UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~UNITED STATES~~

~~SECURITIES AND EXCHANGE COMMISSION~~

~~Washington, D.C. 20549~~FORM 10-Q

~~FORM 10-Q~~

☒

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

For the quarterly period ended ~~September 30, 2017~~March 31, 2018

☐

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

For the transition period from ~~_________~~ to ~~_________~~

Commission File Number: 001-37941

SENESTECH, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-2079805
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3140 N. Caden Court, Suite 1 Flagstaff, AZ		86004
(Address of principal executive offices)		(Zip Code)

(928) 779-4143

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer	☐	☐	Accelerated filer	☐
Non-accelerated filer	☐	~~(Do~~☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒
Emerging growth company		☒

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

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

The number of shares of common stock outstanding as of ~~November 7, 2017: 10,389,497~~May 14, 2018: 16,537,710

SENESTECH, INC.

FORM 10-Q

For the Quarterly Period Ended ~~September 30, 2017~~March 31, 2018

TABLE OF CONTENTS

		Page
	PART I. FINANCIAL INFORMATION	3
Item 1	Financial Statements	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2825
Item 3	Quantitative and Qualitative Disclosures About Market Risk	3934
Item 4	Controls and Procedures	39
		34
	PART II. OTHER INFORMATION	39
Item 1A	Risk Factors	39
~~Item 5~~	~~Other Information~~	4034
Item 6	Exhibits	4135
	Index to Exhibits	4135
	Signatures	4236

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

~~Item 1. Financial Statements~~SENESTECH, INC.

~~SENESTECH, INC.~~
CONDENSED BALANCE SHEETS

(In thousands, except shares and per share data)

September 30,
2017 December 31,
2016
ASSETS (Unaudited)

Current assets:
Cash $ 699 $ 11,826
Investment in securities held to maturity 2,949 —
Accounts receivable 7 10
Prepaid expenses 172 337
Inventory 394 57
Deposits 17 9
Total current assets 4,238 12,239

Property and equipment, net 1,559 631
Total assets $ 5,797 $ 12,870

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Short-term debt $ 174 $ 45
Accounts payable 175 351
Accrued contract cancellation settlement — 1,000
Accrued expenses 1,074 371
Notes payable, related parties 18 30
Total current liabilities 1,441 1,797

Notes payable, related parties — 6
Long-term debt, net 637 138
Common stock warrant liability 4 69
Deferred rent 45 33
Total liabilities 2,127 2,043

Commitments and contingencies (See note 15) — —

Stockholders’ equity:

Common stock, $0.001 par value, 100,000,000 shares authorized, 10,363,189 and 10,157,292 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively 10 10
Additional paid-in capital 74,946 72,069
Stock subscribed, but not issued, consisting of -0- and 4,750 shares at September 30, 2017 and December 31, 2016, respectively — 59
Accumulated deficit (71,286 ) (61,311 )
Total stockholders’ equity 3,670 10,827

Total liabilities and stockholders’ equity $ 5,797 $ 12,870

	March 31,			December 31,
	2018			2017
	(Unaudited)
ASSETS

Current assets:
Cash	$	528		$	2,101
Investment in securities held to maturity		4,243			5,023
Accounts receivable		2			16
Prepaid expenses		245			170
Inventory		787			540
Deposits		17			19
Total current assets		5,822			7,869

Property and equipment, net		1,350			1,454
Total assets	$	7,172		$	9,323

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Short-term debt	$	182		$	177
Accounts payable		369			391
Accrued expenses		473			589
Notes payable, related parties		6			12
Total current liabilities		1,030			1,169

Long-term debt, net		552			591
Deferred rent		35			41
Total liabilities		1,617			1,801

Commitments and contingencies (See note 15)		—			—

Stockholders’ equity:
Common stock, $0.001 par value, 100,000,000 shares authorized, 16,512,246 and 16,404,195 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively		17			16
Additional paid-in capital		81,792			81,103
Stock subscribed, but not issued		8			—
Accumulated deficit		(76,262	)		(73,597	)
Total stockholders’ equity		5,555			7,522

Total liabilities and stockholders’ equity	$	7,172		$	9,323

~~See accompanying notes to financial statements.~~

~~SENESTECH, INC.~~
~~CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS~~
~~(In thousands, except shares and per share data)~~
~~(Unaudited)~~

For the Three Months
Ended September 30, For the Nine Months
Ended September 30,
2017 2016 2017 2016
Revenue:
License revenue $ — $ 131 $ — $ 261
Product Sales 17 — 34 —
Total revenue 17 131 34 261
Cost of goods sold 11 — 27 —
Gross profit 6 131 7 261

Operating expenses:
Research and development 721 829 2,517 1,964
General and administrative 2,235 1,932 7,506 5,259
Total operating expenses 2,956 2,761 10,023 7,223

Net operating loss (2,950 ) (2,630 ) (10,016 ) (6,962 )

Other income (expense):
Interest income 9 — 20 —
Interest expense (33 ) (6 ) (54 ) (49 )
Interest expense, related parties — (9 ) (1 ) (43 )
Loss on extinguishment of unsecured promissory note — (59 ) — (171 )
Other income (expense) 37 — 76 51
Total other income (expense) 13 (74 ) 41 (212 )

Net loss (2,937 ) (2,704 ) (9,975 ) (7,174 )

Series A convertible preferred stock dividends — (30 ) — (90 )

Net loss and comprehensive loss $ (2,937 ) $ (2,734 ) $ (9,975 ) $ (7,264 )

Weighted average common shares outstanding - basic and fully diluted 10,334,211 7,306,234 10,234,211 5,774,738

Net loss per common share - basic and fully diluted $ (0.28 ) $ (0.37 ) $ (0.97 ) $ (1.26 )

See accompanying notes to financial statements.

4 3

SENESTECH, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except shares and per share data)

(Unaudited)

For the Three Months
Ended March 31,
2018 2017

Revenue:
Sales $ 19 $ 7
Cost of sales 19 4
Gross profit (loss) — 3

Operating expenses:
Research and development 634 823
Selling, general and administrative 2,028 2,639
Total operating expenses 2,662 3,462

Net operating loss (2,662 ) (3,459 )

Other income (expense):
Interest income 6 10
Interest expense (22 ) (13 )
Interest expense, related parties — (1 )
Other income (expense) 13 8
Total other income (expense) (3 ) 4

Net loss $ (2,665 ) $ (3,455 )

Weighted average common shares outstanding - basic and fully diluted 16,496,385 10,160,917

Net loss per common share - basic and fully diluted $ (0.16 ) $ (0.34 )
See accompanying notes to financial statements.
4
SENESTECH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)

(Unaudited)

For the Nine Months
Ended September 30,
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,975 ) $ (7,174 )
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on investments held to maturity (20 ) —
Amortization of discounts on investments held to maturity 11 —
Depreciation and amortization 273 143
Stock-based compensation 2,818 2,406
Non-cash charge for settlement of dispute — 300
Amortization of debt discount — 27
Gain on remeasurement of common stock warrant liability (65 ) (51 )
Loss on extinguishment of unsecured promissory note — 171
(Increase) decrease in current assets:
Accounts receivable 3 (4 )
Prepaid expenses 165 (17 )
Inventory (337 ) —
Deposits (8 ) —
Increase (decrease) in current liabilities:
Accounts payable (176 ) 77
Accrued contract cancellation settlement (1,000 ) —
Accrued expenses 703 61
Deferred rent 12 (4 )
Deferred revenues — (175 )
Net cash used in operating activities (7,596 ) (4,240 )

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities held to maturity (2,940 ) —
Purchase of property and equipment (885 ) (54 )
Net cash used in investing activities (3,825 ) (54 )

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of series B convertible preferred stock — 896
Proceeds from the issuance of common stock — 6,199
Proceeds from the issuance of convertible notes payable — 326
Repayments of convertible notes payable — (810 )
Proceeds from the issuance of notes payable 437 —
Repayments of notes payable (48 ) (24 )
Repayments of notes payable, related parties (18 ) (721 )
Repayments of capital lease obligations (77 ) (16 )
Payment of deferred offering costs — (801 )
Proceeds from exercise of stock options and warrants — 449
Net cash provided by financing activities 294 5,498

NET CHANGE IN CASH (11,127 ) 1,204
CASH AT BEGINNING OF PERIOD 11,826 141
CASH AT END OF PERIOD $ 699 $ 1,345

SUPPLEMENTAL INFORMATION:
Interest paid $ 55 $ 23
Income taxes paid $ — $ —

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of equipment under capital lease obligations $ 316 $ 157
Original issue discount $ — $ 147
Debt discount on convertible notes $ — $ 9
Related party convertible note extinguished for settlement payable $ — $ 404
Contributed capital, debt forgiveness by related parties $ — $ 2,003
Issuance of series B convertible preferred stock in connection with conversion of convertible notes and $ — $ 16
Issuance of shares of common stock upon conversion of Series B convertible preferred stock $ — $ 260
Dividends $ — $ 90

	For the Three Months
	Ended March 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(2,665	)	$	(3,455	)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on investments held to maturity		(18	)		(9	)
Amortization of discounts on investments held to maturity		—			5
Bad debts expense		5			—
Depreciation and amortization		117			59
Stock-based compensation		698			1,061
Amortization of debt discount		—			(9	)
(Increase) decrease in current assets:
Accounts receivable		9			4
Prepaid expenses		(75	)		90
Inventory		(247	)		(54	)
Deposits		2			(196	)
Increase (decrease) in current liabilities:
Accounts payable		(22	)		(166	)
Accrued contract cancellation settlement		—			(1,000	)
Accrued expenses		(116	)		291
Deferred rent		(6	)		5
Net cash used in operating activities		(2,318	)		(3,374	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities held to maturity		—			(2,957	)
Proceeds received on sale of securities held to maturity		798			—
Purchase of property and equipment		(3	)		(130	)
Net cash provided by (used in) investing activities		795			(3,087	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of notes payable		—			21
Repayments of notes payable		(26	)		(6	)
Repayments of notes payable, related parties		(6	)		(10	)
Repayments of capital lease obligations		(18	)		(7	)
Net cash used in financing activities		(50	)		(2	)

NET CHANGE IN CASH		(1,573	)		(6,463	)
CASH AT BEGINNING OF PERIOD		2,101			11,826
CASH AT END OF PERIOD	$	528		$	5,363

SUPPLEMENTAL INFORMATION:
Interest paid	$	22		$	14
Income taxes paid	$	—		$	—

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of equipment under capital lease obligations	$	10		$	—

See accompanying notes to financial statements.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 1 - Organization and Description of Business

SenesTech, Inc. ~~(the “Company”~~(“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. ~~The Company has its~~Our corporate headquarters is in Flagstaff, Arizona.

~~The Company has~~ We have developed and are commercializing a global, proprietary technology for managing animal pest populations, primarily rat populations, through fertility control. ~~The Company believes that its innovative non-lethal approach, targeting reproduction,~~

Although there is ~~more humane, less harmful~~a myriad of tools available to fight rat infestations, pest management professionals (PMPs) continue to face challenges in controlling infestations. Not only do these infestations result in incredible infrastructure damage, but rats also pose additional risks to the ~~environment,~~health and ~~more effective~~food security of our communities. In addition to these challenges, PMPs are being increasingly asked for new solutions to help them solve the infestation problem. With growing interest in ~~providing~~non-lethal options, it is becoming increasingly important for PMPs to have new tools at their disposable. Our goal is to provide PMPs with a ~~sustainable~~proven solution to ~~pest~~not only combat their most difficult infestations, ~~than traditional lethal~~but also offer a non-lethal option to serve customers that are looking to decrease or remove the amount of poison used in their integrated pest management ~~methods. Its~~programs.

Our first fertility control product, ~~candidate,~~ ContraPest is a liquid bait containing the active ingredients 4-vinylcyclohexene diepoxide (“VCD”) and triptolide. When consumed, ContraPest targets reproduction, limiting fertility in 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. We submitted ContraPest for registration with the ~~rat population. The innovative compound is consumed by rats~~EPA on August 23, 2015, and ~~leaves them non-reproductive without other observable side effects. The U.S. Environmental Protection Agency (“EPA”)~~the EPA granted registration approval for ContraPest effective August 2, 2016. ~~The Company plans~~We expect to continue to ~~commercialize~~pursue regulatory approvals and ~~distribute ContraPest by leveraging new and~~amendments to existing ~~third-party relationships with manufacturing, marketing and distribution partners~~registration in the ~~U.S.~~United States for ContraPest, including additional species and ~~internationally.~~additional jurisdictions.

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 U.S., we must obtain registration from the various state regulatory agencies prior to selling in each state. To date, we have received registration for ContraPest in 49 states and the District of Columbia. Registration in California is currently pending.

Potential Need for Additional Capital

InSince our inception, we have sustained significant operating losses in the course of ~~its~~our research and development activities, ~~the Company has sustained operating losses since its inception~~ and ~~expects~~expect such losses to continue for the near future. ~~The Company’s~~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 full scale marketing of our first product, ContraPest, and we continue to develop other product candidates, which are in various phases of development. We have funded our operations to date through the sale of convertible preferred stock and common stock, including an initial public offering of 1,875,000 shares of our common stock on December 8, 2016 with warrants to purchase an additional 187,500 shares issued to Roth Capital Partners, LLC as underwriter, and a second offering on November 21, 2017 of 5,860,000 shares of our common stock at $1 per share with warrants issued to investors to purchase an additional 4,657,500 shares of our common stock at $1.50 per share, and warrants issued to Roth Capital Partners, LLC, as underwriter, to purchase an additional 945,000 shares at $1.50 per share; debt financing, consisting primarily of convertible notes; and, to a lesser extent, payments received in connection with research grants and licensing fees. Through March 31, 2018, we had received net proceeds of $54.4 million from our sales of common stock and preferred stock and issuance of convertible and other promissory notes, and an aggregate of $1.6 million from licensing fees. At March 31, 2018, we had an accumulated deficit of $76.3 million and cash and cash equivalents and highly liquid investments of $4.8 million.

Our ultimate success depends upon the outcome of a combination of factors, including: (i) the success of ~~its~~our research and development; (ii) ongoing regulatory approval and successful commercialization of ContraPest and ~~its~~our other product candidates; (iii) market acceptance, ~~and~~ commercial viability and profitability of ContraPest and other ~~products if the Company obtains the necessary regulatory approvals;~~products; (iv) the ability to market ~~its~~our products and establish an effective sales force and marketing infrastructure to generate significant revenue; (v) the ability to retain and attract key personnel to develop, operate and grow ~~its~~our business; and (vi) ~~the timely and successful completion of additional financing. The Company has funded its operations~~our ability to date through the sale of convertible preferred stock and common stock, including an initial public offering of 1,875,000 shares of its common stock on December 8, 2016, debt financing, consisting primarily of convertible notes and, to a lesser extent, payments received in connection with research grants and licensing fees. As of September 30, 2017, the Company hadmeet our working capital needs.

Based upon our current operating plan, we expect that cash and cash equivalents and highly liquid, short term investments ~~of $3,648.~~at March 31, 2018, in combination with anticipated revenue, will be sufficient to fund our current operations for the near future. However, ~~the Company is~~if anticipated revenue targets are not achieved, we may seek to reduce operating expenses and are likely to require additional capital in order to fund ~~its~~our operating losses and research and development activities ~~by issuing additional~~until we become profitable. We may never achieve profitability or generate positive cash flows, and unless and until we do, we will need to continue to need to raise capital through equity or debt ~~and equity instruments until such time as the Company is profitable.~~financing. If such equity or debt financing is not available at adequate levels ~~the Company will~~or on acceptable terms, we may need to ~~reevaluate its plans.~~delay, limit or terminate development and commercialization efforts.

~~All amounts shown in these financial statements are in thousands, except percentages and per share and share amounts. Per share and share amounts reflect post-reverse split values.~~

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 (“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, 2017,~~March 31, 2018, the Company’s operating results for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ and the Company’s cash flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 and ~~2016.~~2017. The accompanying financial information as of December 31, ~~2016~~2017 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/A~~10-K for the year ended December 31, ~~2016.~~

2017. 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 accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and classification of assets and liabilities, ~~and~~ 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, 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.

~~Deferred Offering Costs~~

Deferred offering costs consisted primarily of legal, accounting and other direct and incremental fees and costs related to the Company’s initial public offering on December 8, 2016. Deferred offering costs of $2,234 were offset against the proceeds received from the initial public offering in December 2016.There were no deferred offering costs at September 30, 2017.

Cash and Cash Equivalents

The Company considers money market fund investments to be cash equivalents. The Company had cash equivalents of ~~$70~~$51 and ~~$-0-~~$3 at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively, included in cash as reported.

Investments in Securities Held to Maturity

The Company uses cash holdings to purchase highly liquid, short term, investment grade securities diversified among security types, industries and issuers. All of the Company’s investment securities are measured at fair value. The Company’s investment securities primarily consist of municipal debt securities, corporate bonds, U.S. agency securities and commercial paper and highly-liquid money market funds.

Accounts Receivable

Accounts receivable consist primarily of trade receivables. 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 ~~$3 and $-0-~~$5 as of ~~September 30, 2017~~March 31, 2018 and $0 at December 31, ~~2016, respectively.~~2017.

Inventories

Inventories are stated at the lower of cost or market value, using the first-in, first-out convention. Inventories consist of raw materials and finished goods. As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the Company had inventories of ~~$394~~$787 and ~~$57,~~$540, respectively.

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 compensation as well as payments made for director and officer insurance, rent and 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 capital 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 capital 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 costs~~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~~third-party independent appraisals. The Company has not recorded an impairment of long-lived assets since its inception.

Revenue Recognition

~~The~~

Effective January 1, 2018, the Company adopted ASC 606 —Revenue from Contracts with Customers. 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.

~~SENESTECH, INC.~~There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three months ended March 31, 2018 and 2017, or the twelve months ended December 31, 2017.

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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

The Company ~~has generated~~derives revenue primarily from 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 terminated on January 23, 2017. The termscommercial sales 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.products.

The Company determined that the license granted pursuant 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. 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.

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

For the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and March 31, 2017, the Company generated net revenues of ~~$34.~~$19 and $7, respectively, from the sale of ContraPest.

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. Also, included in research and development expenses is an allocation of facilities related costs, including depreciation of research and development equipment.

SENESTECH, INC.

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-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. 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.

The stock-based compensation expense recorded for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016~~ is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		Three Months Ended March 31,
									2018		2017
Research and development	$	85	$	135	$	269	$	309	$	29	$	94
General and administrative		861		798		2,549		2,097
Selling, general and administrative										669		967
Total stock-based compensation expense	$	946	$	933	$	2,818	$	2,406	$	698	$	1,061

See Note 13 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.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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

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, 2018 or December 31, 2017 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, 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, 2017~~March 31, 2018 and ~~2016.~~2017. Therefore, basic and diluted loss per share attributable to common stockholders ~~was~~are the same for ~~all periods~~each 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):

	September 30,				March 31,
	2017		2016		2018		2017
Series A convertible preferred stock		—		400,000
Series B convertible preferred stock		—		483,609
Common stock purchase warrants		829,285		750,185		6,431,785		829,284
Restricted stock units		344,982		—
Restricted stock unit						237,885		855,430
Common stock options		1,558,800		1,321,300		1,629,967		1,502,300
Total		2,733,067		2,955,094		8,299,637		3,187,014

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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

Adoption ofNew Accounting Standards:

In May ~~2017,~~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. See Note 2 — Summary of Significant Accounting ~~Standard Update (“ASU”)No.~~~~2017-9,~~~~Compensation~~Policies — ~~Stock Compensation (Topic 718): Scope~~Revenue Recognition.

In March 2016, the FASB issued ASU 2016-09,Improvements to Employee Share-Based Payment Accounting(“ASU 2016-09”). This standard involves several aspects of ~~Modification Accounting~~ ~~(“ASU2017-9”), which provides guidance about which changes to~~ the ~~terms or conditions of a~~accounting for share-based payment ~~award require an entity to apply modification accounting in Topic 718.Per ASU 2017-9, an entity should account for~~transactions, including 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) theincome tax consequences, classification of awards as either equity or liabilities and classification on the ~~modified award as an equity instrument or a liability instrument is the same as the classification~~statement of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments incash flows. ASU ~~2017-9.ASU 2017-9~~2016-09 is effective for ~~public business entities for~~ annual ~~and interim~~ periods ~~in fiscal years~~ beginning after December 15, ~~2017.~~2016 and interim periods within those annual periods for public business entities. The method of adoption is dependent on the specific aspect of accounting addressed in this new guidance. Early adoption iswas permitted ~~including adoption~~ in any interim ~~period, for (1) public business entities for reporting periods for which~~or annual period. The Company has adopted the provisions of ASU 2016-09 on its financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The adoption of~~ASU 2017-9~~ ~~is not expected to have a~~statements. There was no material impact on ~~the Company’s~~our financial ~~statements~~position, results of operations, or ~~related disclosures.~~cash flows

In August 2016, the FASB issued ASU ~~No.~~ 2016-15,Statement of Cash Flows ~~(Topic230)~~(Topic 230): Classification of Certain Cash Receipts and Cash Payments. 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 rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement 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 interests 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~~Company has adopted the provisions of ASU ~~No.~~ 2016-15 ~~is not expected to have a~~on its financial statements. There was no material impact on ~~the Company’s~~our financial ~~statements~~position, results of operations, or ~~related disclosures.~~cash flows.

In ~~March~~January 2016, the FASB issued ASU ~~No. 2016-09,~~2016-01,~~Improvements to Employee Share-Based Payment Accounting~~Recognition and Measurement of Financial Assets and Financial Liabilities(“ASU ~~2016-09”~~2016-01”). This standard ~~involves several aspects of~~affects the accounting for ~~share-based payment transactions, including~~equity instruments, financial liabilities under the ~~income tax consequences, classification~~fair value option and the presentation and disclosure requirements of ~~awards as either equity or liabilities and classification on the statement of cash flows.~~financial instruments. ASU ~~2016-09~~2016-01 is effective ~~for annual periods beginning after December 15, 2016 and interim periods within those annual periods for public business entities.~~the first quarter of 2018. The ~~method~~Company has adopted the provisions of ~~adoption is dependent~~ASU 2016-01 on ~~the specific aspect of accounting addressed in this new guidance. Early adoption~~its financial statements. There was ~~permitted in any interim or annual period. ASU 2016-09 was adopted by the Company and did not have a~~no material impact on ~~the Company’s~~our financial ~~statements~~position, results of operations, or ~~related disclosures.~~cash flows.

Accounting Standards Issued But Not Yet Adopted:

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,~~February 2018, the FASB issued ASU ~~No. 2016-01,~~2018-02, ~~Financial Instruments — Overall: Recognition~~Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance allows an entity to reclassify the income tax effects of the Public Law 115-97 “An Act to Provide Reconciliation Pursuant to Titles II and ~~Measurement~~V of ~~Financial Assets~~the Concurrent Resolution on the Budget for Fiscal Year 2018”, commonly known as the Tax Cuts and ~~Financial Liabilities(“ASU 2016-01”~~Job Act of 2017 (the “2017 Tax Act”). on items within accumulated other comprehensive income/(loss) to retained earnings. 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~~new guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The new standard must be adopted retrospectively to each period in which a taxpayer recognizes the effect of the change in the ~~first quarter of 2019.~~U.S. federal corporate income tax rate from the 2017 Tax Act. The Company is ~~evaluating~~currently assessing the impact of ~~the adoption of~~ ASU ~~2016-01~~2018-02 on ~~its~~our consolidated 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 entity 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 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, 2016 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.SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(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 adoptionthousands, except share 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 material impact on our financial position, results of operations, or cash flows. Related disclosures will be expanded in line with the requirements of the standard. We will continue our evaluation until our adoption of the new standard.per share data)

Note 3 - Fair Value Measurements

~~The carrying amounts of certain of the Company’s~~We invest in various short term, highly liquid financial instruments, ~~including cash equivalents, accounts receivable~~which may include municipal debt securities, corporate bonds, U.S. agency securities and ~~accounts payable approximate their fair values due to their short maturities. Assets and liabilities recorded~~commercial paper. We value these instruments 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, ~~provides~~among other things, establishes a consistent framework for measuring fair value and ~~requires certain disclosures about how~~expands 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 of~~to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the ~~measurement~~reporting date. The ~~accounting guidance also establishes~~framework for measuring fair value consists of a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

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

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

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

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

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

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

assets or liabilities.

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

Income approach: Techniques to convert future amounts to a single present amount based upon market expectations,

including present value techniques, option-pricing and excess earnings models.

The Company’s cash equivalents, which include money market funds, are classified as Level 1 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.

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):

September 30, 2017
Level 1 Level 2 Level 3 Total
Financial Assets:
Money market funds $ 70 $ — $ — $ 70
Corporate fixed income debt securities — 2,949 — 2,949
Total $ 70 $ 2,949 $ — $ 3,019
Financial Liabilities:
Common stock warrant liability⁽¹⁾ $ — $ — $ 4 $ 4
Total $ — $ — $ 4 $ 4

	December 31, 2016								March 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Assets:
None	$	—	$	—	$	—	$	—
Money market funds									$	51	$	—	$	—	$	51

Corporate fixed income debt securities										—		4,243		—		4,243

Total									$	51	$	4,243	$	—	$	4,294
Financial Liabilities:
Common stock warrant liability⁽¹⁾	$	—	$	—	$	69	$	69	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	69	$	69	$	—	$	—	$	—	$	—

									December 31, 2017
									Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds									$	3	$	—	$	—	$	3

Corporate fixed income debt securities										—		5,023		—		5,023

Total									$	3	$	5,023	$	—	$	5,026
Financial Liabilities:
Common stock warrant liability (1)									$	—	$	—	$	—	$	—
Total									$	—	$	—	$	—	$	—

⁽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~~March 31, 2018 was recorded as a decrease to other income (expense) and interest expense of ~~$30 and $69, respectively,~~less than $1, 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.~~

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 4 - ~~Investment~~Investments in Securities Held to Maturity

As of ~~September 30, 2017,~~March 31, 2018, 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 plus or minus market fluctuation and gains and losses are ~~only~~ recognized as the sale or redemption of the securities is realized. ~~Realized gains~~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~~For the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2018, the Company ~~had a minimal amount of~~recorded $18 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 following is a summary of held to maturity securities at ~~September 30, 2017:~~March 31, 2018:

		September 30, 2017									March 31, 2018
	Contractual Maturity (in months)	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Market Value		Contractual Maturity (in months)	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Market Value
Mutual funds		$	—	$	—	$	—	$	—		$	—	$	—	$	—	$	—
Corporate fixed income securities	Less than 12 months		2,746		3		—		2,749	Less than 12 months		4,237		6		—		4,243
Commercial paper	Less than 12 months		200		—		—		200

Total investments		$	2,946	$	3	$	—	$	2,949		$	4,237	$	6	$	—	$	4,243

Note 5 - Prepaid Expenses

Prepaid expenses consist of the following:

					March 31,		December 31,
	September 30, 2017		December 31, 2016		2018		2017
Director compensation	$	—	$	215	$	37	$	66
Director, officer and other insurance		95		70
Director and officer insurance						82		33
NASDAQ fees						41		—
Legal retainer		25		25		25		25
Inventory purchase deposits						20		20
Professional services retainer						8		8
Rent		17		17		17		—
Inventory Purchase Deposits		20		—
Equipment service deposits						5		7
Engineering, software licenses and other		15		10		10		11
Total prepaid expenses	$	172	$	337	$	245	$	170

1615

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:

							March 31,			December 31,
	Useful Life	September 30, 2017		December 31, 2016		Useful Life	2018			2017
Research and development equipment	5 years	$	1,335	$	989	5 years	$	1,349		$	1,349
Office and computer equipment	3 years		672		235	3 years		686			672
Autos						5 years		305			305
Furniture and fixtures	7 years		34		17	7 years		34			34
Autos/Trucks	5 years		306		—
Leasehold improvements	*		283		189	*		283			283
			2,630		1,430			2,657			2,643
Less accumulated depreciation and amortization			1,071		799			(1,307	)		(1,189	)
Total		$	1,559	$	631		$	1,350		$	1,454

* Shorter of lease term or estimated useful life

Depreciation and amortization expense was approximately ~~$118~~$117 and ~~$49~~$59 for the three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016, respectively, and $272 and $143 for the nine months ended September 30, 2017 and 2016,~~ respectively.

Note 7 - Accrued Expenses

Accrued expenses consist of the following:

					March 31,		December 31,
	September 30, 2017		December 31, 2016		2018		2017
Compensation and related benefits	$	705	$	82	$	198	$	304
Accrued litigation		269		286
Research project agreement		100		—
Accrued Litigation						269		269
Board Compensation						—		16
Other		—		3		6		—
Total accrued expenses	$	1,074	$	371	$	473	$	589

Note 8 - Accrued Contract Cancellation Settlement

The accrued contract cancellation settlement of $1,000 was ~~the~~a 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 — Commitments and Contingencies 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:

	September 30, 2017			December 31, 2016				March 31,			December 31,
Short-term debt:								2018			2017

Current portion of long-term debt		174			45				182			177
Total short-term debt	$	174		$	45			$	182		$	177
Long-term debt:
Capital lease obligations	$	290		$	51			$	263		$	272
Other unsecured promissory notes		521			132
Other promissory notes									471			496
Total		811			183				734			768
Less: current portion of long-term debt		(174	)		(45	)			(182	)		(177	)
Total long-term debt	$	637		$	138		��	$	552		$	591

Capital Lease Obligations

Capital lease obligations are for computer and lab equipment leased through ~~Great American,~~GreatAmerica Financial Services, Thermo Fisher Scientific, Navitas Credit Corp. and ~~ENGS.~~ENGS Commercial Finance Co. These capital leases expire at various dates through ~~June 2022.~~ April 2022 and carry interest rates ranging from 6.4% to 11.6%.

Other Promissory Notes

Also included in the table above are three notes payable to Direct Capital, ~~and~~ 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 4.3% to 13.8%.

Note 10 - Notes Payable, Related Parties

A summary of the Company’s notes payable, related parties is as follows:

					March 31,		December 31,
	September 30, 2017		December 31, 2016		2018		2017
Unsecured promissory note, interest rate of 4.25% and 8% per annum	$	18	$	36	$	6	$	12
Total notes payable, related parties						6		12
Less: current portion of notes payable, related parties		18		30		6		12
Total notes payable, long-term, related parties	$	—	$	6
Total notes payable, long-term					$	—	$	—

In April 2013, the Company and a previous employee entered into an agreement to settle all outstanding obligations consisting of a promissory note of $40, dated March 2009, and deferred salaries amounting to $72. The note and salary obligation continue to bear interest at 8% and 4.25%, respectively. The note requires monthly payments of $1 and matures in ~~April~~May 2018. The deferred salary obligation requires monthly payments of $1 and matures in ~~May~~June 2018.

Amounts outstanding on these obligations were ~~$18~~$6 and ~~$36~~$12 at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively.

Interest expense on the notes payable, related parties, was ~~$-0-~~$0 and $1 for the three months ~~and nine months~~ ended ~~September 30, 2017~~March 31, 2018 and ~~$56 for~~ the year ended December 31, ~~2016~~2017 respectively.

~~TECH,~~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

The table summarizes the common stock warrant activity as of ~~September 30, 2017~~March 31, 2018 as follows:

Number
of Date Exercise
Common Stock Warrants Warrants Issued Term Price
Outstanding at December 31, 2015 610,487
Initial Public Offering Underwriter 187,500 December 2016 5 years $ 9.60
Marketing and Development Services 100,000 February 2016 5 years⁽¹⁾ $ 7.50
Other Advisory Services 40,000 August 2016 3 years⁽¹⁾ $ 7.50
Promissory Notes 9,031 March 2016 3 years⁽¹⁾ $ 7.50
Warrants issued 336,531
Warrants exercised (117,733 )
Outstanding at December 31, 2016 829,285
Warrants issued —
Warrants exercised —
Outstanding at September 30, 2017 829,285

Number

Date

Common Stock Warrants

Warrants

Issued

Term

Exercise Price

Outstanding at December 31, 2016

829,285

Common Stock Offering Warrants Issued

4,657,500

November 2017

5 years

1.50

Common Stock Offering Underwriter Warrants

945,000

November 2017

5 years

1.50

Outstanding at December 31, 2017

6,431,785

Warrants issued

—

Warrants exercised

—

Outstanding at March 31, 2018

6,431,785

⁽¹⁾

The warrants also terminate, if not exercised by the earlier of (i) December 13, 2018, or the second anniversary of the closing of an initial public offering of common stock; or (ii) a liquidation, dissolution or winding up of the Company.

~~Promissory Notes;~~ Common Stock Warrants Issued to Participants in Offering of the Company’s Common Stock

~~In conjunction with the issuance by~~On November 8, 2017, the Company issued a total of ~~certain promissory notes, the Company issued~~4,657,500 detachable common stock warrants ~~(“Warrants”) to purchase an aggregate 270,400~~issued with the second public offering of 5,860,000 shares of its common stock ~~with an exercise price of $7.50~~at $1.00 per share. The ~~Warrants were~~common stock warrant is exercisable until ~~the earlier of (i) 5~~five years from ~~the date of grant; (ii) December 13, 2018, or the second anniversary of the closing of our initial public offering; and (iii) the closing of liquidation, dissolution or winding up of 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 at the time of exercise of the warrant after deduction of the aggregate exercise price. However, the Warrants would be exercised automatically in full pursuant to the net exercise provision, without any further action on behalf of the holder, immediately prior to the time the Warrants would otherwise terminate.

The Warrants are considered freestanding instruments as (i) they were transferred together with the notes issued but exist independently as a separate security; (ii) they may be exercised separately from the notes; and (iii) they are exercisable for a specific period (term) and do not impact the notes if and when exercised.

~~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)~~

The Company estimated the fair value of the Warrants at issuance using a Monte Carlo option pricing model based on the following significant inputs: common stock price of $7.50 to $7.575; comparable company volatility of 58.0% to 76.7%; risk- free rates of 1.31% to 1.76%; and the probability of an equity event occurring. The Company reflected the amounts recorded for 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 and the Company has the ability to settle the warrant contract in common shares and met the conditions within the contract to classify the Warrants as an equity instrument.

~~Common Stock Warrant Issued for Marketing and Development Services~~

In February 2016, the Company issued to a stockholder a warrant to purchase 100,000 shares of common stock at an exercise price of $7.50 per share as consideration for providing marketing and development services in Southeast Asia. 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 anniversaryshares of the ~~closing of our initial public offering of common stock;~~Company’s stock and ~~(iii)~~detachable warrants exist independently as separate securities. As such, 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~~exercisable at $1.50 per share, to be $661 using a ~~Monte Carlo pricing~~lattice model based on the following significant inputs: ~~common~~Common stock price of ~~$7.575;~~$1.00; comparable company volatility ~~79.6%~~of 73.8%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of ~~1.49%~~1.87%.

~~August 2016 Other Advisory Services~~Common Stock Warrant Issued to Underwriter of Common Stock Offering

~~On August 16, 2016,~~In November 2017, the Company issued to ~~each of two advisors warrants~~Roth Capital Partners, LLC, as underwriter, a warrant to purchase ~~20,000~~945,000 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~~$1.50 per share as consideration for providing services in connection with ~~the Company’s initial public~~our common stock 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 ~~warrant~~warrants, exercisable at $1.50 per share, to be ~~$939 on the date of grant~~$134 using a ~~Black- Scholes option pricing~~lattice model based on the following significant ~~inputs~~:~~common~~inputs: Common stock price of ~~$8.00;~~$1.00; comparable company volatility of ~~82.1%~~73.8%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of ~~1.92%~~1.87%.

~~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 15,000 shares of common stock at an exercise price of $7.50 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.

The estimated fair value of the derivative warrant liability was $4$0 at ~~September 30, 2017.~~March 31, 2018. 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 ~~were~~was based on the following significant inputs using a Monte Carlo option pricing model: common stock price of $7.91; 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~~less than $1 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 and was recorded in other income (expense) in the accompanying statements of operations and comprehensive loss.

~~July 2015 Consulting Agreement Common Stock Warrant~~

In July 2015, the Company issued a common stock warrant to purchase 121,227 shares of common stock, with an exercise price of $7.50 per share, as consideration for services under a consulting arrangement. The warrant was fully vested and exercisable on the date of grant. This common stock warrant has the similar features as the Warrants described above, except it is exercisable until the earlier of (i) ten years from the date of grant; (ii) December 13, 2018, 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 estimated the fair value of the common stock warrant on the date of grant was $537 as determined by using a Black-Scholes option pricing model based on the following significant inputs: common stock price of $7.575; comparable company volatility of 60.9%; expected term of 6.25 years; risk-free rate of 2.09%; and dividend yield of 0%. The Company recorded the fair value of the warrant as stock-based compensation expense within general and administrative expense in the accompanying statements of operations and comprehensive loss in 2015.

~~Northern Arizona University Common Stock Warrant~~

In November 2015, the Company issued a common stock warrant to purchase 210,526 shares of common stock at an exercise price of $15.00 per share to Northern Arizona University (“NAU”) as part of the consideration given with the Series A convertible preferred stock in exchange for the full cancellation of a promissory note that had been previously issued to NAU.

Note 12 - Stockholders’ Deficit

Common Stock

The Company had ~~10,363,189~~16,512,246 and ~~10,157,292~~16,404,195 shares of common stock issued and outstanding as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively.

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, the Company issued an aggregate of ~~205,897~~108,051 shares of common stock as follows: ~~48,240 shares to consultants for services, valued at $137, to settle previous claims; 14,014~~13,900 shares for the cashless exercise of ~~vested~~ stock ~~options;~~options, 32,625 shares to a former employee for the net settlement of restricted stock units whose vesting accelerated upon the termination of their employment contract, 37,162 shares to a Board member in net settlement of Board compensation totaling $28 and ~~143,643~~24,364 shares for the net settlement of restricted stock units that vested during the period.

~~Rights Offering~~SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In ~~April 2016, the Company offered to the existing holders of shares of (i) its common stock~~thousands, except share and (ii) Series B convertible preferred stock, in each case, as of April 8, 2016 (the “Record Date”), at no charge, non-transferable subscription rights, on a pro rata basis, to purchase shares of common stock at a subscription price of $2.50 per share (the “Rights Offering”). In addition, the holders also had the right to purchase additional shares of common stock, if any shares remain unsubscribed. The Company offered subscription rights on 5,794,162 shares of its common stock. The Rights Offering was conducted as a private placement on a “best efforts” basis, with no minimum subscription required.data)

The subscription rights were initially exercisable beginning on April 8, 2016 and expiring on April 29, 2016 (the “Subscription Period”). However, the Company reserved the right to extend the Subscription Period for up to two additional weeks. The Company extended the Subscription Period for one additional week. The Rights Offering closed on May 6, 2016.

The Company issued 2,478,486 shares of common stock and received aggregate consideration of $6,199 in the Rights Offering. The aggregate consideration received consisted of: (i) $5,284 in cash; (ii) $821 in consideration paid through the cancellation of $821 in outstanding principal amount (and related unpaid interest) under certain outstanding unsecured notes; and (iii) the extinguishment of $94 in amounts owed by the Company for services and related miscellaneous expenses. Such cash proceeds will be used for working capital and general corporate purposes. As the Rights Offering was offered to certain existing holders of the Company’s stock, the shares sold are treated as outstanding from the date of their issuance in the computation of loss per share, basic and diluted in future periods.

Note 13 - Stock-based Compensation

Effective December 2008, the Company established the 2008 – 2009 Non-Qualified Stock Option Plan (the “2008 – 2009 Plan”) under which no stock options remain outstanding at September 30, 2017. The stock-based awards were issued with a price not less than $15.00 per share or 100% of the fair value of a share of common stock on the date of grant. After July 2015, no further awards were granted under the 2008 – 2009 Plan.

Effective July 2015, the Company’s stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”), which permits the issuance of up to 2,000,000 shares reserved for the grant of stock options, stock appreciation rights, restricted stock units and other stock-based awards for employees, directors or consultants of the Company. The Board of Directors and the Company’s stockholders approved an additional 1,000,000 shares of common stock for issuance under the 2015 ~~Plan.~~Plan, effective September 26, 2016. The stock-based awards are generally issued with a price equal to no less than fair value at the date of grant. Options granted under the 2015 Plan generally vest immediately, or ratably over a two- to 36-month period coinciding with their respective service periods; however, participants may exercise their options prior to vesting as provided by the 2015 Plan. Unvested shares issued for option exercised early may be subject to a repurchase by the Company if the participant terminates at the original exercise price. Options under the 2015 Plan generally have a contractual term of five or ten years. Certain stock option awards provide for accelerated vesting upon a change in control. As of ~~September 30, 2017,~~March 31, 2018, the Company had ~~779,095~~1,008,928 shares of common stock available for issuance under the 2015 Plan.

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

~~SENESTECH, INC.~~

~~NOTES TO CONDENSED FINANCIAL STATEMENTS~~

~~(In thousands, except share and per share data)~~

~~Note 13 - Stock-based Compensation - (continued)~~

The weighted-average assumptions used in the Black-Scholes option-pricing model used to calculate the fair value of options granted during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, were as follows:

	Employee			Non-Employee
Expected volatility		~~73.8% -83.7~~71.0% -72.3	%		N/A
Expected dividend yield		—			N/A
Expected term (in years)		~~3.0 to~~ 3.5			N/A
Risk-free interest rate		~~1.45%-1.94~~1.58%-2.44	%		N/A

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

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 13 - Stock-based Compensation – (continued)

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

	Number of Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value⁽¹⁾		Number of Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (1)
Outstanding at December 31, 2016		1,477,300			1.61		5.8	$	9,662

Outstanding at December 31, 2017											1,651,800		$	1.67		5.0	$	—
Granted		161,500		$	8.04		5.0	$	—		34,167		$	0.65		5.0	$	—
Exercised		(15,000	)	$	0.50		—		—		(56,000	)	$	0.50		—	$	—
Forfeited		—		$	—		—		—		—		$	—		—	$	—
Expired		(65,000	)	$	10.22		—		—		—		$	—		—	$	—
Outstanding at September 30, 2017		1,558,800			1.73		5.1	$	183
Exercisable at September 30, 2017		1,263,599		$	1.08		4.8	$	968
Outstanding at March 31, 2018											1,629,967		$	1.69		4.5	$	—
Exercisable at March 31, 2018											1,276,596		$	1.31		4.3	$	—

⁽¹⁾

The aggregate intrinsic value on the table was calculated based on the difference between the estimated fair value of the Company’s stock and the exercise price of the underlying option. The estimated stock values used in the calculation was ~~$1.85~~$0.51 and ~~$8.15~~$0.72 per share ~~at September 30, 2017~~for the three months ended March 31, 2018 and the year ended December 31, ~~2016,~~2017, respectively.

The stock-based compensation expense was recorded as follows:

	Three Months Ended March 31,
	2018		2017
Research and development	$	29	$	94
Selling, general and administrative		669		967
Total stock-based compensation expense	$	698	$	1,061

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

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 13 - Stock-based Compensation – (continued)

~~The stock-based compensation expense was recorded as follows:~~

Three Months Ended September 30 Nine Months Ended September 30,
2017 2016 2017 2016
Research and development $ 85 135 $ 269 $ 309
General and administrative 861 798 2,549 2,097
Total stock-based compensation expense $ 946 933 $ 2,818 $ 2,406

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

At ~~September 30, 2017,~~March 31, 2018, the total compensation cost related to ~~non-vested~~unvested options not yet recognized was ~~$1,942,~~$1,425, which will be recognized over a weighted average period of four years, assuming the employees complete their service period required for vesting.

Effective December 2008, the Company established the 2008-2009 Plan under which no stock options remain outstanding at September 30, 2017. The stock-based awards were issued with a price not less than $15.00 per share or 100% of the fair value of a share of common stock on the date of grant. After July 2015, no further awards were granted under the 2008 – 2009 Plan.

Restricted Stock Units

The following table summarizes restricted stock unit activity for the ~~nine~~three months ended ~~September 30, 2017:~~March 31, 2018:

Number of
Units Weighted
Average
Grant-Date Fair
Value Per Units
Outstanding as of December 31, 2016 455,430 $ 0.76
Granted 117,885 ⁽¹⁾ $ 6.95
Vested (228,333 ) $ 2.00
Forfeited — $ —
Outstanding as of September 30, 2017 344,982 ⁽²⁾ $ 2.05

~~(1)~~

40,000 restricted stock units were granted on March 27, 2017 with a weighted average grant date fair value of $8.35, 17,885 restricted stock units were granted on May 19, 2017 with a weighted average grant date fair value of $6.99 and 60,000 restricted stock units were granted on June 19, 2017 with a weighted average grant date fair value of $6.00.

	Number of Units			Weighted Average Grant-Date Fair Value Per Units
Outstanding as of December 31, 2017		287,885		$	1.86
Granted		—		$	—
Vested		(50,000	)(1)	$	6.00
Forfeited		—		$	—
Outstanding as of March 31, 2018		237,885		$	0.99

(1)

⁽²⁾

~~At September 30, 2017,~~In February 2018, the ~~total compensation cost related~~Company net issued 32,625 shares of common stock to ~~non-vested~~a former employee of the Company under the employee’s separation agreement, which accelerated the vesting of certain restricted stock ~~units not yet recognized was $1,075, which will be recognized over a weighted average period of 1.3 years, assuming the recipients complete their service period required for vesting.~~units.

2421

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 14 - License and Other Agreements

Neogen Corporation

In May 2014, the Company entered into an exclusive license agreement with Neogen Corporation (“Neogen”)~~. The~~, which agreement was subsequently terminated in January 2017. Under the terms of the license agreement, the Company granted an exclusive license to Neogen to (i) use the Company’s intellectual property (“IP”), consisting primarily of the ContraPest technology and (ii) manufacture, distribute and sell commercial rodent control products in the United States and certain U.S. territories, Canada and Mexico. Under the terms of the licensing agreement, the Company was required to submit an application to the United States Environmental Protection Agency (“EPA”) for approval of ContraPest, complete two agricultural field trials that support commercial feasibility for use of the product, and submit such studies and results to Neogen for their approval. The application to the EPA was submitted in August 2015, and the EPA granted registration approval for ContraPest effective August 2, 2016. The first field trial was completed, but never approved by Neogen. With respect to the second trial, the EPA indicated to the Company that it would be more efficient to wait until the product was approved rather than applying for an additional experimental use permit. Given that the EPA has granted registration approval, the Company is now preparing to commence the second field trial.

~~As previously disclosed~~The Company received nonrefundable, upfront license fee payments, totaling $488. The remaining license fee of $162 was to be paid when Neogen formally accepted the Company’s report on its study of the field trials. The Company has determined that the license does not have stand-alone value, therefore, the license fees of $488 are deferred and recognized, on a straight-line basis, from May 2014, the effective date of the agreement, over the estimated related period of performance through December 2016, which includes the acceptance by Neogen of the Company’s study for the field trials that support commercial feasibility for use of the product.

The Company did not recognize any revenue for the three months ended March 31, 2018 or the year ended December 31, 2017 under the licensing agreement.

In addition, Neogen was obligated under the licensing agreement to pay additional consideration to the Company consisting of future fixed-amount of contingent milestone payments (i.e. post-regulatory approval license fees) of up to an aggregate of $3.0 million, and sales-based royalties on the net sales of licensed products by Neogen, as well as its affiliates and sub licensees. The Company did not receive or earn these potential contingent consideration payments as the milestone events to receive such post-approval license fees and sales based royalties were not achieved prior to the termination of the agreement. The agreement was to expire upon the later of (i) the expiration of last patent included in ~~our Current Report on Form 8-K dated and filed January 23, 2017, on~~the licensed IP; or (ii) the tenth anniversary of the effective date of the agreement (i.e. May 2024).

On January 23, 2017 we entered into a termination agreement (the “Settlement Agreement”) with ~~Neogen Corporation (“Neogen”).~~Neogen. Pursuant to the Settlement Agreement, the parties agreed to (a) terminate the existing Exclusive License Agreement between us and Neogen dated May 15, 2014 (the “License Agreement”), with neither Neogen or us 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”), as further described below; 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. As part of the Settlement Agreement, we agreed to pay to Neogen upon the execution of the Settlement Agreement an aggregate of ~~$1,000~~$1.0 million in settlement of all claims.

~~For the nine months ended September 30, 2017 and the year ended December 31, 2016, the Company recognized revenue of $0 and $186, respectively, under the License Agreement.~~

Bioceres/INMET S.A. Agreement

In January 2016, the Company entered into a services agreement with Bioceres, Inc. (“Bioceres”), a wholly-owned subsidiary of Bioceres S.A., a leading agricultural biotechnology company in Argentina, and its Argentinean subsidiary, Ingenieria Metabolica

S.A. (“INMET”) to develop a production method for synthetic triptolide, the main ingredient in ContraPest. The Company also entered into an agency agreement with INMET whereby the Company appointed INMET as its exclusive agent to seek regulatory approval for and conduct pre-sales and marketing of its product, ContraPest, in Argentina. The Company and INMET ~~have~~ also agreed to manufacture and distribute its product in Argentina and other countries, as mutually agreed, through a newly formed entity.

The term of the service agreement is for two years. The service agreement can be terminated at any time upon written notice by either party for any reason. The term of the agency agreement with INMET is the earlier of: (i) when the Company and INMET incorporate the joint venture entity in Argentina or (ii) January 2018. These agreements were renewed for an additional year, through January 2019.

~~At September 30, 2017, the Company had accrued expenses of $100 due to Bioceres as detailed in the table or accrued expenses in Note 7~~

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Note 15 - Commitments and Contingencies

Legal Proceedings

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

On February 20, 2018, New Enterprises, Ltd. (“New Enterprises”), filed suit in the U.S. District Court for the District of Arizona against the Company and Roth Capital Partners, LLC. The suit alleges nine counts against the Company, including that the Company engaged in common law fraud and securities fraud to induce the chairman of New Enterprises into investing in the Company; that the Company breached the lock-up agreement and tortuously interfered with prospective business advantage. New Enterprises is seeking monetary damages, including compensatory damages, punitive damages, and attorney’s fees. The Company believes there is no basis to any of the claims, and intends to vigorously defend itself, including seeking appropriate counterclaims.

Neogen Settlement Agreement

~~See Note 14 above~~On January 23, 2017, the Company entered into an agreement (the “Settlement Agreement”) with ~~regards~~Neogen Corporation (“Neogen”). Pursuant to the Settlement Agreement, the parties agreed to (a) terminate the existing Exclusive License Agreement between us and Neogen dated May 15, 2014 (the “License Agreement”), with ~~Neogen.~~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”), as further described below; 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. Prior to the notice of filing received by SenesTech, the Company was unaware that any action was contemplated or actioned and was proceeding with all elements of the agreement in good faith. All communications prior to the complaint indicated that Neogen also was proceeding in good faith to execute on the agreement.

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. Both Neogen and the Company further agreed to drop any and all legal complaints, claims or threat of litigation for failure to perform under the previous contractual relationship.

Although notice of the legal action by Neogen and the ~~Settlement Agreement~~subsequent agreement to terminate existing agreements with Neogen, occurred after December 31, 2016, as per the provisions of ~~Accounting Standards Codification Topic 450~~FAS 5 Loss ~~Contingencies,~~Contingency, included in the financial statements of the Company at December 31, 2016 is a $1,000 charge to selling, general and administrative expenses and a corresponding accrual of contract cancellation settlement agreement related to this agreement.

Lease Commitments

Rent expense was $61 and $78 for the three months ended March 31, 2018 and March 31, 2017, respectively. The future minimum lease payments under non-cancellable operating lease and future minimum capital lease payments as of March 31, 2018 are as follows:

	Capital Leases		Operating Lease
Years Ending December 31,
2018		76		192
2019		92		221
2020		71		—
2021		57		—
2022		28		—
Total minimum lease payments	$	324	$	413

	Capital Leases

Less: amounts representing interest (6.39%, ranging from 10.48% to 11.56%)	$	59

Present value of minimum lease payments		265

Less: current installments under capital lease obligations		73

Total long-term portion	$	192

SENESTECH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

~~Note 15 - Commitments and Contingencies – (continued)~~

~~Resolution of Dispute~~

In recognition of his continued support and cooperation, and to resolve a dispute regarding whether his options appropriately expired in the first quarter of 2016, in July 2016, the Company’s Board of Directors agreed to issue to its former chief executive officer 120,000 shares of the Company’s common stock. The expense of $300 associated with this full and final settlement was recorded at December 31, 2016.

~~Lease Commitments~~

Rent expense was $246 and $234 for the nine months ended and year ended September 30, 2017 and December 31, 2016, respectively. The future minimum lease payments under non-cancellable operating lease and future minimum capital lease payments as of September 30, 2017 are follows:

Capital
Leases Operating
Lease
Years Ending December 31,
2017 $ 25 $ 63
2018 96 258
2019 88 221
2020 67 —
2021 84 —
Total minimum lease payments $ 360 $ 542

Capital
Leases
Less: amounts representing interest (ranging from 7.25% to 11.56%) $ 75

Present value of minimum lease payments 285

Less: current installments under capital lease obligations 70

Total long-term portion $ 215

Note 16 - Subsequent Events

In ~~October of 2017,~~April 2018, the Company net issued ~~26,308~~25,464 shares of ~~its~~ common stock ~~to two executives of~~for the ~~Company in~~ net settlement of restricted stock units that vested ~~on September 30, 2017 but were not issued until October 2, 2017.~~during the period.

The Company has evaluated subsequent events from the balance sheet date through May 15, 2018, the date at which the financial statements were issued, and determined that there were no other items that require adjustment to or disclosure in the financial statements.

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

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and related notes. Some statements and information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, notes to our condensed consolidated financial statements and elsewhere in this ~~Quarterly Report on Form 10-Q~~report are not historical facts but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, readers can identify ~~forward-looking~~forward- looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology, which when used are meant to signify the statement as forward-looking. These forward-looking statements include, but are not limited to, the effect of new accounting standards on our financial results, our expectations regarding our current operating plan, our beliefs regarding certain tax positions, the sufficiency of our liquidity and capital resources, our beliefs regarding ongoing litigation, our expectations regarding product development, statements about our plans, objectives, expectations and intentions and other statements that are not historical facts. Specific examples of forward-looking statements include those concerning the sufficiency of our cash and future revenue to fund operations, our expectations as to expenses, future revenue and the commercialization of our products, our research and development plans and initiatives and the development of our products. These forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and situations that are difficult to predict and that may cause our own, or our industry’s actual results, to be materially different from the future results that are expressed or implied by these statements. Accordingly, actual results may differ materially from those anticipated or expressed in such statements as a result of a variety of factors, including those discussed in Item 1A of Part I of our Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2016~~2017, entitled “Risk Factors,” and those contained from time to time in our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

~~All amounts shown in the following Management’s Discussion and Analysis of Financial Condition and Results of Operations are full amounts (and are not shown in thousands).~~

Overview

Since our inception in 2004, we have devoted substantially all of our resources to organizing and staffing our company, conducting research and development activities for our product candidates, business planning, raising capital and acquiring and developing product and technology rights. Until August 2016, we did not have any products approved for sale, and we have ~~not~~ generated ~~any significant~~minimal revenue from product sales to date. We have primarily funded our operations to date with proceeds from the sale of common stock and preferred stock, the issuance of convertible and other promissory notes and, to a lesser extent, payments received in connection with research grants and licensing fees. Through ~~September 30, 2017,~~March 31, 2018, we had received net proceeds of ~~$49.2~~$47.2 million from our sales of common stock, preferred stock and issuance of convertible and other promissory notes and an aggregate of $1.6 million from research grants, licensing fees and ~~licensing fees.~~sales of products.

We have incurred significant operating losses every year since our inception. Our net losses were ~~$2.9 million, $10.0~~$2.7 million and ~~$11.0~~$12.3 million for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and the year ended December 31, ~~2016,~~2017, respectively. As of ~~September 30, 2017,~~March 31, 2018, we had an accumulated deficit of ~~$71.3~~$76.3 million. We expect to continue to incur significant expenses and generate operating losses for at least the next 12 months.

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

As a result, a significant portion of our operating expenses includes stock-based compensation expense. Stock-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy. Specifically, our stock-based compensation expense for ~~each of~~ the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and March 31, 2017, ~~and September 30, 2016~~ was ~~$2.8~~$0.7 million and ~~$2.4~~$1.1 million, respectively, which represented ~~28.1%~~26.0% and ~~33.0%~~30.1%, respectively, of our total operating expenses for those periods.

Components of our Results of Operations

Revenue

~~To date,~~For the three months ended March 31, 2018 and 2017, we ~~have~~ generated ~~$34,000,~~revenue from product sales of $19,000 and ~~we expect to generate increased revenue from the sale of products or royalties~~$7,000, respectively. The increase in ~~the fourth quarter of 2017. Except for the minimal~~our product sales ~~noted above,~~revenue was a result of increased sales of ContraPest. Prior to 2017, all of our revenue ~~to date has been~~was derived from payments received in connection with research grants and licensing fees received ~~as a result of our execution of~~under the former license agreement with Neogen.

We recognized ~~product sales~~$0 revenue ~~of $17,000 and $-0-~~ for the three months ended ~~September 30,~~March 31, 2018 and March 31, 2017, respectively, for services performed under NIH grants and 2016, respectively, and $34,000 and $-0- and for the nine months ended September 30, 2017 and 2016, respectively. In addition, for the nine months ended September 30, 2016, we recognized revenue of $139,000in licensing fees under our former license agreement with ~~Neogen and $122,000 under NIH grants.~~Neogen. We do not anticipate additional grant revenue under the NIH grants or additional revenue from our former license agreement with Neogen.

Operating Expenses

Research and Development Expenses

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

●

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

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

●

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

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

●

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

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

We expense research and development costs as incurred.

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

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

Selling, General and Administrative Expenses

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

We anticipate that our selling, general and administrative expenses may increase in the future as we increase our headcount to support commercialization of ~~any approved products~~ContraPest and further development of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance, director and officer insurance costs as well as investor and public relations expenses associated with being a public company.

We plan to continue to hire employees to support our commercialization of ~~any approved products~~ContraPest and further development of our product candidates, and anticipate that we will continue to utilize various forms of stock-based compensation awards in order to attract and retain qualified employees. As a result, we anticipate that stock-based compensation expense will continue to represent a significant portion of our selling, general and administrative expenses for the foreseeable future.

Other Income (Expense), Net

Interest Income. Interest income consists primarily of interest income earned on cash and cash equivalents. ~~Our~~Prior to 2017, our interest income has not been significant due to nominal cash and investment balances and low interest earned on invested balances. For the three months ended March 31, 2018 and 2017, we recorded $6,000 and $10,000 of interest income on our cash and short term, highly liquid investments. The decrease in interest income was primarily due to a decrease in investments.

Interest Expense. Interest expense infor the three months ended March 31, 2018 and the year ended December 31, 2017 consists primarily of interest accrued on our capital lease and note commitments. ~~Interest expense in 2016 consisted primarily~~For the three months ended March 31, 2018 and 2017, we recorded $22,000 and $13,000 of interest ~~on $2.9 million~~expense, respectively. The increase in ~~convertible and other promissory notes we issued~~interest expense was primarily due to an increase in note commitments during ~~2014, 2015 and 2016, most of which was converted or redeemed by December 31, 2016.~~2017.

Other Income (Expense), Net. Other income (expense), ~~net;~~net, consists primarily of recognized change in value of short-term investments and income (expense) related to the year-over-year fair market value adjustment of our derivative warrant. We recorded $13,000 and $8,000 of other income, net, ~~losses on extinguishment~~for the three months ended March 31, 2018 and 2017, respectively. The increase in other income was primarily due to lower expense related to the fair market value adjustment of ~~convertible and non-convertible, secured and unsecured promissory notes.~~our derivative warrant.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between the financial statement and tax basis of assets and liabilities, as well as a consideration of net operating loss and credit carry forwards, using enacted tax rates in effect for the period in which the differences are expected to impact taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company’s effective tax rate for the three months ended March 31, 2018 and the year ended December 31, 2017 has been affected by the valuation allowance on the Company’s deferred tax assets.

Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of ~~December~~March 31, ~~2016,~~2018, we had federal net operating loss carryforwards of ~~$34.0~~$46.7 million which begin to expire in ~~2021~~2023 and state net operating loss carryforwards of ~~$27.8~~$36.0 million which began to expire in 2016, unless utilized.

Comparison of the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~

The following table summarizes our results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016:~~2017:

~~SENESTECH, INC.~~

~~CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS~~

~~(In thousands, except shares and per share data)~~

~~(Unaudited)~~

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2017 2016 2017 2016
Revenue:
License revenue $ — $ 131 $ — $ 261
Product Sales 17 — 34 —
Total revenue 17 131 34 261
Cost of goods sold 11 — 27 —
Gross profit 6 131 7 261

Operating expenses:
Research and development 721 829 2,517 1,964
General and administrative 2,235 1,932 7,506 5,259
Total operating expenses 2,956 2,761 10,023 7,223

Net operating loss (2,950 ) (2,630 ) (10,016 ) (6,962 )

Other income (expense):
Interest income 9 — 20 —
Interest expense (33 ) (6 ) (54 ) (49 )
Interest expense, related parties — (9 ) (1 ) (43 )
Loss on extinguishment of unsecured promissory note — (59 ) — (171 )
Other income (expense) 37 — 76 51
Total other income (expense) 13 (74 ) 41 (212 )

Net loss (2,937 ) (2,704 ) (9,975 ) (7,174 )

Series A convertible preferred stock dividends — (30 ) — (90 )

Net loss and comprehensive loss $ (2,937 ) $ (2,734 ) $ (9,975 ) $ (7,264 )

~~Three Months Ended September 30, 2017 compared to Three Months Ended September 30, 2016:~~

	Three Months Ended March 31,
	2018			2017
	(in thousands)
Revenue	$	19		$	7
Cost of sales		19			4
Gross profit		—			3
Operating expenses:
Research and development		634			823
Selling, general and administrative		2,028			2,639
Total operating expenses		2,662			3,462
Loss from operations		(2,662	)		(3,459	)
Interest expense		(16	)		(4	)
Loss on extinguishment debt		—			—
Other income (expense), net		13			8
Net loss	$	(2,665	)	$	(3,455	)

Revenue

Revenue was ~~$17,000~~$19,000 for the three months ended ~~September 30, 2017,~~March 31, 2018, compared to ~~$131,000~~$7,000 for three months ended ~~September 30, 2016.~~March 31, 2017 due to increased sales of ContraPest, primarily through our distribution network.

~~The $17,000 revenue recognized~~Cost of Sales

Cost of sales was $19,000 for the three months ended ~~September 30, 2017 represented sales of our product, ContraPest. The $131,000 of revenue~~March 31, 2018, compared to $4,000 for the three months ended ~~September 30, 2016, was earned from research grants and from our former license agreement with Neogen, which was terminated in January 2017. We did not recognize any license fees in~~March 31, 2017 ~~under this agreement.~~

~~Cost of Goods Sold~~

~~Cost of goods sold was $11,000 for the three months ended September 30, 2017, compared~~due to ~~$-0- for three months ended September 30, 2016. The~~an increase in ~~cost of goods sold corresponded to the product launch of ContraPest.~~sales volume and an adjustment for scrap/obsolete inventory.

Research and Development Expenses

	Three Months Ended September 30,				Increase /		Three Months Ended March 31,				Increase (Decrease)
	2017		2016		(Decrease)		2018		2017
	(in thousands)						(in thousands)
Direct research and development expenses:
Unallocated expenses:
Personnel related (including stock-based compensation)	$	449	$	701	$	(252)	$	386	$	512	$	(126)
Professional Fees/Consultants		39		10		29
Facility related		76		51		25
Facility-related								58		71		(13)
Other		157		67		90		190		240		(50)
Total research and development expenses	$	721	$	829	$	(108)	$	634	$	823	$	(189)

Research and development expenses were ~~$721,000~~$634,000 for the three months ended ~~September 30, 2017,~~March 31, 2018, compared to ~~$829,000~~$823,000 for the same period in ~~2016.~~2017. The ~~$108,000~~$189,000 decrease in research and development expenses was primarily due to a decrease of ~~$252,000~~$126,000 in personnel-related costs, ~~offset by increases in professional fees/consultant expenses~~including stock-based compensation expense of ~~$29,000, facility expenses of $25,000~~$65,000 and ~~other expenses of $90,000. The decrease in personnel-related costs resulted from lower~~ research and development salaries of ~~$219,000~~$61,000 due to ~~reduced~~ headcount ~~and~~reductions in 2018. Facility-related expense decreased $13,000 due to the expiration of a temporary lease for a facility to support technical services on the east coast. The decrease in ~~stock-based compensation expense of $50,000, offset by higher payroll taxes of $17,000. Professional services~~other research and ~~consulting~~development expenses ~~increased $29,000 for the three months ended September 30, 2017, compared to the same period in 2016~~was primarily due to ~~an increase~~a decrease of $7,000 in ~~synthetic triptolide research~~state registration and filing fees and legal fees. Rent and utilities for the three months ended September 30, 2017 increased $25,000 over the same period in 2016 due primarily to the expansion into the research space at Northern Arizona Center for Entrepreneurship and Technology (“NACET”) facility. Other expenses increased by $90,000 from $67,000 for the three months ended September 30, 2017 as compared to the same period in 2016, primarily due to increased travel expenses of $34,000 related to field team support due to on-site evaluations of potential customers and research operations and increased depreciation expense of $70,000 due to fixed asset additions in our research operations offset by lower lab fees of $14,000. As noted last quarter, we have now filed for registration in all 50 states and the District of Columbia, a decrease in lab expenses of $32,000 due to nonrecurring lab related activities in preparation for our commercial launch of ContraPest, and ~~have begun the process~~an increase of ~~refiling in some states.~~$8,000 for travel related costs.

~~General~~Selling, general and Administrative Expenses

~~General~~Selling, general and administrative expenses were ~~$2.2~~approximately $2.0 million for the three months ended ~~September 30, 2017,~~March 31, 2018, as compared to ~~$1.9~~approximately $2.6 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The ~~increase~~decrease of ~~$0.3 million~~$612,000 in selling, general and administrative expenses was due to ~~an increase~~a decrease of ~~$228,000~~$390,000 in ~~personnel related expenses, an increase~~net salary costs, a decrease of ~~$89,000~~$156,000 in ~~insurance expenses~~professional service fees, primarily related to ~~the increased D&O insurance expense as~~reduced Board related and consulting fees, a ~~public company, an increase of $18,000~~$37,000 reduction in office supplies and non-capitalized ~~furniture and computer~~IT equipment and ~~an increase in occupancy expenses of $8,000, offset by~~ a ~~$24,000 decrease in professional services fees due primarily to lower audit and accounting fees and a $20,000~~$29,000 reduction in ~~travel and entertainment expenses.~~depreciation expense. The ~~increase~~reduction in ~~personnel related expenses consisted of an increase of $144,000 in net additional~~ salary costs ~~an increase~~was comprised of a $300,000 reduction in stock ~~based~~ compensation, ~~of $61,000, an increase~~a $58,000 reduction in payroll taxes and ~~processing~~related payroll filing fees ~~of $35,000~~ and ~~an increase of $32,000 in recruiting expenses offset by~~ a ~~$44,000~~$36,000 reduction in ~~employee benefits due to reduced relocation and benefits costs.~~recruitment expenses.

Interest Expense, Net

We recorded ~~$24,000~~$16,000 of interest expense, net, for the three months ended ~~September 30, 2017,~~March 31, 2018, as compared to ~~$6,000~~$4,000 for the same period in ~~2016.~~2017. The $12,000 increase in interest expense ~~of $18,000~~ was ~~the~~a result of increased ~~debt in the form~~interest on capital leases and promissory notes entered into during 2017 and lower interest income as a result of ~~notes payable and leases on equipment acquisitions during 2017.~~lower investment balances.

Other Income (Expense)~~, Net~~

We recorded ~~$37,000~~$13,000 of other income, net, for the three months ended ~~September 30, 2017,~~March 31, 2018, compared to ~~$59,000~~$8,000 of other ~~expense~~income for the same period in ~~2016.~~2017. The ~~$96,000~~$5,000 net ~~decrease~~increase in other ~~expense~~income was primarily due to ~~lower~~recognized changes in value of short-term investments and reduced expense related to the year-over-year fair market value adjustment of our ~~convertible promissory notes and losses on the extinguishment of said promissory notes.~~

~~Nine Months Ended September 30, 2017 compared to Nine Months Ended September 30, 2016~~:

~~Revenue~~

~~Revenue was $34,000 for the nine months ended September 30, 2017, compared to $261,000 for nine months ended September 30, 2016.~~

The $34,000 revenue recognized for the nine months ended September 30, 2017 represented sales of our product, ContraPest. The $261,000 of revenue for the nine months ended September 30, 2016 was earned from research grants and from our former license agreement with Neogen, which was terminated in January 2017. We did not recognize any license fees in 2017 under this agreement.

~~Cost of Goods Sold~~

~~Cost of goods sold was $27,000 for the nine months ended September 30, 2017, compared to $-0- for nine months ended September 30, 2016.~~derivative warrant. The increase in cost of goods sold corresponded to the product launch of ContraPest. Cost of goods sold as a percentage of sales for the period was approximately 80% due to manufacturing inefficiencies surrounding the start-up of the new manufacturing line and the cost of replacement product shipped to replace damaged product.

~~Research and Development Expenses~~

Nine Months Ended
September 30, Increase/
2017 2016 (Decrease)
(in thousands)
Direct research and development expenses:
Unallocated expenses:
Personnel related (including stock-based compensation) $ 1,471 $ 1,384 $ 87
Professional Fees/Consultants 272 142 130
Facility related 228 157 71
Other 546 281 265
Total research and development expenses $ 2,517 $ 1,964 $ 553

Research and development expenses were $2.5 million for the nine months ended September 30, 2017, compared to $2.0 million for the same period in 2016. The $500,000 increase in research and development expenses was partially due to an increase of $87,000 in personnel-related costs. This increase in personnel-related costs resulted from increased research and development salaries of $47,000 due to headcount additions in 2017 and an increase in stock-based compensation expense of $40,000. Professional services and consulting expenses increased $130,000 for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to an increase in synthetic triptolide research fees and legal fees.

State registration and filing fees increased $27,000 for the nine months ended September 30, 2017 compared to the same period in 2016 due to the increase in state filings and registrations as we have now filed in all 50 states and the District of Columbia and have begun the process of refiling in some states. Travel expenses related to field team support increased $97,000 for nine months ended September 30, 2017 over the same period in 2016 due to on-site evaluations of potential customers and research operations. Rent and utilities for the nine months ended September 30, 2017 increased $51,000 over the same period in 2016 due to the expansion into the research space at our NACET facility. Depreciation expense increased $62,000 for the nine months ended September 30, 2017 over the same period in 2016 due to fixed asset additions in our research operations.

~~We continue to investigate applications of our core technology to~~ other product candidates, which includes laboratory tests and academic collaborations. We also continue to develop our supply chain, particularly identifying and improving our sourcing of triptolide, a key active ingredient for our product candidates.

~~General and Administrative Expenses~~

General and administrative expenses were $7.5 million for the nine months ended September 30, 2017, compared to $5.3 million for the nine months ended September 30, 2016. The increase of $2.2 million in general and administrative expenses was due to an increase of $1.5 million in personnel related expenses, an increase in travel expenses of $113,000, an increase in insurance expense of $248,000, a $178,000 increase in office supplies and non-capitalized furniture and computer equipment and an increase in marketing, stock service and shareholder relations expenses of $23,000. The increase in personnel related expenses consisted of an increase in stock based compensation of $450,000 and an increase of $1.1 million in net additional salary costs. The increase in insuranceincome was primarily due to increased director and officer insurance as a result of the public becoming a public reporting company in December of 2016. Likewise, marketing, stock service and shareholder relations expenses increased due to the Company becoming a commercial, public reporting company in December of 2016.

~~Interest Expense~~

We recorded $35,000 of interest expense, net for the nine months ended September 30, 2017, compared to $92,000 for the same period in 2016. The decrease in interest expense of $57,000 was the result of a decrease of $2.9 million in convertible notes that were issued in 2014 and exchanged for Series B convertible preferred stock in December 2016 partially offset by the increase in interest related to increased debt in the form of notes payable and leases on equipment acquisitions during 2017.

~~Other Income (Expense), Net~~

We recorded $76,000 of other income, net, for the nine months ended September 30, 2017, compared to $120,000 of other expense for the same period in 2016. The $196,000 net decrease in other expense was primarily due to thelower expense related to the ~~year-over-year~~ fair market value adjustment of our ~~convertible promissory notes and losses on the extinguishment of said promissory notes.~~derivative warrant.

Liquidity and Capital Resources

Since our inception we have sustained significant operating losses in the course of our research and development activities ~~we have sustained significant operating losses~~ and ~~expects~~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. ~~During the first nine months of~~In 2017, we began full scale marketing of our first product, ContraPest and we continue to develop other product candidates, which are in various phases of development. We have funded our operations to date ~~primarily with proceeds from~~through the sale of convertible preferred stock and common stock, including an initial public offering of 1,875,000 shares of our common stock on December 8, 2016 with warrants to purchase an additional 187,500 shares issued to Roth Capital Partners, LLC as underwriter, a second offering on November 21, 2017 of 5,860,000 shares of our common stock at $1 per share with warrants issued to investors to purchase an additional 4,657,500 shares of our common stock at $1.50 per share, and ~~preferred stock, the issuance~~warrants issued to Roth Capital Partners, LLC, as underwriter, to purchase an additional 945,000 shares at $1.50 per share, debt financing, consisting primarily of convertible ~~and other promissory~~ notes and, to a lesser extent, payments received ~~under~~in connection with research grants and ~~pursuant to our former license agreement with Neogen.~~licensing fees. Through ~~September 30, 2017,~~March 31, 2018, we had received net proceeds of ~~$49.2~~$54.4 million from our sales of common stock and preferred stock and issuance of convertible and other promissory notes, and an aggregate of $1.6 million from licensing fees. At March 31, 2018, we had an accumulated deficit of $76.3 million and cash and cash equivalents and highly liquid investments of $4.8 million.

~~The Company’s~~Our ultimate success depends upon the outcome of a combination of factors, including: (i) the success of ~~its~~our research and development; (ii) ongoing regulatory approval and successful commercialization of ContraPest and ~~its~~our other product candidates; (iii) market acceptance, ~~and~~ commercial viability and profitability of ContraPest and other ~~products if the Company obtains the necessary regulatory approvals;~~products; (iv) the ability to market ~~its~~our products and establish an effective sales force and marketing infrastructure to generate significant revenue; (v) the ability to retain and attract key personnel to develop, operate and grow ~~its~~our business; and (vi) ~~the timely and successful completion of additional financing as needed. The Company has funded its operations~~our ability to date through the sale of convertible preferred stock and common stock, including an initial public offering of 1,875,000 shares of its common stock on December 8, 2016, debt financing, consisting primarily of convertible notes and, to a lesser extent, payments received in connection with research grants and licensing fees. As of September 30, 2017, we had an accumulated deficit of $71.3 million and cash and cash equivalents and highly liquid investments of $3,648.meet our working capital needs.

Based upon ~~its~~our current operating plan, ~~the Company expects~~we expect that cash and cash equivalents and highly liquid, short term investments at ~~September 30, 2017,~~March 31, 2018, in combination with anticipated revenue, will be sufficient to fund ~~its~~our current operations for the near future. However, ~~the Company is~~if anticipated revenue targets are not achieved, we may seek to reduce operating expenses and are likely to require additional capital in order to fund ~~its~~our operating losses and research and development activities ~~by issuing additional~~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 ~~and equity instruments, until such time as the Company is profitable.~~financing. If such equity or debt financing is not available at adequate levels ~~the Company will~~or on acceptable terms, we may need to ~~reevaluate its plans.~~

~~Off-Balance Sheet Arrangements~~

~~As of September 30, 2017, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.~~delay, limit or terminate development and commercialization efforts.

Additional Funding Requirements

We expect our expenses to increase ~~substantially~~ in connection with our ongoing activities, particularly as we advance field studies of our product candidates in development. In addition, we will continue to incur additional costs associated with operating as a public company.

In particular, we expect to incur substantial and increased expenses as we:

●

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

●

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

●

Scale up manufacturing processes and quantities to prepare for the commercialization of ContraPest and any other product candidates for which we receive regulatory approval;

●

Establish an infrastructure for the sales, marketing and distribution of ContraPest and any other product candidates for which we may receive regulatory approval;

●

Attempt to achieve market acceptance for, and generate sales of, our products;

●

Expand our research and development activities and advance the ~~discovery~~research and development programs for other product candidates;

●

Maintain, expand and protect our intellectual property portfolio; and

●

Add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts and operations as a public company.

Cash Flows

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

							Three Months Ended March 31,
	Nine Months Ended September 30,						2018			2017
	2017			2016
Cash used in operating activities	$	(7,596	)	$	(4,240	)	$	(2,318	)	$	(3,374	)
Cash used in investing activities		(3,825	)		(54	)
Cash provided by financing activities		294			5,498
Cash provided by (used in) investing activities								795			(3,087	)
Cash (used in) provided by financing activities								(50	)		(2	)
Net increase (decrease) in cash and cash equivalents	$	(11,127	)	$	1,204		$	(1,573	)	$	(6,463	)

Operating Activities.

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, operating activities used ~~$7.6~~$2.3 million of cash, primarily resulting from our net loss of ~~$10.0~~$2.7 million and by changes in our operating assets and liabilities of ~~$0.6 million,~~$455,000, partially offset by non-cash charges of ~~$3.0 million.~~$802,000, consisting primarily of stockbased compensation, depreciation and amortization. Our net loss was primarily ~~attributed~~attributable to research and development activities and our selling, general and administrative expenses, as we generated limited product revenue during the period. Net cash used by changes in our operating assets and liabilities for the ~~nine~~three months ended ~~September~~ March 31, 2017 consisted primarily of a decrease in receivables of $9,000 and a decrease in deposits of $2,000 offset by an increase in inventories of $247,000, a net decrease in accrued expenses and accounts payable of $138,000 and an increase in prepaid expenses of $75,000.

During the three months ended March 31, 2017, operating activities used $3.4 million of cash, primarily resulting from our net loss of $3.5 million and by changes in our operating assets and liabilities of $1.0 million, partially offset by non-cash charges of $1.1 million. Our net loss was primarily attributable to research and development activities and our selling, general and administrative expenses, as we generated limited product revenue during the period. Net cash used by changes in our operating assets and liabilities for the three months ended March 31, 2017 consisted primarily of a decrease in prepaid expenses ~~of $165,000~~ and ~~a decrease in~~ receivables of ~~$3,000~~$94,000, and an increase in deferred rent of ~~$12,000,~~$5,000 offset by a net decrease in accrued expenses and accounts payable of ~~$473,000, a net~~$875,000, an increase in inventories of ~~$337,000~~$54,000, and an increase in deposits of ~~$8,000.~~$196,000. The ~~net~~ decrease in accrued expenses and accounts payable was primarily due to ~~timing of expense occurrence and payables management, offset by our~~the payment of the $1.0 million contract cancellation settlement accrual ~~in January.~~

~~During the nine months ended September 30, 2016, operating activities used $4.2 million of cash, primarily resulting from our net loss of $7.2 million, partially~~ offset by ~~non-cash charges of $3.0 million~~an increase in net accounts payable and by cash provided by changes in our operating assets and liabilities of $62,000. Our net loss was primarily attributed to research and development activities and our general and administrative expenses, as we generated limited research grant and licensing revenue during the period. Net cash provided by changes in our operating assets and liabilities for the nine months ended September 30, 2016 consisted primarily of a $175,000 decrease in deferred revenue related to our license agreement with Neogen and a $202,000 decrease in accrued expenses ~~and accounts payable. The decrease in accrued expenses and accounts payable was~~ due to ~~increased payments as a result of the receipt of cash raised in financing activities.~~better vendor terms and vendor payment management.

Investing ~~Activities~~Activities.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2018, we generated $795,000 in net cash related to investing activities consisting of $798,000 of proceeds from the sale of securities held to maturity offset by $3,000 in purchases of property and equipment.

For the three months ended March 31, 2017, we used ~~$3.8~~$3.1 million in investing activities consisting of ~~$2.9~~$3.0 million of purchases in securities to be held to maturity and ~~$885,000~~$130,000 in purchases of property and equipment.

~~For the nine months ended September 30, 2016, we used $54,000 of cash in investing activities, consisting of purchases of property and equipment.~~

Financing ~~Activities~~Activities.

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, net cash ~~generated from~~used by financing activities was ~~$294,000~~$50,000 as a result of ~~$437,000~~payments of $32,000 related to notes payable and notes payable, related party and $18,000 in payments of capital lease obligations.

During the three months ended March 31, 2017, net cash used by financing activities was $2,000 as a result of $21,000 of proceeds from the issuance notes payable offset by payments of ~~$66,000~~$16,000 related to notes payable and related party notes payable ~~related party~~ and ~~$77,000~~$7,000 in payments of capital lease obligations.

During the nine months ended September 30, 2016, net cash provided by financing activities was $5.5 million as a result of $6.2 million of proceeds from the issuance of shares of common stock in our rights offering discussed elsewhere in this prospectus, $326,000 of proceeds received from our issuance of notes payable, $896,000 of proceeds received from the issuance of Series B convertible preferred stock, and $449,000 of proceeds received from the exercise of stock options, all of which were partially offset by payments of $1.6 related to the notes, payable, notes payable related party and convertible notes payable, $16,000 of capital lease repayments and $801,000 of deferred offering cost payments.

~~Recent Developments~~Off-Balance Sheet Arrangements

None

Recent Developments

None

Critical Accounting Policies and Significant Judgments and Estimates

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

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

Revenue Recognition

~~We recognize revenue in accordance~~Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the ~~Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”), Topic 605,~~ ~~Revenue Recognition~~~~. Accordingly, we recognize~~Company recognizes revenue from the commercial ~~sale~~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 fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.

~~We have generated revenue from~~There was no impact on the Company’s financial statements as a license agreement with a strategic partner pursuant to which we had granted to such partner the exclusive license in North America to manufacture, distribute and sell commercial control products based on our intellectual property, which includes ContraPest,result of adopting Topic 606 for the ~~later of 10 years~~three months ended March 31, 2018 and 2017, or the ~~expiration of the patent for ContraPest (if issued).~~twelve months ended December 31, 2017.

~~The license agreement was subsequently terminated on January 23, 2017.~~

When we receive non-refundable, upfront license fee payments for the exclusive rights to licensing our intellectual property, management determines if such license has stand-alone value. Since management determined that the license to our intellectual property did not have stand-alone value, we recognized revenue attributable to that license on a straight-line basis over the estimated related performance period. Any changes in the estimated period of performance will be accounted for prospectively as a change in estimate.

Our licensing agreement also provided for a future fixed amount of contingent milestone payments and contingent sales-based royalties to be received upon the achievement of milestone events. We recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved and the milestone payments are due and collectible. A milestone is considered substantive when the consideration payable to us for such milestone has all of the following characteristics: (1) there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved; (2) the event can only be achieved based in whole or part on either our performance or a specific outcome resulting from our performance; and (3) if achieved, the event would result in additional payments being due to us. In making this assessment in the future, we will consider all facts and circumstances relevant to the arrangement, including whether any portion of the milestone consideration is related to future performance or deliverables. In addition, we will account for sales-based royalties as revenue upon achievement of certain sales milestones.

Stock-Based Compensation

We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures, in accordance with ASC Topic 718 — Stock Compensation (“ASC 718”). We estimate the grant date fair value of the awards, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of stock-based awards is expensed on a straight-line basis over the vesting period of the respective award. We account for stock-based compensation arrangements with non-employees using a fair value approach. The fair value of these stock options is measured using the Black-Scholes option-pricing model reflecting the same assumptions as applied to employee options in each of the reported periods, other than the expected life, which is assumed to be the remaining contractual life of the option. The fair value of the stock options granted to non-employees is re-measured as the stock options vest and is recognized in the statements of operations and comprehensive loss during the period the related services are rendered.

We recorded stock-based compensation expense of approximately ~~$2.8 million~~$698,000 and ~~$2.4~~$1.1 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. We expect to continue to grant stock options and other equity-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

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

●

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

●

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

●

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

●

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

●

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

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

As noted above, we are required to estimate the fair value of the common stock underlying our stock-based awards when performing the fair value calculations using the Black-Scholes option-pricing model. ~~Prior to~~Before the consummation of our initial public offering, ~~in December 2016,~~and in the absence of an active market for our common stock, we ~~previously~~ utilized methodologies in accordance with the framework of the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of our common stock.

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

Three Months Ended
September 30 Nine Months Ended
September 30,
2017 2016 2017 2016
Research and development $ 85 $ 135 $ 269 $ 309
General and administrative 861 798 2,549 2,097
Total stock-based compensation expense $ 946 $ 933 $ 2,818 $ 2,406

	Three Months Ended December 31,
	2018		2017
	(in thousands)
Selling, general and administrative expenses	$	669	$	967
Research and development expense		29		94
Total stock-based compensation expense	$	698	$	1,061

The intrinsic value of stock options outstanding as of ~~September 30, 2017 is $183,000, of which $968,000 and $(785,000) would have been related to stock options that were vested and unvested, respectively, at that date.~~March 31, 2018 was $0

Emerging Growth Company Status

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

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not ~~applicable.~~required for smaller reporting companies.

Item4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We ~~maintain~~conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”)), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures ~~that~~(as defined in Rule 13a-15(e)) as of the end of the period covered by this report. These disclosure controls and procedures are designed to ensure that ~~the~~ information required to be disclosed in ~~the~~our reports that ~~we file~~are filed or ~~submit~~submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to ~~our~~ management, including ~~our Chief Executive Officer~~the principal executive and ~~Chief Financial Officer (or Acting Principal Financial Officer, as the case may be),~~principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. ~~Our management conducted an evaluation (pursuant to Rule 13a-15(b)) of~~

Based on the Exchange Act, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that ~~our~~these disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There ~~were~~was no ~~changes~~change in our internal control over financial reporting that occurred during the ~~three-month period~~quarter ended ~~September 30, 2017~~March 31, 2018, that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

~~The Company may be subject~~There have been no material changes to ~~legal proceedings and claims arising from contracts or other matters from time to time~~the Legal Proceedings set forth in in the ~~ordinary course of business. Management is not aware of any pending or threatened litigation where~~risk factors set forth in Part I, Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the ~~ultimate disposition or resolution could have a material adverse effect on its financial position, results of operations or liquidity.~~year ended December 31, 2017

Item 1A.

~~Item 1A.~~

Risk Factors

~~Except as detailed below and disclosed in subsequently filed Quarterly Reports on Form 10-Q, there~~There have been no material changes in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2016.~~2017.

Depending on the commercial success of ContraPest, we may require additional capital to fund our operations. Failure to obtain this necessary capital if needed may force us to delay, limit, or terminate our product development efforts or other operations.

Developing product candidates, including conducting experiments and field studies, obtaining and maintaining regulatory approval and commercializing any products later approved for sale, is a time-consuming, expensive and uncertain process that takes years to complete. We expect our expenses to continue to increase in connection with our ongoing activities, particularly as we advance our commercialization activities. We plan to substantially expand our operations, and as a result of many factors, some of which may be currently unknown to us, our expenses may be higher than expected. Securing additional financing may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates, including ContraPest. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

●

~~Significantly delay, scale back or discontinue the development or commercialization of our product candidates, including ContraPest;~~

●

Seek strategic partners for the manufacturing, sales and distribution of ContraPest or any of our other product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; and

●

~~Relinquish, or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.~~

~~The occurrence of any of the events described above would have a material adverse effect on our business, operating results and prospects and on our ability to develop our product candidates.~~

If securities or industry analysts, or other sources of information, do not publish research, or publish inaccurate or unfavorable research or other information about our business, our stock price and trading volume could decline.

The trading market for our common stock may depend on the research, reports and other information that securities or industry analysts, or other, third party sources of information, publish about us or our business. We do not have any control over these analysts or other, third party sources of information, and from time to time inaccurate or unfavorable research or other information about our business, financial condition, results of operations and stock ownership may be published. We cannot assure that analysts will cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline. If incorrect or misleading information is disseminated publicly by third parties about us, our stock price could decline.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

~~Unregistered Sales of Equity Securities and Use of Proceeds~~None

~~None.~~

~~Use of Proceeds from Public Offering of Common Stock~~

In December 2016, we closed our initial public offering (“IPO”), in which we sold 1,875,000 shares of common stock at a price to the public of $8.00 per share. No shares were sold in connection with the underwriters’ option to purchase additional shares. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-213736), which was declared effective by the SEC on December 7, 2016. We raised approximately $12.6 million in net proceeds after deducting underwriting discounts and commissions of approximately $1.1 million and offering expenses of approximately $1.3 million. Using the proceeds from the IPO, on December 13, 2016, we paid $175,890 to the holder of all of our shares of Series A convertible preferred stock for its agreement to waive all accrued dividends on the Series A convertible preferred stock and convert all of its shares of Series A convertible preferred stock into common stock immediately prior to the consummation of the IPO. No payments were made by us to directors, officers or persons owning 10% or more of our capital stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries. There has been no material change in the planned use of proceeds from our IPO as described in the final prospectus issued in connection with the IPO. We have invested the remaining proceeds in accordance with our board approved investment policy, which provides for investments in obligations of the U.S. government, money market instruments, registered money market funds and corporate bonds. The managing underwriter of our IPO was Roth Capital Partners, LLC and co-managing underwriters were Craig-Hallum Capital Group LLC and Aegis Capital Corp.

~~Item 5.~~

~~Other Information~~

~~None.~~

Item 6.

Exhibits

~~The exhibits listed in the Index to Exhibits are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.~~

INDEX TO EXHIBITS

Exhibit
Number Filed or
Furnished Herewith
Incorporated by Reference
Description Form Filing
Date Exhibit File No.
3.1 Amended and Restated Certificate of Incorporation S-1/A 10/20/2016 3.3 333-213736

3.2 Amended and Restated Bylaws S-1 9/21/2016 3.5 333-213736

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 X

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 X

32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X

32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X

101.INS XBRL Instance Document X

101.SCH XBRL Taxonomy Extension Schema X

101.CAL XBRL Taxonomy Extension Calculation Linkbase X

101.DEF XBRL Taxonomy Extension Definition Linkbase X

101.LAB XBRL Taxonomy Extension Label Linkbase X

101.PRE XBRL Taxonomy Extension Presentation Linkbase X
Exhibit Filed or
Furnished Incorporated by Reference
Number Description Herewith Form Filing Date Exhibit File No.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 X
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 X
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X
101.INS XBRL Instance Document 10-Q 5/15/2018 101.INS 001-37941
101.SCH XBRL Taxonomy Extension Schema 10-Q 5/15/2018 101.SCH 001-37941
101.CAL XBRL Taxonomy Extension Calculation Linkbase 10-Q 5/15/2018 101.CAL 001-37941
101.DEF XBRL Taxonomy Extension Definition Linkbase 10-Q 5/15/2018 101.DEF 001-37941
101.LAB XBRL Taxonomy Extension Label Linkbase 10-Q 5/15/2018 101.LAB 001-37941
101.PRE XBRL Taxonomy Extension Presentation Linkbase 10-Q 5/15/2018 101.PRE 001-37941

35
SIGNATURES

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

SENESTECH, INC.
(Registrant)

Dated: ~~November 8, 2017~~May 15, 2018 By: /s/ Loretta P. Mayer, Ph.D.
Loretta P. Mayer, Ph.D.
Chair of the Board, Chief Executive Officer and Chief Scientific Officer
~~Chief Scientific Officer~~

Dated: ~~November 8, 2017~~May 15, 2018 By: /s/ Thomas C. Chesterman
Thomas C. Chesterman
Chief Financial Officer and Treasurer
36

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Revenue:
License revenue	$	—		$	131		$	—		$	261
Product Sales		17			—			34			—
Total revenue		17			131			34			261
Cost of goods sold		11			—			27			—
Gross profit		6			131			7			261

Operating expenses:
Research and development		721			829			2,517			1,964
General and administrative		2,235			1,932			7,506			5,259
Total operating expenses		2,956			2,761			10,023			7,223

Net operating loss		(2,950	)		(2,630	)		(10,016	)		(6,962	)

Other income (expense):
Interest income		9			—			20			—
Interest expense		(33	)		(6	)		(54	)		(49	)
Interest expense, related parties		—			(9	)		(1	)		(43	)
Loss on extinguishment of unsecured promissory note		—			(59	)		—			(171	)
Other income (expense)		37			—			76			51
Total other income (expense)		13			(74	)		41			(212	)

Net loss		(2,937	)		(2,704	)		(9,975	)		(7,174	)

Series A convertible preferred stock dividends		—			(30	)		—			(90	)

Net loss and comprehensive loss	$	(2,937	)	$	(2,734	)	$	(9,975	)	$	(7,264	)

Weighted average common shares outstanding - basic and fully diluted		10,334,211			7,306,234			10,234,211			5,774,738

Net loss per common share - basic and fully diluted	$	(0.28	)	$	(0.37	)	$	(0.97	)	$	(1.26	)

	For the Nine Months
	Ended September 30,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(9,975	)	$	(7,174	)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on investments held to maturity		(20	)		—
Amortization of discounts on investments held to maturity		11			—
Depreciation and amortization		273			143
Stock-based compensation		2,818			2,406
Non-cash charge for settlement of dispute		—			300
Amortization of debt discount		—			27
Gain on remeasurement of common stock warrant liability		(65	)		(51	)
Loss on extinguishment of unsecured promissory note		—			171
(Increase) decrease in current assets:
Accounts receivable		3			(4	)
Prepaid expenses		165			(17	)
Inventory		(337	)		—
Deposits		(8	)		—
Increase (decrease) in current liabilities:
Accounts payable		(176	)		77
Accrued contract cancellation settlement		(1,000	)		—
Accrued expenses		703			61
Deferred rent		12			(4	)
Deferred revenues		—			(175	)
Net cash used in operating activities		(7,596	)		(4,240	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities held to maturity		(2,940	)		—
Purchase of property and equipment		(885	)		(54	)
Net cash used in investing activities		(3,825	)		(54	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of series B convertible preferred stock		—			896
Proceeds from the issuance of common stock		—			6,199
Proceeds from the issuance of convertible notes payable		—			326
Repayments of convertible notes payable		—			(810	)
Proceeds from the issuance of notes payable		437			—
Repayments of notes payable		(48	)		(24	)
Repayments of notes payable, related parties		(18	)		(721	)
Repayments of capital lease obligations		(77	)		(16	)
Payment of deferred offering costs		—			(801	)
Proceeds from exercise of stock options and warrants		—			449
Net cash provided by financing activities		294			5,498

NET CHANGE IN CASH		(11,127	)		1,204
CASH AT BEGINNING OF PERIOD		11,826			141
CASH AT END OF PERIOD	$	699		$	1,345


SUPPLEMENTAL INFORMATION:
Interest paid	$	55		$	23
Income taxes paid	$	—		$	—

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of equipment under capital lease obligations	$	316		$	157
Original issue discount	$	—		$	147
Debt discount on convertible notes	$	—		$	9
Related party convertible note extinguished for settlement payable	$	—		$	404
Contributed capital, debt forgiveness by related parties	$	—		$	2,003
Issuance of series B convertible preferred stock in connection with conversion of convertible notes and	$	—		$	16
Issuance of shares of common stock upon conversion of Series B convertible preferred stock	$	—		$	260
Dividends	$	—		$	90

	Number
	of			Date			Exercise
Common Stock Warrants	Warrants			Issued	Term		Price
Outstanding at December 31, 2015		610,487
Initial Public Offering Underwriter		187,500		December 2016		5 years	$	9.60
Marketing and Development Services		100,000		February 2016		5 years⁽¹⁾	$	7.50
Other Advisory Services		40,000		August 2016		3 years⁽¹⁾	$	7.50
Promissory Notes		9,031		March 2016		3 years⁽¹⁾	$	7.50
Warrants issued		336,531
Warrants exercised		(117,733	)
Outstanding at December 31, 2016		829,285
Warrants issued		—
Warrants exercised		—
Outstanding at September 30, 2017		829,285

	Three Months Ended September 30				Nine Months Ended September 30,
	2017		2016		2017		2016
Research and development	$	85		135	$	269	$	309
General and administrative		861		798		2,549		2,097
Total stock-based compensation expense	$	946		933	$	2,818	$	2,406

	Number of Units			Weighted Average Grant-Date Fair Value Per Units
Outstanding as of December 31, 2016		455,430		$	0.76
Granted		117,885	⁽¹⁾	$	6.95
Vested		(228,333	)	$	2.00
Forfeited		—		$	—
Outstanding as of September 30, 2017		344,982	⁽²⁾	$	2.05

	Capital Leases
Less: amounts representing interest (ranging from 7.25% to 11.56%)	$	75

Present value of minimum lease payments		285

Less: current installments under capital lease obligations		70

Total long-term portion	$	215

	Nine Months Ended September 30,				Increase/
	2017		2016		(Decrease)
	(in thousands)
Direct research and development expenses:
Unallocated expenses:
Personnel related (including stock-based compensation)	$	1,471	$	1,384	$	87
Professional Fees/Consultants		272		142		130
Facility related		228		157		71
Other		546		281		265
Total research and development expenses	$	2,517	$	1,964	$	553

	Three Months Ended September 30				Nine Months Ended September 30,
	2017		2016		2017		2016
Research and development	$	85	$	135	$	269	$	309
General and administrative		861		798		2,549		2,097
Total stock-based compensation expense	$	946	$	933	$	2,818	$	2,406

Exhibit Number		Filed or Furnished Herewith	Incorporated by Reference
Exhibit Number	Description	Filed or Furnished Herewith	Form	Filing Date	Exhibit	File No.
3.1	Amended and Restated Certificate of Incorporation		S-1/A	10/20/2016	3.3	333-213736

3.2	Amended and Restated Bylaws		S-1	9/21/2016	3.5	333-213736

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934	X

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934	X

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

101.INS	XBRL Instance Document	X

101.SCH	XBRL Taxonomy Extension Schema	X

101.CAL	XBRL Taxonomy Extension Calculation Linkbase	X

101.DEF	XBRL Taxonomy Extension Definition Linkbase	X

101.LAB	XBRL Taxonomy Extension Label Linkbase	X

101.PRE	XBRL Taxonomy Extension Presentation Linkbase	X

	SENESTECH, INC.
	(Registrant)

Dated: ~~November 8, 2017~~May 15, 2018	By:	/s/ Loretta P. Mayer, Ph.D.
		Loretta P. Mayer, Ph.D.
		Chair of the Board, Chief Executive Officer and Chief Scientific Officer
		~~Chief Scientific Officer~~

Dated: ~~November 8, 2017~~May 15, 2018	By:	/s/ Thomas C. Chesterman
		Thomas C. Chesterman
		Chief Financial Officer and Treasurer