receivable-other at December 31, 2018.2019 of $123 consisted primarily of receivables related to insurance reimbursements due the Company. 

Inventories

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

Components of inventory are:

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.

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

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

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, which are expensed as incurred.

Impairment of Long-Lived Assets

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

Revenue Recognition

Effective January 1, 2018, the Company adopted ASCAccounting Standards Codification (“ASC”) 606 —Revenue from Contracts with Customers.Customers (“ASC 606”). Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 —Revenue Recognition.Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of the fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. The performance obligations identified by the Company under Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts With Customers, are straightforward and similar to the unit of account and performance obligation determination under ASC Topic 605,Revenue Recognition. There was no impact on the Company’s financial statements as a result of adopting ASC 606 for the three months or nine months ended September 30, 2019 and 2018, respectively.

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

The Company derives revenue primarily from commercial sales of products.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, and regulatory compliance costs. Also, included in researchcosts, and manufacturing costs associated with process improvement. Research and development expenses isinclude an allocation of facilities related costs, including depreciation of research and development equipment.

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 stock optionsthese 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 measurement of the stock-based compensation is subject to re-measurement as the underlying equity instruments vest.

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

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

The stock-based compensation expense recorded for the three and nine months ended September 30, 2020 and 2019, and 2018,

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 statementstatements and tax bases of assets and liabilities and net operating loss carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.

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

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, 20192020 or December 31, 20182019 and as such, no interest or penalties were recorded in income tax expense.

Comprehensive Loss

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

Loss Per Share Attributable to Common Stockholders

Basic loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share attributable to common stockholders is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury stock and if-converted methods. For purposes of the computation of diluted loss per share attributable to common stockholders, common stock purchase warrants, and common stock options are considered to be potentially dilutive securities but have been excluded from the calculation of diluted loss per share attributable to common stockholders because their effect would be anti-dilutive given the net loss reported for the three and nine months ended September 30, 20192020 and 2018.2019. Therefore, basic and diluted loss per share attributable to common stockholders are the same for each period presented.

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

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

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

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

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

Adoption of New Accounting Standards:

In May 2014, the FASB issued ASU 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. Effective January 1, 2018, the Company adopted ASU 2014-09,“Revenue from Contracts with Customers”using the modified retrospective method to all contracts that were not completed as of the date of adoption. The results of operations for reported periods after January 1, 2018 are presented under this amended guidance, while prior period amounts are reported in accordance with ASC 605 —Revenue Recognition. There was no material impact on our financial position, results of operations, or cash flows.

In January 2016, the FASB issued ASU 2016-01,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 the first quarter of 2018. The Company has adopted the provisions of ASU 2016-01 on its financial statements. There was no material impact on our financial position, results of operations, or cash flows.

In February 2016, the FASB issued ASU 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 was permitted, and the new standard had been adopted using a modified retrospective approach and provides for certain practical expedients.

On January 1, 2019, the Company adopted the newAccounting Standards Updated (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”).  Under ASU No. 2016-02, an entity is required to recognize right-of-use lease assets and lease liabilities on its balance sheet and disclose key information about leasing standard and all related amendments.arrangements.  The Company elected the optional transition method provided by the FASB in ASU 2018-11, Leases (Topic 842): Targeted Improvements, and as a result, has not restated its condensed consolidated financial statements for prior periods presented. The Company has elected the practical expedients upon transition to retain the lease classification and initial direct costs for any leases that existed prior to adoption. The Company has also not reassessed whether any contracts entered into prior to adoption are leases.

ASU 2016-02 The Company applied the new guidance to all operating leases within the scope of the standard that were in effect on January 1, 2019, or entered into after, the adoption date.  Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.  The adoption did not have a material impact on the Company’s Condensed Consolidated Statementscondensed statement of Comprehensive Income. The cumulative effectcomprehensive income (loss).  However, the new standard established $87 of the changes made toliabilities and corresponding right-of-use assets of $87 on the Company’s Consolidated Balance Sheetcondensed balance sheet for leases, primarily related to operating leases on rented office properties, that existed as of the January 1, 2019, for the adoption of the new leasing standard was as follows:date. 

At September 30, 2019,2020, the balance remaining in Right to Use Asset-Long Term and Lease Liability-Long Term was $29,000$726 and ($29,000)731) 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 determines if an arrangementassesses 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, atthe Company allocates the consideration in the contract to each lease inception. Operating lease right-of-use (ROU) assets and operating lease liabilities are recognizedcomponent based on its relative stand-alone price to determine the lease payments.

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

The right-of-use lease asset is initially measured at cost, which primarily comprises the initial amount of the lease termliability, plus any initial direct costs incurred.  All right-of-use lease assets are reviewed for impairment.  The lease liability is initially measured at commencement date. As most of the Company’s lease contracts do not include an implicit rate, the Company uses its incremental borrowing rate based on information available at commencement date in determining the present value of future payments. Thethe 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 is estimated to approximatefor the interest rate on a collateralized basis with similar terms and payments, and in economic environments wheresame term as the leased asset is located. The operating lease ROU asset also includes any initial direct costs and lease payments made prior to lease commencement and excludes lease incentives incurred.underlying lease.

The Company’sCompany identified and assessed the following significant assumptions in recognizing the right-of-use lease terms may includeassets 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 wethe Company will exercise that option. Operating lease expense for minimum

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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

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 is recognized onin a straight-line basis over the lease term. similar economic environment.  

The Company has certainelected not to recognize right-of-use lease agreementsassets and lease liabilities for short-term leases that contain bothhave a term of 12 months or less.

The Company reports right-of-use lease and non-lease components, which it has elected to account for as a singleassets within non-current assets in its condensed balance sheet.  The Company reports the lease component for all asset classes.liabilities within long-term liabilities in its condensed balance sheet.

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

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

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

Accounting Standards Issued but Not Yet Adopted

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

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and statement of cash flows uponalso clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this guidance. We do not expect this guidance to have a significant impact, or potential significant impact, to our unauditedstandard on its condensed consolidated interim financial statements.statements and related disclosures.

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

Note 3 - Fair Value Measurements

The Company issued common stock warrants to purchase shares of common stock in June of 2015 (see Note 9 —11 - Stock-based Compensation for more details) that contain a cash settlement provision resulting in a common stock warrant liability that is revalued at the end of each reporting period.

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

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 3 - Fair Value Measurements – (continued)

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 common stock warrant liabilities are classified as Level 3 because there is limited activity or less transparency around the inputs to 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):

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 3 - Fair Value Measurements – (continued)

Financial Instruments Not Carried at Fair Value

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

Note 4 - Credit Risk

The Company is potentially subject to concentrations of credit risk in its accounts receivable. Credit risk with respect to receivables is limited due to the number of companies comprising the Company’s customer base. Althoughbase, however the Company is directly affected by the financial condition of its customers, management does not believe significant credit risks existdid identify a potentially uncollectable account and at September 30, 2019 or2020 and December 31, 2018.2019 maintained a reserve for this receivable balance of $123. The Company does not require collateral or other securities to support its accounts receivable.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 5 - Prepaid Expenses

Prepaid expenses consist of the following:

Note 6 - Property and Equipment

Property and equipment, net consist of the following:

* Shorter of lease term or estimated useful life

Depreciation and amortization expense was approximately $101$71 and $108$101 for the three months ended September 30, 20192020 and 2018,2019, respectively, and $314$219 and $332$314 for the nine months ended September 30, 2020 and 2019, respectively.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and 2018, respectively.per share data)

Note 7 - Accrued Expenses

Accrued expenses consist of the following:

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 8 - Borrowings

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

CapitalFinance Lease Obligations 

CapitalFinance lease obligations at September 30, 2020 are for computer and lab equipment leased through GreatAmerica Financial Services Thermo Fisher Scientific, Navitas Credit Corp. and ENGS Commercial Finance Co. These capitalfinance leases expire at various dates through July 2023April 2022 and carry interest rates ranging from 6.4%11.4% to 11.6%18.3%.

Other Promissory Notes

Also included in the table above are three notes payable to Direct Capital, one note to M2 Financing and one note to Fidelity Capital, all for the financing of fixed assets. These notes expire at various dates through June 2022 and carry interest rates ranging from 10.88%13.1% to 13.28%13.3%.

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

Pursuant to amendments to the CARES Act, as long as the Company submits its application for loan forgiveness within ten months after the expiration of the applicable covered period, the Company will not be required to make any payments until the forgiveness amount is remitted to the lender by the SBA. In the event the PPP loan is not forgiven in whole or in part, the lender is responsible for notifying the Company of the date on which the Company’s first repayment is due.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 9 - Common Stock Warrants and Common Stock Warrant Liability

The table summarizes the common stock warrant activity as of September 30, 20192020 as follows: